IN THE MATTER OF Academia La Danza Artes Del Hogar,
Docket No. 90-31-SP
Student Financial Assistance Proceeding
Appearances: Rafael E. Torres Torres, Esq., of Ponce, Puerto Rico for the Respondent
Russell B. Wolff, Esq., of Washington, D.C., Office of the General Counsel, United States Department of Education for the Office of Student Financial Assistance
Before: Judge Allan C. Lewis
This is an action initiated by the United States Department of
Education to recover $467,294 in Federal funds advanced to the
Academia La Danza Artes Del Hogar (Academy) under the student
financial assistance programs and to require Academy to purchase
from the lending institutions 13 loans in the total amount of
$25,616 which were obtained by its students under the Guaranteed
Student Loan Program. This action was proposed following a
program review which concluded that Academy was erroneously
determined to be eligible to participate in the student financial
assistance programs under the Higher Education Act of 1965, as
amended. Academy argues, in effect, that the actions of the
Department preclude its recovery under the doctrine of estoppel.
Based upon the findings of fact and conclusions of law, infra, the Department may recover
$467,294 from Academy and Academy
shall purchase from the lending institutions the 13 guaranteed
I. FINDINGS OF FACT
1. On November 28, 1986, Academy submitted to
Occupational/Vocational Eligibility Branch, Division of
Eligibility and Certification of the U.S. Department of Education
(Eligibility Branch), inter alia, a Form 1059, Request for Institutional Eligibility for Programs
Under the Higher Education
Act of 1965, as amended. The accompanying letter indicated that
a non-profit, tax exempt certification would be submitted as soon
as Academy received it. In addition, its designated
accreditation status was as a public postsecondary vocational
institution.See footnote 1
2. On December 18, 1986, the Eligibility Branch returned Academy's application because the state license submitted with its application had expired and the tax exempt certification was not submitted. It was not returned due to its accreditation status as a public postsecondary vocational school. The Eligibility Branch required that "[t]his letter must be returned when you re-submit your application."
3. By letter dated January 27, 1987, Academy
application and instructed the Eligibility Branch to note the
amendment to item #7 which indicated that Academy was a
"proprietary" as opposed to "public" or "nonprofit"
Academy enclosed copies of the student enrollment agreement and
current promotional literature as required by its newly
4. By letter dated February 9, 1987, the Eligibility
returned Academy's application indicating "[s]ince you have
changed your school's designation from Nonprofit to Proprietary,
you must complete page 3 of the 1059, listing all courses and
course lengths to be offered." Again, the Eligibility Branch's
form letter required that "[t]his letter must be returned when you re-submit your
5. By letter dated March 11, 1987, Academy
application with page 3 completed which listed the courses and
their length as requested by the Department's letter of February
6. On April 4, 1987, the Eligibility Branch
the Secretary of Education has determined . . . [that the
institution] satisfies the definition of an eligible
Vocational School (Section 435(c),HEA) as set forth in
the . . . Higher Education Act of 1965, as amended (HEA).
. . .
As a result of the designation as an eligible institution, the institution is eligible to apply to participate in the following postsecondary education Federal assistance programs administered by the U.S. Department of Education
. . . [which included the Pell Grants, SEOG, GSL, Work- Study, and DLS programs].
This eligibility designation remains in effect so long as the institution continues to satisfy all relevant statutory and regulatory eligibility requirements and the enclosed Requirements for Maintaining Institutional Eligibility, which are incorporated into this Notice by this reference.
. . . .
In the Requirements for Maintaining Institutional Eligibility, it
1. PROGRAM PARTICIPATION REQUIREMENTS.
Designation as an
eligible institution of higher education . . . ; a
proprietary institution . . .; or a vocational school
(435(c), HEA), DOES NOT MEAN that the institution or school
is automatically eligible to participate in any of the
listed Federal student financial assistance programs.
. . . .
Specifically, in order to participate in the -
- STUDENT FINANCIAL ASSISTANCE PROGRAMS
Title IV of the HEA -- . . . the institution or
school must execute a Program Participation Agreement
in accordance with Student Assistance General
Provisions, 34 CFR Part 668.11.
. . . .
3. PERIOD OF ELIGIBILITY. The institution's or school's status as an eligible institution remains in effect so long as it continues to satisfy all the relevant statutory and regulatory requirements for institutional eligibility. Thus the institution loses its status as an eligible institution or program ON THE DATE THAT IT FAILS TO SATISFY ANY OF THE REQUIRED ELEMENTS on which ts [sic] status as an eligible institution was based, such as its accreditation or its legal authority to provide a program of postsecondary education in the State in which it is located.
7. By letter dated July 31, 1987, the Eligibility Branch notified Academy that its request for certification to participate in selected programs of student financial assistance was approved by this office and that appropriate operations areas within these programs will forward a funding authorization and/or identification number and other necessary informational manuals.
8. By letter dated August 11, 1987, the Financial
Section of Division of Program Operations notified Academy that,
according to the Eligibility Branch, the school has met the
necessary requirements for eligibility to participate in the GSL
program and, therefore, the school was assigned a specific code
number for all transactions.
9. By letter dated May 2, 1988, the Eligibility
[a]s the result of a review of your school's eligibility
records, we have determined that your school is not now nor
has it ever been an eligible institution to participate in
financial assistance programs administered by the U.S.
Department of Education.
You initially submitted your eligibility application in
December 1986. In item #7 on the ED Form 1059, you
indicated the school's control as that of "Nonprofit". As a
part of the application documentation, you submitted a
Certificate of Accreditation from the Puerto Rico Department
of Public Instruction, a recognized State agency for the
approval of public postsecondary vocational education.
On December 18, 1986, we requested that you provide evidence
from the Internal Revenue Service that your school is tax
exempt under Section 501(c)(3) of the Internal Revenue Code.
Your letter of January 17, 1987, advised us that you had
amended your application to designate your school as a
"proprietary" institution of higher education. Proprietary
institutions must be accredited by one of the private
nationally recognized accrediting agencies. (see the
Your institution must obtain accreditation by an appropriate
private recognized accrediting agency within the next six
(6) months. Should you fail to do so, your school will be removed from the list of eligible
October 31, 1988.
10. The above action by the Eligibility Branch
to continue to draw upon, and to disburse to its students, funds
under the student financial assistance programs. While a public
or nonprofit postsecondary vocational institution is permitted to
receive funds while obtaining accreditation, this procedure is
clearly prohibited by statute for proprietary, vocational
11. By letter dated May 17, 1988, Academy
Eligibility Branch as follows:
Please be advised that the Academy is looking forward to
contact any of those [private accrediting] agencies [on the
list furnished by Eligibility] to see its availability to
perform the accredition.
. . . .
We would like your assistance and orientation in respect to the dateline within which the Academy should obtain accreditation. Although you say in your letter [of May 2,
1988] that the Academy has six months to comply with the
requisite; the period is shorter. We do not know, at this
time, if it will be possible for any private accreditation
agency to conduct its investigation and make the final
recommendation within that time period.
Our concern is that, if the Academy does not provide the
evidence of accreditation then, it will be removed from the
list of eligible institutions as of October 31, 1988.
We want to assure your agency that, by all possible means,
the Academy will try to get the accreditation because its
eligibility is of the essence for the continuation of
As a matter of fact, the Academy welcomes any accreditation
process and it will be willing to provide your Department
with any evidence of the affirmative action taken towards
that direction. We would like to know if there is any
possibility of a time extension to the dateline previously
stated in the event the accreditation process has begun, but
is not finished by that time.
12. By letter dated June 14, 1988, the Eligibility
Academy a list of recognized accrediting agencies and suggested
that Academy pursue accreditation. In addition, the Eligibility
Branch indicated that "[i]f the accreditation process is not
completed or near completion as of October 15, 1988, we suggest
that you contact us at that time to pursue the possibility of the
Department granting the institution an extension."
13. By letter dated September 27, 1988,
Academy wrote the
Eligibility Branch that it was in the process of accreditation
with the National Association of Trade and Technical Schools
(NATTS); that it was in the accreditation roster for February
1989; and that it requested an extension of the dateline beyond
the October 15, 1988, until the accreditation is effective.
Academy also provided the Eligibility Branch with its telephone
number in case Eligibility needed "some other information."
The Department did not respond in writing to this letter. In the
meantime, the Eligibility Branch contacted NATTS on November 1,
1988, and was apprised informally that Academy's application
process had been deferred due to its failure to satisfy certain
standards and that full accreditation was not expected until six
to nine months after the deficiencies were corrected.
The next relevant correspondence by the Department occurred on
March 8, 1990--more than two years later--in which Academy was
informed by the Chief, Liaison Section I, Program Financing
Branch that the Department's program personnel had requested that
funds not be released to Academy and that this request was being
14. Academy kept the Department informed of
its progress during
the accrediting process with NATTS:
a. By letter dated December 7, 1988, Academy submitted to
the Eligibility Branch a Form 1059 in which it indicated
that the institution was changing from proprietary to
corporation and that it was undergoing the accreditation
process with NATTS. (Ultimately, on or about May 17, 1989,
Academy and John Haines on behalf of the Secretary of
Education executed a revised program participation
b. On March 16, 1989, NATTS accepted Academy's application
for accreditation indicating--
[y]our initial application materials as well as the
resubmitted information appears to be in substantial
compliance with accreditation standards . . .
. . . .
Since one of your chief executive officers attended
the . . . workshop on September 22-23, 1988, the next step in the accreditation process is for the school to prepare a Self-Evaluation Report.
c. By letter dated April 9, 1989, Academy advised the
Eligibility Branch that NATTS had accepted its application
for accreditation and that the school was beginning the
self-evaluation. Thereafter, it remained for NATTS to
complete the accreditation process.
d. By letter dated April 9, 1990, Academy informed the
Eligibility Branch that an accreditation team will be
visiting the school in May 1990. Although Academy expected
the results of accreditation by July 1990, it requested
additional time, up to December 1990, in order to give NATTS
the opportunity to complete the accreditation. Academy also
explained that the delay in accreditation was not due to its
fault, rather NATTS had amended its rules which required
previously performed work to be changed. Lastly, Academy
sought clarification regarding the freezing of funds by the
e. NATTS visited the school in May 1990. Thereafter, on
October 17, 1990, it denied Academy its accreditation.
Academy appealed this denial to NATTS' appeals panel.
Subsequently, on December 20, 1990, NATTS' appeals panel
upheld the denial.
15. On January 2, 1989, the Director of the Division of Eligibility and Certification prepared a memorandum to the Chief,
Program Financing Branch, Financial Management Service which
requested that the authority of Academy to draw Federal funds be
withheld. This request was not forwarded or was received and
misplaced by, or was rejected by the Financial Management Service
because the authorization was not withdrawn.See
Approximately one year later, on January 26, 1990, another
request to withhold authority to draw funds was made by the
Director of the Division of Eligibility and Certification to the
Chief of the Program Financing Branch.
Federal funds were withheld from Academy by the Financing Branch
on January 25, 1990, and continued thereafter.
16. Academy received the following Federal
up to 5/2/88 $ 18,901
5/2/88 to 1/2/89 170,799
1/3/89 to 1/1/90 277,594
Total $ 467,294
17. In a final program review dated April 29,
1990, the Chief of
Institutional Review Branch, Division of Field Operations,
Student Financial Assistance advised Academy that it was never
eligible to participate in the financial assistance programs and
therefore requested repayment of all Federal funds received by
it, i.e. $467,294. In addition, the notice demanded that any
loans obtained by students under the GSL programs must be
repurchased from the lending institution(s) by Academy. The
notice also indicated that Academy was entitled to a hearing on
18. On June 7, 1990, Academy appealed the final program review determination and, thereafter, this matter was referred to the Office of Hearings and Appeals.
In order to participate in the student financial assistance
programs, an educational institution must be an eligible
institution. Section 487(a) of the Higher Education Act of 1965,
as amended by Section 407(a) of the Higher Education Amendments
of 1986, Pub. L. 99-498, 100 Stat. 1268, 1488-89 (20 U.S.C. §
1094(a)(1988)). Under the student loan insurance program, an
eligible institution may be, inter alia, an institution of higher education or a vocational school.
Section 435(a) of the HEA of
1965, as amended by Section 402(a) of the HEA of 1986, 100 Stat.
1268, 1408-09, (20 U.S.C. § 1085(a)(1988)).
One difference between an institution of higher education and a
vocational school is that the former must be a public or other
nonprofit institution, while the latter may not be a public or
other nonprofit institution, i.e. it must be a proprietary
institution. Section 435(b) and (c) of the HEA of 1965, as amended by Section 402(a) of the
HEA of 1986, 100 Stat. 1268,
1409-10 (20 U.S.C. § 1085(b) and (c)).
To qualify under either category, the institution shall be
"accredited by a nationally recognized accrediting agency or
association" approved by the Secretary.See
Id. However, there are distinct, separate groups of accrediting agencies and
associations under each category. Thus, there is a group which
accredits the institutions of higher education and a different
group which accredits the vocational schools.See
In the instant case, Academy applied to the Eligibility Branch
for a determination that it was an eligible institution. Under
the Department's procedure, there is an initial determination
whether the institution is an eligible institution for the
student financial assistance programs. Upon a favorable
determination, the Department and the institution may then
execute a program participation agreement which permits the
institution to participate in the specified student financial
Academy applied for eligibility in November 1986 as a nonprofit
organization under the institution of higher education category
for purposes of the student loan insurance program. Though the
Eligibility Branch accepted, apparently, Academy's accredited
status by an agency recognized for accrediting institutions of
higher education, its application was rejected in December 1986
on the grounds that Academy had not submitted a tax exempt
certificate and that its state license had expired.
Approximately one month later, Academy reapplied. This time, it
sought eligibility under a different classification in the
student loan insurance program, i.e. as a vocational school,
since it represented that it was a proprietary organization.
This classification required, however, accreditation by an agency
or association of a different type. The Eligibility Branch
reviewed the application and acknowledged Academy's change in
classification status. However, it returned the application in
February 1987. The application was not returned on the basis
that an accreditation was required by a different agency or
association. Rather, it was returned because certain information
regarding its courses, which was required under this new
classification, was omitted from its application.
In March 1987, Academy resubmitted its application with this
additional information. The Eligibility Branch then erroneously
approved Academy as an "eligible Vocational School (Section
435(c),HEA)." OSFA Brief Ex. 7. The approval was erroneous in
that Academy's accreditation was by an agency or association from
the wrong group of accreditors. Following its approval, Academy
and the Department executed a program participation agreement.
Monies were distributed to Academy under the Pell Grant program
and student loans were insured under the student loan insurance
Initially, it is clear that the Eligibility Branch was grossly
negligent in its determination that Academy satisfied the
criteria as a vocational school and, therefore, constituted an
eligible institution for purposes of participating in the student
financial assistance programs. Thus, the question for resolution
is whether, under these circumstances, the Department may now
recover the funds which were received by Academy under a mistaken
impression by it that it was qualified to participate in the
student financial assistance programs.
Unfortunately for Academy, the law is clear that the Department
may recover the funds. It is well established that "anyone
entering into an arrangement with the Government takes the risk
of having accurately ascertained that he who purports to act for
the Government stays within the bounds of his authority."
Federal Crop Insurance Corp. v. Merrill, 332 U.S. 380, 384 (1947). Moreover, in absence of
specific statutory authority,
government officials may not ignore statutory requirements. M-R- S Manufacturing Co. v.
United States, 492 F.2d 835 (Ct.Cl. 1974). Hence, when a government agent goes beyond the
ambit of his
authority, the government is not bound. Federal Crop Insurance Corp. v. Merrill, 332 U.S. 380,
In the instant case, the Chief of the Occupational/Vocational
Eligibility Branch, Division of Eligibility and Certification had
no authority to grant Academy the status as an eligible
institution unless that institution satisfied the statutory
requirements. Similarly, absent qualification under the
eligibility statutory requirements, the Department had no
authority to execute a program participation agreement with
Academy. Academy was not an eligible institution as a vocational
school because it was not accredited by an agency recognized by
the Department of Education for accrediting vocational schools.
Hence, the favorable determination by the Eligibility Branch was
patently in error and, therefore, the Department had no authority
to execute the program participation agreement or to disburse
funds pursuant thereto. Thus, under the general principle of
Merrill, the Department may recover the funds in issue.
The Merrill decision is not, however, absolute. As the Eleventh Circuit explained in Deltona
Corp. v. Alexander, 682 F.2d 888, 891 (1982)--
Although never overruled, the apparently absolute holding of
Merrill that the federal government could never be estopped by the conduct of its agents has
eroded in the face of later
Supreme Court precedents which state that an open issue
exists whether estoppel lies against the government if a
party proves "affirmative misconduct" on the part of a
government agent. See Schweiker v. Hansen, 450 U.S. 785, 101 S.Ct. 1468, 1470-71, 67
L.Ed.2d 685 (1981); INS v. Hibi, 414 U.S. 5, 8-9, 94 S.Ct. 19, 21-22, 38 L.Ed2d 7 (1973);
Montana v. Kennedy, 366 U.S. 308, 314-15, 81 S.Ct. 1336, 1340-41, 6 L.Ed.2d 313 (1961).4
4. The Ninth Circuit has adopted the "affirmative misconduct" exception, see Lavin v. Marsh, 644 F.2d 1378 (9th Cir. 1981), but neither the former Fifth nor Eleventh Circuits has addressed the issue.
Other courts, including the former Fifth Circuit, have
suggested that the government is subject to estoppel when it
acts in a proprietary manner, but not when it exercises its
sovereign powers for the benefit of the public. See Air-Sea Brokers, Inc. v. United States, 596
F.2d 1008, 1011 (C.C.P.A. 1979); United States v. Florida, 482 F.2d 205, 209 (5th Cir. 1973);
United States v. Georgia Pacific Co., 421 F.2d 92, 100-101 (9th Cir. 1970).
Sovereign functions of the government concern "unique
governmental functions for the benefit of the whole public,"
whereas "proprietary governmental functions include essentially
commercial transactions involving the purchase or sale of goods
and services and other activities for the commercial benefit of a
particular government agency." Federal Deposit Ins. Corp. v. Harrison, 735 F.2d 408, 411
(11th Cir. 1984). In this context, the award of student loans, according to the Fifth Circuit in
Hicks v. Harris, 606 F.2d 65 (1979), is a characteristic sovereign-type activity. Under this view,
the present proceeding
to collect funds disbursed improperly under the student financial
assistance programs constitutes a sovereign-type activity.
Accordingly, the application of estoppel in the instant case is
The doctrine of estoppel is also applied against the government
by some courts where there has been affirmative misconduct by the
government. Under this approach, there are two additional
elements which must be satisfied beyond the traditional elements
of estoppel. According to Watkins v. U.S. Army, 875 F.2d 699, 707 (9th Cir. 1989), the party
establish 'affirmative misconduct going beyond mere negligence'; even then, 'estoppel will only apply where the government's wrongful act will cause a serious injustice, and the public's interest will not suffer undue damage by imposition of the liability.' Wagner v. Director, Federal Emergency Management Agency, 847 F.2d 515, 519 (9th Cir. 1988) (quoting Morgan v. Heckler, 779 F.2d 544, 545 (9th Cir. 1985)). [footnote omitted.]
Affirmative misconduct is based on the particular facts and
circumstances in each case. It is clearly shown where the
official's action is "a deliberate lie" or reflects "a pattern of
false promises." Id. at 707-08. However, the Court held recently, in Office of Personnel
Management v. Richmond, 110 S.Ct. 2465 (1990), that affirmative misconduct was not
in a context analogous to the instant case.
In Richmond, the Court reviewed a decision by a divided court of appeals which held that
affirmative misconduct estoppel precluded
the government from denying disability annuity payments to a
claimant where that individual twice sought, received, and relied
upon erroneous advice from Navy personnel regarding the maximum
statutory level of earnings he could maintain without losing his
disability annuity. The legal advice by Naval personnel, both
oral and written, did not reflect a change in the law made four
years previously. In the view of the Federal Circuit, these
actions constituted affirmative misconduct by the Navy personnel
and the Federal Circuit ordered that the claimant was entitled to
his disability annuity.
Initially, the Court sought to dispel the notion that affirmative
misconduct estoppel was a realistic, viable exception to the
principle that the government is not bound by the unauthorized
acts of its officials--
[o]ur own opinions have continued to mention the
possibility, in the course of rejecting estoppel arguments,
that some type of "affirmative misconduct" might give rise
to estoppel against the Government. . . .
. . . .
In sum, courts of appeals have taken our statements as an invitation to search for an appropriate case in which to apply estoppel against the Government, yet we have reversed every finding of estoppel that we have reviewed. Indeed, no less than three of our most recent decisions in this area have been summary reversals of decisions upholding estoppel claims.
Id. at 2470.
Thus, the circumstances under which affirmative misconduct
estoppel applies in the Court's view remain elusive--"[w]e leave
for another day whether an estoppel claim could ever succeed
against the Government." Id. at 2471.
The Court then held that affirmative misconduct estoppel may not
apply to a claim for money from the Federal Treasury where the
payment thereof reflects a "direct contravention of the federal
statute." Such an action constitutes a violation of the
Appropriations Clause of the Constitution. In short, claims "may
be paid out only through an appropriation by law; in other
words, the payment of money from the Treasury must be authorized
by law." Id. at 2471. Therefore, the Court denied the claimant his disability annuity as it
was not authorized by law.
In the instant case, the proposed recovery of funds which were
disbursed by the government contrary to law is not unlike the
Court's denial of a claim for money against the government in
Richmond. In both situations, the government seeks to follow the law, that is, to deny claims
which are contrary to the law or to
recover amounts disbursed contrary to the law. Thus, a corollary
to the holding in Richmond is that, absent a statute of limitations or other similar problems, the
recovery of funds
disbursed by the government contrary to law is not precluded by
the concept of affirmative misconduct estoppel. Accordingly, it
is inappropriate to apply the concept in the instant case.
On the basis of the foregoing findings of fact and conclusions of
law, and the proceedings herein, it is hereby--
ORDERED, that Academy immediately and in the manner
by law pay the United States Department of Education a sum of
$467,294; and it is further
ORDERED that Academy immediately and in the manner provided
by law pay off the loan balances in the total amount of $25,616
or such lesser amount as may be due for the 13 guaranteed student
Allan C. Lewis
Administrative Law Judge
Issued: May 19, 1992
Russell B. Wolff, Esq.
Office of the General Counsel
U.S. Department of Education
Room 4066, FOB-6
400 Maryland Avenue, S.W.
Washington, D.C. 20202
Rafael E. Torres Torres, Esq.
P.O. Box 1041
Ponce, Puerto Rico 00733-1041