Opinion
3:02-CV-1870-P
September 23, 2002
MEMORANDUM AND ORDER GRANTING PRELIMINARY INJUNCTION
Now before the Court are Plaintiffs Application for Temporary Restraining Order and Motion for Preliminary Injunction ("Pl.'s Appl."), filed August 30, 2002; Memorandum of Law in Support of Plaintiffs Application for Temporary Restraining Order and Motion for Preliminary Injunction ("Pl.'s Memo."), filed August 30, 2002; Defendants' Memorandum of Law in Opposition to Plaintiffs Motion for Preliminary Injunction ("Def.'s Resp."), filed September 10, 2002; and Plaintiffs Reply in Support of Motion for Preliminary Injunction ("Pl.'s Reply"), filed September 11, 2002. Plaintiff submitted with its Application the sworn Affidavit of Michael Levitt ("Aff. of Levitt"), chief executive officer of Plaintiff, dated August 29, 2002, as well as the sworn Affidavit of Maurice L. Barksdale ("Aff. of Barksdale"), signed August 28, 2002. Defendants submitted with their Response the sworn Declaration of Kerry J. Mulholland, Acting Director, Lender Qualifications and Monitoring Division, Office of Multifamily Development, United States Department of Housing and Urban Development ("Mul. Decl."), dated September 9, 2002. With its Reply, Plaintiff submitted a Supplemental Affidavit of Michael Levitt ("Supp. Aff. of Levitt"), dated September 11, 2002. Defendants filed a Notice of Correction in Federal Defendant's Memorandum of Law in Opposition to Plaintiffs Motion for Preliminary Injunction on September 12, 2002.
Subsequent to the filing of the briefs on Plaintiffs motion for preliminary injunction, Defendants filed on September 17, 2002, their Motion and Brief for Leave to File Declaration of Laurie D. Kahn in Further Support of Defendants' Opposition to Plaintiffs Motion for Preliminary Injunction. Plaintiffs response was filed September 18, 2002, and the Defendants' reply on September 19, 2002.
After considering the parties' briefings, the affidavits and attachments, and the applicable law, the Court GRANTS Plaintiffs request for preliminary injunction.
I. Background
Malone Mortgage Company America, Ltd. ("Malone Mortgage" or "Plaintiff") originates and services loans for the construction, rehabilitation, or refinancing of multifamily housing and healthcare projects. Pl.'s Compl. ¶ 5. These loans are insured by the United States Department of Housing and Urban Development ("the Department" or "HUD") under the National Housing Act ("NHA"). 12 U.S.C.A. § 1701 et seq. (West 2001). Id. Since May 2000, Malone Mortgage has participated as an approved lender in HUD's Multifamily Accelerated Processing ("MAP") program. Id. ¶ 6. This program is designed to streamline the process by which HUD-insured loans are underwritten. Before this program was introduced, HUD itself facilitated underwriting of the loans it insured (under a procedure now called "traditional application processing" or "TAP"). Def.'s Resp. at 2-3. Under TAP, it would take up to one year for HUD to approve mortgage loan insurance. Pl.'s Compl. ¶ 6. The new MAP program has shortened the time necessary for securing HUD approval; MAP loans are generally approved within 45 to 60 days of submission to HUD. Id. Because of this program's success in fast-tracking HUD's insuring of loans, MAP has all but cornered the market for getting these types of loans approved. Pl.'s Compl. ¶ 14.
Only approved lenders can get HUD insurance for loans processed through the MAP program. Def.'s Resp. at 3. HUD approval can be withdrawn if the lender violates certain rules published by HUD in its "MAP Guide." Id. One rule prohibits MAP Lenders from engaging in transactions involving an "identity of interest." The pertinent rule, found in section 2.5 of MAP Guide, provides as follows:
No financial or family relationship is permitted between an officer or partner of the MAP Lender, its principal staff or contracting employees working on the particular application and an officer, director or partner of the sponsor, the mortgagor, the principal of the mortgagor, the general contractor, the subcontractor, or the seller of the land or property. . . .
Def.'s Resp., Att. A at 2-4. If an approved lender violates this rule, the Director of Multifamily Housing Development or the director of a regional HUD Office ("Hub Director") can place the lender on probation for a limited time or until a specified condition is met. See id. at 2-10. An MAP Lender placed on probation is forbidden to submit under the MAP program (i) any new materials for pre-application review as well as (ii) new applications for Firm Commitments for FHA Multifamily insurance. Id. The MAP Guide tells MAP Lenders that the imposition of probation can be appealed to the Deputy Assistant Secretary for Multifamily Housing Development. Id. at 2-11.
In June 2002, the Office of quality assurance ("OQA") at HUD discovered potential violations of MAP guidelines in two projects underwritten by Malone Mortgage. Aff. of Mul. ¶¶ 4-7. One project (No. 112-22006) concerned the Walnut Place Nursing Home in Dallas, Texas (the "Walnut Place transaction"). Id. ¶ 8. This project was a mortgage refinancing insured by HUD under § 232 (pursuant to § 223(f) of the NHA, 12 U.S.C. § 1715w 1715n(f). OQA endorsed mortgage insurance on this project on March 26, 2001. HUD's review disclosed that (i) Malone Mortgage had not included a verbatim definition of "identity of interest" from the MAP Guide in its certification that no identity of interest exists with respect to the Walnut Place transaction, and (ii) Bernard P. Malone ("Mr. Malone"), president of Malone Mortgage, billed the mortgagor, Telesis/Walnut Place Nursing Home, Inc., ("Telesis") $15,000 on March 23, 2001, for professional services rendered "as attorney for mortgagor" in apparent violation of the identity-of-interest provisions of the MAP program. See Def.'s Resp. at 7. In addition to the bill, two forms submitted in connection with the Walnut Place project contain disclosures that seem to bear on this alleged identity of interest. (1) At section H, line 31, of the "Health Care Facility — Summary Appraisal Report" (Form HUD 92264-HCF), the appraiser estimated legal fees in the amount of $15,000. Mul. Decl., Att. 9 at 3. (2) At item 6 of the "Mortgagor's Certificate of Actual Cost" (Form HUD 2205-A), the mortgagor disclosed that it was to pay legal and organizational expenses totaling $32,534. See Mul. Decl., Att. 10 at 1. An attached schedule of costs specifies that $15,000 in legal fees were to be paid to Mr. Malone. See id. at 2.
The second project (No. 112-35408) concerned the Reserve Apartments in frying, Texas (the "Reserve Apartments transaction"). Aff. of Mul. ¶ 7. This project involved a new construction loan insured by HUD under § 221(d)(3) of the NHA, 12 U.S.C. § 17151 (d)(3). HUD endorsed mortgage insurance on this project on April 6, 2001. HUD's review disclosed that (i) the identity-of-interest certification, as with the Walnut Place transaction, did not contain a definition of "identity of interest" taken verbatim from the MAP Guide, and (ii) Mr. Malone, president of Malone Mortgage, billed the mortgagor, Agape Irving Housing, Inc., ("Agape") $18,750 on April 6, 2001, for professional services rendered "as attorney for mortgagor" in apparent violation of the identity-of-interest provisions of the MAP program. See Def.'s Resp. at 7. In addition to the bill, two forms submitted in connection with the Reserve Apartments transaction contain purportedly incriminating disclosures. (1) At section G, line 64, of the "Multifamily Summary Appraisal Report" (Form HUD 99264), the appraiser estimated legal fees in the amount of $25,000. See Mul. Decl., Att. 6. (2) At line 11 of the "Application for Insurance of Advance of Mortgage Proceeds" (Form HUD 92403), the mortgagor disclosed its intent to pay fees identified as "Legal (75%)" in the amount of $18,750. See id. at Att. 8.
On August 7, 2002, Malone Mortgage received a letter from the Director of HUD's Office of Multifamily Development, Michael McCullough ("Director McCullough"). Pl.'s Compl. ¶ 10. This letter informed Malone Mortgage that it was being placed on twelve-months' probation for violations of section 2.5 of the MAP Guide. Id. The letter recited its finding that Malone Mortgage twice made deficient "identity-of-interest certifications" by omitting "key language required by Sections 2.5 and 2.6L of the MAP Guide." Mul. Decl., Att. 11 at 1. Director McCullough informed Malone Mortgage that, instead of defining "identity of interest," the certifications filed in connection with the Walnut Place and Reserve Apartments transactions merely stated that "[n]o identity of interest whatsoever exists presently, nor is any identity of interest contemplated in the future, by and between the mortgagor, and the mortgagee, Malone Mortgage Company America, Ltd." Id. The letter further stated that, on two occasions, "each mortgagor retained the legal services of the Law Offices of Bernard P. Malone in connection with their project and paid monies for these services." Id. at 2. "Because [Malone Mortgage] chose to submit and process a mortgage application as a MAP Lender, for a project in which a prohibited identity of interest existed between [Malone Mortgage] and the proposed sponsor/mortgagor and . . . failed to disclose and discuss this interest of identity with the Department," Director McCullough imposed a one-year probation barring Malone Mortgage from submitting
(i) new MAP preapplications for new construction or substantial rehabilitation under § 220, 221(d), or 232 of the National Housing Act, or
(ii) new MAP firm-commitment applications involving purchase or refinancing under § 223(f) or § 232 pursuant to § 223(f) of the NHA.See id. During the probation period, Malone Mortgage is allowed to continue
(i) processing any MAP § 220, 221(d), or 232 project involving new construction or substantial rehabilitation for which a preapplication was submitted before August 7, 2002;
(ii) processing any MAP § 223(f) or § 232-pursuant-to-§ 223(f) project involving purchase or refinancing for which a preapplication was submitted before August 7, 2002; and
(iii) submitting projects for mortgage insurance using the traditional application process.See id.
Malone Mortgage appealed Director McCullough's ruling to HUD's Acting Deputy Assistant Secretary for Multifamily Housing, Frederick Tombar III ("Acting Secretary Tombar"), on August 12, 2002. Pl.'s Compl. ¶ 11. Counsel for Malone Mortgage reported that he had attempted to trace the origins of the language used in the Walnut Place and Reserve Apartments transactions. Mul. Decl., Att. 12, at 2. He concluded that "the certification language submitted is drawn from FHA loan certifications regularly used by Malone Mortgage and deemed adequate and proper for many years." Id. He further averred that "[n]o problem with the form of certification has ever been suggested before." Id. Counsel went on to state that the failure to quote verbatim the definition contained in section 2.5 was "an inadvertent and innocuous oversight and not part of some intentional effort to circumvent the rules." Id. at 3.
As for the alleged violation of the MAP Guide's prohibition of "identities of interest," counsel stated that the fee statements "are not correctly worded. Id. at 2. The description of services in the fee statements derived from a form which was habitually used by Mr. Malone for many years while he was in private practice and did not accurately identify the true client in these two transactions." Id. To demonstrate that Mr. Malone had not represented the mortgagor in connection with the Walnut Place transaction, Malone Mortgage submitted copies of (i) an opinion letter signed by Lester V. Baum, a partner of Powell Coleman, L.L.P., stating that the firm "is special counsel to Telesis/Walnut Place Nursing Home I, Ltd., a limited partnership ("Mortgagor") . . . in connection with a mortgage loan . . . from Malone Mortgage Company America, Ltd. ("Mortgagee") to the Mortgagor," dated March 26, 2001; (ii) a "Certification of Mortgagor" executed by "TELESIS/WALNUT PLACE NURSING HOME I, LTD. for reliance upon by Powell Coleman, L.L.P. ("Mortgagor's Counsel") in connection with the issuance of an opinion letter dated of even date herewith," dated March 26, 2001; and (iii) the "Borrower's Statement" executed by the mortgagor, which listed among the charges and disbursements an item describing "Lender's Atty. Fees to Law Offices of Bernard P. Malone" in the amount of $15,000. Id. at 20, 32, 40.
Page numbers referring to the attachments generally indicate the page number one might find by counting from the first page without consideration of any change in document.
To demonstrate that Mr. Malone had not represented the mortgagor in connection with the Reserve Apartments transaction, Malone Mortgage submitted copies of (i) an opinion letter signed by Joseph H. Vives stating that he "is special counsel to Agape Irving Housing, Inc., a non-profit corporation ("Mortgagor") . . . in connection with a mortgage loan . . . from Malone Mortgage Company America, Ltd. ("Mortgagee") to the Mortgagor," dated April 6, 2001; (ii) a "Certification of Mortgagor" executed by "Agape Irving Housing, Inc. for reliance upon by Joseph H. Vives ("Mortgagor's Counsel") in connection with the issuance of an opinion letter dated of even date herewith," dated April 6, 2001; (iii) a letter written by Mr. Malone to Mr. E. Ross Burton, Director of the Fort Worth Office of HUD, stating that he had, in his capacity "[a]s the attorney for Malone Mortgage Company America, Ltd. ("Mortgagee"), the lender on the [Reserve Apartments] loan . . . prepared or reviewed all of the documents which will be used in connection with the funding of a mortgage . . . "dated April 6, 2001; and (iv) the "Borrower's Statement" executed by the mortgagor, which listed among the charges and disbursements an item describing "Attorney's Fees for Preparation of Papers to JBP Malone" in the amount of $18,750. See Mul. Decl., Att. 12, at 5, 15, 36 42.
Malone Mortgage subsequently submitted more recently dated statements from the mortgagors and their counsel to the effect that Mr. Malone had not represented the mortgagors in these loans. Pl.'s Compl. ¶ 11; Mul. Decl., Att. 13. On August 21, 2002, counsel and representatives of Malone Mortgage met with Acting Secretary Tombar and Director McCullough in Washington, D.C., to discuss the appeal. Pl.'s Compl. ¶ 11; Mul. Decl. ¶ 12. According to a sworn affidavit submitted by Maurice L. Barksdale, a consultant who appeared at the appeal conference on behalf of Plaintiff, Acting Secretary Tombar "stated that he was satisfied that Mr. Malone had not acted as counsel for both parties in the transactions. . ." Aff. of Barksdale ¶ 14. Director McCullough, on the other hand, "said that he was not satisfied with the explanation on the mortgagor-mortgagee's counsel issue. . ." Id. ¶ 15. Representatives of Mortgage Malone also offered that "it was the usual and customary practice in the industry for the borrower to be assessed various third party fees in connection with a loan and that included attorney's fees for the parties." Id. ¶ 16. According to Mr. Barksdale, Director McCullough agreed that the assessment of lender's attorney's fees to the borrower would be acceptable if they were merely "tacked onto the lender's financing fees." Id. At the end of the meeting, Acting Secretary Tombar allegedly "stated again that he was satisfied with the mortgagor-mortgagee attorney representation question . . ." Id. ¶ 17. Following the meeting, Mr. Malone submitted a letter to HUD committing not to charge attorney's fees in connection with any future MAP transactions. Pl.'s Compl. ¶ 11; Mul. Decl., Att. 14.
On August 27, 2002, Acting Secretary Tombar sent Malone Mortgage a letter reiterating HUD's conclusion (i) that "key language . . . was dropped" from the identity-of-interest certifications for the Walnut Place and Reserve Apartment transactions and (ii) that "[t]here is evidence that Mr. Malone served . . . as the attorney for [both] the mortgagee and the mortgagor" and that "[t]he mortgagor entities paid Bernard P. Malone for legal services provided to the mortgagor entities." See id. ¶ 14 Att. 15. Based on this evidence and the evidence presented by Malone Mortgage, Acting Secretary Tombar concluded that "the mortgagor entities paid Bernard P. Malone for legal services provided to the mortgagor entities." Id., Att. 15. "This payment," he continued, "created a prohibited identity-of-interest as detailed in Section 2.5 of the MAP Guide." Although "[t]he violation of HUD procedures contained in the MAP Guide is a serious matter," Acting Secretary Tombar reduced the probationary period to four months. Id.
Plaintiff maintains that this "probation" is effectively a suspension of its ability to originate HUD-insured loans. Pl.'s Compl. ¶ 14. Although it remains theoretically possible to submit applications for HUD insurance under TAP, that means of processing loans "is not being used by competing loan originators" and the Fort Worth regional office of Hub "has not processed a TAP submission since the MAP program was initiated." Id. Insofar as "100% of Malone Mortgage's originations are from MAP loans," Plaintiff expects to lose a significant source of income because of the probation. Supp. Aff. of Levitt ¶ 5. Were it to rely solely on income derived from its servicing of loans it has already originated, it will lose about $300,000 monthly. Id. ¶ 4. Two prospective borrowers have already informed Plaintiff "that they will not pursue applications with Malone Mortgage due to the time delay associated with the [probation] imposed" on the company. Id. ¶ 3. These lost prospects translate into about $1,372,000 in lost origination fees. Id. The company anticipates losing future business because of the probation. Id. ¶ 5. "Without the prospect of new loan originations, Malone Mortgage may fail . . ." Id. ¶ 4. Thirty-five highly specialized employees "are in peril of losing their employment if the MAP suspension stands." Id.
Plaintiff filed a Complaint for Injunctive and Declaratory Relief in this Court on August 30, 2002, naming as Defendants Mel R. Martinez, Secretary of the United States Department of Housing and Urban Development, Frederick Tombar III, and Michael McCullough (collectively, "Defendants"). In its Complaint, Plaintiff seeks relief in the form of a preliminary injunction and a declaratory judgment that the "processes and procedures set forth in section 2 of the MAP Guide for penalizing alleged violations" are "null and void" because they violate (i) the provisions of the organic statute, the National Housing Act, specifically § 202(c), codified at 12 U.S.C. § 1708 (c), and the regulations promulgated thereunder, see 24 C.F.R. § 25.1 et seq., (ii) the Administrative Procedures Act ("APA") § 706, codified at 5 U.S.C. § 706, and (iii) the Due Process Clause of the Fifth Amendment of the United States Constitution. Pl.'s Compl. ¶ 27.
Plaintiff also filed a concurrent application for temporary restraining order ("TRO") and motion for preliminary injunction on August 30, 2002. In its Application for a TRO or preliminary injunction, Plaintiff alleges (i) that Defendants' conclusions were arbitrary and capricious, (ii) that Defendants' actions were not supported by substantial evidence, (iii) that Defendants' probation action was not issued in accordance with HUD regulations or the MAP Guide procedures, and (iv) that Defendants violated Plaintiff's procedural and substantive due process rights. Plaintiff maintains that it will suffer irreparable harm if an injunction does not issue, namely the loss of enough revenue to cause the company to fail. In conclusion, Plaintiff prays that the Court enjoin Defendants from
a. prohibiting [Plaintiff] from participating in the MAP lending program as HUD would do under the terms of the four month probation;
b. refusing to reinstate [Plaintiff] as a MAP lender in good standing;
c. debarring, withdrawing, removing, suspending, or otherwise acting to prevent [Plaintiff] from acting as a lender fully authorized to participate in the MAP lending program until the outcome of further judicial proceedings; and
d. refusing to correct any notification of [Plaintiff's] probation to the Government National Mortgage Association (Ginnie Mae), Federal National Mortgage Association (Fannie Mae), [Plaintiff's] lenders, warehouse lenders, rating agencies and other[s] with whom [Plaintiff] must remain in good standing in order to remain a viable company.
Pl.'s Appl. at 9. Plaintiff also filed on August 30, 2002, a Motion for Leave to Take Expedited Discovery. This Court declined to issue an injunction ex parte, and ordered full briefing on an abbreviated schedule. See Order of Sept. 4, 2002. Having received Defendants' Response and Plaintiff's Reply, the Court now disposes of Plaintiff's Motion for Preliminary Injunction.
II. Application for Preliminary Injunction
A preliminary injunction may be granted only if the plaintiff establishes four elements: (1) a substantial likelihood of success on the merits, (2) a substantial threat that plaintiff will suffer irreparable injury if the injunction is denied, (3) that the threatened injury outweighs any damage that the injunction might cause defendants, and (4) that the injunction will not disserve the public interest. Sugar Busters LLC v. Brennan, 177 F.3d 258, 265 (5th Cir. 1999). All four of these factors are mixed questions of law and fact, and each must be considered to determine whether, on balance, they collectively favor granting the injunction. Id. A preliminary injunction is an extraordinary remedy that should be granted only when the plaintiff has clearly carried its burden of proof as to all four elements. See Kern River Gas Transmission Co. v. Coastal Corp., 899 F.2d 1458, 1462 (5th Cir. 1990). The decision is to be treated as the exception rather than the rule. See Mississippi Power Light Co. v. United Gas Pipe Line Co., 760 F.2d 618, 621 (5th Cir. 1985).
A. Plaintiffs Likelihood of Success on the Merits
In its Complaint, Plaintiff seeks a declaratory judgment that the disciplinary procedures published in section 2 of the MAP Guide are unenforceable because they violate (i) the provisions of the organic statute, (ii) the Administrative Procedures Act, and (iii) the Due Process Clause of the Fifth Amendment. See Pl.'s Compl. at 1-2. In its Application for Temporary Restraining Order and Motion for Preliminary Injunction, Plaintiff maintains that the administrative actions imposed by HUD should be "reversed on the grounds that their actions violate § 706 of the [APA] . . ." Pl's Appl. at 9. Section 706 lists several bases on which a reviewing court might "hold unlawful or set aside agency action," four of which are of particular relevance to the declaratory judgment Plaintiff seeks in its Complaint. First, a reviewing court can reverse agency action that is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706 (2)(A). Second, if a formal hearing was required to be made "on the record," then agency action may be set aside if the action is "unsupported by substantial evidence." Id. § 706(2)(E). Third, agency action may be held unlawful if it exceeds "statutory . . . authority." 5 U.S.C. § 706 (2)(C). Fourth, a court may overturn agency action that is "contrary to constitutional right." 5 U.S.C. § 706 (2)(B).
1. Defendants' Action Against Plaintiff Was Arbitrary and Capricious
Plaintiff's asking a reviewing court to overturn agency action under APA § 706(2)(A) must demonstrate that
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.Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto Ins. Co., 463 U.S. 29, 43 (1983) (citing SEC v. Chenery Corp., 332 U.S. 194, 196 (1947)). See also Harris v. United States, 19 F.3d 1090, 1096 (5th Cir. 1994). In State Farm, the Court further opined that a "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." Id. Then again, a reviewing court should "uphold a decision of less than ideal clarity if the agency's path may reasonably be discerned." Id. (citing Bowman Transp., Inc. v. Ark-Best Freight Sys., Inc., 419 U.S. 281, 286 (1974)).
In the pleadings and briefs, Plaintiff does not argue that Director McCullough or Acting Secretary Tombar relied on factors Congress did not intend for them to consider, nor that Defendants failed to consider an important aspect of the problem. Plaintiff does not expressly argue that Defendants' explanation is so implausible that it cannot be attributed to a difference in view or the product of agency expertise. Rather, the parties dispute whether the explanation offered by Defendants runs counter to the evidence. Consequently, the issue before the Court, in the context of this motion for preliminary injunction, is whether there is a substantial likelihood that Plaintiff will succeed in demonstrating that Defendants' explanation runs counter to the evidence and is thus arbitrary and capricious. See Blue Cross Blue Shield of Tex., Inc. v. Office of Civilian Health Med. Program of the Unif. Serv's., 889 F. Supp. 955, 957 (N.D. Tex. 1995) (Solis, J.) ("[A] reviewing court must . . . determine whether the agency `offers an explanation for its decision that runs counter to the evidence before the agency.'"). See also Chem. Mfrs. Ass'n v. EPA, 217 F.3d 861, 865-866 (D.C. Cir. 2000) (reviewing the record and finding the conclusion drawn by EPA to be arbitrary and capricious because counter to the evidence before the agency); Mausolf v. Babbitt, 125 F.3d 661, 669-670 (8th Cir. 1998) (reviewing evidence before agency to find agency's decision to promulgate a rule not arbitrary and capricious).
Defendants' actions in this case relate to alleged violations by Malone Mortgage in each of two applications submitted under the MAP program. All the allegations relate to HUD's objective to maintain the integrity of the MAP program by avoiding so-called "identity of interest" transactions. Such conflicts in MAP transactions — where at least one party has a familial or financial relationship with both the mortgagee and the mortgagor — erodes HUD's confidence in the ability of lenders to serve as both underwriter and servicer of HUD-insured loans. See Def.'s Resp. at 5. HUD first alleges that Malone Mortgage omitted certain "required" language from the identity-of-interest certification submitted in connection with the Walnut Place and Reserve Apartment transactions. Second, HUD alleges that Malone Mortgage president Bernard P. Malone violated the prohibition against identity-of-interest transactions by acting as counsel to the mortgagor in both the Walnut Place and Reserve Apartment transactions.
a. The Omitted-Language Allegation
Section 2.6 of the MAP Guide states that "an application for approval as a MAP Lender" should include, inter alia,
[c]ertification by the Lender that it will certify with each preapplication and application for mortgage insurance that it is in compliance with the identity of interest provisions in the MAP Guide which will provide that, "No financial or family relationship is permitted between an officer or partner of the MAP Lender, its principal staff or contracting employees working on the particular application and an officer, director or partner of the sponsor, the mortgagor, the principal of the mortgagor, the general contractor, the subcontractor, or the seller of the land or property."
Def.'s Resp., Att. B at 2-6. Malone Mortgage president Bernard P. Malone executed on May 1, 2000, as part of the company's application to become an MAP Lender, a document certifying that "each preapplication and application for mortgage insurance that Lender will file under MAP will contain lender's certification that such preapplication and application is in compliance with the identity of interest provisions in the MAP Guide." Mul. Decl., Att. 1. Since executing this certification, Malone Mortgage has closed twenty-eight loans under the MAP program with a total principal value of about $287 million. Pl.'s Compl. ¶ 9.
In HUD's letter imposing probation, Director McCullough informed Malone Mortgage that the "identity-of-interest certifications submitted by Malone" in the Walnut Place and Reserve Apartments transactions "fail to conform to the MAP requirements set out in Sections 2.5 and 2.6L of the MAP Guide." Mul. Decl., Att. 11 at 1. The record shows that on September 26, 2000, Malone Mortgage executed a "Statement of Identity of Interest" in connection with the Walnut Place transaction, in which Malone Mortgage's vice president Linda Walker attested to the fact that "no identity of interest whatsoever exists, nor is any identity contemplated in the future, by and between the mortgagor . . . and the mortgagee . . ." Mul. Decl., Att. 2. A similar "Statement of Identity of Interest" was executed by Ms. Walker on October 4, 2000, in connection with the Reserve Apartments transaction. Mul. Decl., Att. 3.
In their brief, Defendants aver that "[e]ach individual certification submitted with a particular loan package must incorporate the exact words used in [the definition of `identity of interest' in] § 2.5 of the MAP Guide," citing MAP Guide section 2.6L as authority for this purported requirement. Def.'s Resp. at 5. Defendants explain that the inclusion of the verbatim definition "prevents a Lender from crafting its own evasive language that might let it secure HUD mortgage insurance without fully complying with MAP Guide [section] 2.5 and without subjecting itself to criminal penalties for its noncompliance." Id. at 5-6.
Though the policy explained in the briefing appears reasonably calculated to achieve this objective of HUD, the Court fails to see how an MAP Lender seeking to comply strictly with its obligations under the MAP Guide would necessarily read section 2.6L as requiring each and every preapplication and application to include a definition of "identity of interest" taken verbatim from section 2.5. A plain reading of section 2.6L suggests that the definition belongs in the certification aspiring lenders must file in order to become approved MAP lenders. The pronoun "which" grammatically refers to one of two nouns in the sentence, either "certification" or "MAP Guide." If the antecedent is "MAP Guide," then the dependent clause appears redundant, for there is no logical reason to state, in a discussion of what an aspiring lender must include in its application to become an approved lender, that the MAP Guide will define "identity of interest." If the antecedent of the pronoun is "certification," then the certification executed in connection with the lender's application to participate in the MAP program should include the definition of "identity of interest." Only a tortured construction of the sentence, and clairvoyance on the part of a lender seeking to comply with the requirements of the MAP Guide, can lead to the conclusion that each preapplication and application certification should include the definition of "identity of interest." HUD would do well to revise section 2.6L if it intends MAP Lenders to include this definition in their routine certifications.
Though Defendants make much of this alleged violation in their letters to Plaintiff and in their brief to this Court, they never claim that the administrative action was taken because Malone Mortgage "dropped" this purportedly "key language." Director McCullough's letter imposing probation stated that Malone Mortgage was being placed on probation "[b]ecause [it] chose to submit and process a mortgage application, as a MAP Lender, for a project in which a prohibited identity-of-interest existed . . ." Mul. Decl., Att. 11 at 2. In the subsequent letter imposing a reduced probation, Acting Secretary Tombar identified as a "fact" that Malone Mortgage "dropped" this allegedly "key language," but failed to cite this fact as a basis for the imposition of probation. Id., Att. 15 at 1-2. Thus, the Court declines to consider evidence of this alleged violation in determining whether HUD acted arbitrarily and capriciously.
b. The Identity-of-Interest Allegations
Section 2.5 of the MAP Guide prohibits financial or family relationships between "an officer . . . of the MAP Lender" and "an officer, Director, or partner of the . . . mortgagor." Def.'s Resp., Att. A at 2-4. The Court has little difficulty with the idea that an officer of an approved MAP Lender who acts as counsel for the mortgagor would violate this provision of the MAP Guide. The issue before the Court is whether there is a substantial likelihood Plaintiff will succeed in demonstrating that Defendants' explanation for imposing a four-month probation on Malone Mortgage — that Mr. Malone "served both as attorney for the mortgagee and the mortgagor" — runs counter to the evidence. The Court has examined the documents submitted by the parties and relied upon by Acting Secretary Tombar. The Court discusses the alleged violations separately, then considers whether the evidence, as a whole, shows a substantial likelihood that Plaintiff will succeed on the merits.
i. The Walnut Place Transaction
The evidence related to the alleged identity of interest in the Walnut Place transaction includes: (A) a bill from the Law Offices of Bernard P. Malone to Stephen L. Rush, president of Telesis, mortgagor on the Walnut Place project, dated March 23, 2001; (B) the "Health Care Facility — Summary Appraisal Report" (Form HUD 92264-HCF), dated February 8, 2001; (C) the "Mortgagor's Certificate of Actual Cost" (Form FHA 2205-A), dated March 26, 2001; (D) the "Borrower's Statement" executed by Telesis, dated March 23, 2001; (E) the opinion letter of Powell Coleman, L.L.P., dated March 26, 2001; (F) the Certification of Mortgagor, executed by Telesis, dated March 26, 2001; (G) the appeal letter from Malone Mortgage's counsel to Acting Secretary Tombar, dated August 12, 2002; (H) the unsworn letter of John E. Neill, vice president of The Telesis Company, dated August 13, 2002; and (I) the unsworn letter of Michael Deahl of Powell Coleman, dated August 13, 2002.
The bill from the Law Offices of Bernard P. Malone states that the $15,000 fee being charged is "FOR PROFESSIONAL SERVICES RENDERED as attorney for the mortgagor in connection with closing of the FHA-insured refinancing loan on the captioned property, including, but not limited to, preparation or review of all closing documents as complying with the FHA commitment." Mul. Decl., Att. 4. Read in isolation, this bill is fairly damaging evidence.
In the appeal letter, counsel for Malone Mortgage explains that the use of the word "mortgagor" was incorrect, a mistake arising from the use of a form "habitually used by Mr. Malone for many years while he was in private practice . . ." Id., Att. 12, at 2. By itself this statement of counsel is plausible, if self serving, yet hardly sufficient to overcome the persuasiveness of the cold, hard type on the bill. But the explanation offered by Plaintiff's counsel is corroborated by several documents and letters. First, the Borrower's Statement (completed to secure title insurance from Republic Title of Texas, Inc.) states that the mortgagor intended to pay "Lender's Atty. Fees to Law Offices of Bernard P. Malone." Mul. Decl., Att. 12 at 40. Second, the opinion letter of Powell Coleman states that the opinion is given in the firm's capacity as "special counsel" to the mortgagor. Id. at 20. Third, the Certification of Mortgagor identifies Powell Coleman as "Mortgagor's Counsel." Id. at 32. Fourth, the unsworn letter of the vice president of The Telesis Company "confirms" that Powell Coleman served as counsel to the mortgagor in the Walnut Place transaction, and that "Mr. Malone did not represent Walnut Place in the above-referenced loan." Id., Att. 13. And fifth, the unsworn letter of Michael Deahl of Powell Coleman states that the firm "was legal counsel to the Mortgagor" in the Walnut Place transaction, and that "Bernard P. Malone represented the lender in the transaction and did not represent the Mortgagor." Id. Each of these documents tends to corroborate the explanation offered by Malone Mortgage in its appeal to Acting Secretary Tombar.
The Court notes that Michael Levitt, chief executive officer of Malone Mortgage, states in a sworn affidavit that Mr. Malone represented Malone Mortgage in the Walnut Place transaction. See Aff. of Levitt at 3. Because this sworn affidavit was not considered by Defendants in making the decision to place Malone Mortgage on probation, the Court cannot countenance it in determining whether Plaintiff is likely to succeed in showing that Defendants acted arbitrarily or capriciously in making that decision.
Defendants point to three documents that indicate that the mortgagor paid Mr. Malone "the amount specified on [the] bill." Def.'s Resp. at 17-18. First, the Borrower's Statement indicates that the mortgagor paid "Lender's Atty. Fees to Law Offices of Bernard P. Malone." Mul. Decl., Att. 13. Second, the Summary Appraisal Report (Form HUD 99264-HCF) filed in connection with the Walnut Place transaction identifies legal fees of $15,000 at section H line 31. See id., Att. 7 at 3. Third, the Mortgagor's Certificate of Actual Cost (Form HUD 2205-A) states that Telesis incurred legal and organizational expenses of $32,534. The accompanying schedule indicates that legal fees paid by the mortgagor in connection with the Walnut Place transaction (listed as "Legal Fees, Bernard P. Malone") totaled $15,000.
None of these documents illuminates the issue whether Mr. Malone was paid "for professional services as attorney for mortgagor" in violation of the MAP program's identity-of-interest rule. The first document plainly states, as Defendants concede, that the payment is for the lender's attorney's fees. See Def's Resp. at 18. The second document (Form HUD 92264-HCF) sheds no light on the question. The value listed at section H line 31 identifies no actual payment to Mr. Malone. It merely reflects how much it would cost in legal fees to build a replacement facility similar to the one being appraised.
The heading accompanying section H is "Estimated Replacement Cost." Defendants did not provide instructions for Form HUD 92264-HCF, but a photocopy of Instructions for Form HUD 92264 was submitted to help explain the evidence related to the Reserve Apartments transaction. See Mul. Decl., Att. 7. The instructions for Form HUD 92264 explain that appraisals for projects insured by HUD are to include an estimate of "the general level of costs necessary to build a similar project in new condition and adjusting for depreciation." Id. at 4. Among the costs to be included in the estimate is "legal expense," which should include, inter alia, fees for "all legal services normally incurred in connection with initial and final closing." Id. at 5. Defendants emphasize that fees estimated at line 64 of Form HUD 92264 are limited to "those expenses typically incurred by a sponsor [ i.e., mortgagor/owner] for legal services . . .," implying that only legal services provided by mortgagor's counsel are listed there. Def.'s Resp. at 8 (citing Mul. Decl., Att. 7 at 5). The instructions are less certain than Defendants' brief. The instructions state that the estimate is to include expenses typically incurred by the sponsor for legal services "necessary in the creation of projects similar to the subject in the competitive locality in which the project is located." Mul. Decl., Att. 7 at 5. The full explanation leaves open the possibility that legal expenses estimated on Form HUD 92264 may include lender's attorney's fees if mortgagors typically pay these fees when creating such projects in the relevant "competitive locality," as appears to be the case here. See Aff. of Barksdale ¶ 16. Assuming that the requirements for "estimated replacement cost" on Form HUD 92264-HCF are consistent with the explanation of legal fees to be included in the replacement-cost estimate on Form HUD 92264, the Court reads the amount listed at line 31 on the Form HUD 92264-HCF filed in connection with the Walnut Place transaction to be nothing more than an estimate of legal fees that might be incurred should the project need to be rebuilt from scratch. It could be based on fees actually paid to mortgagor's counsel or fees paid to lender's counsel. It is difficult to say whether Defendants' explanation runs with or counter to this evidence.
The import of the third document (Form FHA 2205-A) is equally ambiguous. The line item in question merely states that legal fees were paid to Mr. Malone, with no indication as to the capacity in which those fees were paid, whether as lender's or as mortgagor's counsel. Defendants imply that it was in the latter capacity by making a somewhat oblique argument. Defendants apparently maintain that the payment must have been for "professional services rendered as attorney for mortgagor" because the mortgagor could not properly certify payment of the lender's attorney's fees at line 11 of the Mortgagor's Certification of Actual Costs (Form FHA 2205-A). Whether this is the case, the Court cannot say with confidence, but Defendants' reliance on MAP Guide section 14.15(J)(3) does not justify their position. Defendants assert that "[l]egal costs may be certified only for `tax advice during organization of mortgagor entity only; and preparation of documents and representation for and during organization of the mortgagor entity.'" Def.'s Resp. 8-9 (quoting MAP Guide section 14.15(J)(3)) (emphasis added). Defendants' quotation omits language plainly requiring certain mortgagors to certify legal expenses "incurred for: initial through final closing," including "customary expenditures expected to be incurred before and during initial closing, construction period, and final closing." Def.'s Resp., Att. A, at 14-21. Furthermore, the instructions contained in MAP Guide section 14.15 apply to Form HUD 92330; nothing in the documents before the Court indicates that they apply to Form FHA 2205-A, the form in which mortgagors engaged in § 223(f) projects (such as the Walnut Place transaction) are required to certify "to the total costs incurred in the acquisition or refinancing of the project . . ." Id. at 14-11. Assuming that the legal costs certifiable on Form FHA 2205-A are the same as those certifiable on Form HUD 92230, it appears that the mortgagor can certify any legal expenses related to closing. If lender's attorney's fees are "customary expenses expected to be incurred," then the mortgagor's listing of fees paid to Mr. Malone on its Certification of Actual Costs tells us nothing about the capacity in which Mr. Malone earned those fees. Thus, one cannot confidently infer from Form FHA 2205-A that the fees paid to Mr. Malone were for professional services rendered as attorney for the mortgagor.
The Court notes that the parties apparently discussed this possibility at the appeal meeting in Washington, D.C. The Affidavit of Maurice Barksdale indicates that the parties agreed that such was the custom, but disagreed about the manner in which attorneys fees should be assessed: separately or as part of lender's financing fees. See Aff. of Barksdale ¶ 16.
In sum, the evidence related to the Walnut Place transaction includes one document plainly indicating that Mr. Malone violated the identity-of-interest rule. Not only was this document reasonably explained as a typographical error, but Plaintiff brought to HUD's attention at least five documents and letters corroborating its position that Mr. Malone did not act as attorney for the mortgagor. Finally, the other documents cited by Defendants as supporting the conclusion that Mr. Malone acted as attorney for the mortgagor tell us nothing either way.
ii. The Reserve Apartments Transaction
The evidence related to the alleged identity of interest in the Reserve Apartments transaction includes: (A) a bill from the Law Offices of Bernard P. Malone to Daniel P. Organ, president of Agape, mortgagor on the Reserve Apartments project, dated April 6, 2001; (B) the "Multifamily Summary Appraisal Report" (Form HUD 92264), last dated January 26, 2001; (C) the "Application for Insurance of Advance of Mortgage Proceeds" (Form HUD 92403), dated April 6, 2001; (D) the opinion letter of Joseph H. Vives, special counsel to Agape, dated April 6, 2001; (E) the "Certification of Mortgagor," executed by Agape, dated April 6, 2001; (F) the "Borrower's Statement" executed by Agape, dated April 6, 2001; (G) the appeal letter from Malone Mortgage's counsel to Acting Secretary Tombar, dated August 12, 2002; (H) the unsworn letter of Laura Taylor Wingfield, executive director of Agape, dated August 13, 2002; and (I) the unsworn letter of Joseph H. Vives, dated August 13, 2002.
The bill from the Law Offices of Bernard P. Malone states that the $18,750 fee being charged is "FOR PROFESSIONAL SERVICES RENDERED as attorney for mortgagor in connection with initial/final closing of the FHA-insured construction/final loan on the captioned property, including, but not limited to, preparation or review of all closing documents as complying with the FHA commitment as well as the required attorney's opinion." Mul. Decl., Att. 5. As with the bill for the Walnut Place transaction, this document, read in isolation, is formidable and damaging to Plaintiff's case.
Plaintiff provided HUD several documents that tend to corroborate the explanation, given in the appeal letter, that the word "mortgagor" was incorrectly used. The opinion letter of Joseph H. Vives states that the opinion is given in Mr. Vives' capacity as "special counsel" to the mortgagor. Mul. Decl., Att. 12. The Certification of Mortgagor identifies Joseph H. Vives as "Mortgagor's Counsel." Id. The unsworn letter of Laura Taylor Wingfield confirms that "the Mortgagor was represented by two law firms: Akin, Gump, Strauss, Hauer Feld, L.L.P., through lawyers Paul Martin and Sidney Swearingen, and Joseph Vives of Yeager Vives." Id., Att. 13. Ms. Wingfield further avers that "Bernard P. Malone, as counsel for the lender . . . prepared the loan documents." Id. Finally, the unsworn letter of Joseph H. Vives states that he and the Akin, Gump lawyers "represented the Mortgagor in the [Reserve Apartments] transaction" and that "Bernard P. Malone represented the lender in the . . . transaction and did not represent the Mortgagor." Id., Att. 13.
Defendants point to two documents that purportedly "support the inference that Mr. Malone performed legal services for the mortgagor" in the Reserve Apartments project. Def.'s Resp. at 8. First, the Multifamily Summary Appraisal Report (Form HUD 92264) filed in connection with this project estimates at section G line 64 that legal fees of $25,000 would be necessary in the event the Reserve Apartments project had to be replaced by a similar project in new condition. Mul. Decl., Att. 6. As discussed above, the instructions for Form 92264 explain that the appraisal is to include a replacement cost estimate that "shall reflect the general level of costs necessary to build a similar project in new condition and adjusting for depreciation." Mul. Decl., Att. 7 at 4. According to the instructions, the estimate of legal expense in the replacement-cost estimate is to include "those expenses typically incurred by a sponsor [i.e., mortgagor] for legal services necessary in the creation of projects similar to the subject in the competitive locality in which the project is located." Id. at 5. Among the legal expenses to be estimated are "all legal services normally incurred in connection with initial and final closing." Id. The $25,000 estimate listed on this Form 92264 is simply an estimate of legal expenses that might be incurred should the project need to be rebuilt from scratch. It does not reflect any actual payment to Mr. Malone and does not necessarily support an inference that Mr. Malone acted as counsel to the mortgagor.
The second document relied on by Defendants is the Application for Insurance of Advance of Mortgage Proceeds (Form HUD 92403), which lists at line 11 a request for legal fees in the amount of $18,750. Mul. Decl., Att. 8. This application indicates that it is for an initial advance. Id. The MAP Guide states that an application for an initial advance can specify an intent to pay certain legal expenses. No more than 75% of the total legal expenses "may be disbursed at initial closing or during construction." Id. The remaining 25% must wait until final closing. Id. The Form HUD 92403 filed in connection with the Reserve Apartment project indicates that it is for an initial advance, and the item listing "Legal fees" is marked "75%," which leads one to conclude that attorney's fees on the project will total $25,000, coincidentally the estimate of legal expenses on Form HUD 92264. Mul. Decl., Att. 8 9. Defendants emphasize that Mr. Malone billed the Mortgagor $18,750 the same day as the initial closing. Def.'s Resp. at 8.
Defendants maintain that the legal fees listed on a Form HUD 92403 should be understood to represent the "mortgagor's legal fees." Def.'s Resp. at 8 (citing Att. A, at 13A-3). The Court recalls that the instructions to Form HUD 92264 speak broadly about "legal services normally in connection with initial and final closing," allowing the inference that a mortgagor might anticipate paying the lender's legal expenses (in the event the project must be rebuilt from scratch) if such fees are normally incurred in connection with initial and final closing. Mul. Decl., Att. 7, at 5. But an initial or interim advance sought by means of Form HUD 92403 may only include "costs associated with counsel's review of initial and final closing documents." Def.'s Resp., Att. A, at 13A-3. The use of the word "counsel" is somewhat ambiguous, as it is not modified by either "mortgagor" or "mortgagee." Nonetheless, it is more specific than the instructions for Form HUD 92264. Defendants have given this Court no reason to believe that participants in the MAP program would feel compelled to construe "counsel's review" to allow only initial advances for legal expenses payable to mortgagor's counsel. At the same time, Plaintiff has not alleged that anyone asked HUD whether an initial advance can be made to pay the lender's attorney's fees. Given the ambiguity in the instructions and the apparent don't-ask-don't-tell approach taken by the parties, the Court defers to HUD's interpretation of its own MAP Guide and finds that the Form HUD 92403 filed in connection with the Reserve Apartments project tends to support HUD's conclusion that Mr. Malone "rendered professional services as attorney for mortgagor," as indicated on his bill to the mortgagor. Insofar as the estimate of total anticipated legal expenses on Form HUD 92264 appears to be based on the amount sought on Form HUD 92403, the Court reads this evidence to support Defendants' conclusion that Mr. Malone served as counsel to the mortgagor in the Reserve Apartments transaction. However, the Court declines to give this evidence any more weight than it deserves.
The Court is untroubled by the differing requirements on Form HUD 92403 (allowing initial advances to pay mortgagor's counsel only) as opposed to Form FHA 2205-A (allowing payments to lender's counsel if the custom is to do so). Although the parties have provided only a glimpse into the policies and formalities of the MAP program, the Court is willing to accept, at this time, that policies differ where lender's legal fees are sought in connection with a new construction loan advanced at intervals as opposed to a refinancing loan advanced all at once.
In sum, the bill, the Form HUD 92264, and the Form HUD 92403 tend to support Defendants' conclusion that Mr. Malone rendered professional services as attorney for the mortgagor in the Reserve Apartments project, while the opinion letter, the appeal letter, the unsworn letter from the executive director of the mortgagor, and the unsworn letter of mortgagor's counsel weigh against the conclusion reached by Defendants.
iii. Mr. Malone's Failure to Appear at the Appeal Conference
Defendants note that Mr. Malone did not personally appear at the appeal conference to give his version of the facts. Def.'s Resp. at 10. They further state that he did not augment his counsel's arguments by including a personal explanation of his conduct in his letter dated August 22, 2002. Id. See also Mul. Decl., Att. 14 at 5. Defendants claim that they were "entitled to consider the fact that the one person who had both the most knowledge about Mr. Malone's legal service and the greatest personal stake in the matter, Robert P. Malone [sic] himself, neither attended the conference before Mr. Tombar nor offered any written explanation of them." Def.'s Resp. at 18. Defendants maintain that they properly drew a negative inference from Plaintiff's "failure to produce a witness `whose testimony would elucidate the transaction,' when that witness has information `peculiarly within his knowledge.'" Def.'s Resp. at 18 (quoting Streber v. C.I.R., 138 F.3d 216, 221-22 (5th Cir. 1998)). Defendants present this explanation for the first time in their Response; in his August 27 letter, Acting Secretary Tombar did not remark upon Mr. Malone's decision not to attend the appeal conference.
Respectfully, the Court disagrees with Defendants as to the propriety of a negative inference this circumstance. In Streber, the Tax Court drew a negative inference from an attorney's failure to testify about the advice he gave his clients. The Court of Appeals held that a negative inference was improper where four witnesses testified about the content of the attorney's advice. Because his testimony would have been cumulative, counterproductive, and not peculiarly within his knowledge, the Tax Court should not have made a negative inference based on the attorney's failure to testify. See 138 F.3d at 222. In the case at hand, Plaintiff submitted to Defendants letters from four persons with knowledge of the facts, testifying to the same thing Mr. Malone would have told Defendants: that he acted as counsel to the mortgagee not the mortgagor. Contemporaneous documents further support Mr. Malone's version of the events. Plainly, Mr. Malone's appearance at the hearing and his recitation of the explanation offered in the appeal letter would be cumulative and not peculiarly within his knowledge. Defendants' reliance on a negative inference was improper. Thus, in weighing whether there is a substantial likelihood that Plaintiff will succeed in demonstrating that the conclusions drawn by Defendants run counter to the evidence, the Court declines to consider the negative inference allegedly drawn by Defendants in concluding that Mr. Malone served as counsel for the mortgagor in the Walnut Place and Reserve Apartments transactions.
iv. Plaintiff is Likely to Succeed on the Merits
Considering the evidence presented to this Court as the record before Defendants at the time Acting Secretary Tombar concluded that Mr. Malone acted as attorney for "the mortgagee and the mortgagor," the Court finds that there is a substantial likelihood that Plaintiff will succeed in demonstrating that the conclusion drawn by Defendants runs counter to the evidence and thus was arbitrary and capricious. With respect to the Walnut Place transaction, the evidence supporting Defendants' conclusion consists of a bill "for professional services rendered as attorney for mortgagor" sent by Mr. Malone to the president of Telesis. The use of the word "mortgagor" has been explained as an error, and the explanation has been corroborated by three documents executed at the time of the transaction as well as two letters written to supplement Malone Mortgage's appeal. The other documents relied on by Defendant do not provide information that can be said to support either party's position. As for the Reserve Apartments transaction, the bill to Agape "for professional services rendered as attorney for mortgagor" is consistent with the Defendants' conclusion. As with the Walnut Place transaction, the significance of this document has been eroded by contemporary documents and more recent statements from persons with knowledge of the transaction. Two documents (Forms HUD 92403 and HUD 92264) appear to support the conclusion drawn by Defendants but, before one can give this evidence much weight, one must assume that Defendants' construction of an ambiguous term controls and that the parties completing those forms shared that understanding. The negative inference drawn by Defendants on the basis of Mr. Malone's failure to appear at the appeal conference was improper and cannot be considered as support for Defendants' conclusion. Finally, the Court notes, the uncontradicted sworn Affidavit of Maurice Barksdale declares that Acting Secretary Tombar himself stated at the appeal meeting in Washington, D.C., that he was satisfied that Mr. Malone had not acted as counsel for the mortgagor in the two transactions. In sum, it appears there is a substantial likelihood that Plaintiff will be able to demonstrate that the explanation offered by Defendants for placing Plaintiff on probation runs counter to the evidence before HUD and, consequently, that the action taken by Defendants was arbitrary and capricious.
2. The Substantial-Evidence Standard Does Not Apply
Agency action can be held unlawful or set aside if it is "unsupported by substantial evidence in a case subject to sections 556 and 557 of [the APA] or otherwise reviewed on the record of an agency hearing provided by statute." 5 U.S.C. § 706 (2)(E). The conference held in Washington, D.C., to discuss Malone Mortgage's appeal was not conducted according to the formal adjudicatory procedures prescribed by the APA, nor was it conducted according to the procedures outlined in 12 U.S.C. § 1708 (c) and 24 C.F.R. part 25. The substantial-evidence standard has no relevance in an informal proceeding like the one conducted by Defendants. See La. ex rel. Guste v. Verity, 853 F.2d 322, 326 n. 7 (5th Cir. 1988). The fact that no hearing was held on the record under §§ 556 and 557 of the APA leads this Court to conclude that it would be inappropriate to consider whether Defendants' action was supported by substantial evidence. Plaintiff is unlikely to succeed on the merits of a claim based on § 706(2)(E).
3. Plaintiff Cannot Show that Defendants' Actions Were Taken Without Observance of Applicable Law
A court may overturn agency action that was taken "without observance of procedure required by law." 5 U.S.C. § 706 (2)(D). Plaintiff argues that Defendants were required to follow the procedures outlined at 24 C.F.R. part 25 and the formal adjudicatory procedures contained in §§ 556 and 557 of the APA. In the alternative, Plaintiff claims that Defendants failed to follow the procedures outlined in the MAP Guide. The Court rejects both arguments.
a. Section 202(c) of the NHA Does Not Apply to Plaintiff
Plaintiff maintains that "HUD's power to take administrative action against FHA approved lenders derives solely from a congressional grant in Section 202(c)(1) of the [NHA]." Pl.'s Reply at 2. The regulations promulgated to implement § 202(c) emphasize this point, Plaintiff avers, by placing within the Mortgagee Review Board ("MRB") "all of the functions of the Secretary with respect to administrative actions [such as probation] against mortgagees and lenders . . ." 24 C.F.R. § 25.2 (cited by Reply at 3). Plaintiff further notes that no exception in the statute or the regulations allows HUD to take an administrative action against an MAP Lender by any procedure other than the one prescribed by the MRB regulations. See Pl.'s Reply at 3.
Defendants argue that the procedures outlined in 12 U.S.C. § 1708 (c) and 24 C.F.R. part 25 apply to administrative actions taken against mortgagees in their capacity as HUD-approved lenders. See Resp. at 13-14. Defendants claim that the procedures outlined in the MAP Guide apply to Plaintiff because Plaintiff was being reprimanded only in its capacity as an MAP Lender: "Its current probation only affects its specially-granted right to act as a mortgage insurance underwriter under the MAP program." Id. at 14 (emphasis original).
The question whether Defendants failed to observe applicable law by imposing the probation sanction outside the context of the MRB thus comes down to whether HUD's interpretation of the statute and the regulations should control. "An agency's interpretations of the statutes and regulations it administers should be given deference." Efe v. Ashcroft, 293 F.3d 899, 903 (5th Cir. 2002) (citing Chevron U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S. 837 (1984)). Substantial deference should be accorded to an agency's interpretation of its regulations, and "controlling weight" must be given to such an interpretation "unless it is plainly erroneous or inconsistent with the regulation." Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994) (internal quotations omitted).
The MRB "is empowered to initiate the issuance of a letter of reprimand, the probation, suspension or withdrawal of any mortgagee found to be engaging in activities in violation of the Federal Housing Administration requirements . . ." 12 U.S.C.A. § 1708(c)(1). HUD's regulations currently provide that "the Board shall exercise all of the functions of the Secretary with respect to administrative actions against mortgagees and lenders and other such functions as are provided by this part [25]." 24 C.F.R. § 25.2 (2002) (emphasis added). The word "all" is ambiguous in that it can be read to mean that the MRB can exercise any "function" the Secretary can exercise or that the MRB exercises the Secretary's "function" to initiate administrative actions against mortgagees to the exclusion of anyone else (unless the MRB has properly delegated this function). The former interpretation is consistent with the fact that the MRB, though performing "all of the functions of the Secretary" in dealing with mortgagees, is only required to take administrative action when a "report, audit investigation or other information before the Board discloses that a basis for an administrative action against a mortgagee exists." 12 U.S.C. § 1708 (c)(3) (emphasis added). How and what information comes before the MRB is not addressed in the statute. A reasonable interpretation of the statute would find that HUD's authority to initiate administrative actions against mortgagees does not reside exclusively with the MRB.
This interpretation of the regulation is bolstered by the fact that the regulation formerly stated that the MRB was to exercise "all of the authority and perform all of the functions of the Secretary with respect to administrative actions against mortgagees." See Mortgagee Review Board: Administrative Actions, 48 Fed. Reg. 40,705 (September 9, 1983) (superceded by 57 Fed. Reg. 31048 (July 13, 1992) and subsequent amendments).
Defendants maintain that the MRB deals with mortgagees only in their capacity as FHA-approved entities, and HUD officials other than the MRB can take administrative action against mortgagees if something less than FHA approval is at risk. HUD's interpretation of its own regulation is consistent with the statute and the regulation itself. Although the MRB is empowered (and required) to initiate administrative action when a matter is brought before the Board, the statute is flexible enough to allow agency officials other than the MRB to initiate administrative action against a mortgagee when the matter has not been brought before the Board. And though the regulation uses the word "all" ambiguously, HUD's interpretation of the regulation to limit the MRB's jurisdiction to matters involving the mortgagee's status as "FHA approved" is consistent with a reasonable interpretation of the regulation. Deferring to HUD's interpretation of 12 U.S.C. § 1708 (c) and 24 C.F.R. part 25, the Court rejects Plaintiff's claim that only the MRB can initiate administrative action against a mortgagee.
b. The MAP Guide
Plaintiff claims that Defendants did not follow the procedures outlined in the MAP Guide for placing an MAP lender on probation. Plaintiff first states that section 2.12 of the MAP Guide "appears to contemplate that the MAP Lender will be informed about improvements necessary to assure that the Lender is using its MAP authority correctly, implying that the MAP Lender will be given an opportunity to make the suggested improvements." Pl.'s Memo. at 10. Contrary to Plaintiff's position, section 2.12 places the decision whether to discuss necessary improvements with a MAP Lender squarely within the discretion of the Hub Director. The Hub Director may proceed directly to the imposition of probation or a recommendation of termination if "there are serious concerns about the Lender's underwriting." Def.'s Resp., Att. A at 2-8.
Plaintiff next argues that two alleged violations are insufficient to justify the imposition of probation: probation is justified "`when there is a pattern or practice of unacceptable performance over several applications.'" Pl.'s Memo. at 11 (quoting MAP Guide section 2.12(D)). Plaintiff misreads the MAP Guide here: serious concern exists " particularly when there is a pattern or practice of unacceptable performance . . ." Def.'s Resp., Att. A at 2-9 (emphasis added). Defendants' imposition of probation based on two applications does not constitute a failure to follow required procedures.
Plaintiff also complains that it was given no opportunity "to correct minor errors or provide additional information," as is allowed under section 2.12(D)(1). Pl.'s Memo. at 11. See also Def.'s Resp., Att. A at 2-9. This opportunity is only afforded to Lenders who fail to provide required exhibits or who file incomplete or inaccurate exhibits. Plaintiff does not allege that the billing errors were contained in exhibits.
Plaintiff maintains that probation may be ended "when the specific requirements of the probation are met . . ." Pl's Memo. at 11 (quoting MAP Guide section 2.13(A)(1)). But this provision applies when probation is "conditioned upon the Lender meeting a specific requirement or requirements." Def.'s Resp., Att. A at 2-10. Plaintiff was placed on a probation "limited by time," not conditions. Id.
Finally, Plaintiff reads the MAP Guide to require probation to last only "until the problems justifying the probation are corrected." Pl.'s Memo. at 12 (quoting MAP Guide section 2.13(A)(3)). Plaintiff omits the remainder of the sentence, which commits to the discretion of the Hub Director or the Director of OQA the determination whether the problem has been "corrected to [his or her] satisfaction." Def.'s Resp., Att. A. at 2-10.
None of the alleged violations of the MAP Guide withstands scrutiny. Consequently, the Court finds that Plaintiff is unlikely to succeed in demonstrating that Defendants' action should be reversed under APA § 706(2)(D).
4. HUD's Actions Against Plaintiff Were Contrary to Plaintiff's Constitutional Right to Due Process
Finally, a court can overturn agency action that is "contrary to constitutional right." 5 U.S.C. § 706 (2)(B). Plaintiff argues that Defendants violated its fights to procedural due process and to substantive due process under the United States Constitution.
a. Procedural Due Process
The Due Process Clause of the Fifth Amendment guarantees procedural fairness whenever the federal government seeks to deprive a person of life, liberty, or property. Procedural due process, "`unlike some legal rules, is not a technical conception with a fixed content unrelated to time, place, and circumstances.'" Cafeteria Rest. Workers Union Local 473 v. McElroy, 367 U.S. 886, 895 (1961) (quoting Joint Anti-Fascist Refugee Comm. v. McGrath, 341 U.S. 123, 162 (1951) (Frankfurter, J., concurring). However, the most basic requirement of due process is "`the opportunity to be heard' . . . `at a meaningful time and in a meaningful manner.'" Goldberg v. Kelly, 397 U.S. 254, 267 (1970) (quoting Grannis v. Ordean, 234 U.S. 385, 394 (1914) Armstrong v. Manzo, 380 U.S. 545, 552 (1965)). "In situations where the [government] feasibly can provide a predeprivation hearing before taking property, it generally must do so regardless of the adequacy of a postdeprivation . . . remedy . . ." Zinermon v. Burch, 494 U.S. 113, 132 (1985).
Defendants correctly note that "the first step" in a procedural due-process claim "is to identify a property or liberty interest entitled to due process protections." Brock v. Roadway Express, Inc., 481 U.S. 252, 260 (1987). The Due Process Clause protects "a broad range of interests" that can be characterized as property. Perry v. Sinderman, 408 U.S. 593, 601 (1972). These interests "are created and their dimensions are defined by existing rules or understandings that stem from an independent source . . ." Bd. of Regents v. Roth, 408 U.S. 564, 577 (1972). The MAP Guide plainly creates a property interest. Plaintiff became an "MAP Lender" in May 2000. See Def.'s Resp. at 6. "Qualification [as an MAP Lender] is continuing unless terminated in accordance with Sections 2.10-2.15 of [the MAP Guide]." Def.'s Resp., Att. A at 2-1. Approval as an MAP Lender may only be terminated if a three-member panel concludes that there are "reasons for serious concern" about the Lender's underwriting "directly and adversely affect[ing] HUD's risk" in insuring loans underwritten by the Lender. Id. at 2-9. The MAP Guide gives examples of acts or omissions that could give rise to serious concern, such as "[p]reparation of an underwriting summary that is not supported by the appropriate documentation and analysis," "[f]ailure to meet MAP closing requirements or construction loan administration requirements," or "[f]raud or misrepresentation." Id. The MAP Guide plainly supports this Court's conclusion that Plaintiff possesses property rights in its continuing participation in the MAP program. See generally Cleveland Bd. of Educ. v. Loudermill, 470 U.S. 532, 538 (1985).
Defendants argue that the property fights Plaintiff derives from the MAP Guide "are subject to its terms and conditions . . ." Def.'s Resp. at 19. Because Malone Mortgage agreed to participate in a program that allowed "an expeditious appeal immediately following an imposition of probation," rather than a hearing beforehand, Plaintiff must "take the bitter with the sweet." Id. The Supreme Court has emphatically rejected the theory espoused by Defendants:
[It] is settled that the "bitter with the sweet" approach misconceives the constitutional guarantee. If a clearer holding is needed, we provide it today. The point is straightforward: the Due Process Clause provides that certain substantive rights — life, liberty, and property — cannot be deprived except pursuant to constitutionally adequate procedures. The categories of substance and procedure are distinct. Were the rule otherwise, the Clause would be reduced to a mere tautology. "Property" cannot be defined by the procedures provided for its deprivation any more than can life or liberty. The right to due process "is conferred, not by legislative grace, but by constitutional guarantee. While the legislature may elect not to confer a property interest . . . it may not constitutionally authorize the deprivation of such an interest, once conferred, without appropriate procedural safeguards."Loudermill, 470 U.S. at 541 (quoting Arnett v. Kennedy, 416 U.S. 134, 167 (1974) (Powell, J., concurring in part and concurring in result in part). Loudermill's analysis applies with equal force to property rights created by agency fiat. HUD cannot deprive Plaintiff of its property interest in its continuing participation in the MAP program without observing constitutionally sound procedures.
Plaintiff also claims that Defendants' action unconstitutionally deprived it of a liberty interest in avoiding the damage to its reputation caused by this probation and the publication of this probation on the Internet. Pl's Compl. ¶ 24 Pl.'s Reply at 6. Defendants dispute the existence of such a liberty interest. Def.'s Resp. at 20. Inasmuch as the Court has found that a property interest was affected by Defendants' actions, the Court declines to decide, at this time, whether a liberty interest was also at risk.
Rather than apply a bright-line rule to questions of procedural due process, courts consider a matrix of factors in determining whether a particular set of procedures contains "defect[s] so serious that we can characterize the procedures as fundamentally unfair." Daniels v. Williams, 474 U.S. 327, 341 (1986) (Stevens, J., concurring). Justice Powell described these factors in Mathews v. Eldridge:
First, the private interest that will be affected by the official action; second, the risk of erroneous deprivation of such interest through the procedures used, and the probable value, if any, of additional or substitute procedural safeguards; and finally, the Government's interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirement would entail.424 U.S. 319, 335 (1976).
First, the private property interest at stake here is Plaintiff's continued participation in a government-insured loan-underwriting program. This program (MAP) has allegedly cornered the market on multifamily housing loan origination; though traditional procedures for securing HUD insurance remain available to lenders, demand for a process that takes up to a year to complete has dried up since MAP was introduced. Thus, for lenders who wish to participate in this niche industry, the ability to process loans through the MAP program is a substantial and valuable property interest. This is especially true where, as here, Plaintiff's "business relied primarily on origination of FHA-insured home mortgage loans" via the MAP program. Capitol Mortgage Bankers, Inc. v. Cuomo, 222 F.3d 151, 156 (4th Cir. 2000).
Second, the Court must consider the risk of erroneous deprivation presented by the current procedures, and the probable value, if any, of additional or substitute procedures. The procedures outlined in the MAP Guide provide that a lender applying to participate in the MAP program agrees to "make its files and records available to HUD . . . for such monitoring of MAP processed loans as HUD wishes to make." Def.'s Resp., Att. A. at 2-6. This monitoring is conducted by the Office of Quality Assurance. Id. at 2-7. "OQA or a Hub Director may place a Lender on probation for inadequate underwriting or poor construction administration which does not seriously affect HUD's risk of loss, but needs to be corrected." Id. at 2-8. The MAP Guide allows Lenders who have been placed on probation to appeal this decision to the Deputy Assistant Secretary for Multifamily Housing. Id. at 2-11. If the decision is appealed, the Hub or OQA Director shall present to the Deputy Assistant Secretary "the evidence on which the Director" made its decision." Id. At this time, the Lender can submit "such relevant evidence as it wishes." Id. The MAP Guide does not provide for any notice to the Lender before probation is imposed. It does not require the Director imposing probation to identify evidence on which he or she based the decision. The Guide does not require a hearing on the appeal, not even an informal hearing. In essence, a Lender learns of a problem the moment the probation takes effect and can present its own evidence only later.
Postdeprivation procedures may be constitutionally sufficient if there is no realistic opportunity to conduct a predeprivation hearing. See Parratt v. Taylor, 451 U.S. 527 (1981) Hudson v. Palmer, 468 U.S. 517 (1984). If deprivations of property are authorized and predictable, and predeprivation process is not impossible, then predeprivation procedures are probably required to satisfy due process. Zinermon v. Burch, 494 U.S. 113, 136-39 (1990). Defendants were clearly authorized to place Plaintiff on probation, provided they made the findings required by the MAP Guide. The possibility of erroneous deprivation is certainly predictable. Unlike the state officials who had no way of knowing whether (or when) prison guards would lose or damage the property of prisoners, Defendants knew exactly when Plaintiff would be deprived of its property interest and that this deprivation could well be erroneous if no input was obtained from Plaintiff. See Parratt, 451 U.S. at 530; Hudson, 468 U.S. at 520. Finally, predeprivation hearings are not impossible in this context. HUD could have notified Plaintiff of the problem and requested an explanation before deciding on a punishment just as easily as it imposed probation and waited for Plaintiff's to appeal. The fact that counsel and representatives of Plaintiff were allowed to meet with Defendants to discuss the matter after probation had been imposed is of little credit to the process provided by the MAP Guide. The risk of erroneous deprivation under the MAP Guide procedures is palpable and the probable value of predeprivation procedures significant. Cf. Capitol Mortgage, 222 F.3d at 156 (finding informal hearing adequate where appellant was given notice and allowed to make "voluminous submissions" before action was taken). See also Doolin Sec. Sav. Bank F.S.B. v. FDIC, 53 F.3d 1395 (4th Cir. 1995).
Third, the Court considers HUD's interest. Relevant to this inquiry is the function performed by HUD in determining to deprive Plaintiff of its property interest, and the financial and administrative burdens that predeprivation procedure would entail. In monitoring Plaintiff and determining to impose probation, HUD was fulfilling its duty to maintain the highest ethical standards among its approved MAP Lenders. This, undoubtedly, is an important function. See Capitol Mortgage, 222 F.3d at 156 (describing HUD's interest). The Court doubts, however, that the Department would bear a significantly greater financial or administrative burden by allowing MAP Lenders a meaningful opportunity to be heard before exercising its prerogative to place a Lender on probation. The Court acknowledges that HUD sometimes needs to act quickly to protect its interests. But the exceptional case need not set the rule for the ordinary. A provision similar to the one contained in the MRB regulations, allowing for immediate suspension under extraordinary circumstances, would allow HUD flexibility without denying predeprivation process to others. See 24 C.F.R. § 25.6 (c).
Defendants point to New Trier Mortgage Corp. v. HUD, No. 1:02-CV-0675 (N.D. Ohio May 28, 2002) (slip opinion) for the proposition that due process was satisfied by the fact that Malone Mortgage had "adequate notice of the standard it was required to follow in this case." Def.'s Resp. at 21. Defendants further invite this Court to concur with the conclusion of New Trier, to the effect that Plaintiff had a "`clear opportunity to be heard on any question about an identity of interest'" because the MAP Guide advises Lenders to present any "`question about whether or not there is an identity of interest'" in a given transaction to HUD headquarters. Def.'s Resp. at 22 (quoting New Trier, slip op. at 17). The Court declines to reach the conclusions of New Trier. Adequate notice of what constitutes a violation is an important part of due process, but adequate notice in the absence of constitutionally sound procedures will not redeem an unlawful deprivation of property. Similarly, HUD cannot, by requiring lenders to ask whether a transaction is acceptable under section 2.5 of the MAP Guide, escape its constitutional duty to provide due process in the deprivation of property.
On balance, the Court finds the procedures applied in this case to be constitutionally deficient. Plaintiffs property interest is extremely valuable, the risk of erroneous deprivation by authorized officials is predictable, and predeprivation process is possible. HUD's interest is also important, but it appears that allowing predeprivation procedures would impose little additional fiscal or administrative burden on the Department. Plaintiff has demonstrated a substantial likelihood it will succeed in overturning Defendants' action as a contrary to Plaintiff's constitutional right to procedural due process.
b. Substantive Due Process
In addition to procedural due process, the Due Process Clause of the Fifth Amendment protects against "certain arbitrary, wrongful government actions `regardless of the fairness of the procedures used to implement them.'" Zinermon v. Burch, 494 U.S. 113, 125 (1990) (quoting Daniels v. Williams, 474 U.S. 327, 331 (1986)). Not all arbitrary governmental acts will violate substantive due process: "only the most egregious official conduct can be said to be `arbitrary in the constitutional sense.'" County of Sacramento v. Lewis, 523 U.S. 833, 846 (1998) (quoting Collins v. Harker Heights, 503 U.S. 115, 129 (1992)). The standard for measuring a violation of substantive due process is conduct that "shocks the conscience." Id. at 846. Almost by definition, negligent conduct fails to shock the conscience. Id. at 848. By contrast, intentional injury, "unjustifiable by any governmental interest," would certainly shock the conscience. Id. at 849.
Defendants maintain that "HUD has a legitimate interest in protecting the public fisc and the integrity of its mortgage insurance program." Def.'s Resp. at 22. Plaintiff argues that the penalty imposed by Defendants constituted "a draconian form of punishment that may equate to Malone Mortgage's death sentence." Pl.'s Memo. at 18. Plaintiff does not allege that the Defendants acted with a shocking degree of moral culpability. Nor does Plaintiff argue that the probation meted out by Defendants cannot be justified by a legitimate governmental interest. Plaintiff cites no authority supporting its suggestion that disproportionate sanctions would shock the conscience. Plaintiff has not demonstrated a substantial likelihood it will succeed on its substantive due process claim.
B. Threat of Irreparable Injury
The second element to be considered in determining whether to issue a preliminary injunction is the threat of irreparable injury, which must be substantial. See Sugar Busters LLC v. Brennan, 177 F.3d 258, 265 (5th Cir. 1999). Mere loss of income does not constitute irreparable injury. Sampson v. Murray, 415 U.S. 61, 89 (1974). But "an exception exists where the potential economic loss is so great as to threaten the existence of the movant's business." Atwood Turnkey Drilling, Inc. v. Petroleo Brasileiro, S.A., 875 F.2d 1174, 1179 (5th Cir. 1989). See also Doran v. Salem Inn, Inc., 422 U.S. 922, 932 (1975) (imminent threat of bankruptcy "sufficiently meets the standards for granting interim relief, for otherwise a favorable final judgment might well be useless") Nat'l Screen Svc. Corp. v. Poster Exchange, Inc., 305 F.2d 647, (5th Cir. 1962) (finding no abuse of discretion where court issued preliminary injunction based on movant's claim that "denial of relief would result in the destruction of the business")).
The Defendants have moved this Court to accept the Declaration of Laurie D. Kahn on the question of irreparable harm. The Court finds that the facts avowed in the Declaration (i) were known to the Defendants at the time they filed their Response and (ii) do little to enlighten the Court on this issue. Even if, as Ms. Kahn alleges, Plaintiff could expect to receive income in the form of origination fees from loans currently being processed by HUD, the fact remains that any business lost during the probation will not be recovered by Plaintiff — the deleterious effects of the probation will be felt most acutely after the probation is lifted. Insofar as the supplemental materials could have been filed timely and add little to the Court's analysis, Defendants' motion for leave to file the declaration of Laurie D. Kahn is DENIED.
The Supplemental Affidavit of Michael Levitt explains how Plaintiff will suffer irreparable harm should this Court deny the injunction. Based on Plaintiff's allegation of facts that lead the Court to conclude that Plaintiff very well may lose its business if the probation remains in force, the Court finds that the threat of irreparable harm in this case is substantial.
C. Damage to Defendants
The third factor courts are to consider in deciding whether to issue a preliminary injunction is the potential damage to the defendants should the court grant the motion. Sugar Busters, 177 F.3d at 265. Defendants aver that "HUD depends upon the credibility of MAP Lenders to provide accurate, sufficient, and detailed reports, studies and evaluations of borrowers and specific loans. These evaluations cannot be tainted by the payment of money from a prospective mortgagor to an officer or employee of a Lender." Def.'s Resp. at 24. Were HUD "to endorse loans from Lenders whose officers routinely received payments from prospective borrowers, HUD would endorse many very bad loans." Id. at 25. Defendants also allege that Congress might withhold funding to the agency (as it did in 1990) if too many bad loans are insured by HUD. Id.
The Court acknowledges that HUD's ability to continue insuring loans under the MAP program depends on its confidence in the underwriting performed by its approved MAP Lenders. HUD's concerns appear broader than the case at hand: the issue would lie whether Mr. Malone received payments from the mortgagors in his capacity as mortgagor's counsel or as mortgagee's counsel. The Court agrees that this is a significant consideration, but considers the danger posed by the issuance of a preliminary injunction to be less outweighed by the threat posed to Plaintiff.
According to the Affidavit of Maurice L. Barksdale, Acting Secretary Tombar was most concerned with this issue at the appeal conference. Aff. of Barksdale ¶ 16.
D. Public Interest
Finally, before entering an order to issue a preliminary injunction, the Court must consider the public interest. Insofar as HUD is a public institution, a department of the executive branch, damage to its ability to police its lenders necessarily implicates the public interest. But the Court is not convinced that this general concern is so pressing that it overcomes the substantial threat of irreparable harm faced by Plaintiff.
Therefore, the Court finds that Plaintiff's have demonstrated a substantial likelihood of success on the merits and a substantial threat of irreparable harm. After considering the potential damage to Defendants and the public interest, the Court finds that it is appropriate to issue a preliminary injunction against Defendants.
III. Preliminary Injunction
Therefore, IT IS HEREBY ORDERED that Defendants are enjoined from
a. prohibiting Plaintiff from participating in the MAP lending program as HUD would do under the terms of the four-month probation;
b. debarring, withdrawing, removing, suspending, or otherwise acting to prevent Plaintiff from acting as a lender fully authorized to participate in the MAP lending program until the outcome of further judicial proceedings; and
c. refusing to correct any notification of Plaintiff's probation to the Government National Mortgage Association (Ginnie Mae), Federal National Mortgage Association (Fannie Mae), Plaintiff's lenders, warehouse lenders, rating agencies and others with whom Plaintiff must remain in good standing in order to remain a viable company.So ordered.