In Re: MACOMB COMMUNITY COLLEGE,
Docket No. 91-80-SP
Student Financial Assistance Proceeding
Appearances: Leslie H. Wiesenfelder, Esq., Dow, Lohnes & Albertson, of Washington, D.C., for Macomb Community College.
Howard D. Sorensen, Esq., of Washington, D.C., Office of General Counsel, for the U.S.
Department of Education.
Before: Judge Daniel R. Shell
On August 5, 1991, the United States Department of Education Office of Student Financial
Assistance (OSFA) issued a preliminary department decision (PDD) demanding that Macomb Community
College (Macomb) refund $G89, 761 to OSFA. On September 23, 1991, Macomb appealed the PDD and
requested an administrative hearing. The parties stipulated that the relevant facts are not in issue. Macomb,
in its initial brief, made clear that it:
does not contest the fact that ts failure to retain certain backup documentation resulted in its
inability to document its original self-help calculations and is a violation of Title IV regulations.See footnote 1
Furthermore, in its initial brief, at 19, Macomb conceded that the effect of its "failure to retain the
backup documentation was that its students received a . . . lareer share" of federal funds "than Macomb
could subsequently document." The parties st pulated that "Macomb submitted to OSFA reconstructed
grids verified by its auditors."See footnote 2
Macomb was able to reconstruct much of the Title IV activity, but not all of it.
Based on the Income Grid reconstructed by Macomb, Macomb's substantiated allocation of funds
$66,516 for college work-study, $79,322 for Perkins loans, and $41,730 for SEOG for the 87/88
Macomb actually spent for the 87/88 award year:
$69,893 for college work-study, $250,000 for Perkins, and $157,436 for SEOG.See footnote 3
The total expenditure of funds for Macomb was $477,329 and the total substantiated allocation of
Title IV funds was $187,568. Thus, the difference between the total funds allocated and the total
expenditures equaled $289,751. The parties further stipulated that "[a]fter deducting amounts actually
expended by Macomb, the OSFA assessed liability of $3,377 for college wor.Ystudy, $170,578 for
Perkins, and $115,706 for SEOG. The total assessment is $289,751."See footnote 4
In Macomb's brief submitled February 6, 1992, counsel states: "The Grids were subsequently reconstructed by Macomb; however,
because of its failure to retain the backup documentation the reconstruction of the Grids that Macomb
could document decreased its proportion of the State of Michigan's so-cal'ed 'fair share' allocation of the
campusbased funds by a total of $289,761." As a consequence, Macomb spent $289,761 of T-tle IV funds
based upon an unsubstantiated calculation of its original self-help need.See footnote 5
The parties agreed that Macomb's failure to maintain backup records of students who received Title IV funds during the 1986-87 award year
violated the record keeping requirements of the program participation agreement and the regulatory
requirements or 34 C.F.R. 674.19(b), 675.19(b), and 676.19(b)(1987).
Does Macomb's admission of a failure to keep records as required by the regulations and the
program participation agreement cause Macomb to be liable to the Federal Government for $298,761?
Accordingly, the only issue before the tribunal is an issue of law: whether, in a Subpart H proceeding, OSFA may recover Title IV funds from an institution that spent undocumented funds. According to Macomb, "[t]he critical question for the Administrative Law Judge presented by this case is what remeay is
available to OSFA for that violation."See footnote 6
Arguments of Counsel
OSFA argues that since Macomb admitted it failed to retain backup documentation necessary to
verify the accuracy of its application for campus-based Title IV funding for the 1987-88 award year,
Macomb should, therefore, be ordered to make "restitution to the Department of Education" for the
amout. stitulated.See footnote 7
Macomb argues that neither statutory nor regulatory authority exists for the recovery , Title IV funds for record keeping violations in Subpart H proceedings. In addition, Macomb urges that it "cannot be ordered to make restitution because neither the Secretary nor the Administrative Law Judge as equitable
powers."See footnote 8
The discussion is divided into three parts: 1) the remedy sought by OSFA, 2) theory of recovery,
and 3) damages.
Remedy Sought by OSFA
OSFA elected to bring this action under a Subpart H proceeding instead of a Subpart G
proceeding. Subpart H differs from Subpart G proceedings in several procedural respects. The relevant
difference is that the remedies available to OSFA in Subpart H proceedings do not include the possibility of
imposing a fine, termination, or limitation upon an institution who unsuccessfully appeais a PDD.See footnote 9
The remedies available to OSFA in Subpart 5 are punitive in nature whereas the remedy available in Subpart H
is an action to collect a debt which is civil in nature.See footnote 10
The Higher Education Act (HEA), 20 U.S.C. § 1070 et seq., provides authority for OSFA to recover Title IV funds misused by an institution. Section 487(c)(1) provides, in pertinent part: ". . . the
Secretary is authorized to prescribe such regulations as may be necessary to provide for . . . a f inancial and
compliance audit of an eligible institution, with regard to any funds obtained by it under this subchapter . .
."See footnote 11
In addition, Section 487(a)(3), 20 U.S.C. § 1094(a)(3), requires all eligible institutions to enter into
a participation agreement. The participation agreement conditions the institutional eligibility for Title IV
funds to a requirement of establishing and maintaining records for administrative and fiscal procedures as
may be necessary to ensure proper and efficient administration of funds received from the Secretary.
Subpart H governs appeal procedures in cases, like this one, which arise from audit or program review determinations. The Subpart H regulations reveal that the Secretary of Education intended that an institution incur a debt to the Federal Government for the amount of funds misused.See footnote 12 12 Under the statutory
authority of Section 487, the Secretary promulgatea C.F.R. § 68.123 which states: "To the extent that the
decision of the Secretary sustains the final audit determination or final program review determination,
ED[ucation] will take steps to collect the debt at issue or otherwise effect the determination that was the
subject of the request for review." Moreover, the plain language of Section 668.24 provides OSFA with
the right to recover funds which were improperly spent.See footnote 13
Subpart H regulations and their statutory precursor substantiate OSFA's position that Congress did not preclude OSFA from bringing a recovery of
funds action in a Subpart H proceeding. Consequently, in this action, it is not beyond the powers of this tribunal to permit OSFA to recover its monetary damages.
Theory for Recovery
In order for OSFA to recover, a recognized legal theory of recovery must form the basis for establishing on what grounds OSFA may obtain relief. That is to say, the recovery of fund. that OSFA seeks is based
on the well settled principle that "there is a legal remedy for every legal wrong."See footnote 14
Accordingly, OSFA's request for relief in this action under Subpart H is most appropriately based on a debt incurred as a resuit
of a breach the participation agreement which requires record keeping as part of the administrative and
fiscal procedures necessary for an audit.See footnote 15
The basis of reccvery is found in contract theory.See footnote 16
A contract action is analogous to OSFA's current action for several reasons: 1) Macomb and OSFA are
parties to a participation agreement;See footnote 17
2) each party recognizes obligations under the agreement; 3) Macomb admits its liability for breach of one of the terms of the agreement by failing to keep records, and
4) OSFA precludes itself from enforcing a quasi-criminal or punitive penalty because of its election to bring
this action in a Subpart H proceeding, instead of Subpart G of 34 C.F.R. Part 668.
Under any theory of recovery, once liability has been established, the party entitled to recover must
prove it suffered damages as a result of the liability created.See footnote 18
The basic concern in awarding damages is to assure that the party surfering the breach is compensated for his harm in cases where harm has been
proven.See footnote 19
"[P]ure speculation" as to damages is insufficient to prove harm or justify the award of compensatory damages.See footnote 20
In other words, OSFA would need to prove damages in an action for the recovery of funds based on a breach of contract.
Macomb, reiying on a decision by Judge Alprin in United Talmudical Academy, U.S. Dep't of Education (September 17, 1987), urges that only a "misuse of Title IV funds" and not a technical record
keeping violation may "subject an institution to a repayment liability.''See footnote 21
Although Judge Alprin did hold as Macomb urges this tribunal to hold, United Talmudical arose under pre-Subpart H proceedings. Consequently, United Talmudical is not binding precedent on the issue of what remedies are available in Subpart H proceedings.See footnote 22
More important, the logic of United Talmudical follows the holding of this case; namely, where OSFA has proven harm to the Federal interest as a result of the breach of contract, the
institution becomes subject to a repayment liability enforceable by the Federal Government. Here, OSFA
has shown a breach of contract by establishing ,facts to prove that Macomb failed to keep records to insure
the proper administration of the federal funds.
The recognition of OSFA's authority to seek restitution or repayment of funds as a remedy is
supported by caselaw. In Bennett v. Kentucky Dep't of Educ., 105 S. Ct. 1544 (1985), the Court held that Kentucky's use of Title I funds to pay the costs of the basic education of students in Kentucky's "readiness"
classes violated the Elementary and Secondary Education Act of 1965.See footnote 23
The Court concluded that as a result of the statutory violation, Kentucky spent funds on a program for which it was not authorized and
therefore "misused funds received under Title I." The Court recognized that in cases where the Federal
interest had been harmed through the use of Federal funds, "recovery of the misused funds" is a permissible
remedy for the Secretarv of Education.See footnote 24
If the Federal Government has been harmed by a party's misuse of Federal funds, the Federal
Government is entitled to recover the misspent funds. In Bennett v. Kentucky Dep't of Educ., supra, the Court recognized that the recovery of misused Federal funds is "intended to promote compliance with the
requirements of the grant program [and therefore,] a demand for repayment is more in the nature of an
effort to collect upon a debt than a penal sanction."See footnote 25
The court clearly fixes liability based upon contract theory. According to the Court, when a private party does not fulfill its assurances that it would abide by
the terms and conditions of the Federal program, "the Federal Government is entitled to recover amounts
spent contrary to the terms" of the program.See footnote 26
Furthermore, whether you characterize Macomb's expenditure of Federal funds in excess of its
documented allocation as a "misuse" of funds or a "harm" to the Federal Government for which the Federal
Government may collect damages, the choice amounts to a distinction without a difference. The result is
the same. In this case, Macomb's conduct resulted in the school receiving a larger share of Michigan's
allocated Federal funds than it was entitled. Thus, Macomb's inability to substantiate its original self-help
need Income Grid amounts to a "misuse" of funds and "harm" to the Federal Government.See footnote 27
In concluslon, the failure to keep records is the harm. The failure to keep records denied OSFA of the ability to verify the institution's original self-help need which is used ultimately determine Macomb's share of Federal funds allotted to Michigan. Since OSFA is denied access to records for verification of use, the only proper conclusion is to find against the institution r its failure to produce records which could substantiate its original Income Grids. The denial of verification is the damaae caused to the Federal Government and to OSFA. As noted supra, the conclusion, here, is not out of step with the Supreme Court. Furthermore, OSFA has often sought damages as a remedy in Subpart H proceedings.See footnote 28 28
Undoubtedly, the purposes of Title IV could easily be defeated if institutions could not be taken to task for
failure to maintain records which could substantiate that an institution was entitled to the Federal funds that
it was given.
OSFA makes clear that it seeks "restitution" as a form of relief.See footnote 29
Macomb recognizes that "OSFA is not asserting a repayment liability but is seeking, in its own terminology, restitution."See footnote 30
"Restitution" is a legal term of art used to denote the measure of damages that may be awarded in a
contract action.See footnote 31
It is one way to calculate damages and is only relevant after it is established that a party is liable for a breach of contract.
As proof of the amount of "harm", "misuse", or "damage caused," OSFA points to Macomb's admissions
regarding its failure to keep records of fiscal administration. Further, Macomb admits that it breached its
'387-88 participation agreement. Macomb has stipulated that restitution damages are set at $289,761. The
record shows that Macomb failed to substantiate that it was entitled to $289,761 in campus-based Title IV
funds. Consequently, the tribunal finds that OSFA has statutory and regulatory authority for its
determination that Macomb must repay the Federal Government $289,761 in Title IV funds. The "lack of
proper documentation" showing the correct allocation resulted in the expenditure of $289,761 in Title IV
funds. Therefore, Macomb incurred a debt to the Federal Government for the amount of funds expended.
Accordingly, it is proper for OSFA, as stated by the Supreme Court in Bennett v. Kentucky, supra," to recover amounts spent contrary to the terms" of the federal program and furthermore, to "take steps to
collect the debt."See footnote 32
The tribunal affirms OSFA's preliminary department decision that Macomb Community College
must repay the Department of Education $289,761.
Pursuant to 34 C.F.R. 668.119, the 30 day period for appeal of this decision to the Secretary
commences on the date of receipt of a copy of the initial decision delivered by certified mail to the counsel
of record for Macomb Community College, Leslie H. Wiesenfelder and counsel of record for U.S.
Department of Education, Office of Student Financial Assistance, Howard Sorensen.
Issued: May 5, 1993
Washington, D.C. Daniel R.S hell
Administrative Law Judge
(a)(1) If, as a result of a Federal audit . . . the Education Department's Inspector General questions an expenditure or the institution's compliance with an applicable requirement (including the lack of proper documentation) [and] . . . . (b)(3) If the institution is found to have expended funds improperly under the proceedings established in subpart H, the institution shall repay those funds witnin 30 days of a final determination under subpart H unless the Secretary permits a longer repayment period.
In addition, appeal proceedings under the General Educati n Provision Act (GEPA), 20 U.S.C. 1221e -3(a)(1), 1234 et seq.,provide for an analogous recovery of funds proceeding. In. the GEPA implementing regulation, Education is permitted to recover funds "to the extent of the harm" caused to an identifiable federal interest. 34 C.F.R. § 81.22(a)(1). An identifiable federal interest includes "providing only authorizied services" and preserving the "integrity of planning, application, record keepinq, and reporting requirements." (emphasis added) 3 C.F.R. § 81.22(a)(2)(ii) and (iv).