IN THE MATTER OF NEW YORK Docket No. 93-81-SP
BUSINESS SCHOOL, Student Financial
Respondent. Assistance Proceeding
Brooker, Esq., Office of the General Counsel, for the Office of
Student Financial Assistance Programs, United States Department of
Before: Judge Richard F. O'Hair
NYBS filed a request for review on July 26, 1993. A Prehearing
Order with a briefing
schedule was issued to all parties and they have filed briefs, exhibits,See footnote 1
and stipulations of fact.
Finding 8. Therefore, no more discussion of Finding 8 is necessary. Stip. No. 10. Thus, only
four findings remain in issue: findings 2, 4, 11, and 22. For findings 2 and 22, the Department
no longer seeks to recover the informal fine portion of those findings. Stip. No. 9.
Consequently, the total amount in dispute in this proceeding is
$11,059.90. This consists
of $744 for Finding 22, $6,425 for Finding 2, $614 for Finding 4, and $3,276.90 for Finding
NYBS did not appeal Finding 22 of the FPRD which, as amended,
assessed a liability in
the amount of $744 against NYBS for making a second disbursement of a Federal Pell Grant to a
student who failed to meet its satisfactory academic progress ("SAP") policy. Stip.
Accordingly, I uphold Finding 22. NYBS must repay $744 to the Department.
Finding 2 of the FPRD alleged that NYBS paid late refunds of
Stafford, SLS or PLUS
loans to various lenders on behalf of some of its students. Ex. E-2-3. This finding concluded,
inter alia, that NYBS owed the Department $6,425 for interest and special allowance
payments that the Department paid to lenders on these late and unpaid Stafford loan refunds. Ex.
As to Finding 2, NYBS stated only that "[a]t this time NYBS has no legal basis upon
refute SFAP's calculation of interest and special allowance with regard to Finding No. 2."
Br. at 13. Accordingly, I uphold Finding 2. NYBS must repay $6,425 to the Department.
In Finding 4 of the FPRD, SFAP contends that NYBS made two
Pell Grant disbursements
of $307 each, totalling $614, to a student whose file did not contain a valid student aid report
A SAR is a report provided to an applicant showing the amount of
his or her expected
family contribution. § 690.2 (1988).See footnote
A valid SAR is a report in which all of the information used in the calculation of
the applicant's expected family contribution is accurate and complete as
of the date the application is signed. § 690.2 (1988). Institutions must maintain the SAR
student applying for a Pell Grant during a particular award year for five years after that award
year has ended. § 690.82(a) and (b) (1988).
As SFAP notes in its initial brief at 3, an institution may make one disbursement within an award year of a student's Pell Grant before receiving the student's valid SAR. § 690.77(a) (1988). However, if an institution chooses to make a disbursement to a student without a valid SAR, it shall be liable for that disbursement if it subsequently does not receive a valid SAR for the student
for that award year. § 690.77(c) (1988).
NYBS disbursed two Pell Grant payments to student #1 in the
amounts of $307 on July
29, 1988, and $307 on September 12, 1988. Stip. No. 17. In response to the program review,
NYBS previously had told the Department that it could not locate an SAR or ESAR (Electronic
Student Aid Report) for student #1 and that the school was awaiting repayment instructions for
this finding. Stip. No. 14 & 15.
Although NYBS has submitted Ex. R-3, which contains Part 3 of
student #1's SAR for
1988-89, the remainder of student #1's SAR for that award year is still missing. As noted above,
if an institution chooses to make a disbursement to a student without a valid SAR, it shall be
for that disbursement if it does not receive a valid SAR for the student for that award year.
Inasmuch as Ex. R-3 contains only Part 3 of student #1's SAR for 1988-89, it is incomplete and
therefore does not constitute a valid SAR as required by § 690.77 and defined in
§ 690.2. Consequently, pursuant to § 690.77(c), NYBS is liable for the two
disbursements of $307 made
to student #1 during the 1988-89 award year. Accordingly, NYBS must repay $614 to the
In Finding 11 of the FPRD, SFAP determined that NYBS
consistently maintained bank
balances that were in excess of the school's need for Federal funds. SFAP seeks the recovery of
$3,276.90 in imputed interest on the excess cash balances. Ex. E-2-10.
In its briefs, SFAP contends that NYBS was required to comply
with the Department's
Payment Management System Users Manual (User Manual),See footnote 3
which prohibits institutions such as NYBS from maintaining cash on hand in excess of an
average of three days' needs. Ex. E-5-6
(User Manual at III-4). Specifically, SFAP claims that the regulations found at 31 C.F.R. Part
205 (1988) govern the withdrawal of cash from the Treasury for advances under Federal grant
programs. SFAP Reply Br. at 2-3. 31 C.F.R. § 205.2 (1988) states that "The
regulations in this
part apply to any Federal program requiring advances to finance the recipient organization's
activities in carrying out the program, whether by contract, grant, contribution, or other form of
agreement." A "recipient organization" is defined as "an organization
outside the Federal
Government (including any State and local government, educational institution, international
organization and any other public and private organization) receiving cash advances under
grant and other programs." 31 C.F.R. § 205.3 (1988) (emphasis added). This
include institutions such as NYBS. 31 C.F.R. § 205.4(a) (1988) states as follows:
(a) Cash advances to a recipient organization shall be limited to the minimum amounts
needed and shall be timed to be in accord only with the actual, immediate cash
requirements of the recipient organization in carrying out the purpose of the approved
program or project. The timing and amount of cash advances shall be as close as is
administratively feasible to the actual disbursements by the recipient organization for
direct program costs and the proportionate share of any allowable indirect costs.
In addition, 31 C.F.R. § 205.8 (1988) states that "Federal program agencies shall
procedural instructions which specify the methods employed to carry out these responsibil-
ities . . . ."
As a result, the Department promulgated the User Manual. As
support for its position
that institutions cannot maintain cash on hand in excess of an average of three days' needs, the
User Manual cites Treasury Financial Manual (TFM) Volume 1, Chapter 4-2500, Treasury
Financial Communications Systems Payments; TFM Volume 1, Chapter 2-6000, Cash Advances
Under Federal Grant Programs; and TFM Volume 1, Chapter 6-8000, Cash Management. Ex. E-
5-4-5 (User Manual at III-3-4). The User Manual also states that Treasury Department Circular
No. 1084 requires each agency to monitor the cash management practices of recipient
organizations to ensure that Federal cash is not maintained in excess of immediate disbursing
needs. Ex. E-5-5 (User Manual at III-4). The Department's reliance on these sources constitutes
a reasonable attempt to comply with the dictates of 31 C.F.R. §§ 205.4(a) and 205.8
While it would have been preferable for the Department to have codified its attempts to comply with 31 C.F.R. Part 205,See footnote 4 4 these regulations effectively require the Department to limit cash advances to educational institutions and to formulate procedural instructions, such as the User Manual, that specify the methods employed by the Department to carry out these responsibilities. As a result, these regulations provide a specific legal basis for the Department's User Manual and its procedures which were designed to prevent institutions from maintaining excess cash. Accordingly, I find that NYBS was obligated to comply with the provisions of the User Manual, which prohibited NYBS from maintaining cash on hand in excess of an average of
three days' needs.
At pages 15-21 of its brief, NYBS argues extensively that SFAP
has no authority to
recover imputed interest, and that, instead, SFAP is attempting, unlawfully, to recover
However, a recent decision squarely rejected these arguments. In In the Matter of
International Career Institute, Dkt. No. 92-144-SP, U.S. Dep't of Educ. (July 7, 1994), the
judge held that SFAP may recover imputed interest on unpaid Pell Grant funds. The judge in
cited In the Matter of Macomb Community College, Dkt. No. 91-80-SP, U.S. Dep't of
Educ. (May 5, 1993), stating as follows:
In Macomb, the administrative law judge (ALJ) determined
that despite the lack of a clear regulatory mandate, the enforcement of the PPA is in the nature of
an action to recover
damages for breach of contract, and therefore, in a Subpart H proceeding, SFAP was not
without authority to recover Federal funds spent contrary to the terms of the PPA.
Significantly, the ALJ did not limit SFAP's recovery to just misspent program funds, but
determined that upon a finding of liability by the ALJ, SFAP could recover, as part of its
damages, improperly disbursed Title IV funds and any interest or other earnings thereon
and any funds calculated as harm to an identifiable Federal interest. Consequently, under
Macomb, SFAP could legitimately seek to recover imputed interest in circumstances
where imputed interest could be shown to be an appropriate measure of a portion of
International Career Institute at 3. The judge also relied on In the Matter of Puerto
Rico Technology and Beauty College, Dkt. No. 92-73-SA, U.S. Dep't of Educ. (August 31,
1992) for the proposition that "SFAP may recover imputed or prejudgment interest as an
of damages to compensate for the loss of the use of money from the time ED's claim accrues
judgment is entered." International Career Institute at 3.
Accordingly, SFAP may recover imputed interest on excess cash
maintained by an
In response to the 1991 program review and subsequent discussions
with the Department,
NYBS conducted a self-study "to determine the amount of excess cash on hand it
more than four (4) working days. . . . [T]he imputed interest liability was based on the amount of
excess cash determined. . . . The amount of interest liability came to $3276.90." Ex.
chart identifying the calculations that led to this result is contained at Ex. E-6-4.
Nonetheless, NYBS argues that the funds in issue were placed in a federal funds account, so that "there is no material difference between the federal funds that SFAP describes as 'excess cash' when they are sitting in NYBS' Federal Funds Account and when they are sitting wherever they sit before being transferred into a Federal Funds Account." Resp. Br. at 23. However, the distinction between these two accounts is that before being transferred to the NYBS account, the
funds were held by the Federal Government, upon which it could earn interest.See footnote 5
Once these funds are transferred to the NYBS account, the Federal Government is no
longer earning interest on
these funds. They are held by NYBS as trustee for the intended student beneficiaries and the
Secretary. §§ 668.16, 674.19(a)(2), 675.19(a)(3), 676.19(a)(2), 690.81(c) (1988).
This loss of
interest ("imputed interest") is the reason for the requirements contained in 31 C.F.R.
(1988) and the User Manual. Therefore, I reject Respondent's implied argument that the funds in
issue were placed in a federal funds account, resulting in no harm to the Federal
Nor am I persuaded by NYBS's other arguments concerning the
calculation of imputed
interest and outstanding checks. As SFAP notes at page 8 of its reply brief, it was NYBS itself
that performed the calculation of imputed interest. Ex. E-6. As for the issue of outstanding
checks, even assuming arguendo that I were to adopt Respondent's arguments, NYBS has
not provided any evidence indicating that it did in fact hold outstanding checks. In sum, NYBS
not satisfied its burden of persuasion under § 668.116(d) (1993).
For the above reasons, I find that Finding 11 is supportable.
Accordingly, NYBS must
repay $3,276.90 to the Department.
2. I uphold Finding 2. NYBS must repay $6,425 to the
3. I uphold Finding 4. NYBS must repay $614 to the
4. I uphold Finding 11. NYBS must repay $3,276.90 to the
Judge Richard F. O'Hair
Issued: July 22, 1994
S E R V I C E
A copy of the attached initial decision was sent by CERTIFIED MAIL, RETURN RECEIPT
REQUESTED to the following:
Leslie H. Wiesenfelder, Esq.
Dwayne Pugh, Esq.
Dow, Lohnes & Albertson
1255 Twenty-Third Street, N.W.
Washington, D.C. 20037
Renee Brooker, Esq.
Office of the General Counsel
U.S. Department of Education
400 Maryland Ave., S.W.
FOB-6, Room 4083
Washington, D.C. 20202-2110