APPLICATION OF THE CALIFORNIA DEPARTMENT OF EDUCATION,
Docket No. 90-82-R
Recovery of Funds
Appearances: Joseph R. Symkowick,
Esq., General Counsel,
Carolyn Pirillo, Esq., Deputy General
Counsel, for the California Department of
Jeffrey C. Morhardt, Esq., Office of the
General Counsel, for the Chief, Financial
Audit Resolution and Cost Determination
Branch, United States Department of
Before: John F. Cook, Chief Administrative Law Judge
I. PROCEDURAL BACKGROUND.
A Notice of Preliminary Departmental Decision (PDD) was
issued by the Chief, Financial Audit Resolution and Cost
Determination Branch, Office of Management, United States
Department of Education, (Departmental official), which required
the California State Department of Education (California) to
refund $965,624 to the U.S. Department of Education (Education).
The PDD was based on an audit report prepared by the Auditor
General of the State of California for the period July 1, 1986,
through June 30, 1987. The disallowed costs were charged to the
Federal Vocational Education funds provided to California
pursuant to the Carl D. Perkins Vocational Education Act (20
U.S.C.§ 2301 et seq.) during FY 1983-84. The funds were part of
a subgrant from California to the Chancellor's Office of the
California Community Colleges.
California submitted an Application for Review (AFR) to the
Office of Administrative Law Judges (OALJ). The OALJ accepted
jurisdiction of the case and issued its Notice of Hearing. In
its AFR, California agreed to remit $526,682 to Education since
no claims existed to support the drawdown of those funds for the
1983-84 award year while California disputed the further claim
for $438,942 attributed to 1983-84 charges. The parties later
stipulated that the remaining $438,942 was appropriately charged
to federal funds and no payment was due. (Stip. 1, para. 3).
California paid the admitted liability of $526,682, to Education
on November 6, 1990. Since California admitted the debt but did
not repay it within 30 days as instructed by the PDD, that led to
Education's demand for payment of interest in the amount of
Since the debt was admitted, the misspent funds described in
the PDD are not an issue before the OALJ. California, however,
continues to challenge Education's attempt to collect interest.
A joint stipulation of undisputed facts and a joint memorandum of
issues of law was filed. Thereafter, briefs were filed by the
parties as well as a "Motion to Dismiss or in the Alternative,
For Summary Judgment, which was filed by the Departmental
official." An oral argument was subsequently held in Washington,
A. Does the OALJ have jurisdiction to determine whether
interest may be assessed by Education as to an amount of funds
due from a State pursuant to a preliminary departmental decision
under 20 U.S.C. § 1234a?
B. If the OALJ does have jurisdiction to determine the
interest issue, does the Debt Collection Act (31 USC § 3701 et
seq.) (D.C. Act) abrogates Education's common law right or any
other statutory or regulatory right to collect interest on debts
owed by States?
III. FINDINGS OF FACT.See footnote
1. On June 16, 1986, the Chancellor's Office for the
California Community Colleges (COCCC) requested $965,624 from the
Vocational Education program grant for the fiscal year ended
September 30, 1984. The California Department of Education (CDE)
drew the funds under its letter of credit with the U.S.
Department of Education (Education). These funds were not
recorded into COCCC accounts until after June 30, 1986. COCCC
posted no expenditures against the funds at the time. The State
accounting records for the State fiscal year 1983-84 were closed
and the $965,624 reverted to the State General Fund.
(Preliminary Departmental Determination, dated September 28,
1990, Enclosure No. 1, page 1, Finding #1).
2. Claims supporting the receipt of $438,942 of fiscal year
1984 monies were paid in 1987 by COCCC. (Preliminary
Departmental Determination, dated September 28, 1990, Enclosure
No. 1, page 4, Finding #2, paragraph 1).
3. On January 31, 1991, the California Office of the
Auditor General certified that the State General Fund paid these
claims and the State did not receive a duplicate reimbursement
for these expenditures from post-1984 federal funds. Both
Education and CDE accept this certification and agree that the
$438,942 is not due Education. (Exhibit A: Auditor General
Certification, letter dated January 31, 1991 to Richard T.
Mueller from Kurt R. Sjoberg, page 1).
4. No expenditures were incurred to support receipt of
$526,682 of these funds. (Appeal of California Department of
Education, at page 2, paragraph 2.)
5. CDE sent a payment of $526,682 to Education and it was
received at the National Finance Center on November 6, 1990.
6. Education accrued interest in the amount of $3,950.12
(at the rate of 9.00 percent per annum) on the principal amount
of $526,682 because the payment was not received by Education by
the due date of October 28,1990. Education posted CDE's payment
first against this interest, then against principal, leaving a
balance of $3,950.12 which Education now characterizes as
7. The Debt Collection Act (D.C. Act) (31 USC § 3701 et
seq.) applies to grants made on or after its effective date of
October 25, 1982. Funds from the 1983-84 Vocational Education
grant were the subject of this audit. The D.C. Act was in force
at the time these funds were granted. (Preliminary Departmental
Decision, dated September 28, 1990, Enclosure No. 1, page 1,
A. Positions of the Parties.
California argues that Education has never cited specific
authority for its contention that interest is due on debts owed
the United States by States. California states that the PDD does
not reference any authority under which it pursues recovery of
interest and that lack of notice of the specific authority
violates Education's duty regarding notice of a prima facie case
for recovery. Next, California discusses Education's program
authority and argues that program-specific statutes, statutes of
general applicability and implementing statutes like the General
Education Provisions Act, as amended, (GEPA) 20 U.S.C. § 1221 et
seq., exist yet contain no authority for collection of interest
on debts owed the United States by States.
California goes on to state that the D.C. Act (Public Law
97-365), which took effect on October 25, 1982, provides for
mandatory collection of interest and penalties on debts owed the
U.S. Government and exemption from that mandate for agencies of
Federal, State, and local governments. In January 1983, P.L. 97-452 made technical
amendments and recodified the Act so that
mandated interest and penalty collection is now at 31 U.S.C. §
3717(a)(1) which provides, in part:
The head of an executive or legislative agency shall
charge a minimum annual rate of interest on an
outstanding debt on a United States Government claim
owed by a person . . . .
and the exemption is at 31 U.S.C. § 3701(c), which provides:
In sections 3716 and 3717 of this title, 'person' does
not include an agency of the United States Government,
of a State government, or of a unit of general local
California argues that section 3701(c) controls unless
another statute explicitly authorizes interest. California then
states that neither the Vocational Education Act nor GEPA
provides express authority for the assessment and collection of
interest on debts owed by States.
Next, California asserts there is no valid regulatory
authority for Education to collect interest on debts owed by
States. California cites the D.C. Act as underlying authority
for the Federal Claims Collection Standards at 4 CFR Part 101 et
California argues extensively that federal common law as
interest collection on debts owed the Federal government by
States was abrogated when Congress enacted the D.C. Act.
California reviews four circuit court opinions on the
question of whether the D.C. Act abrogates the federal common
law. Three said it did; one said it did not. In all four cases,
petitioners were State agencies resisting interest collection on
debts owed the U.S. government. None of the cases involved
specific statutes authorizing interest collection on State debts.
All petitioners argued the D.C. Act abrogated federal common law
as to interest recovery from States. All of the cases involved
claims arising under contracts after October 25, 1982. The three
cases in which the courts agreed that the plain meaning of the
Act abrogated any common law right to collect interest from
States were: Arkansas v. Block, 825 F.2d 1254, 1258 (8th Cir.
1987), Commonwealth of Pennsylvania Dept. of Public Welfare v.
United States, 781 F.2d 334 (3rd Cir. 1986), and Perales v.
United States, 751 F.2d 95 (2nd Cir. 1984), affirming 598 F.
Supp. 19 (S.D.N.Y.).
California argues that the case which reached the opposite
conclusion-- no abrogation of common law right to interest from
States-- can nevertheless be distinguished for several reasons.
The case, known as Gallegos v. Lyng, 891 F.2d 788 (10th Cir.
1989), according to California, involved faulty analysis of three
factors: (a) misapplication of the U.S. Supreme Court's holding
in a case that post dated the other three circuits' rulings, but
concerned a claim on a contract not subject to the act, (b) the
legislative history, and (c) the overall purpose of the act.
The Departmental official raises three issues-- first, that
the OALJ lacks jurisdiction over this case in that the OALJ's
jurisdiction is limited by statute and regulation to proceedings
such as recovery of funds, rather than debt collection. Second,
that both the Federal Claims Collection Standards at 4 C.F.R.
Parts 101-105 (FCCS), which is government wide, and Education's
own debt collection procedures in 34 C.F.R. Part 30 grant
Education the right to assess interest at common law against
States for debts owed the Federal Government. Third, the
Departmental official argues that GEPA authorizes Education to
assess interest against a State.
The first issue will be discussed infra.
As relates to the second issue, the Departmental official
referred to several regulations as follows:
4 C.F.R. § 102.13(h)(2) provides, in part:
[A]gencies are authorized to assess interest and
related charges on debts which are not subject to 31
U.S.C. 3717 to the extent authorized under the common
law or other applicable statutory authority.
34 C.F.R. § 30.1(a) provides:
The Secretary may take one or more of the following
actions to collect a debt owed to the United States:
. . .
(4) Take any other action authorized by law.
The Departmental official then states that "other action
authorized by law" includes without limitation, "[c]harg[ing]
interest on the debt as provided in the FCCS." Id. at (c) (3).
In addition, the pertinent departmental regulations at 34
C.F.R. § 30.2(a)(1) provide:
(a)(1) The Secretary takes an action referred to under
§ 30.1(a). In accordance with--
. . .
(iii) the common law.
Education argues that these regulations are binding on the
administrative law judge inasmuch as the judge is bound by all
applicable statutes and regulations under 34 C.F.R. § 81.5(b).
California takes issue with the Departmental official's
interpretation of the regulations and maintains that the Federal
Claims Collection Standards, 4 C.F.R. § 102 et seq., and
Education's debt collection procedures, 34 C.F.R. § 30 et seq.,
were both adopted pursuant to the authority of the D.C. Act,
which mandates interest assessments on debts owed to the Federal
Government (at 31 U.S.C. § 3717) but exempts agencies of the
Federal Government, States, and general local governments from
that mandate under 31 U.S.C. § 3701(c). California then argues
that from the plain language of the regulations they do not
purport to create or grant any rights inconsistent with the
statute upon which they are founded, because otherwise they would
render the D.C. Act meaningless.
The Departmental official maintains that California's
reliance on the state's exclusion from the procedures of the D.C.
Act under 31 U.S.C. § 3717 is misplaced in light of the clear and
unambiguous language in the applicable regulations which
authorize debt collection remedies based on common law.
That official further maintains that the general exclusion
of states from coverage of the D.C. Act does not help
California's cause. It takes this position since Sections
1234(a)(i) and 1234a(1) were added to the GEPA enforcement
provisions by the August F. Hawkins- Robert T. Stafford
Elementary and Secondary School Improvement Amendments of 1988,
(Pub.L. 100-297) (Hawkins-Stafford), which postdated the D.C. Act
of 1982. On this point, the official claims that the two
statutes-- the D.C. Act and the Hawkins-Stafford Amendments-- and
their relevant sections must be read and interpreted in pari
materia. By reading them in that manner and by recognizing that
when Congress passed the Hawkins-Stafford Amendments it did so
despite the D.C. Act's exclusion of states from coverage of §
3717 (interest collection), the Departmental official argues that
the only possible conclusion is that the Secretary has full
authority to assess interest against states in cases like the
present one where an admitted debt under an applicable program is
California responds that the Departmental official's pari
materia reading of the D.C. Act and the Hawkins-Stafford
Amendments of 1988 results in an unreasonable conclusion, given
the plain language of the two statutes. California challenges as
unreasonable the Departmental official's interpretation that a
prohibition in GEPA on predecisional interest somehow verifies
the existence of a right to collect post-decisional interest. It
argues that that kind of conclusion requires the interpolation of
new provisions to the existing statute, which is not permissible.
California argues that the fact that GEPA establishes
predecisional interest immunity is not dispositive of the total
exemption issue under the D.C. Act.
California again argues that 20 U.S.C. § 1234a(i) directs
the Secretary to collect debts from recipients "in accordance
with the Debt Collection Act," and that Education conveniently
leaves the exemption at 31 U.S.C. § 3701(c) as to interest from
States out of its discussion. California argues that to overrule
the exemption, a statute has to state the intent of Congress
unambiguously to that effect, and that Education has not shown
through legislative history or otherwise the intent of Congress
to overrule the exemption. Contrary to Education's claims,
California says that reading selected sections of GEPA and the
D.C. Act together does not result in the unavoidable conclusion
presented by Education that interest can be levied on States'
The Departmental official argues that a prohibition as to
interest assessment on States' debts would lead to the absurd
result that the Department may litigate a claim and then not be
able to collect the judgment.
California disputes such an absurd result and points out
that it is only collection of interest on the principal, and not
collection of the principal itself, that is barred by 31 U.S.C. §
3701(c). Additionally, to illustrate further that the exemption
from interest under 31 U.S.C. § 3701(c) is not a general
exemption nor one which can be stretched to cover a judgment or a
debt, California comments that States are subject to procedures
prescribed in the D.C. Act, such as for settlement of claims by
the Comptroller General (31 U.S.C. § 3720), and for collection
and compromise of claims by heads of agencies( 31 U.S.C. § 3711).
B. Interest Issue.
Aside from the question as to whether the OALJ has
jurisdiction to determine whether interest may be assessed by
Education in this case, the fundamental issue is whether or not
the D.C. Act abrogates the Federal Government's common law right
or any other statutory or regulatory right to collect prejudgment
interest on debts owed by States.
Prior to the passage of the D.C. Act it was held that the
Federal Government had a right under the federal common law to
assess prejudgment interest against persons owing debts to the
Federal Government where the underlying claim was a contractual
obligation to pay money. Royal Indemnity Co. v. U.S., 313 U.S.
289 (1941). In Bell v. New Jersey, 461 U.S. 773 (1983), the
Court held that the provisions of the Elementary and Secondary
Education Act, as amended, (ESEA), 20 U.S.C. § 2701 et seq., and
GEPA, gave the Federal Government the right to recover funds from
federal grants misapplied by States.
West Virginia v. U.S., 479 U.S. 305 (1987), involved a debt
owed by the State of West Virginia arising from a contractual
obligation to reimburse the United States for services rendered
by the Army Corps of Engineers. This occurred in the 1970's
prior to the enactment of the D.C. Act. The Court held that West
Virginia was liable for prejudgment interest under the federal
In Riles v. Bennett, 831 F.2d 875 (9th Cir. 1987), it was
held that the U.S. Department of Education was entitled to
prejudgment interest on an award of Elementary and Secondary
Education Act grants which were misspent by the State of
California. The facts in this case arose prior to the
applicability of the D.C. Act.
Thus we see that in circumstances existing prior to the
effective date of the D.C. Act. the courts have held that the
U.S. Department of Education was entitled to assess prejudgment
interest under the federal common law as relates to grants of
funds which were misspent by a State.
In 1982, the D.C. Act was enacted to facilitate
substantially improved collection procedures in the Federal
Government. The D.C. Act provides, at 31 U.S.C. § 3717, for the
assessment of interest against persons owing debts to the Federal
Government.See footnote 2 Further, 31 U.S.C.
§ 3701 (c) provides that: "In
sections 3716 and 3717 of this title, 'person' does not include
an agency of the United States government, of a State government,
or of a unit of general local government." Thus the D.C. Act
does not provide for the assessment of interest by the Federal
Government on debts owed by States.
The question arises as to whether the D.C. Act went further
and actually abrogated the Federal Government's common law right
to collect interest on debts owed by States.
Certain circuit courts of appeal have held that the D.C. Act
has abrogated that common law right. Other federal courts have
held the opposite.
In Perales v. United States, 751 F.2d 95 (2nd Cir. 1984),
the court of appeals held that the United States Department of
Agriculture was not authorized to charge interest on debts
arising out of the Food Stamp Program due it from the New York
Department of Social Services. In doing this the court affirmed
the district court's decision in 598 F.Supp. 19 (S.D. N.Y. 1984).
In that decision the district court stated at pages 23-24:
Defendants recognize that the recently amended Federal
Claims Collection Act expressly excludes state agencies
from the definition of "persons" against whom late
payment interest can be assessed. See 31 U.S.C. §§
3701(c), 3717. Nevertheless, they argue that the
United States has a common law right to interest that
is not abrogated by this statute. They also maintain
that the assessment of interest against DSS is
authorized by regulation. There is no legal basis for
either of these contentions.
As part of the foundation for the decision the district
court cited Pennhurst State School and Hospital v. Halderman, 451
U.S. 1, 17, 101 S.Ct. 1531, 1539, 67 L.Ed. 2d 694 (1981) in
connection with the following statements:
In the administration of cooperative
programs, state governments assume only those
obligations that are explicitly imposed by statute. . .
. In the absence of an unambiguous authorization by
Congress, FNS' policy of assessing late payment
interest against state agencies must be deemed invalid.
Id. at 24.
However, in Bell v. New Jersey, 461 U.S. 773 (1983), the
Supreme Court distinguished the circumstances of the Pennhurst
case from cases where a remedy is sought against a noncomplying
State. At page 791 of the Bell case the Court stated, in
The States have also argued that
School and Hospital v. Halderman, 451 U.S. 1, 101 S.Ct.
1531, 67 L.Ed.2d 694 (1981), requires a different view
of the effect of the pre-1978 version of the statute.
Pennhurst required that Congress act "unambiguously"
when it intends to impose a condition on the grant of
federal money. Id., at 17, 101 S.Ct., at 1539. The
States argue that Congress did not speak unambiguously
before 1978 in imposing liability and it therefore was
not effective in imposing liability. We disagree. As
our discussion shows, we think that the plain language
of the statute is sufficiently clear, and ESEA meets
Pennhurst's requirement of legislative clarity.
Moreover, Pennhurst arose in the context of imposing an
unexpected condition of compliance--a new obligation
for participating States--while here our concern is
with the remedies available against a noncomplying
Id. at 791 (emphasis added).
In Com. of Pa., Dept. of Public Welfare v. U.S., 781 F.2d
334 (3rd Cir. 1986) the court stated at page 342:
Thus, the plain meaning of the Debt
now controls the question of state liability for
interest to federal agencies, and disallows such
assessments in the absence of clear statutory
authority. Because the Act's language is clear, we
will not defer to the administrators who construe it
differently. This situation contrasts with that
discussed earlier concerning the liability of states
for "financial loss" in disbursement errors. Congress
left unstated the method of proof of such loss, and
therefore delegated its determination to the agency.
The Debt Collection Act, on the other hand, is
comprehensive, and the administrators perceive
ambiguity where it does not exist. Therefore, as the
Food Stamp Act itself contains no interest provision,
the Debt Collection Act bars its assessment.
Id. at 342 (footnote omitted).
In State of Arkansas By Scott v. Block, 825 F.2d 1254 (8th
Cir. 1987), the court stated, at page 1258, that:
the Secretary argues that in passing the Debt
Collection Act, Congress did not intend to abrogate the
federal government's pre-existing common law right to
collect interest on a state debt in certain
discretionary circumstances. We cannot refer to the
legislative history of the Debt Collection Act to
ascertain congressional intent in passing the statute.
The provision exempting states was added to the bill on
the Senate floor; no legislative history on this
provision is thus available.
Absent legislative history to the
must assume that the congressional purpose is expressed
by the plain meaning of the statutory language and the
language must be considered conclusive. . . . By
enacting a statute that explicitly denies the federal
government authority to charge interest on debts owed
it by the states, Congress abrogated any pre-existing
common law right.
Id. at 1258 (footnote, citation and headnote numbers omitted).
In the case of Riles v. Bennett, 831 F.2d 875 (9th Cir.
1987), the court distinguished the Perales and Arkansas cases.
The timing of the circumstances of the Riles case was such that
the D.C. Act did not apply and the court, in holding that the
Department of Education was entitled to prejudgment interest as
to funds misspent by the State of California, held that the
Pennhurst case was not a bar to such interest. Pennhurst, as
mentioned previously, held that "if Congress intends to impose a
condition on the grant of federal moneys, it must do so
unambiguously." 451 U.S. at 17, 101 S.Ct. at 1540 (footnote
omitted). The State in the Riles case argued that Pennhurst
barred the recovery of prejudgment interest because Congress had
not provided "unambiguously" or indeed at all, for the collection
of interest on Title I grants misapplied by a State. The court
stated that it was clear from the Supreme Court's subsequent
decision in Bell that Pennhurst is not applicable to the State's
liability for prejudgment interest.
In Bell the Supreme Court held that States could be required
to repay the Secretary of Education for misspent Title I funds.
The State in that case had argued that Pennhurst required that
Congress state "unambiguously" that a State was obligated to
repay misspent funds, and that the statute contained no such
As mentioned above, the Bell court held Pennhurst
inapplicable and stated: "Pennhurst arose in the context of
imposing an unexpected condition for compliance-a new obligation
for participating States-while here our concern is with the
remedies available against a noncomplying State." 461 U.S. at
790 n.17, 103 S.Ct. at 2197 n.17.
Therefore, in the Riles case prejudgment interest was a part
of "the remedies available against a noncomplying State," rather
than an additional condition to the grant.
After stating that the Perales and Arkansas cases, relied
upon by the State, appeared to be distinguishable, the court
The Supreme Court has emphasized
that decisions to
award or deny interest on statutory obligations rest on
"an appraisal of the congressional purpose in imposing
them . . ." Rodgers v. United States, 332 U.S. 371,
373, 68 S.Ct. 5, 7, 92 L.Ed. 3 (1947). Perales relies
heavily on the provisions of the Food Stamp Act,
especially those limiting the federal agency's right to
collect losses before appeals are exhausted. See 598
F.Supp. at 24-26. In Perales and Arkansas the federal
agency sought to impose interest only 30 days after the
state had been notified that funds had been misspent,
and before administrative appeals had been exhausted.
Here, no effort was made to collect interest for the
period during which the administrative process was
being pursued. Indeed, the Secretary did not seek
interest for two-and-one-half years after notice of the
final determination. The results in Perales and
Arkansas are better understood as applications of the
common law balancing test where federal interests were
out-weighed by those of the state.
831 F.2d at 878 n.4.
In contrast to the Perales, Pennsylvania, and Arkansas
decisions, we find other decisions which come to the opposite
In Gallegos v. Lyng, 891 F.2d 788 (10th Cir. 1989), which is
the most recent court of appeals decision on the subject, the
court held that the D.C. Act did not abrogate the Federal
Government's common law right to assess interest on outstanding
debts of States incurred pursuant to the Food Stamp Act.
The court recognized that three other circuit courts had
reached the opposite conclusion, citing the three cases mentioned
above. Id. at 795-796.
The court also referred to a Sixth Circuit Court decision
which also rejected the claim that the D.C. Act precludes the
Federal Government from charging the States interest on their
unpaid debts. County of St. Clair v. United States Dep't of
Labor, 754 F.2d 375 (6th Cir. 1984). The Gallegos court at page
796 pointed out that the State involved in Gallegos contended
that the D.C. Act clearly was not intended to be applied to the
States and that because the statute is not silent or ambiguous
there is no need for interpretation by either the agency, the
Food and Nutrition Service (FNS), or the court. Then the court
went on to say that the FNS countered:
that the Act is completely silent as to the rights and
liabilities of state and local governments with respect
to overdue debts owed to the United States. FNS
reasons that §§ 3701 and 3717 do not prohibit the
federal government from charging states interest, but
rather impose certain requirements concerning interest
rates to be charged, methods for computing those rates,
and other penalties applicable to persons other than
state and local government entities. The Act does not
abrogate the federal common-law right to charge state
and local governments interest, it merely maintains the
status quo between the federal government and those
entities. In other words, FNS argues, the Act leaves
intact the federal common-law right to obtain
compensation to make the federal government whole when
the United States is injured by the failure of a state
to pay its debt. The Act simply excepts state and
local governments from the mandatory provisions of §
Id. at 796.
The Gallegos court went on at pages 796-797 to discuss the
effect of the West Virginia case on the basic issue as follows:
In West Virginia v. United States, 479
107 S.Ct. 702, 93 L.Ed.2d 639 (1987), the United States
Supreme Court held:
"[t]he rule governing the interest recovered as damages for delayed payment of a contractual obligation to the United States is not controlled by state statute or local common law. In the absence of an applicable federal statute, it is for the federal courts to determine, according to their own criteria, the appropriate measure of damage, expressed in terms of interest, for nonpayment of the amount found to be due."
Id. at 308-09, 107 S.Ct. at 705 (quoting Royal Indem. Co. v. United States, 313 U.S. 289, 296, 61 S.Ct. 995, 997, 85 L.Ed. 1361 (1941)). The Court observed that it was a "longstanding rule that parties owing debts to the Federal Government must pay prejudgment interest where the underlying claim is a contractual obligation to pay money." 479 U.S. at 310, 107 S.Ct. at 706. "Prejudgment interest," the Court held, "is an element of complete compensation." Id. The West Virginia court noted that the Debt Collection Act of 1982 was inapplicable to the case at bar because the claim at issue arose under a contract entered into before October 25, 1982, and thus under the terms of § 3717(g)(2) the Act did not apply. The court went on to state:
We can draw no inference about
comprehension of the federal common law of
interest from its enactment, without any
discernible legislative history, of a
definitional section excluding state agencies
from those "persons" statutorily required to
pay interest on debts owed to the Federal
Government. Moreover, we venture no opinion
regarding the question whether this enactment
was intended to abrogate or leave intact the
federal common law governing when a State
must pay interest to the Federal Government.
479 U.S. at 312 n. 6, 107 S.Ct. at 707 n. 6.
Id. at 796-797 (emphasis added).
After other comments the Gallegos court then stated:
We note also that, while the Supreme Court expressly
reserved the issue, its reference (quoted above) to the
relationship between the Debt Collection Act and the
federal common law right to collect interest at least
suggests that the statute is not as unambiguous as
appellant would have us find.
Id. at 797.
The Gallegos court went on at page 799 to discuss an
argument relied upon by the State in that case which had been
raised by the court in the Perales case. The State argued that
assessing interest on claims owed by States under the mail loss
regulation (of the FNS) improperly extends the terms and
conditions under which those States have agreed to participate in
the food stamp program, in contravention of the principle
established in the Pennhurst case. In Perales the court held
that, under Pennhurst and absent an unambiguous authorization by
Congress in the Food Stamp Act, "FNS" policy of assessing late
payment interest against State agencies must be deemed invalid.
The Gallegos court then went on, at pages 799-810, to state that:
The limits of the Pennhurst doctrine were described in Bell v. New Jersey, 461 U.S. 773, 103 S.Ct. 2187, 76 L.Ed.2d 312 (1983). The Bell Court distinguished Pennhurst, explaining: "Pennhurst arose in the context of imposing an unexpected condition for compliance--a new obligation for participating States--while here our concern is with the remedies available against a noncomplying State." 461 U.S. at 790 n. 17, 103 S.Ct. at 2197 n. 17. The same distinction applies here. FNS is not seeking to force New Mexico to comply with an obligation not set out in the Food Stamp Act or program regulations, but rather is seeking interest as a remedy for the state's breach of a known and voluntarily undertaken obligation-the duty to pay for excess losses of food stamps distributed through the mail. The state has failed to reimburse FNS promptly for those losses and thus is in default of its statutory obligation.
The lack of an express provision in
the Food Stamp
Act authorizing the assessment of interest against a
state in default does not preclude the federal agency
from assessing interest, nor does it make interest an
unknown or unexpected condition of the state's contract
with the federal agency.
The five circuit court cases referred to above related to
the effect upon federal common law rights caused by the D.C. Act
definition of the term "person" contained in 31 U.S.C. § 3701(c)
and in doing so those five cases related specifically to the
provisions of "section 3717" entitled "Interest and penalty on
claims." Those cases did not get into the issue as to whether
the definition of "person" in 31 U.S.C. § 3701(c) affected
federal common law rights as to the subject matter of "section
3716" entitled "Administrative offset."
Of course the definition of the term "person" contained
31 U.S.C. § 3701(c) is such that both as to "sections 3716 and
3717 of this title, 'person' does not include an agency of . . .
a State government, or a unit of general local government."
Section 3716 provides a basis for federal agencies to
collect claims against persons by means of administrative offset.
Therefore, similar to the circumstances relating to the assessing
of interest on debts of States, the D.C. Act, because of the
definition of the term "person", does not provide for the use of
administrative offset by the Federal Government to collect claims
owed by States or units of general local government.
The question then arises as to whether the D.C. Act went
further and actually abrogated the Federal Government's common
law right to collect debts owed by States or local governments by
means of recoupment or administrative offset.
Therefore, the treatment by the courts concerning the effect
of the D.C. Act upon the federal common law rights relating to
the subject of "Administrative offset" is relevant to this case.
In Housing Authority of the County of King v. Pierce, 701
F.Supp. 844 (D.D.C. 1988) the court held that the provisions of
31 U.S.C. § 3701 relating to the term "person" as used in § 3716
have not modified or displaced the Department of Housing and
Urban Development's (HUD) common law right to recoup funds
erroneously advanced to a local housing authority.
The facts of the case indicate that the "recapture" of
excess subsidies involved in that case by HUD were first
described as the collection of a debt by administrative offset.
Id. at 846.
The court found that the D.C. Act and HUD's administrative
offset regulation, by their express terms did not apply in view
of the definition of the term "person." The court then stated
Having departed from the statutory
scheme, however, matters become less clear. HACK
argues that, absent the express authorization to
undertake administrative offset contained in the Act
and HUD's regulation, HUD has no authority to undertake
its recoupment scheme. In essence, HACK argues that a
general common law right of government agencies to
undertake specific, extra-statutory recoupment
mechanisms such as that proposed by HUD does not exist,
and that express statutory authorization is a
precondition to the implementation of any such scheme.
As HACK notes, the Supreme Court "pretermitted" this
issue in Bell v. New Jersey, 461 U.S. 773, 782 n. 7,
103 S.Ct 2187, 2193 n. 7, 76 L.Ed.2d 312 (1983), by
finding that the statute at issue in that case did
authorize non-litigation recoupment.
Absent a definitive statement from the
Court, this Court finds substantial support for the
proposition that HUD enjoys the common law right to
recoup, in the manner proposed, the funds erroneously
advanced to HACK, and rejects HACK's assertion that the
Act or HUD's regulations have somehow displaced or
modified that right. The federal government's common
law right to recoup erroneously disbursed funds is
firmly established and has been consistently
recognized. . . . The variation in the above cases as
to the manner of recoupment, which HACK cites as
somehow limiting HUD's recoupment options, instead
appears to this Court to underscore the breadth of the
common law remedy . . . .
In this Court's view, Congress has not
specifically abrogated HUD's common law right to
undertake the recoupment scheme . . . .
Id. at 848-849 (footnotes omitted) (citations omitted).
Thus we have a situation where three circuit courts of
appeal have ruled that the D.C. Act has abrogated the Federal
Government's common law right to collect prejudgment interest on
debts owed by States. And contrary to this we have three other
federal courts that have ruled that the effect of the D.C. Act
has not abrogated federal common law rights in collecting
prejudgment interest or in collecting debts by administrative
offset from States or units of general local government. Two of
these were circuit courts of appeal dealing with the interest
issue while one was a U.S. district court dealing with
Consequently, the solution to the question as to whether the
D.C. Act has abrogated the Federal Government's common law right
to collect prejudgment interest on debts owed by States is not
clear cut. The fact that the resolution of this issue is not
clear cut has been made more evident by the comments of the U.S.
Supreme Court in the West Virginia case. As stated previously,
in that case the Court noted that the D.C. Act was inapplicable
to that particular case because the claim at issue there arose
under a contract entered into before October 25, 1982 and thus
under 31 U.S.C. § 3717(g)(2) that Act did not apply. However,
the court stated:
We can draw no inference about Congress' comprehension
of the federal common law of interest from its
enactment, without any discernible legislative history,
of a definitional section excluding state agencies from
those "persons" statutorily required to pay interest on
debts owed to the Federal Government. Moreover, we
venture no opinion regarding the question whether this
enactment was intended to abrogate or leave intact the
federal common law governing when a State must pay
interest to the Federal Government.
479 U.S. at 312 n. 6, 107 S.Ct. at 707 n. 6 (emphasis added).
As is apparent in the discussion earlier in this decision,
the court in the Gallegos case took particular note of these
comments of the Court in West Virginia. In Gallegos the State
involved, in taking the position that the D.C. Act had abrogated
the Federal Government's common law right to charge interest on
unpaid debts owed by States, had argued that the D.C. Act was
unambiguous and the Gallegos court noted that: "while the
Supreme Court expressly reserved the issue, its reference (quoted
above) to the relationship between the Debt Collection Act and
the federal common law right to collect interest at least
suggests that the statute is not as unambiguous as appellant
would have us find."
As noted previously, the court in Gallegos went on to hold
that the D.C. Act did not abrogate the federal common law right
to assess interest on outstanding debts of States owed to the
In the instant case the statute relating to the recovery of
Department of Education funds owed by recipients of grants [20
U.S.C. § 1234a(i)] provides that "[t]he amount . . . may be
collected by the Secretary in accordance with Chapter 37 of Title
31." (emphasis added). Since the operative statute is not
mandatory, the Secretary has the option to determine what
procedures to use for the collection of funds, including those
under the common law. This is in keeping with the Department of
34 C.F.R. § 30.1 sets forth administrative actions which the
Secretary of Education may take to collect a debt as follows:
§ 30.1 What administrative actions may the Secretary
take to collect a debt?
(a) The Secretary may take one or
more of the
following actions to collect a debt owed to the United
(1) Collect the debt under the
authorized in the regulations in this part.
(2) Refer the debt to the General Accounting Office for collection.
(3) Refer the debt to the Department of Justice for compromise, collection, or litigation.
(4) Take any other action authorized by law.
(b) In taking any of the actions listed in paragraph (a) of this section, the Secretary complies with the requirements of the Federal Claims Collection Standards (FCCS) at 4 CFR parts 101-105 that are not inconsistent with the requirements of this part.
34 C.F.R. § 30.2 sets forth the authority upon which the
Secretary relies to collect debts as follows:
(a)(1) The Secretary takes an action
under § 30.1(a) in accordance with--
(i) 31 U.S.C. Chapter 37, Subchapters I and II;
(ii) Other applicable statutory authority; or
(iii) The common law.
In accordance with 34 C.F.R. § 30.1(b) reference is made to
the Federal Claims Collection Standards (FCCS). As relates to
the question of interest 4 C.F.R. § 102.13 of the FCCS contains a
provision as to exemptions as to State or local government as
(i) Exemptions. (1) The provisions of
3717 do not apply: (i) To debts owed by any State or
local government. . . .
(2) However, agencies are authorized
interest and related charges on debts which are not
subject to 31 U.S.C. 3717 to the extent authorized
under the common law or other applicable statutory
Assuming that these regulations are valid they do set forth
a foundation for the collection of outstanding debts owed to the
Federal Government pursuant to the federal common law, including
the assessment of interest on State debts.
The net result is that the arguments in favor of the
authorized Departmental official's position that the D.C. Act has
not abrogated the Federal Government's common law right to assess
prejudgment interest on debts owed by States are at least as
strong as those arguments which are to the contrary.
The result is that, although the solution to the question as
to whether the D.C. Act has abrogated the Federal Government's
common law right to collect prejudgment interest on debts owed by
States is not clear cut, there is a foundation in the statutes
and regulations referred to above for such a procedure.
C. Jurisdictional Issue.
Counsel for the Departmental official filed a Motion to
Dismiss or in the Alternative for Summary Judgment. The motion
to dismiss is premised upon the position that the OALJ does not
have jurisdiction of a proceeding involving the collection of
interest upon a debt owed by a recipient of grant funds who
either made an unallowed expenditure or failed to properly
account for the funds. Counsel refers to the statute relating to
the jurisdiction of the OALJ as follows:
The jurisdiction of the OALJ is
derived from the
Hawkins-Stafford Education Amendments of 1988. Pub. L.
100-297, 20 U.S.C. 1234 et seq. 20 U.S.C. 1234(a)
The Secretary shall establish in the
Education and [sic] Office of Administrative Law Judges
(hereinafter in this subchapter referred to as the
"Office") which shall conduct-
(1) recovery of funds hearings pursuant to section 1234a of this title,
(2) withholding hearings pursuant to section 1234d of this title,
(3) cease and desist hearings pursuant to section 1234e of this title, and
(4) other proceedings designated by the Secretary.
Departmental official's Brief at 4-5.
Counsel then refers to 20 U.S.C. § 1234(a)(1) which sets
forth the foundation for a recovery of funds proceeding. That
provision is as follows:
(1) Whenever the Secretary
determines that a
recipient of a grant or cooperative agreement under an
applicable program must return funds because the
recipient has made an expenditure of funds that is not
allowable under that grant or cooperative agreement, or
has otherwise failed to discharge its obligation to
account properly for funds under the grant or
cooperative agreement, the Secretary shall give the
recipient written notice of a preliminary departmental
decision and notify the recipient of its right to have
that decision reviewed by the Office and of its right
to request mediation.
20 U.S.C. § 1234a(a)(1).
Counsel argues that the OALJ in this case has jurisdiction
only to conduct a recovery of funds proceeding as set forth above
in the statutes and that the assessment of interest against
California constitutes a debt collection action and not a
recovery of funds proceeding.
Counsel states that the OALJ jurisdiction is predicated on
the recovery of misspent funds received under a grant or
cooperative agreement and that the demand "for and collection of
interest is not such a recovery of misspent funds but rather a
claim separate and apart from grantee misexpenditures." For
additional support Counsel refers to the decision of the OALJ's
predecessor, the Education Appeal Board (EAB) in the case
entitled: Appeal of the State of Michigan, EAB Docket No.
15(215)86 (Final Decision May 6, 1988).
California argues that the OALJ has jurisdiction. It
strongly argues against dismissal, claiming that the interest
claim is not severable from the debt claim. California refers to
page 2 of Enclosure 1 of the PDD of September 28, 1990, which
describes the circumstances under which interest could accrue if
payment was not made within a certain period of time. California
goes on to argue that but for the recovery of funds action, no
interest would have been assessed by ED, and that the claim for
interest is inseparable from the recovery of funds action.
In Appeal of the State of Michigan, the EAB Panel concluded
that it did not have authority to rule upon a question as to the
authority of ED to assess interest upon a purported collection.
It determined that the obligation to pay interest on any
indebtedness will arise, if at all, only as and when a final
decision has issued from the Secretary by either his adoption of
the initial decision or his independent statement.
The EAB Panel at p. 16 further stated as follows:
Appellant has failed to convince us that the Panel's
authority goes beyond inquiry into, and decision as to,
the principal sums involved in the demand for
repayment. We are limited, we think, to the questions
of whether there is a debt and if so, the amount
thereof. Appellant cites no law that places this facet
of collection within the jurisdictional authorization
to EAB involved in 34 C.F.R. Subpart A, secs. 78.1 et
seq., without which we must decline to assume
The EAB Panel's decision became the Secretary's final
decision and was subsequently appealed to the Sixth Circuit in
Michigan v. United States, 875 F.2d 1196 (6th Cir. 1989). There
the court concluded that the issue regarding prejudgment interest
recovery was not ripe for review because ED had retracted its
efforts to collect the interest. Thus the matter was resolved on
a procedural rather than substantive basis. However, the court
did comment that the D.C. Act defines "person" to exclude an
agency of a State government. The court then stated: "Thus, it
would seem that the imposition of interest in this case is not
mandatory under the Act." Id. at 1206.
This comment indicates that ED therefore had an option to
assess interest against the State agency, but that, in view of
the definition of the term "person," which,under the D.C. Act,
excluded an agency of a State government, the assessment of
interest was not mandatory.
The statutory provisions relating to jurisdiction of the
OALJ, the nature of recovery of funds proceedings, and the
restrictions on collection action pending final decision, which
are significant to the determination of this jurisdictional issue
in the instant case are similar to the statutory provisions on
these same subjects relating to its predecessor, the EABSee footnote 3
Therefore, it is considered that the Michigan decision has some
precedential value in reaching a decision in this case.
The EAB decision in the Michigan case became the final
decision of the Department of Education on May 6, 1988.
As argued by Counsel for the Departmental official in this
case the jurisdiction of the OALJ in this case is confined to the
issues involved in a recovery of funds proceeding under 20 U.S.C.
§ 1234a. Under that statute the funds to be recovered would be
that part of the funds received under a grant or cooperative
agreement used for an unallowable expenditure or for which there
was not a proper accounting. No question or issue arises in that
proceeding as to interest. The interest issue would arise later
when collection action was taken. This is a separate matter. In
keeping with this 20 U.S.C. § 1234a(f) provides that if a
recipient submits an application for review of a PDD, ED shall
take no collection action until a decision of OALJ upholding the
PDD in whole or in part becomes final agency action. Also 20
U.S.C. § 1234a(l) provides that no interest shall be charged
arising from a claim during the administrative review of the PDD.
In this case the amount of funds sought to be recovered was
uncontested by the State.See footnote 4 And the
assessment of interest was
the result of the State's late payment of the debt to ED. The
assessment of interest was not part of what is contemplated to be
the subject matter of a recovery of funds proceeding under 20
U.S.C. § 1234a(a).
Therefore, as relates to the question of jurisdiction of the
OALJ, it appears that there is a foundation to follow the last
determination by the Department of Education on the
jurisdictional issue in Appeal of the State of Michigan, EAB
Docket No. 15(215)86 (Final Decision May 6, 1988). As stated
earlier the significant statutory provisions relating to the EAB
and the OALJ, as relates to the subject matter in this type of
proceeding, are substantially similar. The Michigan case is
consequently considered to be a good precedent to be followed
under the circumstances of this case. Therefore, an order will
be issued granting the Departmental official's motion to dismiss
V. CONCLUSIONS OF LAW.
The Office of Administrative Law Judges does not have
jurisdiction to determine whether interest may be assessed by the
Department of Education as to an amount of funds due from a State
pursuant to a preliminary departmental decision under 20 U.S.C. §
VI. DETERMINATIONS AS TO THE PROPOSED
FINDINGS OF FACT AND
CONCLUSIONS OF LAW.
Both parties have proposed conclusions of law in their
briefs. Such proposed conclusions have been considered fully,
and except to the extent that such proposed conclusions have been
expressly or impliedly affirmed in this decision, they are
rejected on the grounds that they are, in whole or in part,
contrary to the law or because they are immaterial to the
decision in this case.
Based on the foregoing findings of fact and conclusions of
law, IT IS ORDERED: That this proceeding be DISMISSED with
John F. Cook
Chief Administrative Law Judge
Issued: September 25 , 1992
A copy of this document was sent to the following:
Mr. Bill Honig
Superintendent of Public Instruction
California State Department of Education
P.O. Box 944272
Sacramento, CA 94244-2720
(Certified Mail RRR)
Joseph R. Symokowick
Roger D. Wolfertz
Assistant General Counsel
Deputy General Counsel
California Department of Education
P.O. Box 944272
721 Capital Mall, Room 552
Sacramento, CA 924272-2720
(Certified Mail RRR)
Richard T. Mueller, Chief
Financial Audit Resolution and Cost Determination Branch
U.S. Department of Education
400 Maryland Avenue, S.W.
ROB-3, Room 3652
Washington, D.C. 20202-4732
(Certified Mail RRR)
Jeffrey Morhardt, Esq.
Office of the General Counsel
U.S. Department of Education
400 Maryland Avenue, S.W.
FOB-6, Room 4083
Washington, D.C. 20202-2110
(Certified Mail RRR)
Chief, Loans and Accounts
Financial Management Service
U.S. Department of Education
400 Maryland Avenue, S.W.
Room 3097, FOB-6
Washington, D.C. 20202-2110
(1) if a statute, regulation required by statute, loan
agreement, or contract prohibits charging interest or
assessing charges or explicitly fixes the interest or
(2) to a claim under a contract executed before October 25, 1982, that is in effect on October 25, 1982.