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KRAUSE v. SBA

December 17, 1980

Donald KRAUSE, Plaintiff,
v.
SMALL BUSINESS ADMINISTRATION and Merit Systems Protection Board, Defendants



The opinion of the court was delivered by: WEINFELD

These are cross-motions for summary judgment in an action commenced by Donald Krause, an employee of the Small Business Administration ("SBA"), to review a seven-day suspension from his position as a Supervisory Loan Specialist on the grounds that there was no evidential basis to support the suspension and that the failure to provide him with a trial-type evidentiary hearing upon his appeal to the Merit Systems Protection Board ("MSPB") violated his right to due process under the Fifth Amendment. The defendants, the SBA and MSPB, contend the suspension is valid on the grounds that the applicable procedures, which do not require a trial-type hearing in a seven-day suspension proceeding, were followed that these accord with due process of law, and that the decision to suspend plaintiff was supported by evidence and was neither arbitrary nor capricious.

Upon a word-by-word study of the administrative record, the Court concludes for reasons noted hereafter that the agency action must be upheld and that the procedures followed by the SBA fully satisfied the requirements of due process.

 I

 Krause's suspension was prompted by a series of events surrounding a loan by the SBA to one Norma Fontane in connection with her purchase of "Norma's Restaurant," located in New York City across the street from the offices of the SBA. An anonymous letter to the SBA asserting that one of its employees, Ben Torrent, had a hidden ownership in Norma's Restaurant and that Fontane was "his girl friend" triggered an investigation by the Division of Security and Investigations ("S&I") into the circumstances whereby the loan which originally was approved by a loan committee of three in the sum of $ 25,000 was increased the same day to $ 40,000 without reconvening the committee that gave approval to the $ 25,000 loan.

 As a result of the investigation, the Regional Director of the SBA advised Krause in a detailed letter that it was proposed to suspend him for thirty days pursuant to applicable civil service regulations upon the following grounds:

 
1. Falsification of the Loan Committee's minutes in violation of SBA regulations;
 
2. lack of adequate security regarding maintenance of a chronological list to assure that applicants were considered in the order in which they filed their applications;
 
3. failure to assure documentation of the loan file; and
 
4. appearance of conflict of interest and/or preferential treatment.

 The basis for each charge was set forth in detail.

 Bernard Kulik, Deputy Associate Administrator for Operations of the SBA was designated to consider and determine the charges. The letter proposing the thirty-day suspension advised Krause of his right to review the material upon which his proposed suspension was based, his right to reply in writing to the offenses advanced, his right to submit affidavits in support of his reply, and his right to the assistance of counsel in preparing the reply. Krause engaged counsel and upon his request was furnished with various documents including the S&I report. On November 21, 1978, Krause submitted his own written response to the charges, a written response by his attorney and the affidavits of five SBA employees. Thereafter, pursuant to his request, he and his lawyer met with Kulik at the latter's office in Washington, D.C. They were afforded the opportunity to and did speak to each of the charges. Following the meeting, Krause and his lawyer wrote to Kulik thanking him for the opportunity to meet with him for a discussion of the charges and enclosing additional material relative to the charges. On February 23, 1979, Kulik rendered his decision which indicated that he had given careful consideration to all documents and written responses submitted by Krause and his attorney in resisting the charges, as well as their oral statements made at the Washington meeting. Kulik found the evidence supported three of the charges: (1) that Krause had falsified Loan Committee minutes, although without an intent to defraud; (2) that he had inadequately safeguarded the chronological list of applicants; and (3) that he had failed to ensure proper documentation of the loan file. Kulik concluded, however, that the evidence did not support the charge that Krause had created an appearance of preferential treatment or a conflict of interest.

 Kulik decided that a thirty-day suspension was excessive and imposed a suspension of seven calendar days. He sent a copy of the agency decision to Krause which also informed him of his right to appeal to the MSPB and of his right to file a grievance under the SBA Grievance Procedure challenging the merits of his suspension, although no such grievance was filed. *fn1"

 Krause, through his attorney, filed a notice of appeal to the MSPB and requested an evidentiary hearing purportedly under 5 U.S.C. ยง 7701(a) (1976) at which he could present the testimony of witnesses. He listed the names of six potential witnesses including those whose affidavits had previously been submitted and considered by Kulik. The appeal was assigned to the Seattle Field Office of the MSPB due to the heavy workload of the New York Field Office. Krause's lawyer protested this assignment claiming that for all practical purposes it destroyed the effectiveness of an evidentiary hearing since his client could not afford the expense of travel for himself, his witnesses or his lawyer to Seattle. Dean Wright, Chief Appeals Officer of the Seattle Field Office, informed Krause and his attorney by letter that under the applicable regulation no right to an evidentiary hearing was provided in cases involving suspensions of less than thirty days, and that in such cases, the only issue subject to review on appeal was compliance with authorized procedures, unless it was claimed that the suspension was taken as a result of discrimination on account of race, color, religion, sex or other discriminatory conduct. *fn2" Wright observed that since the individuals Krause listed as proposed witnesses would have no knowledge of any claimed procedural ...


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