Kisser v. Kemp, Civ. A. No. 91-2380.

• Citation: 786 F. Supp. 38
• Decision Date: 18 February 1992
• Docket Number: Civ. A. No. 91-2380.
• Parties: Carroll P. KISSER, Plaintiff, v. Jack KEMP, et al., Defendants.
• Court: U.S. District Court — District of Columbia

786 F. Supp. 38

Carroll P. KISSER, Plaintiff, v. Jack KEMP, et al., Defendants.

Civ. A. No. 91-2380.

United States District Court, District of Columbia.

February 18, 1992.

Steven D. Gordon, Michael H. Ditton, Washington, D.C., for plaintiff.

Jeffrey T. Sprung, Asst. U.S. Atty., Washington, D.C., for defendants.

MEMORANDUM

GESELL, District Judge.

Plaintiff, Mr. Kisser, a former employee of DeFranceaux Group, Inc. ("DRG"), a company that co-insured loans made for projects sponsored by the Department of Housing and Urban Development ("HUD"), has been prevented from participating in primary and lower tier covered transactions "throughout the executive branch of the Federal Government" since March 22, 1989. See 24 C.F.R. §§ 24.200(a), 24.110. Initially, he was suspended by HUD under 24 C.F.R. § 24.400 et seq.; and subsequently, on December 2, 1991, he was debarred under 24 C.F.R. § 24.300 et seq. for three years, ending March 22, 1992, after being given credit for the time he was suspended.

Mr. Kisser alleges that the suspension and debarment decisions of the Secretary, by his designee Ms. Dudley, were each improper under the Administrative Procedure Act ("APA"), 5 U.S.C. § 551 et seq., and the Due Process Clause of the Constitution. His persistent efforts throughout this process to obtain preliminary relief have been unsuccessful. The issues are now before the Court on cross-motions for summary judgment, which have been thoroughly briefed and fully argued. There are no material issues of fact in dispute.

Background

In January 1988, Mr. Kisser was employed as executive vice president of DRG, a company that was responsible for a large number of coinsured loans on HUD projects. Each month, DRG collected mortgage payments from property owners and credited the collections to the holders of securities pledged to guarantee the mortgages. If a property owner failed to make its monthly payment, DRG, as a HUD coinsured lender, was responsible for meeting the monthly payment to the security holders out of its own funds.

During 1988, a dispute developed between DRG and Government National Mortgage Association ("GNMA"), an instrumentality of HUD, concerning the proper treatment of foreclosure sale proceeds received by DRG on properties in its HUD loan portfolio. GNMA insisted that those proceeds should be passed through to the security holders in the month following receipt, pursuant to section 2.05 of the Guaranty Agreement, and DRG contended under the same section that the funds did not need to be passed through until the month following receipt of a final insurance claim settlement from HUD.¹ As a result, GNMA defaulted DRG as an approved lender in July 1988. Thereafter, DRG did comply and was reinstated, but in September 1988, DRG was unable to meet its pass-through obligations and was again defaulted.²

Pending completion of an investigation that HUD subsequently initiated regarding DRG, HUD on March 22, 1989, suspended DRG and related business entities, as well as sixteen individuals — including Mr. Kisser — virtually all of whom were high-ranking employees of DRG. Following the suspensions, Mr. Kisser, like most of the individuals, resigned his position with DRG. Unlike other individuals, however, Mr. Kisser entered into a nonexclusive consulting agreement with DRG the day after his resignation. Consequently, although HUD later lifted the suspensions of the remaining individuals who had left DRG, it did not lift Mr. Kisser's suspension, claiming he remained an "affiliate" of DRG.

Mr. Kisser challenged his suspension, on the ground that he was not an "affiliate" of DRG for purposes of the applicable regulation. See 24 C.F.R. § 24.105(b). The administrative law judge, ALJ Heifetz, agreed, and lifted the suspension, but counsel for HUD sought discretionary review of the decision, and the Secretary's designee, Ms. Dudley, reversed the ALJ, on August 4, 1989.

Although a suspension generally may not last beyond twelve months, HUD extended the suspension an additional six months, to the maximum time possible, before initiating formal debarment proceedings on September 23, 1990. See 24 C.F.R. § 24.400(d), 24.415(b). Those debarment proceedings had the effect of continuing Mr. Kisser's suspension still longer. After an evidentiary hearing that lasted from April 8-16, 1991, another ALJ, ALJ Cooper, found for Mr. Kisser and held him responsible and qualified to participate in government nonprocurement programs.

Again counsel for HUD sought discretionary review by the Secretary, pending which HUD summarily ruled that Mr. Kisser remained suspended, despite the decision of the ALJ. Finally, on December 2, 1991, more than two and a half years after the initial suspension, the Secretary's designee, Ms. Dudley, issued HUD's final ruling on the matter. Ms. Dudley again reversed the ALJ, and imposed debarment on Mr. Kisser for a period of three years, with credit for time served. Mr. Kisser's debarment ends March 22, 1992.

The Initial Suspension

The Court reviews HUD's actions— in regard to the initial suspension, as well as the final debarment—under the traditional "arbitrary or capricious" standard set forth in the APA. See 5 U.S.C. § 706(2).³ Though the first suspension has long since expired, issues relating to it are not moot because the agency's findings continue to stigmatize plaintiff, see Caiola v. Carroll, 851 F.2d 395, 401 (D.C.Cir. 1988)—particularly in light of the fact that plaintiff was one of the few former DRG employees singled out to have his suspension continued after his resignation from DRG.

Based on the administrative record before the Court, HUD's manner of proceeding against plaintiff in regard to the first suspension is indeed perplexing. HUD originally suspended sixteen high-ranking members of DRG—including Mr. Kisser— for being "affiliates" of DRG, pursuant to 24 C.F.R. § 24.105(b). That section defines "affiliates" as follows:

Persons are affiliates of each another sic if, directly or indirectly, either one controls or has the power to control the other, or, a third person controls or has the power to control both. Indicia of control include, but are not limited to: interlocking management or ownership, identity of interests among family members, shared facilities and equipment, common use of employees, or a business entity organized following the suspension or debarment of a person which has the same or similar management, ownership, or principal employees as the suspended, debarred, ineligible, or voluntarily excluded person.

HUD's decision to proceed under the "affiliate" section is highly questionable when one realizes that other regulations more obviously applicable in this situation specifically allow the agency to impute the acts of a debarred or suspended organization like DRG to "any officer, director, shareholder, partner, employee, or other individual associated with the participant who participated in, knew of, or had reason to know of the participant's conduct." See 24 C.F.R. §§ 24.325(b)(2), 24.420. Clearly, it would have more appropriate to proceed against the sixteen individuals under the "imputation" section for their acts and knowledge leading up to the time that DRG was suspended by HUD.

HUD's decision to suspend the sixteen individuals as affiliates was apparently the easiest course. Under the "affiliate" section of the regulations, all that the agency needs prove is that an individual was an affiliate, namely, that there existed the requisite "control" relationship between the individual and the suspended company. No actual proof of wrongdoing on the part of the individual is required. In fact, if the company does not challenge its suspension, HUD does not have to prove that there was any wrongdoing at all. In contrast, to have proceeded under the "imputation" section, HUD would have actually had to prove, first, that DRG's conduct was itself improper and deserving of suspension, and second, that the individuals suspended "participated in, knew of, or had reason to know of" DRG's wrongful conduct.

By suspending the individuals as affiliates, the agency tried to take the short-cut of suspending them without going through the bother of proving that there had been any wrongdoing by DRG or the officers. HUD obviously wanted to force the individuals to resign from DRG immediately, before any type of proceeding had been concluded. As soon as the individuals severed their formal ties with DRG, HUD lifted their suspensions.

Mr. Kisser also left DRG, but the day after he resigned, he entered into a contract with DRG as an independent consultant. As a result, HUD continued to treat him as an affiliate and did not lift his suspension. The decision by HUD not to lift Mr. Kisser's suspension raises two questions: first, was it a valid exercise of agency discretion to proceed with suspension proceedings against Mr. Kisser but not against the others; and second, was Mr. Kisser in fact an affiliate of DRG as defined by the regulations? Because the validity of the initial suspension can be resolved on the second...