Krause v. Small Business Administration, 79 Civ. 5272.

• Decision Date: 17 December 1980
• Docket Number: No. 79 Civ. 5272.,79 Civ. 5272.
• Citation: 502 F. Supp. 1332
• Parties: Donald KRAUSE, Plaintiff, v. SMALL BUSINESS ADMINISTRATION and Merit Systems Protection Board, Defendants.
• Court: U.S. District Court — Southern District of New York

502 F. Supp. 1332

Donald KRAUSE, Plaintiff, v. SMALL BUSINESS ADMINISTRATION and Merit Systems Protection Board, Defendants.

No. 79 Civ. 5272.

United States District Court, S. D. New York.

December 17, 1980.

COPYRIGHT MATERIAL OMITTED

O. John Rogge, New York City, for plaintiff.

John S. Martin, Jr., U. S. Atty., for the Southern Dist. of New York, New York City, for defendants; Thomas D. Warren, Asst. U. S. Atty., New York City, of counsel.

OPINION

EDWARD WEINFELD, District Judge.

These are cross-motions for summary judgment in an action commenced by Donald Krause, an employee of the Small Business Administration ("SBA"), to review a seven-day suspension from his position as a Supervisory Loan Specialist on the grounds that there was no evidential basis to support the suspension and that the failure to provide him with a trial-type evidentiary hearing upon his appeal to the Merit Systems Protection Board ("MSPB") violated his right to due process under the Fifth Amendment. The defendants, the SBA and MSPB, contend the suspension is valid on the grounds that the applicable procedures, which do not require a trial-type hearing in a seven-day suspension proceeding, were followed that these accord with due process of law, and that the decision to suspend plaintiff was supported by evidence and was neither arbitrary nor capricious.

Upon a word-by-word study of the administrative record, the Court concludes for reasons noted hereafter that the agency action must be upheld and that the procedures followed by the SBA fully satisfied the requirements of due process.

I

Krause's suspension was prompted by a series of events surrounding a loan by the SBA to one Norma Fontane in connection with her purchase of "Norma's Restaurant," located in New York City across the street from the offices of the SBA. An anonymous letter to the SBA asserting that one of its employees, Ben Torrent, had a hidden ownership in Norma's Restaurant and that Fontane was "his girl friend" triggered an investigation by the Division of Security and Investigations ("S&I") into the circumstances whereby the loan which originally was approved by a loan committee of three in the sum of $25,000 was increased the same day to $40,000 without reconvening the committee that gave approval to the $25,000 loan.

As a result of the investigation, the Regional Director of the SBA advised Krause in a detailed letter that it was proposed to suspend him for thirty days pursuant to applicable civil service regulations upon the following grounds:

1. Falsification of the Loan Committee's minutes in violation of SBA regulations;

2. lack of adequate security regarding maintenance of a chronological list to assure that applicants were considered in the order in which they filed their applications;

3. failure to assure documentation of the loan file; and

4. appearance of conflict of interest and/or preferential treatment.

The basis for each charge was set forth in detail.

Bernard Kulik, Deputy Associate Administrator for Operations of the SBA was designated to consider and determine the charges. The letter proposing the thirty-day suspension advised Krause of his right to review the material upon which his proposed suspension was based, his right to reply in writing to the offenses advanced, his right to submit affidavits in support of his reply, and his right to the assistance of counsel in preparing the reply. Krause engaged counsel and upon his request was furnished with various documents including the S&I report. On November 21, 1978, Krause submitted his own written response to the charges, a written response by his attorney and the affidavits of five SBA employees. Thereafter, pursuant to his request, he and his lawyer met with Kulik at the latter's office in Washington, D.C. They were afforded the opportunity to and did speak to each of the charges. Following the meeting, Krause and his lawyer wrote to Kulik thanking him for the opportunity to meet with him for a discussion of the charges and enclosing additional material relative to the charges. On February 23, 1979, Kulik rendered his decision which indicated that he had given careful consideration to all documents and written responses submitted by Krause and his attorney in resisting the charges, as well as their oral statements made at the Washington meeting. Kulik found the evidence supported three of the charges: (1) that Krause had falsified Loan Committee minutes, although without an intent to defraud; (2) that he had inadequately safeguarded the chronological list of applicants; and (3) that he had failed to ensure proper documentation of the loan file. Kulik concluded, however, that the evidence did not support the charge that Krause had created an appearance of preferential treatment or a conflict of interest.

Kulik decided that a thirty-day suspension was excessive and imposed a suspension of seven calendar days. He sent a copy of the agency decision to Krause which also informed him of his right to appeal to the MSPB and of his right to file a grievance under the SBA Grievance Procedure challenging the merits of his suspension, although no such grievance was filed.¹

Krause, through his attorney, filed a notice of appeal to the MSPB and requested an evidentiary hearing purportedly under 5 U.S.C. § 7701(a) (1976) at which he could present the testimony of witnesses. He listed the names of six potential witnesses including those whose affidavits had previously been submitted and considered by Kulik. The appeal was assigned to the Seattle Field Office of the MSPB due to the heavy workload of the New York Field Office. Krause's lawyer protested this assignment claiming that for all practical purposes it destroyed the effectiveness of an evidentiary hearing since his client could not afford the expense of travel for himself, his witnesses or his lawyer to Seattle. Dean Wright, Chief Appeals Officer of the Seattle Field Office, informed Krause and his attorney by letter that under the applicable regulation no right to an evidentiary hearing was provided in cases involving suspensions of less than thirty days, and that in such cases, the only issue subject to review on appeal was compliance with authorized procedures, unless it was claimed that the suspension was taken as a result of discrimination on account of race, color, religion, sex or other discriminatory conduct.² Wright observed that since the individuals Krause listed as proposed witnesses would have no knowledge of any claimed procedural deficiencies, no purpose would be served by an evidentiary hearing and thus there was no reason why the Seattle Office should not adjudicate the case. On June 21, 1979, the MSPB issued a written decision affirming the suspension and finding that the SBA had complied with the procedural requirements of 5 C.F.R. § 752.302 (1978) in effecting Krause's suspension.

II

In addressing the substance of an agency's action, the scope of judicial review is narrowly confined. Review is based on the administrative record,³ and the Court's role is to address, not the wisdom or good judgment of the agency's decision, but only whether the agency complied with applicable procedures and whether its actions were arbitrary or capricious.⁴ Because a federal employee may be suspended only "for such cause as will promote the efficiency of the service,"⁵ the reasons for a discharge must be rationally related to the good of the service for its decision not to be arbitrary or capricious.⁶

Krause does not claim that the procedures employed for his suspension were below statutory standards,⁷ nor does he claim that the reasons advanced for his suspension lack a rational relationship to the efficiency of the service. He does, however, argue that the agency act of suspending him was arbitrary and capricious. Thus the Court considers separately each charge that was upheld and upon which the suspension was based.

A. Falsification of the Loan Committee's Minutes in Violation of Regulations

As of February 1978, the operating procedure governing loan approvals required that a loan application be reviewed by an individual loan officer who was to sign his recommendation which then was submitted for consideration at a meeting of a three-member Loan Review Committee.⁸ The procedure stresses that "it is vital that the chairman Krause direct the meeting in a manner that will assure in-depth analysis" of a loan request and that committee members shall vote, with the majority prevailing, only "after a full discussion of both the favorable as well as the unfavorable factors." The procedure also directs that the Committee minutes are to be an official record of what transpired in the meeting; while they need not be verbatim, they must cover the major points of discussion and must be signed by the chairman. The minutes of the meeting in which the Fontane loan was considered clearly do not meet these requirements.

Norma Fontane's initial application dated February 8, 1978 was for a $25,000 loan for a restaurant operation. The loan had been recommended for approval by Henry Staubach, the loan officer. On the morning of February 28, 1978, the Loan Committee, consisting of Krause, Staubach, and John Parowski, the portfolio management representative, met and approved the requested loan. Minutes of that meeting were prepared by Krause. Those minutes state that the approval was of a $40,000 loan and bear the initials of each member of the Committee, which Krause admits to have written,⁹ indicating such approval. The circumstances attendant upon this incident were as follows: after the Committee had met and approved the $25,000 loan, a letter from the applicant requesting that it be increased to $40,000 was hand delivered by Ben Torrent to SBA officer Philip Stuart, who in turn brought it to Staubach's attention. Staubach conferred with Krause and the two agreed to the increase. This action was taken without reconvening the Loan Committee and...