United States District Court, N.D. California
For United States of America, Plaintiff: E. Kathleen Shahan, Frances Mary McLaughlin, John Joseph Siemietkowski, United States Department of Justice, Washington, DC.
For Gonzales & Gonzales Bonds and Insurance Agency, Inc., American Surety Company, Defendants: Gary Alan Nye, David Ryan Ginsburg, Roxborough Pomerance & Nye LLP, Woodland Hills, CA.
For U.S. Department of Homeland Security, Miscellaneous: Ann Marie Reding, LEAD ATTORNEY, United States Attorney's Office, San Francisco, CA; David Ryan Ginsburg, Roxborough Pomerance & Nye LLP, Woodland Hills, CA; Frances Mary McLaughlin, United States Department of Justice, Washington, DC.
For American Surety Company, Gonzales & Gonzales Bonds and Insurance Agency, Inc., Counter-claimants: Gary Alan Nye, David Ryan Ginsburg, Roxborough Pomerance & Nye LLP, Woodland Hills, CA.
For United States of America, Counter-defendant: E. Kathleen Shahan, Frances Mary McLaughlin, United States Department of Justice, Washington, DC; John Joseph Siemietkowski, U.S. Department of Justice, Washington, DC.
For United States of America, Counter-claimant: David Ryan Ginsburg, Roxborough Pomerance & Nye LLP, Woodland Hills, CA; E. Kathleen Shahan, Frances Mary McLaughlin, United States Department of Justice, Washington, DC; John Joseph Siemietkowski, U.S. Department of Justice, Washington, DC.
For U.S. Department of Homeland Security, Counter-defendant: Ann Marie Reding, LEAD ATTORNEY, United States Attorney's Office, San Francisco, CA.
For U.S. Department of Homeland Security, Counter-defendant: Ann Marie Reding, LEAD ATTORNEY, United States Attorney's Office, San Francisco, CA; E. Kathleen Shahan, United States Department of Justice, Washington, DC.
For U.S. Department of Homeland Security, Counter-claimant: David Ryan Ginsburg, Roxborough Pomerance & Nye LLP, Woodland Hills, CA; E. Kathleen Shahan, United States Department of Justice, Washington, DC.
For American Surety Company, Gonzales & Gonzales Bonds and Insurance Agency, Inc., Counter-defendant: Gary Alan Nye, David Ryan Ginsburg, Roxborough Pomerance & Nye LLP, Woodland Hills, CA.
ORDER RE MOTIONS FOR SUMMARY JUDGMENT
(Docket Nos. 156, 159, 163, 165, 167, 169, 171, 174, 176, 182, 242)
EDWARD M. CHEN, United States District Judge.
Plaintiff the United States initiated this lawsuit against Defendants Gonzales & Gonzales Bonds and Insurance Agency, Inc. and American Surety Company (collectively, " G& G" ). The lawsuit concerns contracts entered into by the government and G& G. More specifically, G& G posted immigration bonds with the government (on behalf of certain aliens), and, according to the government, G& G substantially violated the conditions of those bonds, for example, by failing to deliver an alien to the government upon demand. The government thus seeks to recover the bond amounts from G& G. G& G, in turn, contends that any bond breach declared by the government should be rescinded or that the bond itself should be deemed invalid because the government first breached the bond agreements, for example, by failing to issue a timely delivery demand. Accordingly, G& G contends it owes nothing to the government.
Currently pending before the Court are multiple summary judgment motions and cross-motions regarding twenty different bond matters. The twenty bond matters were identified by the parties as bellwether cases. Subsequently, the parties identified ten out of the twenty bond matters that the Court could evaluate as an initial matter, with the understanding that the Court's ruling on these ten matters would help resolve the remaining bellwether cases, as well as all other bond matters at issue in this action. The ten bond matters identified by the parties are with respect to the following aliens:
(1) Jose Velasquez-Ortega;
(2) Francisco Ayala-Sanchez;
(3) Jose Rodriguez-Yanez;
(4) So Mi Lee;
(5) Yi Chun Yeh;
(6) Martin Nicholas Antonio;
(7) Ingrid Maricela Cruz-Palacios;
(8) Leonel Antonio Recinos-Flores;
(9) Sandeep Singh; and
(10) Miguel Antonio Ortega-Sagbay.
Having considered the parties' briefs and accompanying submissions, as well as the oral argument of counsel, the Court hereby GRANTS summary judgment to G& G on the Velasquez-Ortega, Ayala-Sanchez, Lee, Yeh, Antonio, Cruz-Palacios, Recinos-Flores, and Singh bond matters but DENIES G& G summary judgment on the remaining bond matters. The Court GRANTS the government summary judgment on the Rodriguez-Yanez and Ortega-Sagbay bond matters but DENIES the government summary judgment on the remaining bond matters.
As to the issue of interest, costs, and penalties, the Court finds in favor of the government on interest and costs. With respect to penalties, the Court finds in favor of the government in part and in favor of G& G in part. More specifically, the government did not abuse its discretion in assessing penalties at the outset but, after G& G offered to pay the principal debt (but not accrued interest or penalties), the government abused its discretion in continuing to assess penalties thereafter on the amounts tendered.
I. GENERAL PRINCIPLES
A. Standard of Review
Previously, the Court ordered a remand to the agency so that, for each bond dispute, the agency could " consider G& G's defenses in the first instance and reach a reasoned decision for this Court to review." Docket No. 141 (Order at 12). Subsequently, in accordance with the Court's order, G& G presented its defenses to the agency and a number of the bond disputes were actually resolved. See Docket No. 153 (civil minutes). However, for the remainder of the bonds, the agency concluded that G& G was in breach and issued decisions to that effect. Those agency decisions are now the subject of the pending motions for summary judgment.
Under Federal Rule of Civil Procedure 56(a), a " 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). In evaluating whether summary judgment is appropriate, the Court applies Judge Patel's prior ruling that " [t]he arbitrary and capricious standard [employed under the Administrative Procedure Act ('APA')] is . . . appropriate for review of the government's bond-breach determinations." United States v. Gonzales & Gonzales Bonds & Ins. Agency, Inc., 728 F.Supp.2d 1077, 1082 (N.D. Cal. 2010) (rejecting G& G's contention that de novo review is appropriate).
Although Judge Patel referred specifically to the arbitrary-and-capricious component of the APA, she did not foreclose de novo review where appropriate under the APA -- e.g., for purely legal issues. See Howard v. FAA, 17 F.3d 1213, 1215 (9th Cir. 1994) (noting that, under the APA, " [p]urely legal questions are reviewed de novo" ); see also 5 U.S.C. § 706 (providing that " the reviewing court shall decide all relevant questions of law" ); Dubois v. United States Dep't of Agric., 102 F.3d 1273, 1284 (1st Cir. 1996) (stating that, under the APA, " [e]rrors of law are reviewed by the court de novo " ). That being said, Judge Patel did not explicitly address whether contract interpretation is considered a purely legal issue for which there is de novo review under the APA. Contract interpretation, of course, is typically deemed a question of law. Nevertheless, several courts have held that, where an agency's action is being challenged pursuant to the APA, and where the agency has interpreted a contract, that interpretation is entitled to deference and the arbitrary-and-capricious standard applies -- at least where the agency's expertise or statutory domain is implicated.
For example, in Muratore v. United States OPM, 222 F.3d 918 (11th Cir. 2000), the Eleventh Circuit so concluded. It explained that the arbitrary-and-capricious standard was appropriate by drawing an analogy to Chevron deference: " Chevron stands, in part, for the proposition that courts may not always conduct a de novo review of agencies even on the pure question of law of statutory interpretation" -- i.e., " the 'question for the court is whether the agency's answer is premised on a permissible construction of the statute.'" Id. at 921 (emphasis added). " ' [C]ontract interpretation . . . is sufficiently similar to statutory interpretation [that it] warrants deference -- especially when the interpretation involves a policy determination within the agency's statutory domain.'" Id. at 922 (emphasis added). In Muratore itself, the Eleventh Circuit concluded that, because of the agency's expertise, it would defer to the agency's contract " interpretation so long as that interpretation is reasonable and relies on ample factual and legal support." Id.
Other courts have adopted the same or a similar approach. For example, the Tenth Circuit has stated that " an agency's interpretation of a contract is reviewed under the arbitrary and capricious standard when the subject matter of the contract involves the agency's specialized expertise." Sternberg v. Sec'y, 299 F.3d 1201, 1205 (10th Cir. 2002). Similarly, in National Fuel Gas Supply Corp. v. Federal Energy Regulatory Commission, 811 F.2d 1563, 258 U.S.App.D.C. 374 (D.C. Cir. 1987), the D.C. Circuit stated that " an agency's reading of a settlement agreement" should be given deference, " even where the issue simply involves the proper construction of language," because the agency's statutory domain had been implicated. Id. at 1569. And in Harrell & Owens Farm v. Federal Crop Insurance Corp., No. 4:09-CV-217-FL, (E.D.N.C. Oct. 6, 2010), a district court acknowledged that there were seemingly conflicting Fourth Circuit cases as to which standard should apply (arbitrary and capricious or de novo) but, ultimately, declined to resolve the conflict because
[t]here is sufficient common teaching in the cases to provide a framework for the court to decide the instant matter. Specifically, the cases agree that where the agency's interpretation turns on reference to rules and regulatory provisions, is made pursuant to a comprehensive statutory scheme, and is based on specific policymaking prerogatives and subject-specific expertise, the court is to afford the agency substantial deference. By contrast, where the agency's determination was made simply by reference to general common law principles governing contracts, no such deference is given.
Id. at *21; see also Dayton Power & Light Co. v. Fed. Energy Reg. Comm'n, 843 F.2d 947, 953 (6th Cir. 1988) (stating that " '[a]n agency's interpretation of a contract . . . may be reviewed by a court without special deference,'" at least where the interpretation is not based on any factual findings or technical expertise).
Cases contrary to those cited above appear to be much fewer in number. See, e.g., Muratore, 222 F.3d at 921 (noting that " [t]he Fifth Circuit has continued to conduct a de novo review in its recent cases" ); Wapato Heritage, LLC v. United States, No. CV-08-177-RHW, at *14 (E.D. Wash. Nov. 21, 2008) (acknowledging that the agreement involved " subject matter clearly within the [agency's] specialized expertise" but still applying de novo review).
The Court agrees with the reasoning of the Eleventh Circuit in Muratore. As a general matter, the Court finds that, here, the agency's specialized expertise and statutory domain have been sufficiently implicated with respect to the contracts at issue, namely, the immigration bonds and the parties' prior settlement agreements which address how the parties should deal with immigration bonds. Thus, even where the agency is interpreting an immigration bond or one of the parties' prior settlement agreements, the Court applies the arbitrary-and-capricious standard.
B. Contracts at Issue
As indicated above, the parties entered into several contracts which are relevant for purposes of this litigation. First, there are the immigration bonds for the various bond matters. Second, the parties previously entered into two settlement agreements, known as Amwest I and Amwest II. Amwest I was entered into before the effective date of the Illegal Immigration Reform and Immigrant Responsibility Act (" IIRIRA" ). Amwest II was entered into after the effective date of the IIRIRA.
At the hearing, the Court noted that, based on its evaluation of the immigration bonds and the Amwest agreements, there was no conflict between the two. For example, the bonds provide that they will be automatically cancelled for certain reasons, see, e.g., Docket No. 156-9 (Ex. B at 961) (general terms and conditions for 1997 version of immigration bond), but they do not preclude cancellation for other reasons, including but not limited to those contemplated by the Amwest agreements. Neither party disagreed with this general assessment of the contracts.
As to the Amwest agreements specifically, the Court also indicated at the hearing that it found the " Policy Statements" attached to Amwest I and the " INS field memo" attached to Amwest II to be part of the binding contract between the parties. Neither party challenged the Court's assessment of the Policy Statements. Nor could they legitimately do so, given the clear language of Amwest I, which states: " The attached policy statements are binding on the parties in their contractual relationship formed through the execution of any immigration bond contract, whether in the past or in the future, using the bond agreement (INS Form I-352) attached to this Agreement as Exhibit K."  Docket No. 156-3 (Ex. B at 33) (Amwest I ¶ 2).
However, with respect to the INS field memo, here, the government did argue that it is not binding on the parties. The Court finds the government's position without merit. Notably, the government itself relied on the INS field memo to support its case, at least on certain issues. The government cannot selectively rely on the INS field memo where it is convenient to do so but disavow the memo where it is inconvenient. Moreover, the language of Amwest II and the INS field memo clearly establishes that the memo is a binding part of the settlement. Under Amwest II, the parties agreed that the government would
immediately send the INS Field Memorandum (" INS field memo" ) in a format substantially similar (i.e. with no material changes unless mutually agreed to by the Parties) to the document attached hereto as Exhibit " A" to all District Directors and District Deportation Directors throughout the United States, and to the AAU.
Docket No. 156-4 (Ex. B at 60) (Amwest II P 1). The INS field memo itself states that its purpose is to " provide comprehensive guidance for the implementation of the subject Settlement." Docket No. 156-4 (Ex. B at 65) (INS field memo attached to Amwest II). Thus, taken together, the government cannot reasonably argue that the INS field memo does not impose obligations on the government as part of the settlement agreement.
The government protests still that the INS field memo should be given no effect because it was not signed and was stamped " DRAFT." This argument is unavailing. The fact that the memo was not signed is irrelevant because the settlement agreement itself (Amwest II), to which the field memo was attached, was signed. Similarly, the fact that the memo was stamped " DRAFT" is insignificant because Amwest II stated that there would be no material change to the memo unless the parties mutually agreed to the change. Despite its " DRAFT" denomination, it was made part of the Amwest II settlement agreement.
Accordingly, in evaluating the alleged bond breaches, the Court shall give force to not only the immigration bonds themselves but also both Amwest I and II, including the attached Policy Statements and INS field memo.
C. Materiality of a Breach
Finally, at the hearing, the Court took note that, as a general matter, unless a contract provides a specific remedy for a breach (there are certain breaches that are so treated), a breach in and of itself does not automatically give the nonbreaching party a remedy -- or, for that mater, an excuse not to perform its obligations under the contract. Rather, under traditional contract law, there must first be a material breach before the nonbreaching party is entitled to a remedy and/or an excuse for nonperformance. See, e.g., Stone Forest Indus., Inc. v. United States, 973 F.2d 1548, 1550-51 (Fed. Cir. 1992) (noting that " [n]ot every departure from the literal terms of a contract is sufficient to be deemed a material breach of a contract requirement, thereby allowing the nonbreaching party to cease its performance and seek appropriate remedy" ; adding that " [t]he standard of materiality for the purposes of deciding whether a contract was breached 'is necessarily imprecise and flexible'" and " [t]he determination depends on the nature and effect of the violation in light of how the particular contract was viewed, bargained for, entered into, and performed by the parties" ); Taco Bell Corp. v. Cont'l Cas. Co., 388 F.3d 1069, 1074 (7th Cir. 2004) (taking note of " the general principle of contract law that breaches that are technical, harmless, and therefore 'immaterial' do not allow the 'victim' of the breach to walk away from the contract to the great harm of the party that committed the harmless breach" ); Foster Poultry Farms, Inc. v. SunTrust Bank, 377 Fed.Appx. 665, 671 (9th Cir. 2010) (stating that " '[a] party's obligation to perform under a contract is only excused where the other party's breach of the contract is so substantial that it defeats the object of the parties in making the contract'" ). Neither party took issue with this general principle.
Based on the Court's review of the summary judgment motions and cross-motions, it makes sense to address the motions issue-by-issue rather than bond-by-bond. There are ten substantive issues that the Court has identified. Also, assuming that the Court will rule in the government's favor on any bond matter, then it will also have to evaluate whether interest, costs, and penalties were properly assessed against G& G.
A. Delivery Demand Within Ninety-Day Removal Period
As explained in one of the agency decisions below,
[i]n general, aliens placed in removal proceedings are subject to a custody determination and some classes of aliens may be released from detention under certain conditions, including the execution of an immigration bond.[ ] Immigration bonds are executed between ICE and the bond obligors -- the surety company and its agent. Immigration delivery bonds are similar to bail bonds, and provide for the release of an alien until the removal proceedings are terminated; the alien has been accepted by DHS for detention, deportation or removal; or the bond is otherwise cancelled. These bonds are underwritten by a surety company certified by the Department of Treasury to post bonds on behalf of the Federal government. . . .
ICE requests the surrender of an alien pursuant to the terms of a delivery bond by sending a demand notice (Form I-340) to the obligor designating the date, time, and place for the alien to appear. If the obligor fails to deliver the alien as requested, ICE may declare the bond breached, and notifies the obligors of that informal administrative decision by issuing a breach notice (Form I-323).
Docket No. 156-1 (Ex. A at 1-2) (agency decision) (emphasis added).
According to G& G, under the Amwest agreements, the agency was obligated to issue a delivery demand for an alien within the ninety-day removal period provided for by the IIRIRA. See 8 U.S.C. § 1231(a)(1)(A) (" Except as otherwise provided in this section, when an alien is ordered removed, the Attorney General shall remove the alien from the United States within a period of 90 days (in this section referred to as the 'removal period')." ). Because, in multiple bond matters, the agency did not issue a delivery demand to G& G until well after the ninety days had expired (in some cases, not until years later), G& G contends that these bonds should be deemed cancelled.
In evaluating G& G's argument, the Court begins first with the Amwest agreements, as this is the source of the alleged contractual obligation to provide a delivery demand within ninety days. In Amwest I, the parties agreed that the government would follow what was known as the Shrode rule. The Shrode rule came from an Eighth Circuit opinion, Shrode v. Rowoldt, 213 F.2d 810 (8th Cir. 1954).
In Shrode, the alien posted a delivery bond. Subsequently, he was ordered deported. More than six months after the deportation order, the alien was placed on supervisory parole. The alien demanded that the delivery bond previously posted be released because " so long as the bond remains in full force and effect and uncancelled he [was] required to pay premiums to his surety and [was] unable to receive back from the surety the deposit made by him on the execution of the bond." Id.
The Eighth Circuit found in favor of the alien. It began by taking note of the immigration statute in place at the time, which provided that " '[a]ny alien, against whom an order of deportation, heretofore or hereafter issued, has been outstanding for more than six months shall, pending eventual deportation, be subject to supervision under regulations prescribed by the Attorney General.'" Id. at 812. The Eighth Circuit held that, under this statute, " the Attorney General is given six months after the entry of an order of deportation within which to effect deportation and during that period plaintiff was properly required to post and keep posted his [delivery] bond." Id. at 812 (emphasis added). But after these six months, the alien was subject to supervision only, and the supervision regulations prescribed by the Attorney General " 'make no provision either for detention, for release under bond, or for the continuance of bonds previously posted.'" Id. at 813.
The court continued:
After six months from the entry of the order of deportation the Attorney General has only the power of supervision. He may not detain, he may not imprison, and hence, it is illogical to hold that he may nevertheless require the posting of bail. When a party is required to post bail his sureties in effect become his jailers and the power to require bail connotes the power to imprison in the absence of such bail.
Id. at 813-14 (emphasis added). In short, the Eighth Circuit held that the predicate for a valid bond is the authority of the government to detain. If the government no longer has the authority to detain, then a bond can no longer be deemed valid.
While at the time of Shrode, the period within which the government was required to deport the alien was six months, the enactment of the IIRIRA shortened that period -- now known as the removal period -- to ninety days. G& G acknowledges this change in timing but argues that, nevertheless, the reasoning underlying Shrode is still valid. That is, based on Shrode, G& G contends that, because the government had the authority to detain an alien only within the ninety-day removal period, it had to issue its delivery demand within that window under the rationale of Shrode. Once past the ninety days, the government's authority to detain the alien ordered to be removed expired, and therefore so did the bond.
The government does not seriously dispute that, under Amwest I, it agreed to follow the Shrode rule. See Docket No. 156-3 (Ex. B at 41) (Amwest I, Ex. A) (stating that, " '[u]pon the expiration of the sixth month period following the date an order of deportation becomes final for detention purpose, the alien, as a rule, cannot be taken or continued in physical custody, released or released or continued on bond or on his own recognizance'" and so " [a]ny outstanding bond or order of recognizance must be cancelled'" ) (emphasis in original). The government asserts, however, that Amwest I was entered into prior to the IIRIRA and, with Amwest II, which was ...