Appearances: Jack L. Simms, Jr., Esq.,of Leesville, Louisiana, for
Morelli, Esq., Office of the General
Counsel, U.S. Department of Education, for the
Office of Student Financial Assistance Programs.
Before: Thomas W. Reilly, Administrative Law Judge
The Respondent, Art of Beauty College (ABC), filed a timely
notice of appeal and request for hearing contesting a notice of
intent to terminate the school's eligibility to participate in
and receive further funds under several programs authorized in
Title IV of the Higher Education Act of 1965, as amended (Title
IV), 20 U.S.C. §1070 et seq. The termination action is based upon the school's failure to
submit its most recent compliance
audit, on its repeated violations of Title IV program
requirements, and also upon the fact that the school filed for
bankruptcy. Respondent also contests a notice of intent to fine
the school $36,900 for certain Title IV violations.
On September 23, 1994, ABC appealed the Department's proposed termination and fine, and requested a hearing. This proceeding is governed by 34 C.F.R. Part 668, Subpart G, and the Department has the "burden of persuasion" (34 C.F.R. 668.88(c)(2)).
The hearing on the record was conducted in Shreveport, Louisiana,
on March 1, 1995. Both sides were represented by counsel.
Counsel stipulated that all exhibits identified by both sides
could be received into evidence without objection to
admissibility, including some identified for the first time at
the hearing.See footnote 1 1/ However, some of ABC's exhibits were never discussed by either witnesses in testimony or by counsel in argument at the hearing and, accordingly, will not be discussed in detail here as they appear to have limited materiality to the legal issues in this proceeding. (These include, for example, personal medical statements relating to the condition of Patricia Diane Ford, the owner of the subject school, who was the only witness on behalf of ABC to testify at the hearing.)
Counsel for ABC argued that Respondent does not dispute or
contest the facts set forth in the exhibits and basic documents
of the Student Financial Assistance Programs (SFAP or ED), nor
does he seriously contest that ED can take the action it proposes
so far as the law and the regulations are concerned. However,
the basic thrust of his position is that there are "mitigating
circumstances" that should be considered by the Judge, and that
the Judge has the discretion to set aside ED's proposed actions
in view of the attendant circumstances and the hardship ABC's
owner has already undergone and will undergo in the future if she
does not have access to additional Federal education funds that
would allow the school to continue in operation, as well as to
pay off the fines or assessments now demanded by ED, and to make
student loan refunds still outstanding and unpaid.
ABC is a proprietary school owned and operated by Ms. Patricia Diane Ford, offering courses in cosmetology. The college operated a main campus in Leesville, Louisiana, with branch campuses in DeRidder, Louisiana, and Jasper, Texas. However, there was testimony from Ms. Ford that only the Leesville campus would remain open. The college has been participating in Title IV programs since 1985, and its most recent program participation agreement was signed July 22, 1991. On March 31, 1994, the school was required to file a compliance audit for the period July 1, 1991-June 30, 1993, with the Department's Office of the
Inspector General (OIG). The audit was not filed on the due
date. As of the present time, the required audit has not been
filed with the Department. (See testimony of John Kucholtz, ED
Audit Coordinator in the Inspector General's office, Dallas,
Texas.) All participants in Title IV are required to have
periodic audits performed which review the school's compliance
with Title IV program requirements. 20 U.S.C. §1094(c); 34
On April 21, 1994, the school filed a petition for bankruptcy
with the U.S. Bankruptcy Court for the Western District of
Louisiana. The bankruptcy petition lists the debtor as "Patricia
Diane Ford, d/b/a Art of Beauty College." Originally filed under
Chapter 13 of the Bankruptcy Laws, it was later changed to a
petition under Chapter 11. (ED Ex.4)
The Department of Education conducted a program review in January
1994, and ED issued a Final Program Review Determination (FPRD)
on June 23, 1994, citing several violations of Title IV. The
violations included failure to make timely Federal Family
Education Loan (FFEL) and Federal Pell Grant (Pell) refunds. The
FPRD noted that similar violations were found in the school's
compliance audit for award years 1989-1991. (ED Ex.6) The
Department assessed $14,171 in liabilities for those violations.
The school did not appeal the findings in the FPRD. To the
present time, the school has not paid those outstanding
On September 2, 1994, the Department issued a Notice of Intent to
Terminate the Eligibility of the school to participate in Title
IV programs, based upon the school's failure to submit the
required compliance audits for award years 1991-1992 and 1992-
1993, and its repeated violations of Title IV program
requirements specified in the June 1994 FPRD. (ED Ex.10) Also,
the Department assessed fines totalling $36,900 for the Title IV
violations. On November 4, 1994, the Department amended its
termination notice to include the bankruptcy filing as a separate
grounds for termination. (ED Ex.11)See footnote 2
Two witnesses testified for the Department of Education -- John Kucholtz, from ED Region VI, Office of the Inspector General,
Dallas, Texas; and Michael Wade, an Institutional Review
Specialist from the Institutional Review Branch, Office of
Student Financial Assistance, ED Region VI, Dallas, Texas. The
ED witnesses discussed and were further questioned about the
missing compliance audits and the program review documents
relating to the ABC school review. Mr. Wade conducted the
program review and issued the FPRD on June 23, 1994.
Ms. Patricia Diane Ford, sole proprietor and owner of the Art of
Beauty College, was the only witness for the respondent school.
She tesified to the problems she has been having lately and her
intention to do the right thing, but that lack of funds prevented
her from doing all that was required by ED. She testified that
her ex-husband took care of the administrative and financial aid
matters before their divorce. She also testified that she had
paid a CPA to do the required audits, but that he never sent them
in. She thinks he requested an extension of time but cannot be
sure that he did so. She does not now have the funds to pay the
overdue student aid refunds.
Counsel for the school argues (brief, Dec. 21, 1994) that "in
neither of (the bankruptcy) proceedings has the debtor attempted
to include or seek relief against the U.S. Department of
Education, or any other state or Federal agency," and that "the
institution has not filed for bankruptcy, but that the owner,
individually, has filed" the subject petitions. However, I find
this to be a distinction without a difference. The sole owner of
the subject school is Ms. Patricia Diane Ford; judging by her
testimony this is her only business and has been for some 13
years. The title of the original petition in bankruptcy was
"Patricia Diane Ford, d/b/a Art of Beauty College," and it
clearly deals with debts incurred by Ms. Ford through and in
connection with her operations of the school. So, in essence, it
is the institution that is in bankruptcy and clearly its
operations are directly affected by the bankruptcy filing. Ms.
Ford owns, manages and directs the policies and day-to-day
activities of the institution. (Cf., 20 U.S.C. §1088(4)(A).)
The argument is also made that terminating the institution's
eligibility (to continue in business and receive more Federal
funds) "is in direct conflict with the provisions of the U.S.
Bankruptcy Code which prohibit...discrimination against persons
who have filed bankruptcy proceedings by effectively preventing
them from engaging in business." However, the "automatic stay"
provisions of the bankruptcy laws (11 U.S.C. §362(b)(16))
specifically exempt from the stay "any action by a guaranty
agency, as defined in §435(j) of the Higher Education Act of 1965
(20 U.S.C. 1001 et seq.) or the Secretary of Education regarding
the eligibility of the debtor to participate in programs
authorized under such Act."
To be eligible to participate in Title IV programs, a school must
meet the definition of an "institution of higher education." See 20 U.S.C.
§1094(a). The definition of an "institution of higher
education" includes proprietary schools such as the Art of Beauty
College. 20 U.S.C. §1088(a). However, the same statute
specifically excludes from that definition institutions which
file for bankruptcy. 20 U.S.C. §1088(a)(4):
(4)An institution shall not be
considered to meet
the definition of an institution of higher
education in paragraph (1) if --
(A)the institution, or an affiliate of the
institution that has the power, by contract
or ownership interest, to direct or cause
the direction of the management or policies
of the institution, has filed for bankruptcy.
It follows that by filing for bankruptcy on April 21, 1994, this school effectively removed itself from the Title IV definition of an "institution of higher education", and it is thereby ineligible to participate in Title IV programs. 20 U.S.C. §1094(a). There is no discretion available here for the Judge to substitute his judgement for the clear mandate of the statute.
Respondent's counsel also makes the argument that the term "file
for bankruptcy" is "vague and non-specific," and thus any attempt
to make those provisions the basis of an action against any
entity is "an unconstitutional deprivation of the entity's right
to due process of law" (citing the U.S. Constitution). I simply
find that argument to be without merit. See footnote 3
There are other separate and independent grounds for terminating the eligibility of this school from participation in Title IV programs. To participate in these programs, the school signs a program participation agreement with the Education Department which specifies various requirements that must be complied with
by the school. 20 U.S.C. §1094. The Secretary has the authority
to terminate a school's eligibility based on the school's
violation of any Title IV regulation. See 34 C.F.R. 668.86.
In this case, the school failed to file its required compliance audits for award years 1991-1992 and 1992-1993. Compliance audits are essential to the Department's ability to ensure that institutions properly account for Title IV funds, and they are required by both law and regulations. 20 U.S.C. §1094(c); 34 C.F.R. 668.23(c), 668.90(a)(3)(iv). Title IV regulations require the termination of a school's eligibility for failing to meet auditing requirements prescribed in 34 C.F.R. 668.23(c). As expressed in 34 C.F.R. 668.90(a)(3)(iv):
In a termination action against an institution based
on the grounds that an institution has failed to comply
with the requirements of §668.23(c)(4), the hearing
official must find that termination is warranted.
For cases wherein the above point has already been ruled upon by
the Secretary, see In re San Francisco College of Mortuary Science, Dkt.No.92-8-ST, U.S. Dept.
of Education (December 31, 1992), affirmed by the Secretary (March 26, 1994), and In re
Institute of Multiple Technology, Dkt.No.92-26-ST, U.S. Dept. of Education (Nov.26, 1993),
affirmed by the Secretary (April 18, 1994).
In addition to the termination action, the school has been
assessed a series of fines totalling $36,900 as punishment for
violation of the Title IV auditing requirements ($18,500 fine),
and for repeated violations of refund requirements under the Pell
grant and FFEL funds regulations ($18,400 fine). If a student
withdraws from an institution prior to the completion of its
educational program, the institution is required to refund
unearned tuition to the appropriate lender or Title IV program
account. 34 C.F.R. 668.22, 682.606, 682.607. Refunds of
unearned Pell funds must be made within 30 days from the date the
student officially withdraws, and refunds of unearned FFEL funds
must be made within 60 days after the student's withdrawal. The
documentary evidence (Findings 1 & 2 of the FPRD and Finding 6 of
the 1989-1991 compliance audit) clearly establishes that this
school repeatedly failed to comply with the refund requirements.
The maximum possible fine is $25,000 per violation, 34 CFR
668.84(a), and the amount of the fine is to reflect "(t)he
gravity of the violation ... and (t)he size of the institution."
34 C.F.R. 668.92(a). Although respondent's counsel argues that
the $36,900 total fine appears to be "some arbitrary figure
somebody pulled out of the air," See footnote 4
the testimony of the ED witnesses, the ED documentary exhibits and the nature of the
violations (some repetitive) indicate that the fines have been
fairly and reasonably calculated.
It is not that the Judge has no sympathy for the problems the
school owner has had to deal with -- domestic problems, medical
problems, and IRS problems -- but the Judge simply has no
discretion to disregard a mandatory statute and regulation that
removes eligibility from a proprietary school whose sole owner
has filed for bankruptcy. Nor does the Judge have the option to
eliminate fines for clear violations of Title IV requirements.
Just as the school has a fiduciary relationship toward the
Federal funds and loan funds it receives, so a Federal agency has
a fiduciary relationship toward the Federal funds (tax dollars)
it is authorized to grant or lend. For the past couple of years
this school has had its financial books and records not carefully
monitored with regard to the Federal HEA funds it has been
charged with dispensing and tracking, particularly with regard to
required refunds, when and to whom they must be paid. And the
failure to have timely required audits conducted is an ominous
portent for a school requesting to be kept in the Title IV
program, and requesting additional Federal education funds. I
recognize that Ms. Ford's ex-husband took care of all these
financial and administrative matters before he departed, with Ms.
Ford simply handling the teaching aspect of the business. I also
recognize her disappointment in the non-performance of the CPA
upon whom she relied. However, the ultimate responsibility for
ensuring timely audits is hers, as owner/manager of the school.
Furthermore, sympathy and understanding cannot substitute for
good business management, and a Federal agency that would
continue to dispense Federal funds to a school in such a state of
record-keeping disarray would be ignoring its own fiduciary duty
to those Federal funds.
FINDINGS AND CONCLUSIONS
After due consideration of all the testimony and evidence of record, and for the reasons discussed above, I find that the Department has met its burden of persuasion in establishing that its proposed termination of eligibility of the respondent school is clearly warranted on the dual grounds (each independently sufficient to support termination) of: (1) the filing for bankruptcy of the school's sole owner, and (2) the school's
failure to submit its most recent compliance audit, and repeated
violations of Title IV program requirements relating to failure
to make timely required refunds.
I further find and conclude that the fines assessed against
respondent are warranted for the violations involved, and have
been reasonably and fairly calculated in accordance with the
standards and criteria set forth in the applicable regulations.
It is hereby ORDERED that the eligibility of the Respondent
school to participate in Title IV HEA programs be TERMINATED in
accordance with the earlier directions from the U.S. Department
of Education to the Respondent Art of Beauty College.
IT IS FURTHER ORDERED that the Respondent school, Art of Beauty
College, pay the total fine of $36,900 for the cumulative
violations of Title IV program requirements, the fine to be paid
in accordance with the directions earlier transmitted to the
school by the U.S. Department of Education and the Administrative
Billing & Collections Section, USDA, OFM, NFC (see Respondent's
Thomas W. Reilly
Administrative Law Judge
Issued: March 28, 1995.
S E R V I C E L I S T
A copy of the attached INITIAL DECISION was sent to the following
by Certified Mail, Return Receipt Requested, on the 28th day of
Jack L. Simms, Jr., Esq.
100 East Texas Street
P.O. Box 1554
Leesville, Louisiana 71496-1554.
Denise Morelli, Esq.
Office of the General Counsel
U.S. Department of Education -- FOB-10B
600 Independence Ave.,S.W.-- Rm.5215
Washington, D.C. 20202-2110