Middletown Mayor Joseph DeStefano gets a high five from Richard Guertin
Middletown Mayor Joseph DeStefano, left, gets a high five from Richard Guertin while election results were coming into the mayor’s campaign headquarters on Nov. 3, 2009. (RecordOnline.com)

The city of Middletown’s corporation counsel must be reimbursed for the cost of successfully defending himself against criminal charges related to the way federal block grants were used a decade ago, a federal appeals court held Wednesday.

The U.S. Court of Appeals for the Second Circuit said Middletown can tap into its U.S. Department of Housing and Urban Development funding to repay Richard Guertin $65,967, plus interest, to cover his legal expenses.

In 2004, Guertin, as corporation counsel, was named in eight counts of a 55-count state indictment accusing Mayor Joseph DeStefano of official misconduct for allegedly steering $140,000 in community development block grants to the mayor’s private businesses.

Guertin, who at the time was also a judge on the City Court in Middletown, was accused of helping the mayor personally benefit from the funds. Community Development Director Neil Novesky was also charged.

Guertin and Novesky were acquitted on all counts. DeStefano was acquitted on all but two minor counts, and those convictions were later overturned. Guertin was represented by defense lawyer John Ingrassia of Newburgh at his 2005 bench trial before Orange County Court Judge Stuart Rossenwasser.

Rosenwasser, who presided over the bench trial, found that Guertin’s actions in connection with one of eight loan transactions at issue did not amount to a criminal conspiracy. But on one, Rossenwasser noted that Guertin “did wear two hats” as corporation counsel for the city and private counsel for DeStefano, and, on that transaction, “he was blinded to his obligation to the City of Middletown and he should have exercised more care.”

DeStefano, who was forced to step down because of the charges, was elected again as mayor in 2009 and brought back Guertin as his corporation counsel. DeStefano won reelection in 2013.

After the acquittals, HUD told Novesky that his legal fees were reimbursable out of block grants, but similar requests by Guertin and DeStefano were denied.

HUD Associate General Counsel Elton Lester wrote that Novesky’s actions were “undertaken in the ordinary course” of his position, but the actions of Guertin and DeStefano were of “a personal nature” and not reimbursable.

Guertin filed suit in the Southern District, claiming the denial was arbitrary and violated the due process and equal protection clauses of the Fifth Amendment.

Judge Kenneth Karas (See Profile) granted summary judgment for HUD in 2012 and Guertin appealed to the Second Circuit, where Judges John Walker (See Profile), Jose Cabranes (See Profile) and Raymond Lohier (See Profile) heard oral argument in Guertin v. United States, 13-186, on October 31, 2013.

Writing for the court Wednesday, Walker said the court agreed that Guertin’s “legal expenses did not arise out of advising DeStefano on private business dealings, of which there is no evidence, but rather from the unproven allegations that Guertin had compromised his duties and obligations as Corporation Counsel in administering Middletown’s CDBG program.”

First, Walker said, Guertin was named in eight counts and, in six of those counts, there was no allegation of private dealing. The remaining two counts, he said, both alleged a conflict of interest based on the accusation that Guertin acted in concert with the mayor.

“The indictment thus does not support HUD’s finding that Guertin’s ‘questioned activities’ were undertaken only in support of DeStefano’s personal business deals ‘as opposed to providing legal services to carry out the city’s CDBG program’,” Walker said. “More importantly, the state court’s verdict, on which Lester purported to rely, does not support Lester’s findings.”

In fact, on the one loan transaction at issue, one where DeStefano allegedly benefited as a landlord of a building, Rossenwasser “expressly found that every single loan was ‘properly considered’ and ‘properly granted’,” Walker said, and similar flaws marred the district court’s ruling that Guertin appealed to the circuit.

The court found that HUD had violated its obligations under the Administrative Procedure Act by acting arbitrarily and capriciously, something that would normally require a remand to the agency.

But Walker said, “This is one of the unusual circumstances” where remand is unnecessary because there was “compelling evidence in the record” that Guertin was entitled to reimbursement.

Robert Isseks of Middletown argued for Guertin.

“I’m very pleased with the court’s decision,” Isseks said. “It has been a long ordeal for my client, and I am happy that it has finally come to this right and just conclusion.”

Isseks said he is now examining whether his fees in prosecuting the appeal are reimbursable.

Assistant U.S. Attorney Michael Byars argued for the government.