IN THE MATTER OF Puerto Rico Technology and Beauty College,
Docket No. 92-73-SA
Student Financial Assistance Proceeding
Appearances: Baltasar Corrada del Rio Esq., of Hato Rey,
Puerto Rico for the Respondent
Stephen M. Kraut, Esq., of Washington, D.C.,
Office of the General Counsel, United States
Department of Education for the Office of Student
Before: Judge Allan C. Lewis
This is an action initiated by the United States Department of
Education to recover $403,875 in Pell Grant funds and $65,700 in
imputed interest and to order Puerto Rico Technology and Beauty
College (Technology College) to pay $4,436 in salary to students
hired under the College Work Study program. This action was
proposed following an audit which concluded that Technology
College improperly disbursed $403,875 in Pell Grant funds to
Lamec Inc. following the acquisition of the Technology College's
Mayaguez campus by Lamec Inc. Due to these alleged improper
disbursements, the audit concluded that Technology College was
also liable for interest in the amount of $65,700. Lastly, the
audit concluded that approximately 30 students in the College
Work Study program were not paid a total of $4,436 in salary by
their employer El Nuevo Hogar and, therefore, it was the
responsibility of Technology College to pay these monies to the
students. Based upon the findings of fact and conclusions of law
which are set forth in the opinion below, the Department may
recover $403,875 in Pell Grant funds from Technology College,
together with $65,700 in interest. It may not, however, require
Technology College to pay the allegedly unpaid salaries due these
students.See footnote 1
The initial issue is whether the Department may recover $403,875
in Pell Grant funds disbursed to Lamec Inc. during the period
July 1, 1987 through June 30, 1988.
The Department's position is that, as of July 1, 1987, Technology
College sold its Mayaguez branch campus to Lamec. Subsequently,
Technology College made 18 lump sum payments of Pell Grant funds
to Lamec which, in turn, disbursed these monies to the students.
According to the Department, Lamec was not eligible to
participate in the Pell Grant Program as it had not executed a
program participation agreement and, therefore, students enrolled
in educational programs provided by Lamec were not eligible to
receive Pell Grant funds. Thus, the Department concluded that
the disbursements by Technology College were improper and
requested the repayment thereof.
Technology College responds that, even though Technology College
and Lamec signed the sale documents for the Mayaguez school,
their actions and conduct subsequent to the purported transfer
was that of a joint operation of the school based on NATTS
refusal to recognize the transfer until a "free standing" status
was authorized. Technology emphasizes that the credits,
certificates or diplomas received by the students were recognized
by the Puerto Rico Department of Education and, therefore, the
students were not harmed academically. Thus, Technology College
asserts that the Pell Grant funds were used for their intended
purpose and there is no justification for restitution of these
In a prior proceeding to terminate the eligibility of Technology
College to participate in the student financial assistance
programs, the Secretary determined that--
a "change of ownership" did occur as a direct and
result of the June 30, 1987 transaction [with Lamec]. The
18 transfers of [Pell Grant] program funds [by Technology
College] were in violation of Title IV, HEA. OSFA was
correct in levying the fines and terminating PR Tech[nology
College] and Lamec's participation in Title IV, HEA
In re Puerto Rico Technology and Beauty College, et.al., Dkt. Nos. 90-34-ST and 90-38-ST, U.S.
Dep't of Education (Oct. 7,
1991) at 4.
Under the doctrine of issue preclusion, the findings of fact and conclusions of law by a tribunal in a prior administrative proceeding with the same party are binding on the parties in a subsequent judicial proceeding. United States v. Utah Const. Co., 384 U.S. 394, 422 (1966); see generally Commissioner v.
Sunnen, 333 U.S. 591, 598-602 (1948). The preclusive effect of the first proceeding serves to
enforce repose and thereby
subsequently conserve judicial resources. University of Tenn. v. Elliott, 478 U.S. 788, 798
(1986). These underlying considerations justify a similar application in administrative
proceedings before an agency involving the same party and issues.
Accordingly, the tribunal concludes that the June 30, 1987 sale
transaction constituted a change of ownership of the Mayaguez
campus from Technology College to Lamec.See
Hence, the 18 disbursements of Pell Grant funds by Technology College during
fiscal 1988 represented distributions of Pell Grant funds to
An institution may disburse Pell Grant funds only to an eligible
student. 34 C.F.R. § 690.75(a) (1987). An eligible student is
an individual who is enrolled in an eligible program in an
eligible institution that has entered into a program
participation agreement with the Department. 20 U.S.C. §§ 1091
and 1094; 34 C.F.R. §§ 690.4 and 690.5. Here, the lump sum
disbursements by Technology College were made to Lamec, an entity
offering educational programs, and were not made to students of
Technology College. Therefore, the disbursements were contrary
to the regulations and improper. As such, Technology College is
liable for the overpayments of Pell Grant funds. 34 C.F.R. §
The second issue is whether Technology College is liable for
interest in the amount of $65,700. Interest is charged,
according to the Department, on Pell Grant funds that "an
institution improperly expends for purposes which the institution
knew or should have known were unallowable." This policy is set
forth in Appendix 6 to the Department's "Audit Resolution System
Handbook." Appendix 6 is entitled "Departmental Policy on
Recovery of Interest in the Audit Resolution Process" and
The Department will seek to recover imputed interest when recipients . . . use Federal funds for purposes which the recipient knew or should have known were erroneous, undocumented or unallowable. In all these cases, interest
Inasmuch as Appendix 6 was added to the handbook in July 1988,
approximately one month after the close of the fiscal year in
which the monies were improperly disbursed, Technology College
asserts that the Department had no authority to impose an
interest charge in the instant case. The Department responds
that the Federal Government is entitled to imputed or prejudgment
interest as an essential element of damages or restitution from a
private party under the federal common law. It relies primarily
upon West Virginia v. United States, 479 U.S. 305 (1987).
West Virginia amply supports the Department's position and citing Royal Indemnity Co. v.
United States, 313 U.S. 289, 295-97 (1941) states that--
the longstanding rule [is] that parties owing debts to the
Federal Government must pay prejudgment interest where the
underlying claim is a contractual obligation to pay money.
Id. at 310.
In addition, the Court noted that--
[p]rejudgment interest serves to compensate for the loss of
use of money due as damages from the time the claim accrues
until judgment is entered, thereby achieving full
compensation for the injury those damages are intended to
redress. See Comment, Prejudgment Interest: Survey and
Suggestion, 77 N.W.U.L.Rev. 192 (1982).
Id. at 311 n.2.
Thus, the Department possessed the right to demand the payment of
interest well before the declaration in Appendix 6 was added in
July 1988. It may also demand interest as of the date of
It is apparently the Department's policy, however, to demand the
payment of interest only under the circumstance in which the
recipient used Federal funds for purposes which the recipient
knew or should have known were erroneous or unallowable.
Technology College asserts that it had no knowledge or reason to
believe that its arrangement with Lamec constituted a change in
ownership thereby creating an unauthorized use of Pell Grant
funds by it. It argues further that this question remained
unclear until the Secretary's decision of October 7, 1991.
The Department disputes Technology College's characterization of the facts and law and urges, moreover, that Technology College
should have known that the disbursements were improper since it
stipulated in the prior termination and fine proceedings that--
[o]n July 1, 1987, PR Tech[nology College] and Lamec should
have known that Lamec was not eligible to participate in the
Title IV, HEA Programs, and that students enrolled in Lamec
were not eligible to receive Pell Grants or any other Title
IV, HEA Program assistance. Jt. Ex. 1, para. 33.
Initially, the Department's reliance upon the stipulation in the
termination and fine proceedings is misplaced. This is not a
stipulation executed by the parties in this case. As such, the
admissibility of this prior stipulation is governed by 34 C.F.R.
§ 668.116(f) (1991) which requires that evidence must be
admissible and timely submitted to the administrative law judge
in order to be considered. Here, the stipulation falls within
category (v) of 34 C.F.R. § 668.116(e) which pertains to "[o]ther
ED records and materials" and must be submitted to the
administrative law judge "no later than 30 days after the
institution's filing of its request for review." The stipulation
was not submitted within this time period and, therefore, it is
excluded from the record.
Technology College applied to the Department for Pell Grant funds
numerous times during fiscal 1988 and, following the receipt
thereof, made 18 transfers of Pell Grant funds to Lamec pursuant
to paragraph 3 C of the sale agreement which provided that
will permit . . . [Lamec] to use its federal permits and
licenses to collect all the federal grants of the enrolled
students or those enrolled in the future, during all the
time that be necessary, while the already started process to
transfer the licenses and permits of collection of grants
under the name of LAMEC, INC. is concluded.
Lamec was obviously using Technology College to obtain Federal
funds which it was not entitled to receive and Technology College
knowingly participated in this diversion of Federal funds--funds
which could only be distributed by Technology College to eligible
students participating in an eligible program within its school.
Under these circumstances, Technology knew or should have known
that its transfers of Federal Pell Grant funds to Lamec violated
a fundamental aspect of the Pell Grant Program. Inasmuch as
Technology College does not dispute the amount of interest, it is
held that the imposition of interest in the amount of $65,700 is
The last issue is whether Technology College must pay a total of $4,436 among approximately 30 students who were hired under the College Work Study program and were allegedly not paid the 20 percent non-Federal share of their salary by their off-campus
employer El Nuevo Hogar. There is no dispute that the students
were paid the remaining 80 percent of their wages by Technology
On brief, the Department maintains that--
El Nuevo Hogar reportedly paid the students in cash for the
non-federal share of the students' compensation, and
submitted forms to PR Tech on which the students appeared to
have signed receipts for those cash payments. However, when
the OIG auditors interviewed student workers, those students
indicated that El Nuevo Hogar never paid them their non-
federal share. Moreover, they indicated that they thought
they were signing a receipt for the check they received from
PR Tech, which represented the federal share of their
Whether the approximately 30 students were paid the 20 percent
non-Federal share of their wages by El Nuevo Hogar is a question
of fact to be resolved by the administrative law judge based upon
the evidence adduced by the parties.
The Department's evidence consists of a report by an ED/OIG
auditor in which he represents that he interviewed five students
over the phone and relates what these students told him.
In contrast, Technology College relies upon the 26 biweekly forms
prepared by El Nuevo Hogar and sent to the finance officer of
Technology College. In these forms, the president of El Nuevo
Hogar certifies as follows:
[t]his is to certify that the following students of the
Institution . . . have received their pay for the work/study
program equalling 20 percent.
ED Ex. G-2 at A-3.
In each form, there were 3 columns. The first column had the
handwritten name of each student, the second column had the
handwritten dollar amount of his or her salary which reflected 20
percent of his or her salary, and the third column had the
signatures of each student. These forms were forwarded to
Technology College. Sometimes before, on, or shortly after the
date on the form Technology College issued checks to these
students. The amounts of the checks represented 80 percent of
his or her salary. This procedure was followed biweekly and
approximately 30 students signed these forms during the fiscal
year in issue.
The purported statements by the students to the ED/OIG auditor were oral. They were not in writing or sworn statements made under penalty of perjury. As noted above, the dollar amount on
each form for each student reflected 20 percent of the student's
salary--an amount which was significantly less than the amount of
the check issued by Technology College. Therefore, even with the
above deficiencies, it is even more difficult to accept a
representation that the students thought they were signing a
receipt for the checks from PR Tech which were for amounts far in
excess of the amounts actually included next to their names.
Given these circumstances, the weight accorded the purported
statements of these five individuals is minimal.
In comparison, the certification forms were signed by each of the
approximately 30 students employed by El Nuevo Hogar and reflect
that each student received 20 percent of his or her salary from
El Nuevo Hogar. These forms were prepared biweekly and sent to
Technology College. While not technically business records, they
are closely akin to such records and are viewed as highly
reliable under the circumstances herein.
Under 34 C.F.R. § 668.116(d), Technology College has the burden
of proof in this matter. Based on the evidence, Technology
College has clearly met this burden. Accordingly, the
Department's request that Technology College be ordered to pay
$4,436 among approximately 30 students is denied.See
On the basis of the foregoing findings of fact and conclusions of
law, and the proceedings herein, it is hereby--
ORDERED, that Technology College immediately and in the manner
provided by law pay the United States Department of Education the
sum of $403,875, plus interest in the amount of $65,700.
Allan C. Lewis
Administrative Law Judge
Issued: August 31, 1992
Jack C. Reynolds
Acting Director, Institutional Monitoring Division
(formerly Audit and Program Review)
U.S. Department of Education
Room 3923, FOB-3
7th and D Street, N.W.
Washington, D.C. 20202-5254
Baltasar Corrada del Rio Esq.
Banco de Ponce Building
268 Munoz Rivera Ave.
Hato Rey, Puerto Rico 00918
On August 31, 1992, a copy of the initial decision was also sent
Stephen M. Kraut, Esq.
Office of the General Counsel
U.S. Department of Education
Room 4091, FOB-6
400 Maryland Avenue, S.W.
Washington, D.C. 20202