Caseflicks

Supreme Court of the United States • 1993

Darby v. Cisneros

509 U.S. 137 | 113 S. Ct. 2539 | 125 L. Ed. 2d 113 | 1993 U.S. LEXIS 4246

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Takeaway

In short, Darby holds that the APA bars courts from demanding exhaustion of optional intra-agency appeals: further administrative review is mandatory only when Congress or a qualifying agency rule clearly says so.

Background

R. Gordon Darby, a South Carolina real-estate developer, used a financing arrangement involving straw purchasers to obtain HUD single-family mortgage insurance for rental projects. The arrangement was designed to avoid HUD’s “Rule of Seven,” which generally barred single-family mortgage insurance when a mortgagor held interests in seven or more similar rental properties in the same project. Although local HUD employees apparently indicated that the plan was lawful, HUD later concluded that it was a sham designed to circumvent the rule. After Darby defaulted, HUD paid more than $6.6 million in insurance claims.

HUD imposed a one-year limited denial of participation and proposed debarment from federal programs. Following a consolidated hearing, an ALJ found that the financing method improperly evaded the Rule of Seven but also found substantial mitigation: Darby had disclosed important facts to local HUD personnel, lacked criminal intent, and cooperated with HUD. The ALJ therefore imposed an 18-month debarment rather than an indefinite one. Under HUD regulations, the decision became final unless the Secretary, in his discretion, elected to review it after a party requested review. Neither side sought that optional review.

Darby instead filed suit under the APA, arguing that the debarment was punitive and thus contrary to HUD regulations. The District Court declined to dismiss for failure to exhaust administrative remedies and later granted Darby summary judgment. The Fourth Circuit reversed, holding that Darby should have sought discretionary review by the Secretary before suing. The Supreme Court granted certiorari to resolve whether courts may impose an exhaustion requirement when neither a statute nor agency rule makes further administrative review mandatory.

Issues

Issue #1

Whether a federal court may require a plaintiff seeking review under the APA to exhaust an optional administrative appeal when neither a statute nor an agency rule makes that appeal a prerequisite to judicial review.

Holding

No. Under 5 U.S.C. § 704, courts may not require exhaustion of an optional appeal to superior agency authority after agency action has become final, unless a statute expressly requires the appeal or an agency rule both requires it and makes the action inoperative while review is pending.

Reasoning

The Court began with the distinction between finality and exhaustion. Finality asks whether the initial decisionmaker has taken a definitive position that causes concrete injury; exhaustion concerns whether an aggrieved party must pursue additional administrative review procedures. But Congress’s intent controls whether courts may impose exhaustion requirements, and § 704 supplies that intent for APA actions.

Section 704 makes final agency action judicially reviewable and states that action otherwise final remains final even if a party has not sought reconsideration or an appeal to superior agency authority. The statute recognizes only two ways an appeal to superior agency authority can be required before judicial review: a statute may expressly require it, or an agency may require it by rule and provide that the underlying action is inoperative during the appeal.

This language reflects Congress’s effort to make exhaustion obligations clear in advance. A litigant should be able to determine precisely which administrative steps are mandatory before going to court. Allowing courts to add discretionary exhaustion requirements for optional appeals would turn § 704 from a protection against barriers to judicial review into a trap for litigants who reasonably relied on the statute and agency rules.

HUD had not adopted a rule requiring Darby to seek Secretarial review before filing suit. Although HUD argued that the debarment was inoperative while Secretarial review could occur, that fact alone did not satisfy § 704: the agency had to require the appeal by rule as well. Because the appeal was optional, the ALJ’s decision was final for APA purposes, and Darby could seek judicial review without pursuing it.

The Court found the legislative history consistent with the statutory text. Congress understood that an examiner’s initial decision could become the agency’s decision unless further review occurred. It therefore allowed agencies to require an appeal before court review only if they also suspended the decision’s operation during that appeal. Requiring a person to continue administrative proceedings while an adverse action remained effective was, in Congress’s view, fundamentally inconsistent with fair exhaustion requirements.

The 1976 amendment to § 702, which preserved other limits on judicial review when Congress abolished sovereign immunity as a defense, did not alter this conclusion. That proviso left existing law unchanged; it did not authorize courts to create exhaustion requirements that § 704 itself had displaced. Exhaustion remains available in APA cases to the extent a statute or properly framed agency rule requires it, and it remains a discretionary judicial doctrine in cases outside the APA.