Guertin v. United States of America et al
OPINION AND ORDER re: 10 MOTION for Summary Judgment filed by Richard Guertin, 17 CROSS MOTION for Summary Judgment filed by Department of Housing and Urban Development. For the reasons stated above, HUD's cross-motion for summary judgment i s granted, (Dkt. No. 17), and Plaintiffs motion for summary judgment, (Dkt. No. 10), is denied. The Clerk is respectfully requested to terminate the pending motions and close the case. SO ORDERED. (Signed by Judge Kenneth M. Karas on 12/21/2012) (mml)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
Case No. 11-CV-4661 (KMK)
OPINION AND ORDER
UNITED STATES OF AMERICA, DEPARTMENT
OF HOUSING AND URBAN DEVELOPMENT,
Robert N. Isseks, Esq.
6 North Street
Middletown, NY 10940
Counsel for Plaintiff
Michael J. Byars, Esq.
Office of the United States Attorney
Southern District of New York
86 Chambers Street
New York, NY 10007
Counsel for Defendants
KENNETH M. KARAS, District Judge:
In 2004, Plaintiff Richard Guertin (“Plaintiff”) was the Corporation Counsel for the City
of Middletown, New York. AR 126–49.1 On August 30 of that year, Plaintiff was indicted —
along with Middletown Mayor Joseph DeStefano (“DeStefano”) and Middletown Community
Development Director Neil Novesky (“Novesky”) — for allegedly committing a variety of
offenses prohibiting official misconduct. AR 126–49. The charges stemmed from a series of
As explained below, the Court here is reviewing an informal agency determination. As
such, record references are to the “Administrative Record,” abbreviated “AR.”
transactions involving Middletown’s use of funds it received from Defendant Department of
Housing and Urban Development (“HUD”) as part of a Community Development Block Grant
(“CDBG”). AR 126–49. Plaintiff was charged in eight of the counts contained in the 55-count
indictment. AR 126–49.
Ultimately, Plaintiff and his co-conspirators were found not guilty on all counts.2
Novesky’s attorney then asked HUD if federal regulations allowed Middletown to reimburse
Novesky for the substantial legal fees he accrued in defending against the criminal charges. AR
42–45; 54–55. A HUD official replied that the reimbursement was permitted. AR 38–39.
Naturally, Plaintiff and Mayor DeStefano then asked HUD the very same question
regarding reimbursement from HUD funds for their legal fees. AR 34–36. But, to their apparent
surprise, HUD denied their request. AR 25–27. According to HUD, the actions that led to the
state criminal prosecution of Plaintiff and Mayor DeStefano were “of a personal nature,”
whereas Novesky’s actions had been “undertaken in the ordinary course of the employee’s
position.” AR 25–26. Reimbursement for legal expenses was available in the latter case but not
the former; hence, the different determinations by HUD. AR 25. After being stymied in his
later attempts to get HUD to reconsider its decision, Plaintiff filed an action in this Court
alleging, among other things, that HUD’s determination to deny reimbursement was
impermissibly arbitrary. (Compl. ¶ 24.) Both Parties have moved for summary judgment based
on the administrative record.
The case went to a bench trial, and the trial judge found Plaintiff and Novesky not
guilty on all counts. AR 79–125. The judge found Mayor DeStefano guilty of two minor
offenses, but the convictions on those counts were reversed on direct appeal. See People v.
DeStefano, 846 N.Y.S.2d 375 (App. Div. 2007). Thus, in the end, all three alleged coconspirators were cleared of all criminal charges.
A. The CDBG Program
The CDBG program originated under the Housing and Community Development Act of
1974, which Congress enacted to promote “the development of viable urban communities, by
providing decent housing and a suitable living environment and expanding economic
opportunities, principally for persons of low and moderate income.” 42 U.S.C. § 5301(c). HUD
is authorized to provide grants under the CDBG program to states, tribes, and local governments
to carry out activities in accordance with the statute. Id. § 5301 et seq. After the federal
government makes a CDBG grant, “the day-to-day administration of the federal program,
including the actual expenditure of federal funds, is delegated to State and local authorities.”
Dixson v. United States, 465 U.S. 482, 486 (1984).
By regulation, HUD has imposed specific criteria for determining whether a particular
activity is eligible for assistance through CDBG funds. See 24 C.F.R. § 570.200(a). As relevant
here, the regulations state that all costs incurred must conform with OMB Circular A-87, which
is called “Cost Principles for State, Local, and Indian Tribal Governments” (“OMB Circular”).
Id. § 570.200(a)(5). The OMB Circular “establishes principles and standards for determining
costs for Federal awards carried out through grants, cost reimbursement contracts, and other
agreements with State and local governments.” See Office of Management and Budget, “OMB
Circular A-87 Revised,” May 10, 2004, http://www.whitehouse.gov/omb/
circulars_a087_2004 (last visited Dec. 17, 2012). HUD has authority to review a grant
recipient’s use of its CDBG funds to ensure compliance with federal law. See 42 U.S.C.
B. The Prosecution of Plaintiff, DeStefano, and Novesky
From 1997 until at least August 2004, Plaintiff was the Corporation Counsel, or “City
Counsel,” for Middletown, New York; DeStefano was the Mayor of Middletown; and Novesky
was Middletown’s Community Development Director. See AR 100. On August 30, 2004, all
three men were indicted in New York County Court, Orange County, on various public
corruption charges in a 55-count indictment. See AR 126–149. Mayor DeStefano was named in
53 of the counts; Novesky in 23; Plaintiff in eight. See AR 126–49.
In particular, the indictment charged with Plaintiff with:
1. Defrauding the government by acting individually and in concert with DeStefano and
Novesky, “to obtain property from the state or a political subdivision of the state or a
governmental instrumentality within the state by false or fraudulent pretenses, representations or
promises” (Count 1, in violation of N.Y. Penal Law § 195.20);
2. Engaging in prohibited conflicts of interest, by acting in concert with DeStefano, who
“knowingly and willfully ha[d] an interest in a contract with the municipality of which
[DeStefano] was an officer or employee, when [DeStefano] . . . had the power or duty to
negotiate, prepare, authorize or approve the contract or authorize or approve payment
thereunder, audit bills or claims under the contract, or appoint an officer or employee who has
any of the powers or duties set forth above” (Counts 37, 40, in violation of N.Y. Gen. Mun. Law
§§ 801, 805);
3. Engaging in official misconduct, by acting individually and in concert with DeStefano
and Novesky, with “intent to obtain a benefit or deprive another person of a benefit, [by]
commit[ting] an act relating to their offices but which constitute an unauthorized exercise of
their official functions, knowing that such act was unauthorized” (Counts 38, 41, in violation of
N.Y. Penal Law § 195.00);
4. Engaging in a prohibited conflict of interest by “knowingly and willfully hav[ing] an
interest in a contract with the municipality of which he was an officer or employee, when he . . .
had the power or duty to negotiate, prepare, authorize or approve the contract or authorize or
approve payment [thereunder], audit bills or claims under the contract, or appoint an officer or
employee who has any of the powers or duties set forth above” (Counts 39, 42, in violation of
N.Y. Gen. Mun. Law §§ 801, 805); and
5. Engaging in a conspiracy with DeStefano and Novesky with the objective of causing
DeStefano “illegally [to] receive an interest in the proceeds of various [HUD] loans administered
through the City of Middletown, [none of which was] taken out in . . . DeStefano’s name.” The
charge went on to state that it was Plaintiff’s “role in the conspiracy to draft agreements between
Mayor DeStefano, his corporation, and the named recipients of loans administered through the
City of Middletown, and to prepare legal papers associated with the loans, such as mortgages
and UCC Security Chattel Agreements in [Plaintiff’s] capacity as Corporation Counsel for the
City of Middletown” (Count 55, in violation of N.Y. Penal Law § 105.05). See AR 127, 139–49.
The case proceeded to a bench trial in New York County Court, Orange County.
Following trial, the judge issued an oral verdict, in which he described his reasoning in finding
Plaintiff not guilty on all counts. AR 91–125. The judge also found Novesky not guilty on all
counts, and he found DeStefano guilty on only two minor counts, both of which were later
reversed on appeal. Id.; see also DeStefano, 846 N.Y.S. 2d at 375.
Though the trial judge’s oral verdict does not fully explain the nature of the case, and the
trial transcript is not in the record, what is clear is that the prosecution arose from a series of
loans involving the three defendants. AR 97–98. Following a brief legal analysis, the trial
judge’s verdict stated that “every single loan under every one of these counts . . . [was] properly
considered, and [was] properly granted.” AR 97–98. Next, the trial judge stated that he was
“urged to accept the proposition that this nefarious cabal existed in the City of Middletown that
made all this possible,” but “if these defendants are presumed innocent, which they all must be,
then the ability to see or fathom a conspiracy is not so clear.” AR 98–99.
Turning first to Novesky in particular, the trial judge found that there was “no credible
evidence that [Novesky] was involved in any illegal scheme to aid or abet anyone else to obtain
any benefits that they were not otherwise entitled to.” AR 100. Instead, as best the court could
tell, Novesky “did his job,” and nothing more. AR 100.
Next, the trial judge described one “troubling transaction in this case.” AR 102. The
details of that transaction are not entirely clear from the limited administrative record,3 but the
trial judge stated this was a loan which “ostensibly was for the building 5-11 North Main Street
for the purpose of making it saleable.” AR 103. The third party involved in the loan “was aware
of and intended to use the services of the [Office of] Economic Development [i.e., the
Middletown entity receiving federal CDBG funds], and then came the negotiations with
DeStefano.” AR 103. Then, crucially, the trial judge said that those “negotiations involved
attorney Guertin ostensibly in his private capacity.” AR 103 (emphasis added). The court stated
that the evidence showed that “DeStefano, with the advice of his attorney [i.e., Plaintiff], entered
into a proposed lease and a proposed option to purchase that building at 5-11 North Main
Street.” AR 105. Given DeStefano’s position as mayor, the court found that, under the
When reviewing an agency action under the arbitrary and capricious standard, as here,
“the focal point for judicial review should be the administrative record already in existence, not
some new record made initially in the reviewing court.” Camp v. Pitts, 411 U.S. 138, 142
(1973) (per curiam).
circumstances of that transaction, DeStefano “engaged in a prohibited conflict.” AR 107. In
other words, because DeStefano was the Mayor of Middletown, he was prohibited from
participating in his individual capacity in a transaction involving a loan made in part using
CDBG funds of some sort. Plaintiff, the court found, acted as DeStefano’s individual lawyer in
But the trial judge did not stop there and find the two guilty, because that was “not the
entire analysis.” AR 107. To violate the relevant state statute, the defendant’s conduct “must be
performed by the actor willfully and knowingly,” which the court construed as meaning that “the
evil motive must be fraught with activities which are incompatible with the paramount duty of a
public official.” AR 108. Applying that standard, the court found no “evil design under
nefarious purpose.” AR 109. As for Plaintiff in particular, the court found there was “no
conspiracy with attorney Guertin.” AR 109. Rather, the evidence showed Plaintiff was “in the
room with [DeStefano and a third-party] “as they did the initial negotiation of this deal, made
some changes and prepared the documents.” AR 110. The court found that Plaintiff was aware
of N.Y. General Municipal Law Section 801 — which prohibits public officials from “hav[ing]
an interest in any contract with the municipality of which he is an officer or employee” — but
that “it’s not so clear on these facts where and to what extent the conflict lies.” AR 110. The
court said there was no evidence that Plaintiff “was seen in contact or consult [sic] or
conversation with either of his two co-defendants at any time relevant to this case.” AR 110–11.
Given these facts, the court said it was “hard to discern the existence of a conspiracy.” AR 111.
The court, however, went on to describe its view of Plaintiff’s conduct as “ill advised”
[A]ttorney Guertin did wear two hats. And in his zeal to represent
his private client DeStefano, he was blinded to his obligation to the City of
Middletown and he should have exercised more due care in making the
evaluation that I have been called upon to make in order to decide this
Whether he told DeStefano this could be a problem or was [a]
problem or wasn’t a problem, I don’t know. And I will not speculate. It is
not in the record. All I know [is Plaintiff] represented [DeStefano].
Lawyers don’t become co-conspirators or aiders or abetters by giving
legal advice unless there is some further demonstrable criminal plan,
which I simply don’t find here.
So Mr. Guertin did his job as attorney for a private citizen,
DeStefano. Perhaps he didn’t do his job quite as well as corporate counsel
for the City of Middletown. You know, sometimes your nose will tell you
something shouldn’t be done and maybe the smell of this ought to have
been enough to go another way.
But having said that I find as to the defendant Guertin that he
lacked the necessary — that there is no evidence that he had reckless
amount — that he knowingly, willfully, violated [the] statute. That he
acted in a way co-conspiracy with defendant DeStefano. As to defendant
Guertin, I find him not guilty.
Finally, the trial judge turned to DeStefano and stated that “if there was no
conspiracy . . . those findings apply equally to defendant DeStefano insofar as it relates to the
criminal charges on the [transaction].” AR 112. The court also discussed DeStefano’s
involvement in six other transactions, and found DeStefano not guilty of any criminal conduct
related to them. AR 114. The court did find DeStefano guilty of two “reduced counts” of
Offering a False Instrument for Filing,” AR 124, but, as noted, the convictions on those two
counts were overturned on appeal because the New York state appellate court found the evidence
legally insufficient to support the convictions, DeStefano, 846 N.Y.S.2d at 376.
C. HUD’s Reaction, and Novesky’s Reinstatement and Request for Reimbursement
After his exoneration, Novesky was reinstated as the Director of the Office of Economic
and Community Development. AR 76. In a May 27, 2005 letter to the new mayor of
Middletown, HUD allowed Novesky’s access to a HUD computer system to be restored. AR 76.
In the same letter, HUD separately stated that, although DeStefano was found not guilty under
New York law, the verdict “establishes a violation of the conflict of interest” provision of HUD
regulations. AR 77. Therefore, HUD would “consider implementation of specific corrective or
remedial action” provided for by regulation. AR 77. This letter did not mention Plaintiff by
Over a year later, on August 18, 2006, Novesky’s attorney, Otto Hetzel, wrote a letter to
an Associate General Counsel at HUD memorializing a previous informal conversation between
the two about the possibility of Middletown’s using CDBG funds to reimburse Novesky for legal
fees he incurred “to defend against criminal allegations involving the administration of Federal
programs.” AR 54. In the letter, Mr. Hetzel stated that he “came away from that [informal]
conversation understanding that you believe, as I do, that recipients of federal program funds
may expend such funds for this purpose.” AR 54. Mr. Hetzel requested a “short
note . . . confirming the eligibility of CDBG funds for this type of payment.” AR 55. There was
no immediate response to this letter from anyone at HUD.
On March 20, 2007, Mr. Hetzel wrote a letter to two HUD officials making a more
formal request for HUD’s authorization to use CDBG funds to reimburse Novesky. AR 42. Mr.
Hetzel stated that reimbursement was authorized by OMB Circular A-87, Attachment B, Item
10, which is called “Defense and prosecution of criminal and civil proceedings, and claims.” AR
42. Subsection (b) of Item 10 states that “[l]egal expenses required in the administration of
Federal programs are allowable. Legal expenses for prosecution of claims against the Federal
Government are unallowable.” AR 42. Mr. Hetzel contended that, because Novesky was found
not guilty on all charges, and because the verdict showed Novesky was “performing work on
behalf of the City under the CDBG program” during the transactions at issue, Middletown was
authorized to reimburse Novesky for his defense costs using CDBG funds. AR 43.
On September 7, 2007, Elton Lester, HUD’s Acting Associate General Counsel in the
Office of Assisted Housing and Community Development, responded that Middletown could
indeed use CDBG to reimburse Novesky’s legal fees. AR 38. First, Lester confirmed that the
issue was governed by the cost principles in OMB Circular A-87. AR 38. Lester stated that,
“[a]s a general matter, [HUD] has taken the position that a recipient may use CDBG funds to pay
reasonable legal expenses incurred in defense of lawsuits resulting from its administration of the
CDBG program as long as the grantee has acted with due diligence in the administration of the
program.” AR 38. Lester then gave two sentences of reasoning for why Novesky could be
reimbursed. “In this case,” Lester wrote, “the proceedings resulted from actions undertaken in
the ordinary course of the Director’s employment and the court acquitted him all charges after a
trial on the merits. Further, no CDBG funds financed the employee’s defense during the
proceedings.” AR 38–39. Lester concluded that, “[u]nder these circumstances, [HUD]
believe[d] the legal expenses would be required in the administration of the CDBG program for
purposes of section 10.b [of the OMB Circular].” AR 39.
D. Plaintiff’s Unsuccessful Attempt at Reimbursement
On March 17, 2008, attorney Robert Isseks, representing Plaintiff and Mayor DeStefano,
wrote to HUD requesting advice as to whether Middletown could reimburse his clients’ legal
fees using CDBG funds. AR 34. Unlike Novesky, who the record shows had pursued
reimbursement with some diligence, this was the first sign that Plaintiff and DeStefano wished to
be reimbursed by Middletown with federal funds. Mr. Isseks’ letter stated that the criminal
allegations against Plaintiff and Mayor DeStefano “involved the same ‘administration of Federal
programs’ that gave rise to the criminal allegations against Mr. Novesky.” AR 34 (quoting the
Letter from Mr. Lester to Mr. Hetzel of September 7, 2007). Because Plaintiff and DeStefano
were, like Novesky, found not guilty on all charges, they were “identically situated with
Novesky.” AR 35. Both DeStefano and Plaintiff, argued Isseks, “played integral roles in the
administration of the subject HUD loans and thus, like Mr. Novesky, the ‘reasonable legal
expenses’ incurred by Mr. DeStefano and Mr. Guertin were in the defense of criminal charges
that ‘resulted from actions undertaken in the ordinary course of [their] employment.’” AR 35
(alteration in original) (quoting the Letter from Mr. Lester to Mr. Hetzel of September 7, 2007).
Mr. Isseks then listed Plaintiff’s regular duties as Middletown’s Corporation Counsel, which
included various tasks related to the administration of HUD funds. AR 35–36.
On June 12, 2008, Lester responded to the letter and denied the request for
reimbursement. AR 25. The letter began by acknowledging that HUD had authorized
reimbursement for Novesky and then restated the language of OMB Circular A-87. AR 25. But,
after quoting Isseks’ description of his clients’ daily responsibilities, Lester stated that those
official activities “did not serve as the basis for the criminal proceedings brought against”
Plaintiff and DeStefano. AR 26. Rather, “[w]hile the alleged misconduct leading to the court
proceedings occurred during Mr. DeStefano’s tenure as mayor, his actions were of a personal
nature.” AR 26. Then, turning specifically to the reasons for denying the request with respect to
Plaintiff, Lester stated:
[T]he court documents described Mr. Guertin’s questioned activities as
being undertaken for the mayor’s personal benefit as opposed to providing
legal services to carry out the city’s CDBG program. The court presiding
over the case stated “attorney Guertin did wear two hats. And in his zeal
to represent his private client DeStefano, he was blinded to his obligation
to the City of Middletown. . . . So[,] Mr. Guertin did his job as attorney for
a private citizen, DeStefano.” In our view, legal expenses arising from a
mayor’s private business dealings, as well as those arising from advising
the mayor on such matters, are not required in the city’s administration of
the CDBG program.
AR 26 (quoting the state verdict, AR 111).
For the next several years, Mr. Isseks took a number of steps to get HUD to reconsider its
denial. He wrote back to Lester requesting a “final determination from an appropriate official,”
though he acknowledged there was “no appeal process per se.” AR 23. He wrote a letter to
another HUD official requesting reconsideration. AR 18–21. He wrote to the congressional
Representative who represented the citizens of Middletown, and in turn that Representative
wrote to HUD about the matter. AR 15–16. The City Council of Middletown even passed a
Resolution declaring “that there is no rational basis in law or fact to reimburse Mr. Novesky but
not Mr. Guertin, for the criminal defense legal expenses incurred” — and then the city sent the
Resolution to HUD. AR 11–13.
The efforts proved fruitless. On February 9, 2011, Yolanda Chávez, HUD’s Deputy
Assistant Secretary for Grant Programs, responded in separate letters to Mr. Isseks and to the
City of Middletown. AR 2, 4. While Ms. Chávez was “sorry that [Isseks] and the City of
Middletown [were] dissatisfied with HUD’s decision in this matter,” the Department “considers
this matter closed.” AR 2, 4. According to HUD, Middletown could not pay Plaintiff’s legal
fees using federal CDBG funds.
E. This lawsuit
After concluding his dealings with HUD, Plaintiff filed the instant Complaint in this
Court. Plaintiff established jurisdiction under the Administrative Procedure Act, 5 U.S.C. § 704
(“APA”), which provides that a “final agency action for which there is no other adequate remedy
in a court [is] subject to judicial review,” and he also invokes 28 U.S.C. §§ 1331, 1343, and
1361, which provide for general federal question jurisdiction, jurisdiction over civil rights claims
and actions to compel agency action.4 The Complaint alleges that HUD’s “refusal to authorize
the City of Middletown to reimburse plaintiff’s legal expenses out of the administrative funds of
the City’s Community Development Office . . . is arbitrary, capricious, and without any rational
basis and in violation of plaintiff’s rights to due process and equal protection.” (Compl. ¶ 24.)
Plaintiff requests that this Court order HUD to authorize Middletown to reimburse him. (Compl.
No discovery was requested, and such a request would have been irrelevant anyway;
when a court’s review is confined to determining whether an agency action was arbitrary or
HUD challenges neither the Court’s jurisdiction nor Plaintiff’s standing to bring this
suit. Exercising its independent duty to verify these matters, the Court notes that HUD’s
determination was clearly a “final agency action” that confers jurisdiction under the APA. See
Sackett v. EPA, 132 S. Ct. 1367, 1371 (2012) (describing the “hallmarks of APA finality” as,
among other things, that the agency action “determined rights or obligations” and that it “marks
the consummation of the agency’s decisionmaking process” (internal quotation marks omitted)).
Standing is a somewhat trickier matter. As an irreducible constitutional minimum, “a
litigant must demonstrate that it has suffered a concrete and particularized injury that is either
actual or imminent, that the injury is fairly traceable to the defendant, and that it is likely that a
favorable decision will redress that injury.” Massachusetts v. EPA, 549 U.S. 497, 517 (2007).
Here, because Middletown surely could pay for Plaintiff’s legal fees, even absent use of CDBG
funding, there is some amount of attenuation between HUD’s denial and Plaintiff’s failure to be
reimbursed. After all, Middletown could just pay Plaintiff out of its non-federal funds. Still, it is
clear from the record — especially the City Council resolution declaring that HUD should
authorize reimbursement with CDBG funds, see AR 12 — that Middletown would reimburse
Plaintiff if it could do so with federal funds, but it will not do so if it does not receive the funds.
This means that Plaintiff does indeed meet the requirements of injury, causation, and
redressability: whether Plaintiff gets reimbursed turns on HUD’s determination. See Carver v.
City of New York, 621 F.3d 221, 226 (2d Cir. 2010) (noting that a defendant’s actions need not
be “the very last step in the chain of causation to demonstrate that the defendant’s actions caused
the claimed injury,” because “[i]t suffices that the defendant’s actions had a determinative or
coercive effect upon the action of someone else who directly caused the claimed injury” (internal
quotation marks omitted)). That gives Plaintiff standing to challenge HUD’s decision.
capricious, “the focal point for judicial review should be the administrative record already in
existence, not some new record made initially in the reviewing court.” Camp, 411 U.S. at 142;
see also Yale-New Haven Hosp. v. Leavitt, 470 F.3d 71, 82 (2d Cir. 2006) (“Generally speaking,
after-the-fact rationalization for agency action is disfavored.”). Thus, based on the
administrative record, the parties cross-moved for summary judgment. The Court held oral
argument on December 6, 2012.
The central challenge here comes under the Administrative Procedure Act. That is, the
Court must determine whether HUD’s determination that Middletown could not use CDBG
funds to reimburse Plaintiff was “arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law,” such that this Court must “hold unlawful and set aside” the relevant
agency action, according to 5 U.S.C. § 706(2)(A). That is a high standard for Plaintiff, and the
Court concludes that Plaintiff has not met it here. Moreover, as explained in the final subsection,
the resolution of the APA claim also necessarily disposes of Plaintiff’s attendant equal protection
A. HUD’s Determination Was Not Arbitrary and Capricious
1. The legal standard
The Parties agree that the “catchall” provision of the APA, 5 U.S.C. § 706(2)(A),
provides the relevant standard of review for this Court. That provision, which “pick[s] up
administrative misconduct not covered by the other more specific paragraphs” of the APA, see
Ass’n of Data Processing Serv. Orgs., Inc. v. Bd. of Governors of the Fed. Reserve Sys., 745 F.2d
677, 683 (D.C. Cir. 1984) (Scalia, J.), states that a “reviewing court shall . . . hold unlawful and
set aside agency action, findings, and conclusions found to be . . . arbitrary, capricious, an abuse
of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A).
While the exact degree of deference courts are to give an agency under this standard has
been dissected in countless decisions since the APA was enacted in 1946, the canonical
formulation of arbitrary and capricious review comes from the Supreme Court’s 1983 decision in
Motor Vehicle Manufacturers Ass’n of the United States, Inc. v. State Farm Mutual Automobile
Insurance Co., 463 U.S. 29 (1983). There, the Court, drawing on language from decades of its
prior decisions, stated:
The scope of review under the “arbitrary and capricious” standard is narrow and a
court is not to substitute its judgment for that of the agency. Nevertheless, the
agency must examine the relevant data and articulate a satisfactory explanation
for its action including a rational connection between the facts found and the
choice made. In reviewing that explanation, we must consider whether the
decision was based on a consideration of the relevant factors and whether there
has been a clear error of judgment. Normally, an agency rule would be arbitrary
and capricious if the agency has relied on factors which Congress has not
intended it to consider, entirely failed to consider an important aspect of the
problem, offered an explanation for its decision that runs counter to the evidence
before the agency, or is so implausible that it could not be ascribed to a difference
in view or the product of agency expertise. The reviewing court should not
attempt itself to make up for such deficiencies: We may not supply a reasoned
basis for the agency’s action that the agency itself has not given. We will,
however, uphold a decision of less than ideal clarity if the agency’s path may
reasonably be discerned.
Id. at 43 (internal quotation marks and citations omitted). Though State Farm was decided in the
context of agency rulemaking, the Supreme Court later added that “adjudication is subject to the
requirement of reasoned decisionmaking as well.” Allentown Mack Sales & Serv., Inc. v. NLRB,
522 U.S. 359, 374 (1998); see also New England Health Care Emps. Union v. NLRB, 448 F.3d
189, 194 (2d Cir. 2006) (applying State Farm to an agency adjudication). That formulation thus
As State Farm makes clear, and as the Second Circuit has subsequently elaborated,
arbitrary and capricious review requires courts to conduct a “searching and careful” review of
the administrative record, Islander E. Pipeline Co., LLC v. McCarthy, 525 F.3d 141, 151 (2d Cir.
2008) — but only to ensure that “the agency has considered the evidence, examined the relevant
factors, and spelled out a satisfactory rationale for its action including the demonstration of a
reasoned connection between the facts it found and the choice it made,” Envtl. Def. v. EPA, 369
F.3d 193, 201 (2d Cir. 2004). If a court finds that the agency has acted within its scope of
authority, considered relevant evidence, and provided a sound reason for its decision, the agency
determination must be upheld, for a reviewing court “may not substitute its judgment for that of
the agency.” Natural Res. Def. Council v. EPA, 658 F.3d 200, 215 (2d Cir. 2011) (internal
quotation marks omitted); see also Mullins v. City of New York, 653 F.3d 104, 114 (2d Cir. 2011)
(explaining that an agency’s interpretation of its own regulation is entitled “to controlling
deference . . . unless it is plainly erroneous or inconsistent with the regulations or there is any
other reason to suspect that the interpretation does not reflect the agency’s fair and considered
judgment on the matter in question” (internal quotation marks and brackets omitted)).
2. HUD’s determination
Plaintiff contends that HUD’s determination must be set aside because HUD “misstated
the reason why Guertin was indicted.” (Pl. Mem. 6.) The Lester Letter denying Plaintiff
reimbursement reasoned that the conduct at issue did not arise out of Guertin’s administration of
the federal program because “court documents described Mr. Guertin’s questioned activities as
being undertaken for the mayor’s personal benefit as opposed to providing legal services to carry
out the city’s CDBG program.” AR 26. But, counters Plaintiff, “even if the trial judge did say
that Guertin ‘did his job as attorney for a private citizen,’ that is not what Guertin was indicted
for. He was indicted on the mistaken belief that he had done something wrong as the attorney
for the City in the course of his administration of the City’s CDBG program.” (Pl. Mem. 7.)
Given the nature of the indictment, and since Plaintiff — like Novesky — was found not guilty
on all charges, “Novesky and Guertin are identically situated under section 10.b [of the OMB
Circular] and HUD’s attempt to distinguish [Novesky and Plaintiff] is arbitrary and capricious.”
(Pl. Mem. 8.)
Plaintiff’s argument is intuitively appealing. After all, Plaintiff and Novesky were
charged by the same charging instrument as part of the same public corruption conspiracy. See
AR 126–149. And the charges themselves certainly do appear to arise, at first glance, from their
combined administration of the federal program.
For example, take Count 41. That Count charged that Plaintiff, Novesky, and DeStefano,
“acting individually and in concert with each other, with intent to obtain a benefit or deprive
another person of a benefit, did commit an act relating to their offices but which constituted an
unauthorized exercise of their official functions, knowing that such act was unauthorized.” AR
141. How, Plaintiff essentially asks, can an indictment for official misconduct where the
Plaintiff was found not guilty not be a prosecution that “resulted from actions undertaken in the
ordinary course of [his] employment,” as required by HUD? See AR 38–39. In Plaintiff’s
words, he was “not indicted for the advice he gave to the mayor on the mayor’s private business
dealings.” (Pl. Reply 2.) Rather, Plaintiff “was indicted for his role, as the City’s Corporation
Counsel, in the administration of the CDBG program.” (Pl. Reply 2.) Those statements are
unimpeachably correct, based on the language of the indictment.
Yet HUD rejected Plaintiff’s proposition that the prosecution “resulted from actions
undertaken in the ordinary course of [his] employment.” In denying Plaintiff’s request, HUD
looked past the indictment and to the actual facts as found by the trial judge. AR 26. Quoting
the state court verdict that Plaintiff “did his job as attorney for a private citizen, DeStefano,”
HUD concluded that, despite the language in the indictment, the prosecution of Plaintiff did not
arise from the ordinary course of administering the CDBG program for the City of Middletown.
AR 26. Rather, it arose from his actions undertaken as a private citizen. It is incontestable that
those actions should not have been taken, since Plaintiff was a government official; hence the
indictment. By contrast, Novesky was prosecuted solely for doing his job. AR 38–39. He was
completely cleared of wrongdoing while doing his job.
Providing reimbursement for Novesky but not Plaintiff and DeStefano is therefore a
rational, non-arbitrary distinction, and it is supported by the evidence that HUD used in deciding
the facts relevant to its decisionmaking. Another, perhaps simpler, way of articulating HUD’s
distinction is the following.
Recall again that Plaintiff and Novesky were both indicted for “commit[ting] an act
relating to their offices but which constituted an unauthorized exercise of the official functions,
knowing that such act was unauthorized.” There are at least two ways to defend against such a
charge. According to HUD, which defense is employed makes all the difference.
The first, perhaps more immediately apparent defense is to say either “I didn’t know the
act was unauthorized” or “The act wasn’t unauthorized given my function.” This first sort of
defense was Novesky’s: the judge found Novesky was just “doing his job,” and therefore not
knowingly doing any unauthorized acts. AR 100. The second defense, though, negates a
different element of the charge: the element which required Plaintiff and Novesky to commit an
act “relating to their offices.” A defendant employing this defense says “The act wasn’t an act
relating to my office.” Plaintiff successfully employed this second sort of defense: with regard
to the acts at issue, the judge found that Plaintiff “did his job as attorney for a private citizen,”
and thus was not guilty of official misconduct. AR 112.
The existence of these different defenses means that HUD may draw a non-arbitrary line
between those employing defense one and those employing defense two. According to HUD,
that difference is the difference between being eligible for reimbursement and being ineligible
for it, since those employing defense one defend a suit “resulting from its administration of the
[federal] program,” but those who employ defense two do not. It is not for this Court to say
whether that is the best possible line to draw under the relevant regulation. Rather, the Court
must simply ask whether that line and the adjudication that Novesky fell on one side of it, and
that Plaintiff fell on the other, was the result of “reasoned decisionmaking.” State Farm, 463
U.S. at 52. The Court concludes that it was, for several reasons.
First, HUD’s determination that Novesky and Plaintiff were differently situated did not
come as a surprise or a change of position; rather, HUD’s reasoning was consistent throughout
all the correspondence available in the administrative record. The first correspondence in the
record from HUD is a May 27, 2005 letter to the Mayor of Middletown, where HUD allowed
Novesky’s access to a HUD computer system to be restored after he was reinstated to his prior
position. AR 76. In the same letter, though, HUD stated that it would “consider implementation
of specific corrective or remedial action” against DeStefano, since the court did find that he
“engaged in a prohibited conflict of interest.” AR 76. Although Plaintiff was not identified by
name in that letter, the HUD official noted that DeStefano had acted “with the advice of his
attorney” — clearly a reference to Plaintiff. AR 76. Moreover, in an August 2006 letter,
Novesky’s attorney stated that he was told in informal conversations with HUD officials that
reimbursement for legal fees would be available from CDBG funds. AR 54. This prior
statement provides a firm footing for HUD: as the Supreme Court said in State Farm, “[a] settled
course of behavior embodies the agency’s informed judgment that, by pursuing that course, it
will carry out the policies committed to it by Congress. There is, then, at least a presumption
that those policies will be carried out best if the settled rule is adhered to.” State Farm, 463 U.S.
at 41–42 (internal quotation marks omitted).
Second, HUD stated, and Plaintiff does not dispute, that the precise distinction invoked
here has been a longstanding line of demarcation for HUD. Lester, in his letter to Novesky,
wrote that HUD “has taken the position that a recipient may use CDBG funds to pay reasonable
legal expenses incurred in defense of lawsuits resulting from its administration of the CDBG
program as long as the grantee has acted with due diligence in the administration of the
program.” AR 38. Though Lester did not cite any prior examples or cases, Plaintiff does not
challenge that this has, in fact, been HUD’s longstanding interpretation of the relevant
regulations — the challenge is only that HUD’s application of law to fact was arbitrary and
capricious. (See Pl. Mem. 1–8, Pl. Reply Mem. 6–8.) Indeed, while HUD argues in its moving
papers that HUD’s legal interpretation of Section 10.b of Attachment B to OMB Circular A-87 is
entitled to deference, the Court need not express an opinion on the level of deference owed by
this Court to HUD’s legal interpretation.5 It is enough to say that the legal principle HUD
In the Administrative Record, there is an example of an earlier HUD letter using
virtually identical language as that used by Lester in his letters. In a 1995 letter to the City
Attorney of Houston, HUD’s Deputy Assistant Secretary for Grant Programs stated that “CDBG
funds may be used to pay legal fees incurred in defense of lawsuits resulting from its
administration of the CDBG program as long as the grantee has acted with due diligence in the
administration of t he program.” AR 161. While HUD has not brought to the Court’s attention
any HUD determination regarding fees following a finding that an exonerated defendant had
acted with a conflict of interest, as here, that letter nonetheless shows that HUD’s legal position
has indeed been consistent over at least the last 17 years.
applied had been its longstanding policy, and that its application to the facts here was not
arbitrary or capricious. This again confirms that HUD followed the principle of regularity of
decisionmaking. See Allentown Mack, 522 U.S. at 374 (“It is hard to imagine a more violent
breach of [the requirement of reasoned decisionmaking] than applying a rule of primary conduct
or a standard of proof which is in fact different from the rule or standard formally announced.”).
Third and finally, HUD’s factfinding methodology was sound. HUD relied on the
verdict transcript to determine the nature of the criminal action, which was an eminently
reasonable place to look to find the necessary facts. Plaintiff vigorously disputes the factual
findings themselves. “The trial court did not find that Guertin had a conflict of interest,”
Plaintiff contends in the heading to Point 3 of his reply memorandum. (Pl. Reply Mem. 5.) But
the argument in this section of the memorandum, like all others in his memoranda, amounts to a
differing interpretation of the trial judge’s verdict from that taken by HUD. One perhaps could
debate HUD’s interpretation of the facts underlying the verdict, but the only role for this Court is
make sure that HUD meets the requirement that the agency “examine the relevant data and
articulate [a] satisfactory explanation for its action.” State Farm, 463 U.S. at 43. The relevant
data — the verdict — was examined, and HUD offered a satisfactory explanation for HUD’s
subsequent action. That ends this Court’s review.6
At oral argument, counsel for HUD appeared to walk back somewhat from defending
HUD’s determination on the basis of the particular rationale given by Mr. Lester in his letter.
Several times, counsel for HUD said that Lester’s letter “perhaps could have been worded
differently.” The problem with this argument is that, as stated above, State Farm tells reviewing
courts that they “may not supply a reasoned basis for the agency’s action that the agency itself
has not given.” 463 U.S. at 43.
Nonetheless, HUD’s memoranda of law do indeed defend Lester’s letter on the basis of
the specific rationale stated in the letter, (see HUD Opening Mem. 18–22), and the Court does
not construe counsel’s representations at oral argument as abandoning the position in HUD’s
memoranda of law. Ultimately, the Court today holds that HUD’s decisionmaking, in the form
To be sure, HUD perhaps could have relied solely on the indictment to determine the
nature of the action, and a reasoned decision to allow Middletown to reimburse Plaintiff may
well also have withstood arbitrary and capricious review. That is the nature of agency
decisionmaking: an agency can often choose between more than one viable option. But our
system puts that judgment in the hands of the agency, not the federal courts. Thus, when an
agency chooses one of those viable options after relying on a perfectly reasonable source to
make its factual determinations — as here — then the action must be upheld. This is because, as
noted, a reviewing court “may not substitute its judgment for that of the agency.” Natural Res.
Def. Council, 658 F.3d at 215 (internal quotation marks omitted).
At bottom, to survive arbitrary and capricious review, “an agency’s decreed result [must]
be within the scope of its lawful authority,” and “the process by which it reaches that result must
be logical and rational.” Allentown Mack, 522 U.S. at 374. Here, there is no dispute that the
agency had the authority to adjudicate this dispute and deny Middletown the authority to
reimburse Plaintiff. Moreover, HUD’s decisionmaking process was logical and rational, as
shown by its consistent position regarding this case through time, its explanation of its
determination in the Lester Letters, and its reasonable reliance on the verdict transcript to
determine the relevant facts. That is enough for the Court to confirm that HUD’s action was not
“arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C.
of the Lester denial letter, was not arbitrary and capricious based on its stated rationale.
B. HUD’s Determination Did Not Violate Plaintiff’s Equal Protection Rights
Plaintiff also presses a so-called “class of one” equal protection claim under the Fifth
Amendment’s equal protection component.7 As the Supreme Court recently stated, “[w]hen
those who appear similarly situated are nevertheless treated differently, the Equal Protection
Clause requires at least a rational reason for the difference, to assure that all persons subject to
legislation or regulation are indeed being treated alike, under like circumstances and conditions.”
Engquist v. Or. Dept. of Agr., 553 U.S. 591, 602 (2008) (internal quotation marks omitted).
Therefore, “when it appears that an individual is being singled out by the government, the
specter of arbitrary classification is fairly raised, and the Equal Protection Clause requires a
rational basis for the difference in treatment.” Id. (internal quotation marks omitted). In other
words, to prevail on such a claim, a plaintiff is “required to show . . . irrational and wholly
arbitrary acts.” Giordano v. City of New York, 274 F.3d 740, 751 (2d Cir. 2001) (internal
quotation marks omitted).
As explained above, HUD’s classification was not “wholly arbitrary” or “irrational.” To
the contrary: HUD’s reliance on the state judge’s disparate findings as to Novesky on the one
hand and Plaintiff and DeStefano on the other provided a rational, non-arbitrary basis for the
The Fifth Amendment, which applies to actions against the federal government, does
not have an explicit Equal Protection Clause like that in the Fourteenth Amendment.
Nonetheless, “[e]qual protection analysis in the Fifth Amendment area is the same as that under
the Fourteenth Amendment.” Buckley v. Valeo, 424 U.S. 1, 93 (1976) (per curiam); see also
United States v. Laurent, 861 F. Supp. 2d 71, 105 (E.D.N.Y. 2011). The Complaint here
technically invokes the Fourteenth Amendment, but, with HUD’s consent, (see HUD Opening
Mem. 14 n.4), the Court construes the Complaint as stating a Fifth Amendment equal protection
claim, and the Court applies the same standard as that which applies under the Fourteenth
Amendment’s Equal Protection Clause.
difference in treatment. Therefore, Plaintiff’s equal protection claim also fails.8
For the reasons stated above, HUD’s cross-motion for summary judgment is granted,
(Dkt. No. 17), and Plaintiff’s motion for summary judgment, (Dkt. No. 10), is denied. The Clerk
is respectfully requested to terminate the pending motions and close the case.
White Plains, New York
December __, 2012
KENNETH M. KARAS
UNITED STATES DISTRICT JUDGE
In the Complaint, Plaintiff also contended that his “due process” rights were violated.
(Compl. ¶ A.) But he does not mention the due process claim in his moving papers either in
support of or in opposition to summary judgment, and he did not raise the issue at oral argument,
so the Court deems the claim abandoned. See, e.g., Singleton v. City of Newburgh, 1 F. Supp. 2d
306, 312 (S.D.N.Y. 1998) (deeming a claim abandoned where the claim was alleged in the
complaint but not “raised elsewhere in the record”).
difference in treatment. Therefore, Plaintiffs equal protection claim also fails. 8
For the reasons stated above, HUD's cross-motion for summary judgment is granted,
(Dkt. No. 17), and Plaintiffs motion for summary judgment, (Dkt. No. 10), is denied. The Clerk
is respectfully requested to terminate the pending motions and close the case.
White Plains, New York
In the Complaint, Plaintiff also contended that his "due process" rights were violated.
(Compl. ~A.) But he does not mention the due process claim in his moving papers either in
support of or in opposition to summary judgment, and he did not raise the issue at oral argument,
so the Court deems the claim abandoned. See, e.g., Singleton v. City of Newburgh, 1 F. Supp. 2d
306,312 (S.D.N.Y. 1998) (deeming a claim abandoned where the claim was alleged in the
complaint but not "raised elsewhere in the record").
Robert Nathan Isseks
Robert N. Isseks
6 North Street
Middletown, NY 10940
Michael J. Byars
U.S. Attorney's Office, SDNY (Chambers Street)
86 Chambers Street
New York, NY 10007
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