In the Matter of Chicago Educational, Inc.,
Docket No. 94-132-SA
Student Financial Assistance Proceeding
Appearances: Peter S. Leyton, Esq., Ritzert & Leyton, P.C., Fairfax, Virginia, for the
Sarah L. Wanner, Esq., Office of the
General Counsel, U.S. Department of
Education, Washington, D.C., for the
Student Financial Assistance Programs.
Before: Frank K. Krueger, Jr., Administrative Judge.
For the reasons provided below, I uphold the findings contained in
the Final Audit
On May 19, 1993, CEI went out of business. Since it claims
that it has no assets, and cannot pay any liability assessed against it, CEI argues that this audit
proceeding should be
dismissed as moot. CEI relies on several cases issued by ED in which termination proceedings
where dismissed as moot because the institutions had gone out of business.
See In Re Pikeville Beauty College,
Docket No. 94-36-ST, U.S.
Department of Education, Initial Decision (April 19, 1994); In Re Bliss College, Docket
No. 93-150-ST, U.S. Department of Education, Decision of Secretary (February 23, 1994).
SFAP argues that the cases cited by CEI are inapposite, since
they deal with a termination proceeding, and not an audit proceeding, the former dealing with the
termination of an institution's eligibility to continue to participate in Federal student aid
the latter dealing with liability of claims made by the government.
I conclude that the case is not moot. The argument made by SFAP
is correct; there is a
fundamental difference between an audit liability appeal and a termination proceeding. If the
decision of ED in an audit proceeding is that an institution has an outstanding audit liability,
though it has gone out of business, ED may seek to collect on that liability. Although CEI
that it has no assets, and thus ED can never collect on anything involving CEI, this is the wrong
forum to consider the issue of whether CEI has any assets, or whether CEI's owner has any
personal liability; those issues are for a bankruptcy court, or a state or local court considering
ED claim based on the outcome of this proceeding. In addition, subsequent to the filing of the
briefs in this case, the Secretary recently ruled that a Title IV program review did not become
moot because the participating school went out of business. In Re Computer Processing
Institute, Docket No. 92-20-SP, U.S. Department of Education, Decision of Secretary (April
13, 1995). Under this ruling, a Title IV audit review cannot be considered moot simply because
school in question goes out of business. Finally, it should be noted that the cases relied on by
were reversed by the Secretary, again subsequent to the filing of briefs in this case. It is no
longer the controlling ED precedent that a termination proceeding is moot when the institution
which is the subject of that proceeding goes out of business. See In Re Fisher Technical
Institute, et al., Docket Nos. 92-141-ST, 92-94-ST, 93-27-ST, and 94-36-ST, U.S.
Department of Education, Consolidated Order of Remand issued by Secretary (January 27,
II. Denial of Due Process.
CEI argues that it is unable to defend itself since, on June 9, 1993, it turned over the records necessary to respond to the Final Audit Review Determination to OIG. CEI further argues that OIG has denied it access to the records at issue because it would only make those records available during normal business hours, 8:30 A.M. to 4:30 P.M., Monday through Friday. OIG would not allow CEI to use its copying machine, but required CEI to arrange to have a copier brought into the OIG office to make copies. CEI argues that it has no assets, and cannot afford to have someone review the records during normal business hours (a former CEI employee
volunteered to review the records in the evening or on weekends), or have the records
at its own expense. Thus, CEI contends that it cannot defend itself and is being denied due
CEI's argument is rejected. The President and sole owner of CEI is
James C. Fedalen, a
practicing attorney in California. When Mr. Fedalen made the decision to turn the records over
OIG without making copies, he knew that his corporation was subject to an audit report which
contained findings adverse to CEI. In addition, Mr. Fedalen knew that, as a Title IV participant
going out of business, CEI would have to make arrangements for a close-out audit, which, one
could safely assume, would require a retention of school records. Since Mr. Fedalen is a
practicing attorney, I must assume that he took an intelligent risk that he would no longer need
those files, and knew the potential consequences of his action.
The decision by OIG to make the pertinent records available during
normal business hours
was entirely reasonable. Under the Freedom of Information Act (FOIA), 5 U.S.C. § 552,
not required to make files available except during normal business hours, and is allowed to
a reasonable fee for reproduction. Other than the possible exception of requiring CEI to arrange
for its own reproduction, OIG's action with regard to the CEI records was consistent with its
legal responsibilities under FOIA. If CEI was not happy with this arrangement, it should have
filed a formal FOIA request, which provides a mechanism for administrative and judicial review
any conditions laid down concerning the release of documents. FOIA also provides that the first
one-hundred pages of a FOIA request are reproduced without charge to the requester and that,
under some circumstances, ED will waive all fees involved in responding to a FOIA request.
To accept CEI's argument that the Federal government should pay
for the reproduction
costs would mean that the Federal taxpayers would be subsidizing Mr. Fedalen's corporate
decision, or irresponsibility, to release the documents without keeping copies. In addition,
although CEI may have no assets, there has been no showing that Mr. Fedalen could not pay the
reproduction costs. Given the small number of files involved in this audit appeal (files
ten students), the cost involved in reproducing those files, even under the somewhat cumbersome
conditions imposed by OIG, would have been modest. In addition, Mr. Fedalen himself, or his
attorney, could have reviewed the files at issue on the OIG premises. Thus, I conclude that there
was no denial of due process in this audit appeal.
III. Liability for the Period of July 1, 1990, through June 30, 1991.
CEI argues that it has no responsibility for any claims arising
during this period, since it
did not take over operation of its cosmetology program until July 1991. This argument too must
be rejected as somewhat frivolous, and, again, it appears to be an attempt by Mr. Fedalen to
the consequences of earlier decisions.
From July 1, 1990, through June 30, 1991, CEI operated under the name of Moler Hairstyling College, Inc., in Joliet, Illinois. In August 1991, Moler Hairstyling College, Inc., was
bought by Mr. Fedalen, who then changed its name to Chicago Educational, Inc., and moved the
location of the school to Chicago. When ED was reviewing whether Chicago Educational, Inc.,
was eligible to continue participation in the Title IV programs, as the successor to Moler
Hairstyling College, Mr. Fedalen, through the same counsel representing him in this proceeding,
vociferously argued that Moler Hairstyling and CEI were the same institution, but with a new
name and location. In addition, Mr. Fedalen represented to OIG that,
as part of the purchase
agreement with the previous owners of Moler Hairstyling College, Mr. Fedalen assumed
responsibility for any liability that was incurred by Moler under the Title IV programs.
(See SFAP Exhibit 9.) Now, Mr.
Fedalen argues that Moler and CEI were separate corporate entities.
I find that the weight of the evidence demonstrates that these two institutions were the same, and
that when Mr. Fedalen purchased Moler Hairstyling College, the changed corporate structure
assumed the liabilities of the earlier structure.
Issued: July 12,
Washington, D.C. Frank K. Krueger, Jr.
Sarah L. Wanner, Esq.
Office of the General Counsel
U.S. Department of Education
600 Independence Ave., S.W.
Washington, D.C. 20202-2110