Associated Mortgage Bankers, Inc. v. Castro

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

ASSOCIATED MORTGAGE BANKERS,
INC.,

Plaintiff,
Civil Action No. 17-0075 (ESH)
v.

BEN CARSON, et al.,

Defendants.

MEMORANDUM OPINION

Defendants have filed a partial motion to dismiss plaintiff’s amended complaint, or, in

the alternative, to remand to the administrative agency. For the reasons set forth below, the

Court grants the motion to remand in part and grants the motion to dismiss in part. The Court

also enters judgment on plaintiff’s behalf on its Appointments Clause claim (Count III). As a

remedy, the Court vacates the December 16, 2016 decision and order by the U.S. Department of

Housing and Urban Development (“HUD”) Administrative Judge and remands to HUD for a

new hearing before a different official appointed in accordance with the Appointments Clause of

the U.S. Constitution. The Court dismisses plaintiff’s two remaining claims (Counts I and II) as

moot.

BACKGROUND

I. FACTUAL BACKGROUND

Plaintiff Associated Mortgage Bankers, Inc. (“AMB”) is a New York company that

originates mortgage loans. (Am. Compl. ¶¶ 1–2, ECF No. 34.) Some of those mortgages are
eligible to be insured by defendant HUD’s Federal Housing Administration (“FHA”) insurance

program. (Id. ¶ 2.) The FHA insures mortgage loans made by FHA-approved lenders for single

family and multifamily homes. (Id. ¶¶ 10–11.)

One of the FHA-insured loans originated by AMB (the “Loan”) became the subject of a

HUD audit, which resulted in AMB and HUD entering into an Indemnification Agreement on

December 10, 2012. (Id. ¶ 69.) HUD’s audit had identified AMB lending practices that did not

comply with FHA standards, thereby increasing the risk that the Loan would default; the

Indemnification Agreement was signed to address this increased risk to HUD. (Decision of

Administrative Judge at 2, Ex. 11 to Am. Compl., ECF No. 34-11.) Under the terms of the

Indemnification Agreement, AMB “agree[d] to indemnify HUD for losses which have been or

may be incurred related to the FHA Case Number 374-5838647 [the ‘Loan’].” (Indemnification

Agreement ¶ 1, Ex. 3 to Am. Compl., ECF No. 34-3.)

As part of its Single Family Loan Sales (“SFLS”) program, HUD sold the note for the

Loan for $360,531.24 in September 2013. (Am. Compl. ¶¶ 77, 92, 190.) AMB asserts that this

only constituted 66% of the value of the collateral associated with the Loan. (Id. ¶ 128.) AMB

represents that the property underlying the Loan was valued at somewhere between $530,100

and $550,000 at the time of the note’s sale. (Id. ¶¶ 79–80.)

SFLS is the name for a HUD program that, at an earlier time, was titled Accelerated

Claim Disposition (“ACD”). (Id. ¶¶ 22–23.)1 The program originated in February 2002, when

HUD issued a “Notice of FHA Accelerated Claims Disposition Demonstration” (the “February

2002 Notice”). (Id. ¶ 24 (citing 67 Fed. Reg. 5,418 (Feb. 5, 2002)).) The February 2002 Notice

1
In addition to SFLS and ACD, the program has also been referred to as: Accelerated Claim and
Asset Disposition, Single Family Joint Venture Loan Sales, Single Family Mortgage Acquisition
and Recovery Initiative, and Distressed Asset Stabilization Program. (Am. Compl. ¶ 23.)

2
requested comments regarding a proposed program under which “HUD would pay accelerated

claims on certain defaulted FHA-insured mortgages.” (Am. Compl. ¶¶ 24–25 (quoting 67 Fed.

Reg. at 5,418).)

After a comment period, HUD published a final “Notice of FHA Accelerated Claims

Disposition Demonstration” in October 2002, formally establishing the program (the “October

2002 Notice”). (Am. Compl. ¶ 26 (citing 67 Fed. Reg. 66,038 (Oct. 29, 2002)).) The October

2002 Notice specified that the program would be limited in duration and geographic scope. 67

Fed. Reg. at 66,040. It further stated that “[o]nly certain defaulted FHA-insured loans are

eligible for the accelerated claim payment process.” Id. Among the restrictions on eligible loans

was the requirement that “[t]o the knowledge of the participating mortgagee, the mortgage loan

is not subject to an Indemnification Agreement as of the provisional claim approval date.” Id. at

66,041.

In June 2006, HUD publicly contemplated making the ACD program permanent. (Am.

Compl. ¶¶ 35–36.) It published an Advance Notice of Proposed Rulemaking, seeking comments

before proceeding to issue a proposed rule that would establish the program’s permanence. (Id.

(citing 71 Fed. Reg. 32,392 (June 5, 2006)).) This proposed rulemaking was withdrawn in

March 2007, and HUD has not initiated a new rulemaking process regarding the ACD program

since that time. (Am. Compl. ¶¶ 44–45.) However, HUD has continued the program. HUD

asserts in its motion—without any citation in support—that “HUD’s decision to withdraw the

June 2006 [Advance Notice of Proposed Rulemaking] reflects the agency’s decision to continue

the ACD Demonstration while retaining the flexibility to modify the procedures used.” (HUD

Memo. in Support of Mot. to Dismiss or Remand (“HUD Mot.”) at 21, ECF No. 46-1.)

3
 When HUD sold the note for the Loan in 2013 as part of the SFLS program, it did so in a

bulk sale of over two thousand notes. (Am. Compl. ¶¶ 83–84.) JPMorgan Chase Bank, N.A.

(“JP Morgan”), the loan servicer, had entered into a Participating Servicer Agreement (“PSA”)

with HUD in connection with this bulk sale. (Id. ¶¶ 104–05.) The PSA provided that HUD

would pay JP Morgan’s insurance claims for “Eligible Mortgage Loan[s].” (Id. ¶ 106.) Part of

the definition of an “Eligible Mortgage Loan” in the PSA was that “the Mortgage Loan is not

subject to an Indemnification Agreement.” (Id. ¶ 107; PSA at 9, Ex. 6 to Am. Compl., ECF No.

34-6.)

JP Morgan made an insurance claim on the Loan in August 2013 in the amount of

$520,979.86. (Am. Compl. ¶ 114.) HUD paid this claim to JP Morgan on August 10, 2013,

having “failed to screen out the Loan as ineligible for an insurance claim [under the terms of the

PSA] due to the presence of the Indemnification Agreement.” (Id. ¶¶ 116–17.)

On July 28, 2014, HUD sent AMB a demand notice seeking to recoup the $160,448.62

difference between the amount HUD paid in the insurance claim and what it received in the sale

of the note for the Loan. (Id. ¶ 145.) On October 13, 2014, HUD issued a notice indicating its

intent to collect the amount via an administrative offset. (Id. ¶ 147.)2 AMB disputed the debt.

In response, HUD sent a December 8, 2014 letter in which it “acknowledge[d] that the

indemnified loan was erroneously included” in the SFLS program, but asserted that “this event

did not impact on the legal enforceability of the Indemnification Agreement.” (Dec. 2014 Letter,

Ex. 10 to Am. Compl., ECF No. 34-10.)

2
An “‘administrative offset’ means withholding funds payable by the United States . . . to, or
held by the United States for, a person to satisfy a claim.” 31 U.S.C. § 3701(a)(1).

4
 HUD regulations provide that “[a] debtor who receives notice of intent to offset . . . has

the right to a review of the case” by an Administrative Judge (“AJ”) of the HUD Office of

Appeals “and to present evidence that all or part of the debt is not past due or not legally

enforceable.” 24 C.F.R. §17.69(a). In accordance with this regulation, AMB filed an appeal

with HUD’s Office of Appeals regarding the administrative offset sought by HUD. (Am.

Compl. ¶ 167.)

Before HUD AJ Vanessa L. Hall, AMB argued that it was not obligated to pay the

alleged debt because 1) the mortgage insurance claim paid was not valid; 2) HUD breached the

Indemnification Agreement by negligently including the Loan in the SFLS program; 3) HUD

acted in contravention of its internal guidance; and 4) HUD violated the Indemnification

Agreement’s implied covenant of good faith and fair dealing. On December 16, 2016, the AJ

issued a decision rejecting each of AMB’s arguments and concluding that the debt was legally

enforceable against AMB. (Decision of AJ at 3–9.)

II. PROCEDURAL HISTORY

On January 12, 2017, AMB filed suit against HUD and its Secretary (collectively referred

to herein as “HUD”). AMB’s initial complaint brought two claims: 1) an arbitrary-and-

capricious challenge under the Administrative Procedure Act (“APA”) to the AJ’s decision, and

2) a claim that HUD breached the Indemnification Agreement’s implied covenant of good faith

and fair dealing. (Compl. ¶¶ 47–56, ECF No. 1.) HUD filed a motion to dismiss, which was

granted with respect to the implied covenant claim based on a lack of subject matter jurisdiction.

Associated Mortg. Bankers, Inc. v. Carson, 279 F. Supp. 3d 58, 64 (D.D.C. 2017). The Court

denied HUD’s motion to dismiss the APA challenge to the AJ’s decision, concluding that the

claim was facially plausible. Id.

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 On September 15, 2017, AMB filed a motion to amend its complaint. (Mot. for Leave to

File First Am. Compl., ECF No. 22.) AMB’s Amended Complaint alleged the following claims:

1) HUD had violated the APA by failing to utilize notice-and-comment rulemaking for its

longstanding SFLS program (Count I); 2) HUD had violated the APA because its AJ’s decision

was arbitrary and capricious (Count II); 3) the HUD AJ’s appointment violated the U.S.

Constitution’s Appointments Clause (Count III); and 4) HUD had breached the Indemnification

Agreement’s covenant of good faith and fair dealing (Count IV). (Am. Compl. ¶¶ 204–31.)

Counts I and III stated new claims not previously contained in AMB’s original complaint.

In support of Count I’s new notice-and-comment claim, AMB pointed to a July 2017 report

issued by the HUD Office of Inspector General (the “HUD OIG Report”), which found that

“HUD did not conduct rulemaking or develop formal procedures for its single-family note sales

program.” (HUD OIG Report at 5, Ex. 2 to Am. Compl., ECF No. 34-2.) The HUD OIG Report

explained that “[w]hen HUD expanded its notes sales to a nationwide level, it did so without a

formal plan to transition from a demonstration to an official program.” (Id. at 6.) The Report

recommended that “[b]ecause HUD already operates its note sales nationwide, it should

complete the rulemaking process.” (Id.) HUD wrote a response letter indicating that it agreed

with the Report’s recommendations. (Id. at 10–11; Am. Compl. ¶ 59.)

AMB’s second new claim, found in Count III, alleged that HUD AJs are inferior officers

within the meaning of the Appointments Clause of the U.S. Constitution. (Am. Compl. ¶ 220.)

AMB argued that HUD had not complied with the Appointments Clause’s requirements

regarding who may appoint an inferior officer, and thus the AJ’s decision contravened the U.S.

Constitution. (Id. ¶¶ 221–22.)

6
 The Court granted in part and denied in part AMB’s motion for leave to amend its

complaint. Associated Mortg. Bankers, Inc. v. Carson, No. 17-cv-0075, 2017 WL 6001733, at

*1 (D.D.C. Dec. 1, 2017). The Court struck the breach of the covenant of good faith and fair

dealing claim (Count IV) since that claim had already been dismissed in the Court’s prior ruling.

Id. at *4. The Court permitted the rest of AMB’s proposed amendments to its complaint. Id. at

*6.

On August 15, 2018, HUD filed the present partial motion to dismiss Counts I and III of

the Amended Complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), or,

in the alternative, to remand the case for a new hearing before a duly appointed AJ and dismiss

the Amended Complaint in its entirety. (HUD Mot. to Dismiss or Remand at 1–2, ECF No. 46.)

ANALYSIS

The Court’s analysis will begin with Count III, AMB’s Appointments Clause claim, as

the Court’s ruling on this count alters the analysis of AMB’s other claims. HUD’s motion seeks

to dismiss this claim, or, in the alternative, to remand the case to a duly appointed AJ. (HUD

Mot. at 1, 12.) As explained herein, the Court will not dismiss this claim but will remand to the

agency. The Court will then proceed to Counts I and II to determine if it has subject matter

jurisdiction over these remaining claims given its ruling on Count III. The Court concludes that

it lacks jurisdiction, and it will therefore dismiss Counts I and II without prejudice.

I. LEGAL STANDARDS

A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(1) challenges a

federal court’s subject matter jurisdiction. In addressing a Rule 12(b)(1) motion, “the court may

consider the complaint supplemented by undisputed facts evidenced in the record, or the

complaint supplemented by undisputed facts plus the court’s resolution of disputed facts.”

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Herbert v. Nat’l Acad. of Scis., 974 F.2d 192, 197 (D.C. Cir. 1992). Mootness is an issue of

subject matter jurisdiction, and it is properly addressed under a Rule 12(b)(1) motion or sua

sponte by the Court. See Cierco v. Lew, 190 F. Supp. 3d 16, 22–23 (D.D.C. 2016).

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) asserts that a

defendant has failed to state a claim upon which relief can be granted. “To survive

a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state

a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)

(quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)).

Where an agency moves for remand, “[t]he decision whether to grant an agency’s request

. . . is left to the discretion of the court.” Code v. McHugh, 139 F. Supp. 3d 465, 468 (D.D.C.

2015). Granting an agency’s remand request is often appropriate where there is new evidence,

where intervening events have affected the validity of the agency’s actions, or where an agency

has raised “‘substantial and legitimate’ concerns in support of remand.” FBME Bank Ltd. v.

Lew, 142 F. Supp. 3d 70, 73 (D.D.C. 2015); see also Code, 139 F. Supp. 3d at 468. Courts

“should deny an agency’s request to remand where the request is ‘frivolous or in bad faith.’”

Code, 139 F. Supp. 3d at 468 (quoting Sierra Club v. Van Antwerp, 560 F. Supp. 2d 21, 23

(D.D.C. 2008)).

II. COUNT III: APPOINTMENTS CLAUSE CLAIM

The Appointments Clause of the U.S. Constitution specifies, in relevant part, that

“Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in

the President alone, in the Courts of Law, or in the Heads of Departments.” U.S. Const. art. II,

§ 2, cl. 2. Count III of AMB’s Amended Complaint argues that the Administrative Judge, who

decided its case at the HUD Office of Appeals on December 16, 2016, was an inferior officer

8
within the meaning of the U.S. Constitution’s Appointments Clause. And, because the HUD AJ

was not appointed by the President, a court of law, or a head of a department, AMB argues that

her appointment was unconstitutional. (Am. Compl. ¶¶ 217–24.)

HUD does not dispute the merits of this claim in light of the Supreme Court’s recent

decision in Lucia v. Securities & Exchange Commission, 138 S. Ct. 2044 (2018), where the

Court held that administrative law judges at the Securities and Exchange Commission (“SEC”)

are inferior officers of the United States within the meaning of the Appointments Clause. Id. at

2049. The Court reasoned that the judges held “a continuing office established by law” and

exercised “significant discretion when carrying out . . . important functions.” Id. at 2053

(internal citation and quotation marks omitted). HUD concedes that its AJs sufficiently mirror

the characteristics of the SEC’s administrative law judges such that they too are inferior officers

within the meaning of the Appointments Clause. (HUD Mot. at 2.)

HUD argues that the Court should nonetheless dismiss AMB’s Appointments Clause

claim because AMB forfeited the claim by failing to raise it before the agency. (Id. at 8; HUD

Reply at 4, ECF No. 49 (“It is well-established that a party generally may not challenge an

agency decision on a basis that was not presented to the agency.”) (quoting In re DBC, 545 F.3d

1373, 1378 (Fed. Cir. 2008)). In support of its argument, HUD cites to the Supreme Court’s

statement in Lucia that “‘one who makes a timely challenge to the constitutional validity of the

appointment of an officer who adjudicates his case’ is entitled to relief.” Lucia, 138 S. Ct. at

2055 (emphasis added) (quoting Ryder v. United States, 515 U.S. 177, 182–83 (1995)). Lucia

did not define the scope of what constitutes a timely challenge, as there was no claim in Lucia

that the challenge to the appointment of the SEC’s administrative law judge—advanced for the

first time on appeal to the SEC—was not timely raised. Lucia, 138 S. Ct. at 2050, 2055.

9
 The Court here need not attempt to define what constitutes a timely challenge such that a

party would be “entitled to relief,” id. at 2055 (emphasis added), for, as HUD concedes, courts

have discretion to grant relief to an untimely challenger with an Appointments Clause claim.

(HUD Reply at 8 (citing Freytag v. Comm’r of Internal Revenue, 501 U.S. 868, 879 (1991)).)

The Supreme Court has “expressly included Appointments Clause objections to judicial officers

in the category of nonjurisdictional structural constitutional objections that could be considered

on appeal whether or not they were ruled upon below.” Freytag, 501 U.S. at 878–79 (citing

Glidden Co. v. Zdanok, 370 U.S. 530 (1962)). In Freytag (on which the Supreme Court heavily

relied in Lucia) the Court utilized its discretion to reach an Appointments Clause claim that was

raised for the first time in the Fifth Circuit. Freytag, 501 U.S. at 871–82, 878–80 (“We conclude

that this is one of those rare cases in which we should exercise our discretion to hear petitioners’

challenge”); see also Lucia, 138 S. Ct. at 2053. The Freytag Court justified its use of discretion

by explaining the importance of the Appointments Clause in “maintaining the constitutional plan

of separation of powers” and that “[t]he structural interests [it] protect[s] . . . are not those of any

one branch of Government but of the entire Republic.” Freytag, 501 U.S. at 879–80. Applying

Freytag’s rationale, this Court will utilize its discretion to reach the Appointments Clause claim.

This case is particularly well-suited for the Court to exercise its discretion because the

policy rationales underlying the waiver rule—“development of a factual record, the application

of agency expertise, [and] the exercise of administrative discretion”—are inapplicable. See R.R.

Yardmasters of Am. v. Harris, 721 F.2d 1332, 1338–39 (D.C. Cir. 1983). Where these policy

rationales are absent, “judicial review” is less likely to be “hindered by the failure of the [party]

to raise its challenge before the [agency].” See id.

10
 The refrain that parties ought to present issues to an agency before seeking judicial

review is analogous to the general rule that appellate courts should not consider arguments not

raised before the district court. See Advocates for Highway & Auto Safety v. Fed. Motor Carrier

Safety Admin., 429 F.3d 1136, 1148 (D.C. Cir. 2005). Yet, the D.C. Circuit has found it

appropriate to address issues not raised before the district court where the claim is “is one of law,

requires no further factual development, has been fully briefed by both parties, and can be

resolved beyond any doubt.” R.R. Yardmasters, 721 F.2d at 1337; see also Ass’n of Am. R.R. v.

U.S. Dep’t of Transp., 821 F.3d 19, 26 (D.C. Cir. 2016) (reaching a claim not raised below where

it was of “purely legal character,” had been fully briefed, and pertained to “significant structural

constitutional rights”). On the other hand, the D.C. Circuit has been reluctant to review a last-

minute Appointments Clause challenge that did not have the benefit of “thorough, considered

briefing from all interested parties,” as this could cause a Court to “run the risk of [issuing] an

improvident or ill-advised opinion on the legal issues tendered.” Intercollegiate Broadcast Sys.,

Inc. v. Copyright Royalty Bd., 574 F.3d 748, 755–56 (D.C. Cir. 2009) (internal quotation marks

and citation omitted) (holding it was “certainly” within the D.C. Circuit’s power to consider

plaintiff’s Appointments Clause challenge first raised in a supplemental brief to the Circuit, but

declining to do so given the “potential for far-reaching consequences” of finding an

Appointments Clause violation in the circumstances presented).

Given this framework, review of AMB’s Appointments Clause claim is appropriate in

this case. The development of a further factual record at the agency level would have been of no

assistance to the Court in deciding the Appointments Clause issue as it is a purely legal claim,

and since it is a constitutional question, there is no reason to defer to agency expertise or

discretion. Moreover, given the parties’ agreement that AMB’s claim is unquestionably

11
meritorious in light of Lucia, there is no plausible concern that AMB’s delay in raising the

argument could hinder this Court’s ability to decide the Appointments Clause claim or could

cause the Court to issue an ill-advised opinion on the merits. See R.R. Yardmasters of Am., 721

F.2d at 1338; Intercollegiate Broadcast Sys., Inc., 574 F.3d at 756.

HUD’s argument against this Court utilizing its discretion appears to rely primarily on

the Federal Circuit’s decision in In re DBC, 545 F.3d 1373 (Fed. Cir. 2008). (See HUD Reply at

8–9.) In DBC, the Federal Circuit refused to entertain a plaintiff’s Appointments Clause

challenge to a decision of the United States Patent and Trademark Office Board of Patent

Appeals and Interferences that had been first raised in a supplemental brief to the Federal Circuit

after briefing in the appeal had been completed. 545 F.3d at 1377 n.2, 1381. The Federal Circuit

declined to utilize its discretion because 1) the plaintiff’s failure to raise the issue earlier was due

to a “lack of diligence”; 2) there was no “intervening change in law or facts”; 3) remedial action

had been taken whereby the head of the agency reappointed the administrative patent judges at

issue pursuant to a new statute and in accordance with the Appointments Clause; and 4) if the

court were to remand, there was “nothing to suggest that the [agency] would do anything other

than simply . . . assign the case to the same panel” of administrative patent judges who

previously heard the case. Id. at 1380–81. None of these factors is present here.

First, in light of the circumstances, the Court would not characterize AMB’s failure to

raise the issue below as demonstrating a complete lack of diligence. AMB’s opportunity to raise

its Appointments Clause claim before the agency was quite limited. HUD regulations restricted

the AJ’s review to “whether there is a debt that is past due and whether it is legally enforceable.”

24 C.F.R. § 17.69(c); see also id. at § 17.73(a). HUD argues that AMB should have raised its

Appointments Clause argument via a motion to disqualify the AJ (HUD Mot. at 9), but such a

12
motion would not have yielded reassignment to a lawfully-appointed AJ given that HUD did not

appear to have any at that time. (AMB Opp. at 9 n.6, ECF No. 48.) Furthermore, the “timely”

challenger in Lucia did not raise his Appointments Clause claim before the administrative law

judge whose appointment he was challenging; instead, Lucia first raised it on appeal to the SEC.

Lucia, 138 S. Ct. at 2050, 2055. AMB did not have a similar opportunity to raise the issue in an

appeal to HUD, as HUD’s regulation provides that “[t]he decision of the administrative judge . . .

concerning whether a debt or part of a debt is past due and legally enforceable is the final agency

decision.” 24 C.F.R. § 17.73(a).

Second, there has been a change in law since AMB first litigated before the HUD AJ. At

the time the AJ issued her decision on December 16, 2016, the Supreme Court had not yet

handed down its decision in Lucia. Instead, the binding law of the D.C. Circuit at the time was

the panel decision in Lucia v. SEC, 832 F.3d 277 (D.C. Cir. 2016), which held that the SEC’s

administrative law judges were not officers within the meaning of the Appointments Clause. Id.

at 283–89. The Supreme Court reversed the D.C. Circuit opinion in a decision issued on June

21, 2018, more than a year after AMB’s case was filed in this Court.

Third, there is no indication that HUD has taken remedial steps since Lucia was issued to

ensure that all of its AJs are currently lawfully appointed. Instead, HUD only indicates that its

Secretary has the statutory authority to appoint AJs—not that the Secretary has done so. (Reply

at 12.)3

3
AMB argues that the Court should vacate the AJ’s decision without remand because “HUD
does not yet have any ‘properly appointed’ AJs . . . and it is not yet entirely clear” that the HUD
Secretary currently has the authority from Congress to appoint new AJs. (AMB Opp. at 12–13.)
AMB’s argument appears to rest on the hypothetical idea that the HUD Secretary might, in the
future, attempt to appoint an AJ to hear AMB’s case without having received the authority to do
so from Congress, or, in the alternative, fail to appoint new AJs despite Lucia’s mandate. Both
hypothetical scenarios are mere speculation. In Lucia, the Supreme Court refused to entertain
13
 Finally, if this Court remands the case to HUD, HUD cannot assign it to the same AJ who

heard the case before. Lucia made clear that where a court remands to an agency for rehearing

due to an Appointments Clause violation, a different AJ (or the agency itself) must hold the new

hearing. Lucia, 138 S. Ct. at 2055.

For these reasons, the Court will utilize its discretion to reach AMB’s Appointments

Clause claim. Given that the claim is undisputedly meritorious under Lucia, the Court grants

judgment to AMB on Count III of its Amended Complaint. 4 The Court further grants the Lucia-

prescribed remedy of vacating the decision of the unconstitutionally appointed AJ and remanding

for hearing before a different AJ who has been appointed in accordance with the Appointments

Clause of the U.S. Constitution.

III. COUNT II: APA CLAIM CHALLENGING THE ADMINISTRATIVE JUDGE’S
DECISION
In Count II of its Amended Complaint, AMB asserts that the AJ’s December 16, 2016

decision is arbitrary, capricious, and contrary to law in violation of the Administrative Procedure

the plaintiff’s argument that an SEC order “‘ratif[ying]’ the prior appointments of its ALJs” was
invalid, explaining it was speculation to assume that Lucia’s case would be heard on remand by
“an ALJ whose claim to authority rests on the ratification order.” Lucia, 138 S. Ct. at 2055 n.6.
The Supreme Court explained that “[t]he SEC may decide to conduct Lucia’s rehearing itself . . .
[o]r it may assign the hearing to an ALJ who has received a constitutional appointment
independent of the ratification.” Id. Following the rationale of Lucia, this Court will decline to
reach AMB’s hypothetical arguments. HUD has pointed to a statute that it believes gives its
Secretary authority to appoint inferior officers. (HUD Reply at 12 (citing 42 U.S.C. § 3535(c)).)
Perhaps the HUD Secretary will appoint AJs under this statute, or perhaps he will do so pursuant
to another statute passed by Congress. Either way, AMB’s conjecture regarding how HUD may
act in the future does not provide a basis for this Court to decline to remand to the agency at this
juncture.
4
AMB requested that the Court enter judgment on this count in order to preserve AMB’s right to
seek attorneys’ fees associated with this claim. (AMB Opp. at 13.) While it will enter judgment
on this claim because it has determined “there is no just reason for delay,” Fed. R. Civ. P. 54(b),
the Court’s action should not be construed as an endorsement of AMB’s claim for attorneys’
fees.

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Act. (Am. Compl. ¶¶ 209–16); see also 5 U.S.C. § 706(2)(A) (“The 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.”). Because the Court

has ruled that, as a remedy for the Appointments Clause violation articulated in Count III, the

AJ’s decision is vacated, Count II becomes moot. The now-vacated decision of the AJ no longer

presents a “live controversy” fit for judicial review. Coal. of Airline Pilots Ass’ns v. F.A.A., 370

F.3d 1184, 1189 (D.C. Cir. 2004). The Court thus dismisses Count II of the Amended Complaint

without prejudice.

IV. COUNT I: CLAIM ALLEGING VIOLATION OF APA’S NOTICE-AND-
COMMENT REQUIREMENTS
In Count I, AMB asserts a claim based on HUD’s failure to employ notice-and-comment

rulemaking before implementing its SFLS program. (Am. Compl. ¶¶ 204–08.) AMB urges that

it be permitted to continue litigating Count I despite the remand associated with Count III, while

HUD urges that the claim be dismissed. (See AMB Opp. at 13–16; HUD Mot. at 12–14.) The

Court will dismiss Count I because the claim has become moot in light of the vacatur of the AJ’s

decision.

“Article III, section 2 of the Constitution limits federal court jurisdiction to cases or

controversies, meaning that a live controversy must exist at all stages of review.” Coal. of

Airline Pilots Ass’ns, 370 F.3d at 1189 (internal quotation marks omitted). A case becomes

moot, and thus a court lacks subject matter jurisdiction, where a “plaintiff no longer has a legally

cognizable injury which is traceable to defendants’ alleged [conduct].” Ctr. for Biological

Diversity v. Kempthorne, 498 F. Supp. 2d 293, 296–97 (D.D.C. 2007); see also Kennecott Utah

Copper Corp. v. U.S. Dep’t of Interior, 88 F.3d 1191, 1207 (D.C. Cir. 1996) (“An issue becomes

moot if intervening events leave the parties without ‘a legally cognizable interest.’”).

15
 The only concrete interest that AMB has identified is its owing of money associated with

the Loan under the Indemnification Agreement. (AMB Opp. at 20.) That injury is eliminated

now that the Court has vacated the AJ’s decision holding that such money is due. 5

Given the vacatur of the AJ’s decision, the only remaining grievance that AMB can point

to is a procedural one: it was unable to provide comments regarding the SFLS program through

notice-and-comment procedures. This is insufficient, for “deprivation of a procedural right

without some concrete interest that is affected by the deprivation . . . is insufficient” for purposes

of Article III. Summers v. Earth Island Inst., 555 U.S. 488, 496 (2009) (describing the necessary

interest required for Article III standing); Arizonans for Official English v. Arizona, 520 U.S. 43,

68 n.22 (1997) (explaining that “[t]he requisite personal interest that must exist at the

commencement of the litigation (standing) must continue throughout its existence (mootness)”)

(citation omitted). The Court thus dismisses Count I of the Amended Complaint as moot.

CONCLUSION

For the reasons stated above, the Court enters judgment in AMB’s favor on Count III.

The Court vacates the decision and order of HUD’s AJ and remands for a hearing before a

different AJ who has been appointed in accordance with the U.S. Constitution’s Appointments

Clause. The Court dismisses without prejudice Counts I and II of the Amended Complaint as

moot. A separate Order accompanies this Memorandum Opinion.

5
AMB’s Opposition alludes to a possible harm it may face due to a second indemnified AMB
loan sold through the SFLS program (see AMB Opp. at 21), but this is insufficient to alter the
conclusion that AMB’s notice-and-comment claim is now moot. The case regarding this second
AMB loan is currently pending before a HUD AJ. (Id.) Since the AJ has not yet ruled regarding
AMB’s possible debt for this second loan, the Court cannot conclude that AMB has suffered any
injury associated with this second loan’s inclusion in the SFLS program.

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 _______________________
ELLEN S. HUVELLE
United States District Judge

Date: January 4, 2019

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