Court Opinion

ID: 9407195
Source: CourtListenerOpinion
Date Created: 2023-07-06 00:00:38.842443+00
Date Added: 2024-06-11T17:20:36.036643
License: Public Domain

Case: 22-30080      Document: 00516809768         Page: 1     Date Filed: 07/05/2023

            United States Court of Appeals
                 for the Fifth Circuit                                United States Court of Appeals
                                                                               Fifth Circuit

                                                                             FILED
                                                                          July 5, 2023
                                   No. 22-30080
                                                                        Lyle W. Cayce
                                                                             Clerk
   OnPath Federal Credit Union,

                                                             Plaintiff—Appellant,

                                       versus

   United States Department of Treasury, Community
   Development Financial Institutions Fund,

                                                            Defendant—Appellee.

                   Appeal from the United States District Court
                      for the Eastern District of Louisiana
                            USDC No. 2:20-CV-1367

   Before Dennis, Elrod, and Ho, Circuit Judges.
   James C. Ho, Circuit Judge:
          When an application for federal funding contains materially false
   information, it’s reasonable for the federal agency to want the money back.
   And that is so even if it turns out that the recipient might’ve been eligible to
   receive the funds on some other basis not presented in the application. No
   harm, no foul may be appropriate in sports—but it’s not a rule that judges
   may unilaterally impose on the funding decisions of federal agencies. We
   accordingly affirm the district court and hold that the agency here did not
   abuse its discretion by requiring repayment under these circumstances.
Case: 22-30080       Document: 00516809768           Page: 2   Date Filed: 07/05/2023

                                      No. 22-30080

                                           I.
          The Treasury Department administers the Community Development
   Financial Institutions Fund. The Fund supports financial institutions that
   serve low-income clients and communities. See 12 U.S.C. § 4701(b). To be
   eligible for funding, a financial institution must apply for and receive
   certification. See 12 C.F.R. § 1805.200(a)(2). As part of its certification
   application, the institution must show that it serves either (1) an Investment
   Area or (2) a Targeted Population. See id. § 1805.201(b)(3)(i).
          An Investment Area is a geographic unit defined by its objective
   economic distress or its designation by the Internal Revenue Code. See id.
   § 1805.201(b)(3)(ii). A Targeted Population is a group of individuals who are
   low-income or lack access to financial services. Id. § 1805.201(b)(3)(iii).
   Under the terms of the certification application, an applicant institution must
   prove that it directs at least 60% of its activities toward either an Investment
   Area or a Targeted Population. If an applicant does not meet this 60%
   threshold, it will not be certified.
          In 2005, OnPath Federal Credit Union submitted a certification
   application. Its application stated that OnPath did not serve an Investment
   Area, but that it did serve a Targeted Population. Using year-end 2004 data,
   OnPath indicated that it served a Low-Income Targeted Population in three
   regions of Louisiana. In these areas, OnPath explained, it directed more than
   60% of its activities toward a Low-Income Targeted Population.
          The Fund certified OnPath in January 2006. As a result, OnPath
   received over $12 million in awards over the next several years.
          The Inspector General of the Treasury Department subsequently
   started an audit of OnPath. Based on this detailed, multi-year audit, the
   Inspector General issued a report concluding that OnPath had “submitted
   invalid information in its Certification Application and Assistance

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   Applications” and had received certification “based on invalid information.”
   The report focused on three problems with the application. First, OnPath
   inaccurately categorized its members’ zip codes—which is notable because
   low-income thresholds can vary by zip code. Second, OnPath improperly
   classed members as low-income by assuming that any member who lacked
   income information automatically counted as low-income. Finally, OnPath
   artificially lowered its members’ incomes by consistently choosing to use the
   lower of two possible income values.
          Based on the Inspector General’s report, the Fund determined that,
   “as a result of [OnPath] submitting invalid information in its . . . Certification
   Application, the . . . awards made to [OnPath] constitute improper
   payments.” OnPath was therefore “not eligible to receive [the] . . . awards.”
   So the agency “require[d] [OnPath] to repay the CDFI Fund for the . . .
   awards,” totaling some $12 million.
          OnPath brought this action to challenge the agency’s findings and its
   demand for repayment. The district court denied OnPath’s motion to
   supplement the administrative record. The district court then granted
   summary judgment to the agency, rejecting OnPath’s arbitrariness challenge
   under the Administrative Procedure Act. OnPath now appeals.
                                          II.
          We review de novo the district court’s grant of summary judgment to
   the agency. See Bd. of Miss. Levee Comm’rs v. EPA, 674 F.3d 409, 417 (5th
   Cir. 2012). “The court shall grant summary judgment if the movant shows
   that there is no genuine dispute as to any material fact and the movant is
   entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a).
           Although we review the district court’s grant of summary judgment
   de novo, we review the underlying agency action under the Administrative
   Procedure Act’s arbitrariness standard. Thus, we “hold unlawful and set

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   aside agency action, findings, and conclusions” when we find them to be
   “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance
   with law.” 5 U.S.C. § 706(2)(A).
          “Arbitrary and capricious review focuses on whether an agency
   articulated a rational connection between the facts found and the decision
   made.” Mexican Gulf Fishing Co. v. Dep’t of Commerce, 60 F.4th 956, 971 (5th
   Cir. 2023) (quoting ExxonMobil Pipeline v. Dep’t of Transportation, 867 F.3d
   564, 571 (5th Cir. 2017)). “In reviewing that explanation, we must consider
   whether the decision was based on a consideration of the relevant factors and
   whether there has been a clear error of judgment.” Texas v. EPA, 983 F.3d
   826, 835 (5th Cir. 2020) (quoting Motor Vehicle Mfrs. Ass’n v. State Farm, 463
   U.S. 29, 43 (1983)).
          We conclude that the agency considered the relevant factors and made
   no clear error in judgment. There was a rational connection between the
   material falsehoods the agency found in the funding application and the
   agency’s decision to seek repayment from OnPath.
                                             A.
          OnPath argues that it was arbitrary and capricious to demand
   repayment because the agency “failed to objectively test . . . whether OnPath
   was in fact eligible for . . . certification.”
          Recall that there are two different ways to qualify as a Community
   Development Financial Institution: (1) the Investment Area route and (2) the
   Targeted Population route. See 12 C.F.R. § 1805.201(b)(3)(i). OnPath only
   applied via the Targeted Population route. It concedes that there were errors
   in its application to qualify through that route. But OnPath contends it would
   nonetheless have qualified through the Investment Areas route.

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          Accordingly, OnPath argues that the agency needed to consider
   OnPath’s eligibility for funding based on Investment Areas before
   demanding repayment. The agency did not do so. So OnPath contends that
   the agency “fail[ed] to consider an important aspect of the problem.” M.D.
   Anderson Cancer Center v. HHS, 985 F.3d 472, 475 (5th Cir. 2021) (quoting
   State Farm, 463 U.S. at 43).
          We reject this contention. For starters, OnPath made errors that were
   material to its eligibility through the Targeted Population route, and those
   errors were fatal to its application.
          Under the agreement between OnPath and the agency, the Treasury
   can hold an awardee in default if it discovers materially “inaccurate, false,
   incomplete or misleading” facts in the application. And once an awardee is
   in default, the agency can “require . . . repayment” of funds. As we explain,
   the agency had good reason to conclude that OnPath’s data was materially
   inaccurate. So it was reasonable for the agency to demand repayment.
          OnPath’s application sought to show that at least 60% of its members
   came from a Low-Income Targeted Population. As OnPath concedes, its
   application assumed that any member with unknown income was low
   income. The agency sensibly rejected OnPath’s assumption on the ground
   that there are plenty of other reasons why income data could be missing. No
   income information doesn’t necessarily mean low income.
          Moreover, when an OnPath member had two potential income values,
   OnPath consistently opted for the lower value. Yet, as the agency noted,
   OnPath could provide no rationale for always lowering (and never raising)
   incomes. The agency reasonably concluded that, by consistently picking the
   lower of two possible income values, OnPath was fudging its Low-Income
   Targeted Population numbers.

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          Having made material errors in its application via the Targeted
   Population route, OnPath cannot rehabilitate its application by invoking the
   Investment Areas route years later in litigation.         OnPath nevertheless
   contends that, by ignoring the possibility that it was eligible through the
   Investment Areas route, the Treasury failed to consider “an important
   aspect of the problem.” State Farm, 463 U.S. at 43.
          But consider the following analogy: A law review accepts law students
   with either (1) the highest grades or (2) the highest essay competition scores.
   Students can apply through either path. And applicants must certify that the
   law review may remove them from the journal if it discovers material
   inaccuracy in their applications. So suppose a student submits a plagiarized
   essay and is admitted to the law review through the essay competition path,
   without ever submitting his transcript. Later, the journal investigates the
   essay plagiarism and removes the student.
          Even if the student would have qualified for membership based on
   grades alone, removing him for his plagiarized essay would surely be
   reasonable. The journal only needs to consider whether the student cheated
   on the essay. It need not consider the student’s excellent grades.
          Similarly here, the agency only needed to consider whether OnPath
   submitted inaccurate information when it applied. It did not need to consider
   whether OnPath could have qualified through an alternative route.
          A venerable principle of administrative law provides further support
   for this conclusion. “An agency must defend its actions based on the reasons
   it gave when it acted.” DHS v. Regents of the Univ. of Cal., 140 S. Ct. 1891,
   1909 (2020). See also SEC v. Chenery Corp., 332 U.S. 194, 196 (1947). It is
   likewise reasonable for agencies to hold applicants to the reasons they
   articulated when they applied.

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          That’s all the agency did here. It required OnPath to justify itself
   based on the rationale offered in its application. The agency did not need to
   let OnPath defend itself “on the basis of . . . [a] ‘post hoc rationalization.’”
   Regents, 140 S. Ct. at 1908 (quoting Citizens to Preserve Overton Park v. Volpe,
   401 U.S. 402, 420 (1971)). We hold that the agency acted reasonably when
   it declined to consider alternative pathways that OnPath itself did not pursue.
                                         B.
          OnPath alternatively argues that the agency acted arbitrarily by using
   the credit union’s loan data from mid-2005 to judge the accuracy of the
   application data, which dated to year-end 2004. The agency used slightly
   later data to determine if OnPath’s application included inaccurate
   information. Thus, OnPath argues, the agency lacked support for its finding
   that the application information was invalid. We reject OnPath’s argument
   for two reasons.
          First, OnPath provides no evidence that the slightly earlier data was
   meaningfully different. Even if there were moderate changes in OnPath’s
   membership or activities over the course of six months, that would not
   explain the massive discrepancies the agency found. “An agency’s decision
   is presumptively valid; the plaintiff bears the burden of showing otherwise.”
   Tex. Tech Physicians Associates v. HHS, 917 F.3d 837, 844 (5th Cir. 2019).
   OnPath points to no change in circumstances that would have made mid-
   2005 so radically different from late-2004.
          Moreover, the agency used the slightly later data by necessity, not
   choice. The agency did not review 2004 data because OnPath could not
   produce it—as the credit union now concedes. It was OnPath itself that
   suggested during the audit that the agency could use July 2005 data as a proxy
   for the 2004 data. It was neither arbitrary nor capricious for the agency to
   accept OnPath’s suggestion.

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                                          C.
          OnPath presses two other theories of arbitrariness.
          First, it argues that the agency failed to correct mistakes OnPath made
   when it applied. In particular, it points to the agency’s failure to correct
   OnPath’s mistaken maps. The agency was guilty of caprice, OnPath argues,
   when the agency asked follow-up questions about the maps rather than
   correct OnPath’s misapprehensions.
          This argument assumes that the onus was on the agency to correct
   OnPath’s mistakes.      The record, by contrast, makes clear that it was
   OnPath’s duty to stay abreast of information that could affect its certification.
   Furthermore, none of the agency’s follow-up questions involved the main
   problems that led to OnPath’s decertification: the credit union’s assumption
   that unknown income meant low income and its consistent practice of
   lowering members’ incomes. These mistakes were OnPath’s alone.
          Second, OnPath asserts that the agency failed to specify a
   methodology that applicants should use. But OnPath cites no authority that
   places the burden on the agency to specify in minute detail the methodology
   an applicant must follow to prove eligibility for funds.           Instead, the
   application form placed the burden on the applicant to “provide
   information” to the agency. And the agreement made it clear that the
   inclusion of materially “inaccurate, false, incomplete or misleading”
   information could lead to a demand for repayment.
                                         ***
          OnPath has failed to show that the agency acted unreasonably.
   Accordingly, we affirm the grant of summary judgment to the agency on
   OnPath’s arbitrariness claim.

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                                         III.
          OnPath also appeals the district court’s denial of its motion to
   supplement the administrative record.
          When the district court denies a motion to supplement the
   administrative record, we review only for abuse of discretion. See, e.g.,
   Novartis Pharmaceuticals v. Leavitt, 435 F.3d 344, 348 (D.C. Cir. 2006) (“We
   review the district court’s refusal to supplement the administrative record
   for abuse of discretion.”); Latin Am. for Soc. & Econ. Dev. v. FHWA Adm’r,
   756 F.3d 447, 462 (6th Cir. 2014) (“A district court’s denial of a motion to
   supplement the administrative record . . . is reviewed on appeal for abuse of
   discretion.”).
          OnPath argues that the district court abused its discretion by failing to
   supplement the administrative record with (1) the declaration of Albert
   Richard and the attached loan data and (2) the declaration and report of
   Terrence Ratigan.
          Motions      to   supplement    the   record    are     rarely   granted.
   “Supplementation of the administrative record is not allowed unless the
   moving party demonstrates ‘unusual circumstances justifying a departure’
   from the general presumption that review is limited to the record compiled
   by the agency.”          Medina County Environmental Action v. Surface
   Transportation Bd., 602 F.3d 687, 706 (5th Cir. 2010) (quoting Am. Wildlands
   v. Kempthorne, 530 F.3d 991, 1002 (D.C. Cir. 2008)).
          There are three situations where such motions might be granted:
          (1) the agency deliberately or negligently excluded documents that
          may have been adverse to its decision, . . .
          (2) the district court needed to supplement the record with
          ‘background information’ in order to determine whether the agency
          considered all of the relevant factors, or

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            (3) the agency failed to explain administrative action so as to frustrate
            judicial review.
   Id. at 706 (quoting Kempthorne, 530 F.3d at 1002). OnPath argues that the
   second scenario is presented here—background information is necessary for
   the court to determine whether the agency considered all relevant factors.
            First, OnPath points out that the district court failed to add Albert
   Richard’s declaration and loan data to the administrative record. OnPath
   claims that this would have offered the best data to establish its eligibility
   based on Investment Areas. But as we’ve already explained, whether OnPath
   would have qualified through the Investment Area route is not a relevant
   factor to this case, because OnPath applied through the Targeted Population
   route.
            OnPath also seeks to supplement the record with expert consultant
   Terrence Ratigan’s declaration and 2021 report. It claims that these will help
   the court understand that the agency’s audit was fundamentally flawed in
   design and execution. But as the agency points out, Ratigan’s 2018 and 2020
   reports are already part of the administrative record. The only argument that
   OnPath can muster for a third Ratigan report is that neither OnPath nor
   Ratigan had access to the administrative record at the time of Ratigan’s
   previous two reports. This is hardly an “‘unusual circumstance[] justifying
   a departure’ from the general presumption that review is limited to the
   record compiled by the agency.” Medina County, 602 F.3d at 706 (quoting
   Kempthorne, 530 F.3d at 1002). The district court did not abuse its discretion
   by declining to supplement the administrative record.
                                          ***
            We affirm.

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