In the Matter of Docket No. 93-115-DA
The Proposed Debarment of
This DECISION is issued by the United States Department of
Education (Department) pursuant to 34 CFR § 85.314. I have
jurisdiction to act in this matter by virtue of a Delegation of
Authority from the Secretary to me to act as the Department's
Designated Deciding Debarment and Suspension Official. The
regulations, 34 CFR Part 85, and the Nonprocurement Debarment and
Suspension Procedures mailed with the notice of proposed
debarment govern this proceeding.
On May 20, 1992, Marcus Katz, President of U.S. Education
Corporation of Atlanta, Georgia, doing business as the Georgia
School of Bartending (school), was issued a "Notice of Proposed
Governmentwide Debarment from Federal Nonprocurement
Transactions" pursuant to 34 CFR § 85.312. The proposed
debarment was based upon three violations of Title IV regulations
at the school which were imputed to him pursuant to 34 CFR §
85.305(b) and (d). These violations were: failure to refund
guaranteed student loan (GSL) funds to lenders when students
withdrew, 34 C.F.R. § 682.607; disbursement of GSL funds to
students who were not enrolled, 34 C.F.R. § 682.604(b)(2); and,
improperly signing student's signatures to GSL checks. Mr. Katz
was also given notice of his right to submit information and
argument in opposition to the proposed debarment.
On July 17, 1992, and October 19, 1993, I held hearings on this
matter in Washington, D.C. At the first hearing, Mr. Katz
appeared pro se while the Department's Notice Official was
represented by Carol S. Bengle, Esq., of the Office of the
General Counsel. At the second hearing, Mr. Katz was represented
by Leigh M. Manasavit, Esq., and George Francis Bason, Jr., Esq.,
while Russell B. Wolff, Esq., represented the Department. The
hearings were recorded by a court reporter and a transcript was
made and provided to both sides. The parties were given an
opportunity to file post-hearing briefs, which they did.
At the second hearing, the Department withdrew the allegations
concerning the disbursement of funds to students not enrolled and
the signing of student signatures on GSL checks. It chose to
proceed on only the issue of the improper refunds of GSL loans.
I find that there are no disputes as to material facts. The
parties stipulated that there were approximately $240,000 of
refunds that were not made as required. Mr. Katz argued that the
only reason refunds were not made in a timely manner was the
school had a serious cash flow problem and, with the limited
funds available, he chose to pay his operating expenses such as
rent and salaries, in an attempt to keep the school operational,
and thereby attempt to generate the income necessary to make all
the payments. The Respondent also argued that the debarment
proceeding is barred by the provisions of §525 of the Bankruptcy
Act, 11 U.S.C. §525. He referred to Perez v. Campbell, 402 U.S.
637 (1971), and claimed that, since he had filed a petition in
bankruptcy, the debarment action constituted a prohibited form of
discrimination against him.
The Department argued that the debarment action was not
prohibited by §525. They point out that Mr. Katz had raised the
same argument when he sought a stay of the debarment action from
the U.S. Bankruptcy Court for the Northern District of Georgia.
His Motion was denied by the Bankruptcy Judge and that decision,
by a Court with jurisdiction over the matter, should be accepted
by me and should not be susceptible to a collateral attack. The
Department also argued that the violations are serious and Mr.
Katz, as president and signatory of the participation agreement
with the Department, knowingly and intentionally did not pay the
refunds as required and, therefore, should be debarred.
Based on the presentations of the parties and evidence submitted,
I find that the debarment action does not violate the automatic
stay provisions of 11 U.S.C. §525. Specifically, I find that I
am bound by the decision of the Bankruptcy Judge in this matter
and, even if I weren't, I would find that the debarment action
does not constitute prohibited discrimination under §525 of the
Bankruptcy Act. Next, I find that Mr. Katz actively participated
in the violation of Title IV of the Higher Education Act of 1965,
as amended, 20 U.S.C. § 1070 et seq. It is abundantly clear
that these violations were substantial and resulted in the loss
of program funds. I note as significant, that the failure to pay
refunds in the Title IV Program can now lead to criminal
penalties. 20 U.S.C. § 1097(a). Consequently, I find that the
Department has established, by a preponderance of the evidence,
that Mr Katz is subject to debarment under 34 C.F.R. §85.305 (b)
The Notice Official argues that the proper standard to apply in a debarment case is that officials in responsible positions, like Mr. Katz here, are subject to debarment when violations occur at schools under their control which are sufficiently serious so as to constitute causes for termination of the school's eligibility. I note, however, that 34 C.F.R. § 85.325(b)(2), which is cited by the Department as a basis for attributing the wrongdoing at the school to Mr. Katz, provides that the fraudulent, criminal, or other seriously improper conduct of the participant (School) may be imputed to any officer, who participated in, knew of, or had reason to know of that conduct. In contrast, I note that 34 C.F.R. § 668.86 (a), which governs termination of eligibility of institutions, provides that the eligibility of an institution to participate in Title IV programs may be terminated for the violation of any Title IV provision.
A comparison of the bases for debarment with the bases for
terminating the participation of an institution in any Title IV
program reveals that the tests for each are dramatically
different, i.e. "fraudulent, serious, or other seriously improper
conduct," as opposed to violation of "any" provision of Title IV.
As such, I cannot agree with the position of the Notice Official
as to the degree of culpability necessary to debar an individual.
The proper standard is that the conduct imputed to an individual
so as to constitute grounds for debarment must be fraudulent,
criminal, or other similarly serious, improper conduct.
The debarment of an individual has extremely serious
consequences. The individual is precluded from initiating,
conducting, or otherwise participating in any covered transaction
under the nonprocurement programs and activities of any Federal
agency, and is not eligible to receive any Federal financial and
nonfinancial assistance or benefits from any Federal agency under
nonprocurement programs and activities. Also, such individual
may not act on behalf of any person in connection with any
As stated in 34 CFR § 85.115, the policy of the Federal
Government is to conduct business only with responsible persons.
It seems clear that in order to support the governmentwide
debarment from federal nonprocurement transactions of an
individual, a greater degree of personal culpability than what
the Notice Official argues is appropriate must be shown. Merely
establishing the violation of program regulations which could
constitute the violation of the fiduciary status conferred upon
Title IV participants and thereby lead to termination of
eligibility is not sufficient.
Applying the correct standard, my review of the facts and
circumstances in this case reveals the seriousness of the
violations and the degree of personal wrongdoing envisioned by
the debarment process has been established. Mr.Katz was directly
responsible for the failure to properly account for federal
funds. This adversely affects whether he is a responsible person
so as to be eligible to participate in federal programs. See
generally Sellers v. Kemp, 749 F.Supp. 1001 (W.D.Mo. 1990).
In light of the foregoing, I find that the Department has met its burden of proof and persuasion that the debarment of Mr. Katz is warranted. Under the provisions of 34 C.F.R. § 85.320, the period of debarment is to be commensurate with the seriousness of the cause(s) of debarment, generally not to exceed three years. Based upon the circumstances here, I have determined that the period of debarment shall be three years.
I order that Marcus Katz be DEBARRED from initiating, conducting,
or otherwise participating in any covered transaction under the
nonprocurement programs and activities of any Federal agency, and
is ineligible to receive Federal financial and nonfinancial
assistance or benefits from any Federal agency under
nonprocurement programs and activities. He may not act as a
principle, as defined in 34 C.F.R. § 85.105(p), on behalf of any
person in connection with a covered transaction. This debarment
is effective for all covered transactions unless an agency head
or authorized designee grants an exception for a particular
transaction in accordance with 34 C.F.R. § 85.215.
ERNEST C. CANELLOS,
Deciding Debarment and
Dated: January 18, 1994
[Notice to reader: On August 2, 2001, Department of Education counsel for the Notice Debarment Official requested the Office of Hearings and Appeals to append the following language to the original decision:
"OHA has been advised that on August 2, 1994, this matter was the subject of a settlement agreement that withdrew the imposition of the debarment."]