Donohue v. United States

• Decision Date: 26 August 1977
• Docket Number: Civ. A. No. 6-71349.
• Citation: 437 F. Supp. 836
• Parties: Donald V. DONOHUE, Plaintiff, v. The UNITED STATES of America, Defendant.
• Court: U.S. District Court — Western District of Michigan

437 F. Supp. 836

Donald V. DONOHUE, Plaintiff, v. The UNITED STATES of America, Defendant.

Civ. A. No. 6-71349.

United States District Court, E. D. Michigan, S. D.

August 26, 1977.

Alan C. Harnisch, Kemp, Klein & Endelman & Ralls, P. C., Norman D. Orr, Southfield, Mich., for plaintiff.

Robert E. Richardson, Civil Division, U. S. Dept. of Justice, Washington, D. C., for defendant.

OPINION

FEIKENS, District Judge.

On November 4, 1974, plaintiff Donald V. Donohue was indicted by a federal grand jury in the Eastern District of Michigan for violations of 18 U.S.C. §§ 1010 and 2(b). Specifically, the indictment charged in three counts that Donohue had wilfully and knowingly filed false statements with the Department of Housing and Urban Development on two applications for FHA mortgage insurance. Donohue was, at that time, a mortgage banker licensed to participate in the federal mortgage insurance programs administered through the Veteran's Administration and the Federal Housing Authority, a subsidiary agency of HUD, and a substantial amount of his business was insured through these programs. 12 U.S.C. § 1717(b)(1). From October, 1961 until May, 1974, plaintiff was employed by the Advance Mortgage Corporation of Detroit, Michigan. He subsequently moved to Phoenix, Arizona, and at the time of the indictment was employed by the Graham Mortgage Company of Phoenix as a branch manager. Upon arraignment, Donohue entered a plea of not guilty.

On November 13, 1974, the Acting Director of the HUD Regional Office in Phoenix notified Donohue that in light of his indictment and "pending completion of the aforesaid action and such legal proceedings as may ensue, you are suspended from participation in the H.U.D./F.H.A. programs." As a result of this notice and, allegedly, some further and more direct pressure by local HUD officials, plaintiff was discharged by the Graham Mortgage Company. On November 18, 1974, Donohue was informed by the Detroit Regional Office of HUD that his indictment had resulted in an "Unsatisfactory Risk Determination" which required that office to reject any of his future applications for FHA mortgage insurance. On December 30, 1974, Donohue was informed by the Washington Office of HUD, through the Acting Assistant Secretary, that he was temporarily suspended from all participation in HUD programs pending resolution of the indictment.

In response, Donohue notified HUD officials in the Phoenix and Washington offices that he desired an immediate hearing on his license suspensions. On November 18, 1974, he wrote a letter to the Acting Director of the Phoenix office, stating:

I am most anxious to clear myself of any irregularities the government believes I was a part of or party to. I, therefore, request a hearing and meeting with you at your earliest possible convenience.

Donohue subsequently flew to Phoenix where, at an informal meeting with HUD officials, he was told that nothing could be done with regard to his suspension until the criminal proceedings had run their course. On January 7, 1975, plaintiff wrote to the Acting Assistant Secretary of HUD at HUD's Washington office, acknowledging receipt of the notice of suspension and stating:

Since I am presently unemployed and find it impossible to obtain employment under the circumstances, I therefore am requesting an immediate hearing with your office.

A hearing was scheduled by the Washington office for March 4, 1975, but prior to this date, plaintiff was informed by HUD's General Counsel that the hearing would not result in his reinstatement, since he was still under indictment. On this basis, Donohue elected to postpone the hearing until after the criminal charges against him had been resolved.

On May 5, 1975, plaintiff's indictment was voluntarily dismissed by the United States Attorney for the Eastern District of Michigan. The dismissal was based on certain evidence, supplied to the government by Donohue himself, showing that his signatures to the HUD documents for which he was indicted were forged. Donohue notified HUD of the dismissal on May 12, 1975. His suspension by the Washington office was rescinded on August 15, 1975; the Phoenix office rescinded its suspension on September 12, 1975; and the Detroit office rescinded its Unsatisfactory Risk Determination on October 10, 1975.

On June 28, 1976, plaintiff, still unemployed, filed this action against the federal government, seeking damages of $200,000 for the alleged deprivation of his constitutional rights. His original complaint, naming only the United States, claimed in three counts that his license to participate in the HUD/FHA mortgage insurance programs was a property and liberty interest protected by the due process clause of the Fifth Amendment, and that his license suspension without hearing was a violation of his due process rights which caused him to lose his present employment and any meaningful opportunity for future employment as a mortgage banker.

Plaintiff further alleged that his procedural rights, as specified by HUD's own administrative regulations governing license suspensions, had been violated by his suspension without hearing. In particular, the complaint alleged that plaintiff's suspension by the Phoenix Regional Office of HUD was totally unauthorized under 24 C.F.R. § 24.12, which grants powers of suspension only to Assistant Secretaries of HUD. Furthermore, the Phoenix office never accorded plaintiff his right to a full hearing with counsel, guaranteed both by 24 C.F.R. §§ 24.10, 24.15,¹ and the Phoenix notice of suspension, itself. The Detroit Regional Office is alleged to have violated 24 C.F.R. § 200.200, which sets forth the grounds upon which an Unsatisfactory Risk Determination can be made:

§ 200.200 Basis of action.

Any Field Office Director may reject an application for mortgage insurance on the grounds of unsound credit or unsatisfactory past experience. Applications will be rejected where past experience with the proposed borrower, builder, or other participant in the mortgage transaction indicates that his previous conduct or method of doing business has been such that his participation in the transaction would make it unacceptable from the underwriting standpoint of an insurer. The Unsatisfactory Risk Determination action is usually temporary in nature and may be followed in aggravated cases by the application of section 512 procedures as set forth in § 200.190 et seq. (Emphasis added).

Plaintiff alleged that underwriting considerations were never considered by the Detroit office in his case.

Against the Washington office, plaintiff alleged a failure to provide him a meaningful opportunity for a hearing, as required by 24 C.F.R. § 24.15, and a failure to consider all relevant evidence in issuing the suspension, as required by 24 C.F.R. § 24.11:

§ 24.11 Suspension.

Suspension is a drastic action taken when there is suspicion of fraud or other criminal conduct in Government business or contractual dealings and, as such, shall not be based upon an unsupported accusation. A contractor or grantee is suspended pending investigation and appropriate action by the Department of Justice. In assessing whether adequate evidence exists for invoking a suspension, consideration shall be given to the amount of credible evidence which is available, to the existence or absence of corroboration as to important allegations, as well as to the inferences which may be properly drawn from the existence or absence of affirmative facts. This assessment shall include an examination of basic documents, such as contracts, inspection reports, and correspondence. A suspension may be modified whenever it is determined to be in the interest of the Government to do so. (Emphasis added).

To the extent that these HUD regulations could be read to authorize his suspension merely upon indictment and without hearing, plaintiff further alleged the unconstitutionality of the regulations under the Fifth Amendment.

In response to the initial complaint, the United States moved for dismissal or summary judgment in the alternative, under Rules 12 and 56 of the Federal Rules of Civil Procedure, contending that the Federal Torts Claims Act, 28 U.S.C. § 1346, et seq., was the exclusive remedy for plaintiff's alleged constitutional deprivations, and that plaintiff's claim was barred under the F.T.C.A. for failure to exhaust administrative remedies, 28 U.S.C. § 2675(b), and in all other respects by sovereign immunity. After a hearing on defendant's motion, held on November 3, 1976, the court deferred ruling and granted plaintiff leave to follow one or more of the following alternatives:

1) to show the court why the United States should not be dismissed from the suit as a party defendant;

2) to move the court to add additional parties or otherwise amend the complaint;

3) to have the complaint dismissed without prejudice.

Subsequently, plaintiff filed administrative tort claims with all three HUD offices, which were, in due course, denied. Plaintiff also moved to amend his complaint to add the Secretary of HUD and the Department of HUD as party defendants to the initial three counts and to add three alternative new counts against the United States under the Federal Tort Claims Act. The government filed briefs in opposition to the amendment of the complaint and in further support of its original motion to dismiss, contending that plaintiff's constitutional claims against HUD, the Secretary of HUD, and the United States were all barred by sovereign immunity and that plaintiff's tort claims against the United States were barred by the "discretionary function" and "due care" exclusions to the F.T.C.A. contained in 28 U.S.C. § 2680(a).² After a further hearing on May 4, 1977, the court granted plaintiff's motion to amend and took all other issues under advisement, pending the submission of further documentary exhibits and post-hearing briefs, which have since been filed.

Defendants' motion for...