13‐186
Guertin v. United States
In the
United States Court of Appeals
For the Second Circuit
________
AUGUST TERM, 2013
ARGUED: OCTOBER 31, 2013
DECIDED: FEBRUARY 26, 2014
No. 13‐186
RICHARD GUERTIN,
Plaintiff‐Appellant,
v.
UNITED STATES OF AMERICA, DEPARTMENT OF HOUSING AND URBAN
DEVELOPMENT,
Defendants‐Appellees.
________
Before: WALKER, CABRANES, and LOHIER, Circuit Judges.
________
This appeal arises out of the refusal by the United States
Department of Housing and Urban Development to authorize
reimbursement of the defense costs of plaintiff Richard Guertin, who
in 2004 was Corporation Counsel for the City of Middletown, New
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York. Guertin incurred these costs successfully defending criminal
charges stemming from a series of transactions that involved
Middletown’s use of funds it received from HUD. Invoking the
Administrative Procedure Act, 5 U.S.C. §§ 701‐706, and his Due
Process and Equal Protection Rights under the United States
Constitution, Guertin sought an order in the District Court for the
Southern District of New York (Kenneth M. Karas, J.) overturning
HUD’s decision. The district court affirmed HUD’s decision. We
REVERSE and ORDER HUD to authorize reimbursement.
________
ROBERT N. ISSEKS, Middletown, NY, for Plaintiff‐
Appellant.
MICHAEL J. BYARS (Emily E. Daughtry, Benjamin
H. Torrance on the brief), Assistant United States
Attorneys, for Preet Bharara, United States
Attorney, United States Attorney’s Office for the
Southern District of New York, New York, NY,
for Defendants‐Appellees.
________
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JOHN M. WALKER, JR., Circuit Judge:
This appeal arises out of the refusal by the United States
Department of Housing and Urban Development (“HUD”) to
authorize reimbursement of the defense costs of plaintiff Richard
Guertin, who in 2004 was Corporation Counsel for the City of
Middletown, New York. Guertin incurred these costs successfully
defending criminal charges stemming from a series of transactions
that involved Middletown’s use of funds it received from HUD.
Invoking the Administrative Procedure Act, 5 U.S.C. §§ 701‐706 (the
“APA”), and his Due Process and Equal Protection Rights under the
United States Constitution, Guertin sought an order in the District
Court for the Southern District of New York (Kenneth M. Karas, J.)
overturning HUD’s decision. The district court affirmed HUD’s
decision. We REVERSE and ORDER HUD to authorize
reimbursement.
BACKGROUND
Between 1997 and 2004, the City of Middletown received
funds under HUD’s Community Development Block Grant
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(“CDBG”) program, which provides federal grants to local
governments to promote the “the development of viable urban
communities.” 42 U.S.C. § 5301(c). Congress delegated the day‐to‐
day administration of the CDBG program, including the actual
expenditure of federal funds, to the grant recipients. See Dixson v.
United States, 465 U.S. 482, 486 (1984). As Corporation Counsel for
the City of Middletown, Guertin had oversight responsibilities of
CDBG fund expenditures.
On August 30, 2004, New York State indicted Guertin—along
with Middletown Mayor Joseph DeStefano and Middletown
Community Development Director Neil Novesky—on a variety of
charges tied to the alleged misuse of CDBG funds. The essence of
these allegations was that, as Corporation Counsel, Guertin had
conspired with DeStefano and Novesky in an illegal scheme by
which Mayor DeStefano had personally benefitted from the loans
made from CDBG funds. Following a bench trial, plaintiff,
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DeStefano and Novesky were found not guilty of all charges against
them.1
In rendering the bench verdict, the trial judge found that
Novesky simply “did his job” as Director of the Office of Economic
and Community Development, and that there was “no credible
evidence that he was involved in any illegal scheme.” Verdict
Transcript, Joint App’x 195. With regard to Mayor DeStefano, the
judge found one of the eight loans from CDBG funds to be
“troubling.” Id. at 197. Although a third‐party had originally
sought the loan to renovate a building, the loan constituted “an
indirect pecuniary benefit” to DeStefano and created a “prohibited
conflict.” Id. at 202. The judge, however, found that DeStefano had
not acted with the mens rea mandated by New York’s conflict of
interest statute,2 which requires, in addition to illegality, some evil
purpose or plan.
1 The court convicted DeStefano on two reduced counts that were later
overturned on appeal.
2 This statute prohibits a municipal officer or employee from “willfully
and knowingly” having an interest in “any contract with the municipality
of which he is an officer or employee, when such officer or employee . . .
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Of relevance to this appeal, the judge found that Guertin had
negotiated this prohibited transaction “ostensibly in his private
capacity” as DeStefano’s private lawyer. Id. at 198. But because
there was no evidence that Guertin “was seen in contact or consult
or conversation with either of his two co‐defendants at any time,” id.
at 205‐06, the judge found that Guertin’s involvement did not
amount to participation in a criminal conspiracy. The judge stated
that, “like it or not, 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 and he should have exercised
more due care . . . . 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.” Id. at 206‐07.
Following his acquittal, Novesky’s attorney asked HUD if
federal regulations allowed Middletown to reimburse Novesky from
CDBG funds for the legal fees he had incurred in defending against
has the power or duty to . . . negotiate, prepare, authorize or approve the
contract or authorize or approve payment thereunder.” N.Y. Gen. Mun.
Law §§ 801, 805.
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the criminal charges. HUD concluded that reimbursement of
Novesky’s legal fees from CDBG funds was permitted because the
“proceedings resulted from actions undertaken in the ordinary
course of [Novesky’s] employment” and because the legal expenses
were incurred pursuant to “the administration of the CDBG
program.” Letter from HUD Associate General Counsel to
Novesky’s Attorney (Sept. 7, 2007), Joint App’x 69‐70.
Naturally, Guertin and Mayor DeStefano then sought HUD’s
approval for reimbursement of their legal fees from HUD funds, but
Elton Lester, HUD’s Associate General Counsel, denied their
requests. Whereas Novesky’s actions had been “undertaken in the
ordinary course of the employee’s position,” in his letter denying
reimbursement, Lester stated that the actions of Guertin and Mayor
DeStefano that had led to their prosecution were “of a personal
nature,” Letter from HUD Associate General Counsel to Guertin’s
Attorney (Jun. 12, 2008), Joint App’x 77. In HUD’s 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
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required in the city’s administration of the CDBG program,” and,
therefore, are not reimbursable. Id.
After unsuccessful attempts to get HUD to reconsider its
decision, Guertin filed an action in the district court alleging, among
other things, that HUD’s decision to deny reimbursement was
impermissibly arbitrary and violated the Due Process and Equal
Protection Clauses of the Fifth Amendment. The parties cross‐
moved for summary judgment and, based on the undisputed
administrative record, the district court granted the government’s
motion, and denied Guertin’s. See Guertin v. United States, 913 F.
Supp. 2d 1 (S.D.N.Y. 2012).
This appeal followed.
DISCUSSION
We review a district court’s grant of summary judgment de
novo. Natural Res. Defense Council, Inc. v. U.S. Food and Drug Admin.,
710 F.3d 71, 79 (2d Cir. 2013). Summary judgment is proper “if the
movant shows that there is no genuine dispute as to any material
fact and the movant is entitled to judgment as a matter of law.” Fed.
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R. Civ. P. 56(a). “In considering the evidence, the court must resolve
all ambiguities, and credit all factual inferences that could rationally
be drawn, in favor of the party opposing summary judgment even if
contrary inferences might reasonably be drawn.” Natural Res.
Defense Council, 710 F.3d at 79 (internal quotation marks and citation
omitted).
The APA limits judicial review of agency action. As relevant
to this dispute, the APA provides that a reviewing court shall only
“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.
“Under this deferential standard of review, we must assess, among
other matters, whether the decision was based on a consideration of
the relevant factors and whether there has been a clear error of
judgment.” Bechtel v. Admin. Review Bd., 710 F.3d 443, 446 (2d Cir.
2013) (internal quotation marks omitted). In doing so, we “may not
substitute [our] judgment for that of the agency”; however the
“record must show that the agency examined the relevant data and
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articulated a satisfactory explanation for its action.” Natural Res.
Defense Council, Inc. v. U.S. Envtl. Prot. Agency, 658 F.3d 200, 215 (2d
Cir. 2011) (citations and internal quotation marks omitted). An
agency decision will thus only be set aside if it “has relied on factors
which Congress had 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.” Bechtel, 710 F.3d at 446
(quoting Nat’l Assoc. of Home Builders v. Defenders of Wildlife, 551 U.S.
644, 658 (2007)).
As relevant here, the CDBG program was created by statute in
1974 as part of an effort 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). The municipal grantee of CDBG funds is largely in control
of disbursement. While this control is extensive, it is not unlimited.
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The statute provides that permissible expenditures include the
“payment of reasonable administrative costs related to establishing
and administering federally approved enterprise zones and
payment of reasonable administrative costs and carrying charges
related to . . . the planning and execution of community
development and housing activities.” Id. § 5305(13).
HUD’s regulations are more specific. See 24 C.F.R. §§ 570.200‐
570.206. HUD’s criteria include that any costs incurred must
conform to the Office of Management and Budget’s Circular A‐87,
“Cost Principles for State, Local, and Indian Tribal Governments,”
revised May 10, 2004 (“OMB Circular A‐87”). 24 C.F.R. §
570.200(a)(5). OMB Circular A‐87 states, under the heading
“[d]efense and prosecution of criminal and civil proceedings, and
claims,” that “[l]egal expenses required in the administration of
[f]ederal programs are allowable. Legal expenses for prosecution of
claims against the [f]ederal [g]overnment are unallowable.” OMB
Circular No. A87, attach. B, § 10(b). In disallowing Guertin’s
reimbursement, Associate General Counsel Lester explicitly relied
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on OMB Circular A‐87. Lester’s letter denying reimbursement
stated:
Along similar lines, the 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.
Joint App’x 77.
Guertin argues that HUD acted arbitrarily and capriciously
because Lester’s denial letter was based upon a premise that is
“plainly false.” Guertin contends that his legal expenses did not
arise out of advising DeStefano on DeStefano’s private business
dealings, of which there was no evidence, but rather from the
unproven allegations that Guertin had compromised his duties and
obligations as Corporation Counsel in administering Middletown’s
CDBG program. We agree.
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Based on the record before us, we hold that HUD acted
arbitrarily and capriciously by incorrectly determining that
Guertin’s legal fees were a result of Guertin’s acting solely as
DeStefano’s private counsel. Lester, referring to the state trial
court’s findings, stated that “the 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.” Id. (emphasis added). This is the factual
finding relied on by Lester in explaining HUD’s denial; however, it
is not supported by either the allegations against Guertin in the
indictment or the state trial court’s verdict.
As an initial matter, Guertin was named in eight counts of the
indictment. Six of those counts contain no claim of private dealing:
they allege that the basis for criminal liability lies solely in Guertin’s
public role as Corporation Counsel. For example, count one charged
that Guertin, being a public servant, schemed with intent to defraud
the government, and counts thirty‐eight and forty‐one charged
Guertin with official misconduct. The two counts that do not
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explicitly charge Guertin in his role as Corporation Counsel (count
thirty‐seven and forty) both allege a prohibited conflict of interest
based on Guertin acting in concert with DeStefano. The indictment
thus does not support HUD’s finding that Guertin’s “questioned
activities” were undertaken only in support of DeStefano’s personal
business deals “as opposed to providing legal services to carry out
the city’s CDBG program.”
More importantly, the state trial court’s verdict, on which
Lester purported to rely, does not support Lester’s findings. The
passage from the trial court quoted by Lester’s letter states “attorney
Guertin did wear two hats . . . So, Mr. Guertin did his job as attorney
for a private citizen, DeStefano.” This statement, however, referred
to only one of the seven loans underlying the charges against
Guertin and DeStefano, which dealt with a piece of property at 5‐11
North Main Street. In every other loan transaction at issue, there is
no support for the proposition that Guertin acted with any purpose
other than administering the CDBG program. And in the loan
transaction in which the trial judge perceived a conflict, the trial
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court made no finding that Guertin had not fulfilled his
responsibilities as Corporation Counsel. To the contrary, the trial
court expressly found that every single loan was “properly
considered” and “properly granted.”
Lester’s statement that the evidence showed that Guertin
acted “for the mayor’s personal benefit as opposed to providing
legal services” to the City thus is not supported by the evidence that
Lester purported to rely on. HUD therefore “offered an explanation
for its decision that runs counter to the evidence before the agency.”
Bechtel, 710 F.3d at 446.
Not only was HUD’s explanation contrary to the evidence, but
the district court’s analysis of HUD’s factfinding was similarly
flawed. The district court found that “HUD’s factfinding
methodology was sound” because it “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.”
Guertin, 913 F. Supp. 2d at 14. The district court further stated that
“[o]ne perhaps could debate HUD’s interpretation of the facts
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underlying the verdict, but the only role for this Court is [to] make
sure that HUD meets the requirement that the agency ‘examine the
relevant data and articulate a satisfactory explanation for its
action.’” Id. (quoting Motor Vehicle Mfrs Ass’n of U.S., Inc. v. State
Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)).
HUD, however, had an obligation to do more. As indicated
above, HUD may not rely on an explanation that runs counter to the
relevant evidence presented to the agency, including the indictment,
nor could HUD ignore relevant evidence in the verdict by relying
solely on portions favorable to its own position. State Farm, on
which the district court relied, states as much. See Islander E. Pipeline
Co., v. McCarthy, 525 F.3d 141, 151 (2d Cir. 2008) (describing State
Farm as requiring an examination of “all relevant data” (emphasis
added)). By articulating an explanation unsupported by the relevant
facts, HUD thus acted arbitrarily and capriciously in disallowing
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Middletown from reimbursing Guertin’s legal fees from CDBG
funds, and the district court erred in not so finding.3
In the usual case, when an agency violates its obligations
under the APA, we will vacate a judgment and remand to the
agency to conduct further proceedings. See, e.g., Ward v. Brown, 22
F.3d 516, 522 (2d Cir. 1994) (in holding that an agency acted
arbitrarily or capriciously, “the appropriate course for a reviewing
court ordinarily is to remand the case to the agency”). This rule,
however, is not absolute. If an agency is found to have acted
arbitrarily or capriciously, “the proper course, except in rare
circumstances, is to remand to the agency for additional investigation
or explanation.” Fla. Power & Light Co. v. Lorion, 470 U.S. 729, 744
(1985) (emphasis added). Thus, there are occasions in which remand
to the agency for further review is not appropriate. See, e.g., Middle
3 We recognize that this case presents an unusual set of facts in which,
among other things, the significant majority of Guertin’s “questioned
activities” were undisputedly undertaken to carry out the City’s CDBG
program and were thus clearly reimbursable. We express no view
regarding whether, under different facts in which a significant proportion
of the conduct at issue was not undertaken to carry out the relevant
federal program and HUD’s position was consistent with the record, HUD
could decline reimbursement of some or all of the claimant’s legal fees.
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Rio Grande Conservancy Dist. v. Norton, 294 F.3d 1220, 1226 (10th Cir.
2002) (holding that remanding to the agency was not appropriate
because, among other reasons, “the record contains overwhelming
evidence” that the agency must prepare an environmental impact
statement).
This is one of the unusual circumstances where remand to the
agency for further proceedings is not necessary because there is
compelling evidence in the record—a record that would not change
if remanded to the agency—that Guertin is entitled to be reimbursed
for his legal fees from Middletown’s CDBG funds. As noted earlier,
the OMB Circular states, under a heading “[d]efense and
prosecution of criminal and civil proceedings, and claims,” that
“[l]egal expenses required in the administration of [f]ederal
programs are allowable.” In his letter approving reimbursement of
Novesky’s legal fees, Lester stated that Middletown 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
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administration of the program.” Joint App’x 69. Further, Lester
noted that Novesky was entitled to reimbursement because “the
proceedings resulted from actions undertaken in the ordinary course
of [his] employment and the court acquitted him of all charges after
a trial on the merits.”
The same is true of Guertin. In six of the seven loans
underlying the charges against Guertin, the trial judge found no
misconduct of any kind. And in the seventh loan, while Guertin
was found to have worn “two hats,” the criminal charges were
dismissed, Guertin fulfilled his role as Corporation Counsel and, as
with the other transactions, this one was expressly found to have
been “properly considered” and “properly granted.”
Accordingly, we hold that the legal fees and expenses
incurred by Guertin in successfully defending the criminal charges
are “[l]egal expenses required in the administration of [f]ederal
programs” under the OMB Circular.
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CONCLUSION
For the reasons stated above, we REVERSE the December 21,
2012 judgment of the district court, and ORDER the United States
Department of Housing and Urban Development to authorize
Middletown to reimburse the criminal defense costs of plaintiff
Richard Guertin from CDBG funds.
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