Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-88-01370/USCOURTS-ca10-88-01370-0/pdf.json

Parties Involved:
Lou Gallegos
Appellee
Richard Lyng
Appellant

Document Text:

PUBLISH 

FILED 

u~1ir1;J Srn.w;. (111)f( ,A Ar1PfUb 

1\wb ('.:'':ll!: 

Ott J j 1989 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT vQH '•T' '!' r unr:rv 1:·R L'\. ~ 1... ( . L. r 1-- ,.., ~ ul"u., . 

LOU GALLEGOS, Secretary, New 

Human Services Department, 

v. 

Plaintiff-Appellant, 

Cross-Appellee, 

Mexico) 

) 

) 

) 

) 

) 

RICHARD LYNG, Secretary-Designate 

of the Utiited States Department of 

Agriculture, 

) 

) 

) 

) 

Defendant-Appellee. 

Cross-Appellant. 

SUBMITTED ON THE BRIEFS:* 

) 

) 

) 

Ckrk 

Nos. 88-1367 & 88-1370 

(D.C. No. CV-84-1736JC) 

(D. New Mexico) -

Jennifer A. Salisbury, General Coun~el, and Dale s. Morritz, 

Assistant General Counsel, New Mexico Human Services Department, 

Santa Fe, New Mexico, on the briefs for Plaintiff-Appellant. · 

John R. Bolton, Assistant Attorney General; John Koch, Office of 

General Counsel, Department of Agriculture; William L. Lutz, 

United States Attorney; William K~nter and Bruce G. Forrest, 

Department of Justice, Washington, D.C., on the briefs for 

Defendant-Appellee. 

Before MOORE, ANDERSON and BRORBY, Circuit Judges. 

BRORBY, Circuit Judge. 

This is an appeal and cross-appeal from an order granting 

* After examining the briefs and appellate record, this panel 

has determined unanimously that oral argument would not materially 

assist the determination of this appeal. See Fed. R. App. P. 

34(a);· 10th Cir. R. 34.1.9. The cause is therefore ordered 

submitted without oral argument. 

Appellate Case: 88-1370 Document: 010110279740 Date Filed: 12/15/1989 Page: 1
summary judgment of the United States District Court for the 

District of New Mexico. Appellant/Cross-Appellee, Lou Gallegos, 

Secretary of the New Mexico Human Services Department and 

Plaintiff below, appeals the· district court's ruling that the 

Department of Agriculture's food stamp mail loss tolerance 

regulation, 7 C.F.R. § 274.3(c)(4), is not arbitrary and 

capricious and was promulgated in accordance with law. Appellee/ 

Cross-Appellant, Richard Lyng, Secretary of the United States 

Department of Agriculture and Defendant below, appeals the court's 

order prohibiting him from charging the State of New Mexico 

inter~st on th~ ~npaid amounts assessed under the regulation. 

This court agrees that the contested.regulation is not arbitrary 

and capricious and was promulgated lawfully, but reverses on the. 

interest issue. 

The 

endeavor 

food stamp 

established 

program is a federal-state cooperative 

by 7 U.S.C. §§ 2011-2030 (1988). Section 

2013(c) authorizes the Secretary of Agriculture to issue such 

regulations "as he deems necessary or appropriate for the 

efficient administration" of the food stamp program. Food stamp 

regulations must be promulgated according to the notice and 

comment requirements of the Administrative Procedure. Act. 5 

U.S.C. § 553 (1988). The Food and Nutrition.Service (FNS) of the 

Department of Agriculture sets eligibility and benefits standards 

for participation in the program. Under FNS 

regulations, participating states 

delivery systems, including mail 

-2-

7 U.S.C. § 2014(b). 

can choose 

delivery, 

among several 

for distributing 

Appellate Case: 88-1370 Document: 010110279740 Date Filed: 12/15/1989 Page: 2
coupons to recipients. 

Under prior rules, FNS assumed full financial liability for 

replacing coupons lost .in the mail. CurreHt regulations, however, 

establish essentially a cost-sharing approach, under which 

participating states are liable to FNS for coupons lost in the 

mails in excess of certain tolerance levels. See 7 C.F.R. § 274.3 

(1988). FNS established the tolerance levels after studying mail 

loss data for the years 1979-81. · The thresholds were established 

"to give State agencies a significant and realistic incentive to 

reduce [mail] losses." 47 Fed~ Reg. 50,682 (1982). FNS received 

several comments on the proposed regulations urging that the 

states should not be liable for mail losses ''directly related to 

Postal Service operations." 48 Fed. Reg~ 15,223, lS,225 (1983). 

The final rule rejected that proposal, but FNS stated in its 

prea.mble to the final regulations that the issue would be 

reexamined in the future "to determine if regulatory changes. are· 

needed." Id. at 15,225. FNS also- rejected a suggestion th~t mail 

losses be reported on a statewide basis. FNS favored reporting on 

the basis of smaller units because that would serve better to 

identify the source of the mail losses. See 48 Fed. Reg. at 

15,224. The current regulation provides that FNS will work with 

the state agency to identify an appropriate subdivision below the 

state level for -r~porting purposes. FNS."reserves the right to 

make the final determihation on reporting requirements and on 

administrative divisions within the state for the purpose of 

determining and assessing liability for mail issuance losses." 

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Appellate Case: 88-1370 Document: 010110279740 Date Filed: 12/15/1989 Page: 3
7 C.F.R. § 274.3(c)(4)(v). 

The State of New Mexico has incurred mail losses that exceed 

the tolerancs level. Brief of Appellee/Cross-Appellant at 7 and 

n • 6 • The state Human Services Department brought this suit for 

declar~tory and injunctive relief challenging the FNS regulation 

as arbitrary and capricious, alleging that the regulatory scheme 

is counter to the governing statute. The State contends the 

regulation improperly attempts to.shift food stamp costs from the 

federal government to the states and to impose lia~ility on the 

states even though n6 loss to the federal governmen~ has occurred 

and in spite of the lack of any fault of the states. New Mexico 

~lso charges that the regulation was promulgat~d unlawfully in 

that FNS failed adequately to consider important aspects of the 

mail loss problem. 

The trial court, in a judg~ent iss~ed without opinion on 

motions for_ summary judgment filed by b9th parties, rejected New 

Mexico's challenges to the rule but o~de.red that the Secretary of 

Agriculture could not collect interest from the State on the sums 

it owed FNS for excess mail losses. 

The .parties agree that there are no ''genuine issue(s] of 

material fact"; thus, in reviewing the grant of summary judgment, 

this court must determine "whether the substantive law was 

correctly applied .... (W]e may affirm the granting of summary 

judgment if any proper ground exists · to support the district 

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Appellate Case: 88-1370 Document: 010110279740 Date Filed: 12/15/1989 Page: 4
court's ruling." Hokansen v. United States, 868 F.2d 372, 374 

(10th Cir. 1989) (quoting Setliff v. Memorial Hosp. of Sheridan 

County, 850 F.2d 1384, 1391-92 (10th Cir. 1988J). 1 Although this 

court reviews de novo the district court's legal determinations, 

our review of FNS's administrative action is rather narrowly 

confined by the Administrative Procedure Act, 5 U.S.C. § 553. The 

"arbitrary and capricious" standard of review is a narrow one, 

which does not allow the court to substitute its judgment for the 

agency's. See Citizens to Preserve Overton Park, Inc. v. Volpe, 

401 U.S. 402, 416 (1971); New Mexico Envtl. Improve~ent Div.· v. 

Thomas, 789 F.2d 825, 831 (10th Cir. 1986). We must affirm the 

agency's ~ction if there is a rational basis for its decision. 

Bowen Transp., Inc~ v. Arkansas-Best-Freight Sys., Inc., 419 U.S. 

281, 290 (1974). "Where the empowering provision of a statute 

states simply that the agency may 'make such. rules and 

regulations as may be necessary to carry out the provisions of 

this act,' ..• the validity of a ·regulation promulgated thereunder 

v,ill be sustained so long as it is 'reasonably related to the 

purposes of the enabling legislation.'" Mourning v~ Family 

Publications Serv., Inc., 411 U.S. 356, 369 (1973) (footnote and 

1 Appellant New Mexico contends that, since it opposed FNS's 

motion for summary judgment, the "record must be viewed in the 

light most favorable to appeilant/cross-appellee, HSD.'' Brief of 

Appellant at 4. New Mexico, however, misstates the governing law. 

"In determining whether a genuine issue of material fact exists, 

we undoubtedly must view the evidence in a light most favorable to 

the party opposing the motion." Missouri Pac. R.R. v. Kansas Gas 

& Elec. Co., 862 F.2d 796, 798 (10th Cir. 1988). Here, however, 

as New Mexico concedes, there were no genuine issues of material 

fact. See Brief of Appellant at 4. Because a ruling on the 

motion involves purely legal determinations, our review is de 

nova. See id. 

. -5-

Appellate Case: 88-1370 Document: 010110279740 Date Filed: 12/15/1989 Page: 5
citations omitted). 

I. Mail Loss Regulation Is Not Arbitrary and Capricious 

The State of New Mexico contends that FNS's food stamp mail 

loss regulation is arbitrary and capricious because it contravenes 

congressional intent in the Food Stamp Act that the federal 

government be responsible for the cost of the food stamps 

themselves, while the states and federal government share the 

administrative costs of running th~ program. New .Mexico contends 

that the mail issuance liability progra~ is not designed to 

achieve the most effective distribution method but rather is 

merely an attempt by the federal goyernmerit to shift the cost of 

benefits to the states. The State concedes that the regulations 

may be "technically consistent with§ 2016(f) of the Food Stamp 

Act, 112 but it neverth~less contends that the rule is inconsisterit 

with the overall scheme of the Food Stamp Act, i.e., that "the 

federal government pay for the benefits themselves, while the 

states ... pay for a portion of the administrative costs." Brief 

of Appellant at 6 (quoting Stewart v. Butz, 356 F. Supp. 1345, 

1350 (W.D. Ky. 1973), aff'd, 491 F.2d 165 (6th Cir. 1974) 

{emphasis in original)) .. Essentially, New Mexico argues thati if 

2 7 u.s.c. § 2016(f) provides: 

Notwithstanding any· other provision of this chapter, ... 

in the case of losses resulting from the issuance and 

replacement of authorizations for coupons and allotments 

which are sent through the mail, the State agency shall be 

liable to the Secretary to the extent· prescribed in the 

regulations promulgated by the Secretary." 

-6-

Appellate Case: 88-1370 Document: 010110279740 Date Filed: 12/15/1989 Page: 6
only the replacement stamps, not the original stamps lost in the 

lltail, are redeemed, the federal government has incurred no 

financial loss in providing. a second set of stamps to the 

recipient. Therefore, in holding the state liable for the mail 

loss, the federal government is improperly shifting liability for 

the cost of the benefit to the state. 

New Mexico further contends that the regulations are 

aibitrary and capricious because they impose strict liabllity on 

the states for mail losses, while§ 2016(f) of the Food Stamp Act 

ex~ludes mail issuance losses from those financial losses for 

which the states are held strictly liable. The full text of 7 

u.s.c. § 2016(f) pro~id~s: 

Notwithstanding any other provision of this 

chapter, the State agency shall be strictly liable to 

the Secretary for any financial losses involved in the 

acceptance, . storage and issuance of coupons, including 

any losses involving failure of a coupon issuer to 

comply with the requirements specified in section 

2020(e)(20) of this title, except that in the case of 

losses resulting from the issuance and replacement of 

authorizations for coupons and allotments which are sent 

through the mail, the State agency shall be liable to 

the Secretary_ to the extent prescribed in the 

regulations promulgated by the Secretary. 

(Emphasis added. ) The State argues that the language of the 

statute makes it clear that Congress considered but rejected the 

possibility of strict liability for mail issuance losses and 

directed that the Secretary of Agriculture promulgate rules 

imposing something less than strict liability for this category of 

losses. The balance of New Mexico's argument is devoted to a 

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Appellate Case: 88-1370 Document: 010110279740 Date Filed: 12/15/1989 Page: 7
discussion of the unfairness of holding states liable regardless 

of fault and of imposing penalties' for mail losses even when mail 

issuance remains the most cost effective method of disbursing food 

stamps. 

New Mexico's assertion that the mail issuance loss regulation 

is inconsistent with the statutory scheme cannot stand in the face 

of the clear languag~ of§ 2016(f). That statute, under which 

7 C.F.R. § 274.3 was promulgated, is an express exception to the 

former rule that the. federal government would absorb the entire 

cost of food stamps. As the statute states, "the State agency 

shall be liable to the Secretary to the extent prescribed in the 

regulations promulgated by the Secretary" for food stamps lost in 

the mail-. In addition, the introductory phrase "notwithstanding 

any other provision of this chapter" reveals that benefit costs 

are tr~ated differently in§ 2016(f) than under the rest of the 

food ·stamp program. New Mexico claims that the "except that" 

proviso in the statute shows that strict liability is not to apply 

to mail issuance losses, but this. claim also fails under more 

careful scrutiny. The statute does not prohibit strict ·liability 

for mail issuance losses but rather provides that liability for 

such losses will be determined by the Secretary pursuant to his 

rulemaking authority. Moreover, the liability that has been 

imposed by the Secretary is strict only in the sense that it is 

imposed without fault. The states do ·not bear the sole liability 

for mail issuance losses as they do for other "financial losses 

involved in the acceptance, storage, and-issuance of coupons" 

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Appellate Case: 88-1370 Document: 010110279740 Date Filed: 12/15/1989 Page: 8
under§ 2016(f). Instead, the regulation at issue here apportions 

liability for coupons lost in the mail between the federal 

government and the states. Basically, the federal government is 

liable for all losses up to 0.5 percent of the dollar value the 

coupons issued by mail by each reporting unit. States are liable 

only for losses in excess of the 0~5 percent threshold. 7 C.F.R. 

§ 274.3(c)(4), 

The threshold was established by FNS after determining mail 

loss issuance rates over a three-year period prior to promulgating 

the regu·_1ation. FNS considered 0. 5 percent a realistic goal and 

believed it would encourage states to identify areas where they 

·' 

were ~aving mail loss problems ~nd improve their efficiency in 

those areas. Brief of Appellee/Cross-Appellant at 5-6. Given 

that the Food Stamp Act authorizes the Secretary to issue "such 

regulations as [he] deems necessary or appropriate for the 

effective and efficient administration of th~ food stamp program," 

7 U.S.C. I 2013(c), the mail loss regulation needs only to meet 

the reasonable relationship test set forth in. Thorpe v. Housing 

Auth. of Durham, 393 U.S. 268, 280-81 (1969), and Mourning v. 

Family Publications Serv., Inc., 411 U.S. at 369, to be valid. 

The regulation clearly meets this deferential test. 

I~ is not necessary that the federal government prove that 

food stamps reported as lost have been redeemed before holding the 

states liable for the value of those lost coupons. Food stamps 

are highly negotiable, and the regulatory presumption that they 

-9-

Appellate Case: 88-1370 Document: 010110279740 Date Filed: 12/15/1989 Page: 9
eventually· will be redeemed is reasonable. This presumption was 

sustained in State ex rel. Health & Human Servs. v. Bergland, 531 

F. Supp. 118 (M.D. La.), aff'd., 694 F.2d 430 (5th Cir. 1982). As 

the district court in that · case noted: "The presumption of 

redemption of stolen coupons eliminates the cost and effort that 

would be required to establish whether any particular stolen 

coupon was in fact presented for redemption 

121. FNS argues and we agree it would·have 

II 

been 

531 F. Supp. at 

irrational for 

the Department of Agriculture to adopt a tracking system for food 

stamp issuances and redemptions as the State of New Mexico 

suggests. Such a system likely would cost more than the savings 

expected from the mail loss reduction program; thus it was not 

arbitrary or capricibus for FNS to reject this proposal. See 

Phillips Petroleum Co. v. Environmental Protection Agency, 803 

F.2d 545, 562 (10th Cir. 1986) (quoting Bowles v. Willingham, 321 

U.S. 503, 517 (1944) (·"considerations of feasibility and 

practicality are certainly germane" to the issue of an agency's 

exercise of rulemaking discretion)). 

Similarly, a liability system based on fault would impose an 

overwhelming administrative burden on both FNS and the states and 

would be prohibitively costly. Furthermore, there clearly is no 

requirement in the statute that liability for mail issuance losses 

be contingent upon fault. Indeed, under the plain terms of 

§ 2016(f), the Secretary could have required the states to bear 

the full cost of replacing food stamps lost in the mails, 

regardless of any fault on their part. Under ·the regulation 

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Appellate Case: 88-1370 Document: 010110279740 Date Filed: 12/15/1989 Page: 10
adopted, however, the federal government bears the bulk of the 

liability for such losses. The rule encourages states to use the 

cost-effective method of mail issuance, while at the same time 

encouraging them to reduce mail losses and improve their 

efficiency by making them liable for all excess losses. Brief of 

Appellee/Cross-Appellant at 5-6, 22; 48 Fed. Reg. 15,223. The 

regulation is clearly consistent with the statute and reasonably 

related to its purposes. 

New Mexico also argues that FNS has been arbitrary and 

capricious in its application of the regulation. While N~w Mexico 

treats this -~s a separate issue and devotes considerable attention 

to it in its brief, we address it here because it implicates the 

same issues of fairness and FNS's authority to allocate liability 

raised in the foregoing discussion. New Mexico does not challenge 

FNS's authority to require r~porting. of mail issuance losses on a 

substate level, but contends· that FNS's requiring New Mexico to 

report on a countywide basis, while allowing ten other states to 

report on the basis of some other, larger subdivision, is unfair 

and hence arbitrary and capricious. Assuming without deciding 

that New Mexico has standing to raise this issue, 3 it is 

nevertheless not clear whether FNS has had a proper opportunity as 

3 See Arkansas v. Block, 825 F.2d 1254, 1257 n.4 (8th Cir. 

1987)-.- Appellant relies on Arkansas v. Block for its argument 

that it has been injured and thus has standing to raise this 

issue. It claims that, had it been allowed to report mail ·1osi 

data.on a statewide basis or to combine certain high-loss and lowloss counties, it would have paid no sanctions since the inception 

of the mail loss liability system. Thus it argues ·it has been 

injured by FNS's application of the contested regulation. 

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Appellate Case: 88-1370 Document: 010110279740 Date Filed: 12/15/1989 Page: 11
the responsible administrative agency to resolve this issue. FNS 

contends that New Mexico has not exhausted its available 

administrative remedies because it has not requested FNS to 

approve a different reporting system "in the manner prescribed by 

7 C.F.R. 274.3(c)(4)." Brief of Appellee at 32-33. We do not 

find that the cited regulation "prescribes" any particular 

"manner" for requesting such changes. However, it is apparent 

from the record that New Mexico's attempts to obtain approval for 

different reporting units have consisted o~ly of oral requests of 

FNS, and FNS's · negative responses. have issued from individual 

officials of unknown rank or authority. 

Furthermore, Ne~ Mexico's argument on this issue appears to 

be based substantially upon information derived from the trial 

court discovery process. It does not appear that New Mexico has 

presented · this information to FNS in the ·course of requesting 

approval of a different reporting system. The regulation provides 

that "the State agency shall work in consultation with FNS to 

identify a particular_ administrative.division below that of the 

State agency that will permit reporting and computation of mail 

issuance losses and liability assessment." 7 C.F.R. § 274.J(c) 

( 4) ( V) , This court cannot review FNS's "decision" in this matter 

without a record of the consultation process required by the 

regulation. The agency's action must be reviewed on the basis 

articul~ted by the agency.and on the evidence before the agency at 

the time it acted. American Mining Congress v. Thomas, 772 F.2d 

617, 626 (10th Cir. 1985). Thus, this claim of New Mexico is not 

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Appellate Case: 88-1370 Document: 010110279740 Date Filed: 12/15/1989 Page: 12
properly before us. 

II. The Mail Issuance Loss Regulation 

Was Properly Promulgated 

New Mexico contends that the mail issuance loss regulation is 

invalid because FNS failed adequately to consider comments 

received during the rulemaking process on Post Office 

responsibility for mail losses of food stamps. Several of the 

.fifty-five comments FNS received on its proposed rule suggested 

that states be excused from.mail loss liability when the losses 

could be traced to postal service operations. See 48 Fed. Reg. at. 

iS,223. FNS nevertheless decided to retain the .proposed 

allocation system for federal and state liability for mail losses, 

but in its preamble to the final rule it stated that it would 

"carefully examine postal service responsibilities in this regard 

and reexamine this issue ••• to determine if regulatory changes 

are needed." Id. at 15,~25. New Mexico contends that FNS, by 

these actions, recognized that its proposed regulation was flawed 

and that it had insufficiently considered an important aspect of 

the mail loss liability issue; consequently, the regulation is 

invalid. Brief of Appellant/Cross-Appellee at 16-20 (citing Saint 

James Hosp. v. Heckler, 760 F.2d 1460 (7th Cir.), cert. denied, 

474 Y.S. 902 (1985)). By this charge, New Mexico suggests that 

PNS ignored public c6mments on the issue of postal service theft 

and negligence, opting to issue the regulation as proposed arid 

delay study of the problem until later. 

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Appellate Case: 88-1370 Document: 010110279740 Date Filed: 12/15/1989 Page: 13
New Mexico's contention overlooks the fact that FNS had 

studied mail issuance loss data for a three-year period before 

issuing the proposed rule. The final rule represented the 

agency's decision to reject, at least for the time being, the 

suggestion that states be relieved of liability for losses due to 

post office negligence ·or theft, but its wil~ingness and intention 

to study the problem further. There is no evidence that FNS 

failed adequately to consider comments on this problem or that its 

data or its reasohing based on that data was flawed (as was the 

case in Saint James Hosp. v. Heckler). Nor is this case like 

Hooker Chemicals & Plastics Corp. v. Train, 537 F.2d 620, 633 (2d 

Cir. 1976), where the EPA had conceded that the reguiations it was 

promulgating failed to account for certain significant factors and 

merely promised that it would later amend them to correct this 

deficiency. In contrast, the agency here, based on the studies it 

had done, simply declined to- adopt suggestions for a -fault-based 

system. New Mexico ,cites to no evidence in the rulemaking record 

that suggests this decision was irrational or unreasonable. In 

essence, New Mexico is simply arguing that FNS should have done 

more than it did and -that this court should substitute its 

judgment for the agency's_. That we may not do. See American 

Mining Congress v. Marshall, 671 F.2d 1251, 1260 (10th Cir. 1982) 

(citing Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 

402, 416 (1971)). 

Additionally, as FNS notes, even if its decision to study 

_further the possibility of• adopting a fault-based system was 

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Appellate Case: 88-1370 Document: 010110279740 Date Filed: 12/15/1989 Page: 14
error, it was harmless error. Interim rules in force at the time 

rNS was considering comments on its proposed mail loss rule (rules 

t.nat were required by the Omnibus Budget Reconciliation Act of 

L082) also did not distinguish between losses caused by the Postal 

Service and those resulting from otber causes. The interim rules 

were to remain in effect until FNS adopted final rules .. Even 

after conducting the further study promised in the preamble to its 

final rule, FNS continues to believe that no changes are needed 

with regard to the possibility of theft by Postal Service 

employees. See 51 Fed. Reg. 12,268, 12,275 (1986). Thus, no harm 

has accrued to New Mexico as the result of FNS's decision to issue 

the rule it did, pending further study of the problem. 

Finally, New Mexico recites other relevant factors that it 

claims FNS imprqperly failed to consider in formulating thi mail 

loss regulation. Th~se arguments ·too must fail for two reasons. 

First, as we've already stated, FNS's rulemaking decision must be 

reviewed on the basis of the record before the agency at the time 

the rule was promulgated. See American Mining Congress v. Thomas, 

772 F.2d 617, 626 (10th Cir. 1985). It is apparent that the 

factors New Mexico alleges FNS overlooked are derived from 

deposition testimony and other information obtained during the 

trial-related discovery process. These arguments cannot properly 

form the basis for review of the agency's rulemaking decision. 

United States v. Morgan, 313 U.S. 409, 422 (1941). Second, New 

Mexico suggests.that the regulation is invalid because the agency 

did not properly consider its cost .effectiveness. This aigumen~ 

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Appellate Case: 88-1370 Document: 010110279740 Date Filed: 12/15/1989 Page: 15
is without foundation. There is no requirement that FNS's regula~ 

tions be based on a cost-benefit analysis. Moreover, the cost 

comparison sought by the State would have been extremely expensive 

to undertake. In any event, FNS did address cost effectiveness in 

the preamble to the final rule, and the rule itself presupposes 

that the states will analyze costs and benefits and make their own 

decisions regarding the most effective food stamp distribution 

systems. 48 Fed. Reg. at 15,225. 

We hold that FNS satisfied the notice and comment 

requirements of the Administrative Procedure Act, 5 U.S.C. § 553, 

including considering relevant matter piesented to it and 

providing a "concise general statement of [the rule's] .basis and 

purpose." 5 U.S.C. § 553(c). The ru·le must be sustained if it is 

supported by substantial evidence when considered on the record as 

a whole; substantial evidence means "more than a mere scintilla." 

Katzson Bros. v. United States Envtl. ·Protection Agency, 839 F.2d 

1396, 1399 (10th Cir. 1988). This standard of review requires us 

t0 give due deference 

discretionary power to 

substantial evidence to 

to an agency's special 

fashion remedies. See 

support FNS's decision. 

expertise 

id. We 

The 

and 

·find 

mere 

possibility that a different conclusion could have been sustained 

does not empower this court to overturn that decision. We may 

neither weigh the evidence nor substitute our discretion for that 

of the agency. Jozefowicz v. Heckler, 811 F.2d 1352, 1357 (10th 

Cir. 1987). We accordingly find the FNS mail loss regulation was 

prope~ly promulgated and the rule itself is not arbitrary or 

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Appellate Case: 88-1370 Document: 010110279740 Date Filed: 12/15/1989 Page: 16
capricious. 

III. Federal Government's Power to Collect Prejudgment 

Interest on New Mexico's Debt 

The district court held that FNS could not charge New Mexico 

interest on overdue amounts due FNS under the mail loss issuance 

regulation. New Mexico contends that the Debt Collection Act of 

1982, 31 U.S.C. §§ 370l(c), 3717, 4 abrogated the federal 

4 31 u.s~c. § 3717 (1982) provides: 

(a)(lJ The head of an executive or legislative agency 

shall charge a minimum annual rate of interest on an 

outstanding debt on a United States Government claim owed by 

a person that is equal to the average investment rate for the 

Treasury tax and loan accounts for the 12-month period ending 

on September 30 of each year •... 

(2) The Secretary may change the rate of interest for a 

calendar quarter if the average investment rate for the 12-

month period ending at the close of the prior calendar 

quarter ... is more or less than the existing published rate 

by 2 percentage points. · 

(b) The interest under subsection (a) of this section 

accrues from [one of two pre~cribed dates] . 

. . . . 

(c) The rate of interest charged under subsection (a) 

of this section--

(!) is the rate in effect on the date from which 

interest begins t6 accrue under subsection (b) of this 

section; and 

(2) remains fixed at that rate for the duration of 

the indebtedne~s. 

(d) Interest under subsection (a) of this section may 

not be charged if [certain conditions are met]. 

(e) The head of an executive .or legislative agency 

shall assess on a _claim owed by a person--

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Appellate Case: 88-1370 Document: 010110279740 Date Filed: 12/15/1989 Page: 17
gover.nment 's common-law right to charge interest on unpaid debts 

owed by state or local governments. Section 3717 of the Act 

requires that the federal gove·rnment charge a minimum rate of 

annual interest on outstanding debts owed by "persons" to the 

United States Government and prescribes a penalty for failure to 

pay any debt that is more than ninety days past due. Section 3701 

.::;f the Act excludes from the definition of "person" for purposes 

of§ 3717 any agency of a state. government or unit of general 

local government. Four circuit courts have considered this issue 

and three have decided that as a result of the Debt Collection Act 

(1) a charge to cover the cost of processing and 

handling a delinquent claim; and 

(2) a penalty charge of not more than 6 percent a 

year for failure to pay a part of a debt more than 90 · days 

past due. 

(f) Interest under subsection (a) of this section does 

not accrue on a charge assessed under subsection (e) of this 

section. 

(g) This section does not apply--

(1) if a statute, regulation required by statute, 

loan agreement, or contract prohibits charging interest or 

assessing charges or. explicitly fixes the interest or 

charges; and 

(2) to a claim under a contract exeriuted before 

October 25, 1982, that is in effect on October 25, 1982. 

(h) In conformity with standards prescribed jointly by 

the Attorney General and the Comptroller General, the head of 

an executive or legislative agency may prescribe regulations 

identifying circumstances appropriate to waiving collection 

·of interest and charges under subsections (a) and (e) of this 

section .... 

31 U.S.C. § 370l(c) provides: "In sections 3716 and 3717 of 

this title, 'persons' does not include an. agency of the United 

.States Government, of a State gover~ment, or of a unit of a 

general local government." 

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lhe federal government may no longer charge interest on debts owed 

il by the states, absent specific statutory authorization. 

Arkansas v. Block, 825 F.2d 1254 (8th Cir. 1987); Pennsylvania, 

Dep't· of Public Welfare v. United States, 781 F.2d 334 (3d Cir. 

1986).; Perales v. United States, 598 F. Supp. 19 (S.D.N.Y.), 

aff'd, 751 F.2d 95 (2d Cir. 1984) (per curiam). Only the Sixth 

Circuit has rejected the claim that the Debt Collection Act 

precludes the federal government from charging the states interest 

on their unpaid debts. County of St. Clair v. United States Dep't 

of Labor, No. 83-3546 (6th Cir. Dec. 7, 1984). 5· 

New Mexico contends that the Debt Collection Act clearly was 

net intended to be applied to the ~tates. Because the statute is 

not silent or ambiguous, it argues, there is. no need for 

interpretation by either the agency (FNS) or the court. "If the 

intent of Congress is clear, that is the end of the matter; for 

the Court, as well as the agency, must give effect to the 

unambiguously expressed intent of Congress." Chevron, U.S.A., 

Inc. v. Na~ural Resources Defense Council, Inc., 467 U.S. 837, 

842-43 (1984). FNS counters that the Act is completely silent as 

to the rights and liabilities of state and local governments with 

5 The parties dispute the precedential value of the unpublished 

St. Clair 9pinion. However, it can have precedential value in the 

Sixth Circuit under that circuit's rule 24, and we are not 

precluded by out rules from considering it. Because the St. Clair 

court summarily rejected the claim that the Debt Collection Act 

had abrogated tne common law, we do not have the benefit of its 

reasoning. However, as FNS points out, the bare fact that the 

Sixth Circuit reached a different conclusion than did the circuits 

that previously considered t~e question demonstrates that the Debt 

Collection Act is ambiguous. · 

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respect to overdue debts owed to ~he United States. FNS reasons 

that §§ 3701 and 3717 do not prohibit the federal government from 

charging states interest, but rather impose certain requirements 

concerning interest rates to be charged, methods for computing 

those rates, and other penalties applicable to persons other than 

state and local government entities. The Act does not abrogate 

the federal common-law right to charge state and local governments 

interest, it merely maintains the status quo between the federal 

government and those entities. In other words, FNS argues, the 

Act leaves intact the federal common-law right to obtain 

compensation to make the federal government whole when the United 

States is injured by the failure of a state to pay its debt. The 

·Act simply excepts state. and local governments from the mandatory 

provisions of S 3717. 

FNS ~oncedes that its perspective of the Debt Collection Act 

has been rejected by three circuit courts of appeals. But it 

argues that, given that the statute is silent as to its effect on 

the federal common-law right to charge interest, this court should 

giv~ appropriate weight to ·the. agency's interpretation of the 

statute. FNS ·argues that, under Chevron, if "the court determines 

Congress has not directly addressed the precise question at issue, 

the court does not simply impose its own construction on the 

statute.... Rather, if the statute is silent or ambiguous with 

respect to the specific issue, the question for the court is 

whether the agency's answer is based on a permissible construction 

of the statute." Chevron, 467 U.S. at 843. FNS provides us with 

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three reasons to depart from the course taken by the Second, 

Third, and Eighth Circuits: first, a recent Supreme Court opinion 

postdating those circuit courts' decisions that clarifies the 

federal common-law right to collect interest on unpaid debts; 

second,. the legislative history of the Debt Collection Act; and 

third, the over.all purpose of the Debt Collection Act. 

In West Virginia v. United States, 479 U.S. 305 (1987), the 

United States Supreme Court held: 

"[t]he rule governing the interest recovered as damages 

for delayed payment of a contractual obligation to the 

United States is not controlled by state statute or 

local common law. In the absence· of an applicable 

federal statute, it is for the federal courts to 

determine, according to their own criteria, the 

appropriate measure of damage, expressed in terms of 

interest,. for nonpayment of the amount found to be due." 

· Id. at 308-09 (quoting Royal Indem. Co. v. United States, 313 U.S. 

289, 296 (1941)). The Court observed that it was a "longstanding 

rule that parties owing debts to the Federal Government must pay 

prejudgment interest where the underlying claim is· a contractual 

obligation to pay money." 479 U.S. at j10. "Prejudgment 

interest," the - Court held, II iS an element of complete 

compensation." Id. The West Virginia Court noted that the Debt 

Collection Act of 1982 was inapplicable to the case at bar becatise 

the claim at. issue arose under a contract entered into before 

October 25, 1982, and thus under the terms of§ 3717(g)(2) the Act 

did not apply~ The Court stated: 

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We can draw no inference about Congress' comprehension 

of the federal common law of· interest from its 

enactment, without any discernible legislative history, 

of a definitional section excluding state agencies from 

those "persons" statutorily required tO pay interest on 

debts owed to the Federal Government. Moreover, we 

· venture no opinion regarding the question whether this 

enactment was intended to abrogate or leave intact the 

federal common law governing when a State must pay 

interest to the Federal Government. 

479 U.S. at 312 h.6. 

The sole issue in West Vitginia was whether the state was 

liable for prejudgme~t interest on a debt arising from a 

contractual obligation to reimburse the United States for services 

rendered by the Army Corps of Engineers. See 479 U.S. at· 306. 

While conceding that too much we~ght ought not be placed upon the 

inference, FNS astutely observes that it is unlikely that the 

Supreme Court in 1986 would grant certiorari to consider an issue 

that, under 31 U.S.C. § 3717(9)(2), would have beeri pro~pectively 

mooted for all contracts entered into after October 25, 1982. See 

Brief of Appellee at 41 n.33. We note also that, while the 

Supreme Court expressly reserved the issue, its reference (quoted 

above) to the relation~hip between th~ Debt Collection Act and the 

federal· common law right to collect interest at least suggests 

that the statute is not as unambiguous as appellant would have us 

find. 

West Virginia predated the Second Circuit's opinion in 

Perales and the Third Circuit's decision in Pennsylvania, Dep't of 

Public Welfare. The. Eighth Circuit in Arkansas v. Block, decided 

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the same year as West Virginia, merely noted that West Virginia 

was distinguishable because the contract at issue in Arkansas was 

entered into after October 25, 1982. The.Eighth Circuit did not 

respond to the common-law abrogation issue left open by the 

Supreme Court in West Virginia. See 825 F.2d at 1258 n.7. This 

recent, unqualified reaffirmation by the Supreme Court of a 

federal common-law right to prejudgment interest on the overdue 

debts of state and local governments prevents us from readily 

accepting the claim that the Debt Collection Act abrog~tes that 

''long-standing rule." We turn to appellee's second and third 

arguments for additional guidance in resolving this issue. 

As the Supreme Court noted, there is. no "discernible 

legislative history" concerning the definition of "person" in the 

Debt Collection Act of 1982. 479 U.S. at 312 n.6. The new 

definition of "person" first. appeared as part of an extensively 

revised version of the bill introduced on the Senate floor and 

substituted for the committee-reported bill. The amendment was 

never explained, discussed, or debated. Thus there is no evidence 

of Congress's intent in ex~epting state and local government 

agencies from the mandatory requirements of §§ 3716 and 3717. 

Where neither the plain language of the statute nor its 

legislative history sheds any light on the question, we look to 

the purpose· of the Act itself for guidance. "A statute must be 

interpreted to effect its evident purpose, and to be consistent 

with 'evidenced congressional intent.'" Rocky Mountain Oil & Gas 

Ass!n ~. Watt, 696 F.2d 734, 745 (10th Cir. 1982) (citations 

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omitted). 

FNS argues that the Debt Collection Act was passed because 

Congress was concerned about the frequent failure of debtors to 

honor their obligations; the Act was intended to tighten the 

collection process. FNS notes that nowhere in the legislative 

history was it suggested that any debtor's burden should be 

alleviated. The Senate Report, for example, expressed· distress 

over "the increasing backlog of unpaid debts owed to the 

Government," and explained that, "[i]n the absence of interest 

charges for delinqu~nt payments, debtors have little or no 

incentive to make timely payments. Also, debtors are likely to 

pay their private sector debts first and their government debts 

last." Report of the Senate Committee on Governmental Affairs on 

S. 1249, S. Rep. No~ 378, 97th Cong., 2d Sess. l] (1982). While 

Congress mat not have believed it necessary to require that the 

strong prodebt collection measures mandated in§ 3717 also be 

imposed against states, it is highly unlikely that Congre·ss 

intended to create incentives for nonpayment of the states' debts 

· and- thereby exacerbate the. very problem it was attempting to cure 

by the Act. A statute should not· be construed to produce such an 

absurd result .. See International Minerals & Chem. Corp. v. Llano, 

Inc., 770 F.2d 879, 886 (10th Cir. 1985), cert. denied, 475-U.S. 

1015 (1986). 

In support of this conclusion, we cite the principle that 

implied repeals of the common law are disfavored and should be 

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found only where such a statutory purpose is evident. St. Regis 

Paper Co. v. United States, 368 U.S. 208, 218 (1961); Isbrandtsen 

Co. v. Johnson, 343 U.S. -779, 783 (1952). The Third clrcuit 

refuted this argument on the ground that ''[j]udicial deference to 

the common law, and the reluctance to declare its demise, is based 

on the federal judicial obligation to protect state sovereignty 

and laws absent clear declarations by Congress." Pennsylvania, 

Dep't of Public Welfare, 781 F.2d at 342 (emphasis added). In 

other words, according to the Third Circuit, such judicial 

deference is required only with respect to state, not federal, 

common law. The Third Circuit's reliance on City of Milwaukee v. 

Illinois, 451 u~s. 304, 312-14 (1981), in support of this 

conclusion, however, is misplaced. Milwaukee involved a 

comprehensive statutory program, the Federal Water Pollution 

Control Act Amendments (FWPCA) of 1972, and a remedy fashioned by 

the trial court under the federal common law of nuisance. Whether 

there is a distinction between the proper judicial deference to 

federal and state common law was not an issue in the case. 

Rather, the question resolved by the Court was. whether the 

comprehensive .nature of the FWPCA had supplanted federal common 

law in that area. The Court stated that federal common law 

applies "'[u]ntil the field has beert made the subject bf 

comprehensive legislation or authorized administrative 

standards.'" 451 U.S. at 314. It held that Congress had not left 

the formulation of appropriate federal water pollution standards 

to the courts through application of nuisance concepts, but had 

occupied the field through the establishment of a comprehensive 

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regulatory program under the Amendments. See id. at 317. The 

Court reportedly emphasized the unusually comprehensive nature of 

the FWPCA. 

Milwaukee and this case are easily distinguished; the Debt 

Collection Act of 1982 cannot be seen as the "'total 

restructuring' and 'complete rewriting"' of existing debt 

collection law as were the FWPCA with respect to water pollution 

law. 6 See 451 U.S. at 317. As the Supreme Court noted in Mobil 

Oil Corp. v. Higginbotham, 436 U.S. 618, 625 (1978), "[t]here i~ a 

basic · difference between filling a gap left by Congress' si_lence. 

and rewriting rules that Congress has affirmatively and 

specifically enacted.'' "[W]hen [an Act] does speak directly to a 

question, the c6urts· are not free to 'supplement' Congress' answer 

so thoroughly that the Act beco~es meaningless." Id. See also 

City of Milwaukee v. Illinois, 451 U.S. at 315. Allowing interest 

to be collected from states whose debts to the federal government 

are overdue i~ an example of "filling a gap left by Congress' 

silence" in the Debt Collection Act of 1982. 

In further ·support of this conclusion, ·FNS cites the 

construction given the statute by the General Accounting Office 

6 The "detailed explanation prepared by the office of Law 

Revision Counsel" for P.L. 97-452, the Debt Collection Act of 

1982~ stated that the "purpose of the bill [was] to codify without 

substantive change recent laws related to money and finance and to 

improve the United States Code .... Like other codifications 

this bill makes·no substantive change in the law."· 1982 U.S. Code 

Cong. & Admin~ News 4301, 4301-02. 

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and the Comptroller General shortly after its.enactment. As the 

Comptroller General noted: "There is no evidence of congressional 

intent to prohibit ... the assessment . of interest and other 

charges against State and local governments when an agency of the 

Federal Government is acting pursuant to some other authority 

which may be available to it,_ whether founded in statute or common 

law.'' Decision of the Comptroller General (Aug. 23, 1983) at 2. 

The Comptroller General further noted § 3717(g)(l) contains a 

proviso that it will not apply if another statute explicitly 

provides for interest or prohibits the assessment of interest and 

other charges authorized by§ 3717. He reasoned that this proviso 

demonstrates Congress did not intend by passage of § 3717 to 

repeal by implication any preexistlng statutes that authorize or 

govern the assessment of interest and other charges. See id. at 

3: see also Morton v. Mancari, 417 U.S. 535, 550 (1974). 

The Comptroller General and the GAO presumed as we do that, 

had Congress intended to establish a comprehensive program that 

repealed or abrogated· common law. principles, it would have 

. provided statutory language to that effect or at least legislative 

history to support such a construction. As the Supreme Court 

stated in Isbrandtsen, 343 U.S. at 783: "Statutes which invade 

the common law_ .•• are to be read with a presumption favoring the 

retention of long-established and familiar principles,- except when 

a statutory purpose to the contrary is evident.'' The silence on 

this issue in the legislative history is significant: "such 

reticence while contemplating an important and controversial 

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change in existing law is unlikely .... At the very least, one 

would expect some hint of a purpose to work such a change, but· 

there was none." Edmonds v. Compagnie Generale Transatlantique, 

443 U.S. 256, 266-67 (1979). 

A final argument raised by the court in Perales, 598 F. Supp. 

19, and relied on by New Mexico, is that assessing interest on 

claims owed by the states under the mail loss regulation 

improperly extends the terms and conditions under which those 

states have agreed to participate in the food stamp program, in 

contravention of the principle established in Pennhurst State 

School & Hosp. v. Halderman, 451 u.s; 1 (1981). P~nnhurst held: 

[L]egislation enacted pursuarit to the spending power is 

much in the nature of a contract: in return for federal 

funds, the States agree to comply with federally imposed 

conditions. The legitimacy of Congress' power to 

legislate under the spending power thus rests on whether 

the State voluntarily and knowingly accepts the terms of 

the ''contract." Thete can, of course, be no knowing 

acceptance if a State is unaware of the conditions or is 

unable to. ascertain what is expected of it. 

Accordingly, if Congress intends to impose a condition 

on the grant of federal. moneys, it must do so 

unambiguously~ 

Pennhurst, 451 U.S. at 17 (quoted in Perales, 598 F. Supp. at 24). 

The District Court for the Southern District of New York held 

that, under Pennhurst and absent an unambiguous authorization by 

Congress in the Food Stamp Act, "FNS' policy of assessing late 

payment interest against state agencies must be deemed invalid." 

598 F. Supp. at 24. 

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The limits of the Pennhurst doctrine were described in Bell 

v. New Jersey, 461 U.S. 773 (1983). 

Pennhurst, explaining: "Pennhurst 

The Bell Court distinguished 

arose in the context of 

imposing an unexpected condition for compliance--a new obligation 

for participating States--while here our concern is with the 

remedies available against a noncomplying State." 461 U.S. at 790 

n.17. _The same distinction applies here. FNS is not seeking to 

force New Mexico to comply with an obligation not set out in the 

Food Stamp Act ·or program regulations, but rather is seeking 

interest as a remedy for the state's breach of a known and 

voluntarily undertaken obligation--the duty to pay for excess 

losses of food stamps distributed through the mail. The state has 

failed to reimburse FNS promptly for those losses and thus is in 

default of its statut·ory obligation. 

The lack of an express proviaion in. the Food Stamp A~t 

authorizing the assessment of interest against a state in default 

does not preclude the federal agency from assessing iriterest, nor 

does it make interest an unknown or unexpected condition of the 

state'j contraGt with the federal agency. As the Supreme Court 

stated in West Virginia, "interesf is an element of complete 

compensation." 479 U.S. at 310. IIThis federal interest i-n 

complete compensation is likely to be pr~sent in any ordinary 

commercial contractual arrangement between a State and the Federal 

Government." Id. at 311. Commercial contracts between private 

persons also frequently do not have express 

for interest upon a debt not promptly 

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provisions providing 

paid, yet interest is 

Appellate Case: 88-1370 Document: 010110279740 Date Filed: 12/15/1989 Page: 29
commonly awarded to the nonbreaching party. The purpose of 

interest is not to punish a debtor by imposing a new condition but 

to make the injured creditor whole for the lost use of the money. 

The Ninth Circuit recently adopted this•reasoning in Riles v. 

Bennett, 831 F.2d 875, 877-8a (9th Cir. 1987), cert. denied, 108 

S. Ct. 1291 (1988), in holding that the Pennhurst doctrine did not. 

stand as a bar to prejudgment interest in a dispute over Education 

Department grant funds allegedly misspent. 

Accordingly, we hold that the Debt CollectioD Act of 1982 did 

·not abrogate FNS's feder~l common-law right to assess interest on 

outstanding debts· of the states incurred pursuant to the Food 

Stamp Act and specifically FNS's mail loss regulation. The 

district court is REVERSED on this point and the case is REMANDED 

for entry of judgment in accordance with this opinion. 

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