## Facts

- Kansas City, Missouri was an “entitlement” recipient of annual Community Development Block Grant (CDBG) funds under the Housing and Community Development Act of 1974.
- From 1978–1985, the City used CDBG funds for sidewalk improvements and assessed adjacent property owners for the costs.
- HUD concluded the assessments violated CDBG requirements and directed the City to reimburse affected property owners.
- The City refused to reimburse the property owners.
- Anticipating that HUD would withhold or condition the City’s 1987 CDBG funds, the City sued seeking distribution of the 1987 grant in full and without conditions.
- HUD subsequently imposed special conditions on part of the City’s 1987 entitlement grant, tying the conditions to the prior dispute and requiring remedial steps, including reimbursement.
- The City contended HUD’s action was a sanction for past noncompliance requiring procedures under 42 U.S.C. § 5311 (§ 111), including notice and an opportunity for a hearing.
- HUD argued it was merely making an “adjustment” under 42 U.S.C. § 5304(d) (§ 104(d)), which HUD claimed did not require a formal hearing.

## Issues

1. Whether HUD may condition or effectively reduce an entitlement city’s current CDBG grant based on alleged past noncompliance by proceeding under § 104(d) rather than § 111.
2. Whether § 111’s “reasonable notice and opportunity for hearing” requirement applies when HUD imposes special conditions on current entitlement funds as a remedy for past alleged violations.

## Decision

- The D.C. Circuit affirmed the district court’s partial summary judgment for Kansas City.
- The court held HUD could not avoid § 111’s procedural protections by labeling its action an “adjustment” under § 104(d) when the action functioned as a sanction for past noncompliance.
- The court concluded § 111 governed HUD’s effort to condition, reduce, or limit the availability of entitlement funds based on alleged past violations.
- Because HUD did not provide the required notice and opportunity for a hearing under § 111, the special conditions on the City’s 1987 grant were invalid.

## Legal Principles

- When an agency’s action is, in substance, a sanction for alleged past noncompliance, it must follow the statute’s specific enforcement provision and its required procedures, even if the agency characterizes the action differently.
- Under the CDBG Act, § 111 is the remedial mechanism for substantial noncompliance and requires reasonable notice and an opportunity for a hearing before termination, reduction, or limitation of the availability of funds.
- § 104(d) audit-related “adjustment” authority does not authorize HUD to impose major remedial funding conditions for past alleged violations in a manner that eliminates § 111’s notice-and-hearing protections.
- Courts will reject an agency interpretation that conflicts with Congress’s clear statutory structure and would render explicit procedural protections ineffective.

## Conclusion

The D.C. Circuit held that HUD’s attempt to condition Kansas City’s 1987 entitlement CDBG funds to remedy alleged past violations required § 111 procedures, including notice and an opportunity for a hearing, and HUD could not proceed under § 104(d) to bypass those statutory protections.


City of Kansas City v. U.S. Dep’t of Hous. & Urban Dev., 861 F.2d 739 (D.C. Cir. 1988)