IN THE MATTER OF Docket No. 94-35-SP
Student Financial Respondent. Assistance Proceeding _________________________________________________________________
Appearances: David H. Larry, Esq., and Gregory P. Schaffer,
Esq., of Manatt, Phelps & Phillips, Washington,
D.C., for the Respondent.
S. Dawn Robinson, Esq., Office of the General
Counsel, U.S. Department of Education, Washington,
D.C., for the Office of Student Financial
Before: Thomas W. Reilly, Administrative Law Judge
This is an appeal under Subpart H of 34 C.F.R. Part 668 contesting a Final Program Review Determination (FPRD) issued on November 6, 1992, by the Region II Office of Student Financial Assistance Programs (SFAP), U.S. Department of Education (ED or the Department). The FPRDSee footnote 1 1/ ordered the return of $3,172,785 which represented all of the funds disbursed to the Nassau School for Medical and Dental Assistants (Nassau or the school) under Title IV of the Higher Education Act of 1965 ("Title IV funds") in the 1990-91 and 1991-92 award years, and included costs and estimated default losses under the Stafford Loan program. The basis for the demand for reimbursement was the school's failure to perform a required file review and failure to submit a required close-out audit when the school closed. Nassau School
closed on February 28, 1992.See footnote 2
The reason given by Nassau for failure to have the close-out audit performed was lack of
financial resources at the time.
While the Department's regulations require close-out audits
covering all Title IV funds received by a school, 34 C.F.R.
668.25(a)(2)(II), the FPRD asserts liabilities only for the last
two award years of Nassau's operation. Insofar as the merits of
the dispute are concerned, SFAP simplified this proceeding by
concentrating on Nassau's failure to account for funds received
only for the last two award years (failure to provide a close-out
audit). Therefore, other sources of liability specified in the
FPRD are not included in this review. The parties have agreed:
(a) that Nassau has not (to this date) filed the required close-
out audit and (b) that the sole issue here (should the merits be
reached) is the impact of Nassau's failure to perform the
required audit (i.e., whether SFAP can demand return of the full
amount of Title IV funds disbursed in those two award years based
solely on failure to provide the close-out audit required by
However, before reaching the merits of the FPRD dispute and the
SFAP demand for reimbursement for the full amount of Title IV SFA
funds disbursed during the two subject award years, a serious
preliminary jurisdictional question must be resolved -- the
question of whether Respondent's appeal was timely filed.
This is a companion case to Metropolitan Career Institute (MCI), Docket No. 94-6-SP, U.S.
Dept. of Education (April 12, 1995) for
which the Initial Decision was issued recently by the same Judge
reviewing the instant case. The appeal in that MCI proceeding
was timely filed. Otherwise, the two proceedings are virtually
identical in that both schools are among the seven owned and
operated by North American Training Services, Inc. (NATS), the
parent company, or one of its subsidiaries. All seven were
closed by NATS in the period August 1991 - June 1992 and all
seven failed to produce a close-out audit as required by the
regulations. In both the MCI and Nassau cases the defenses are the same, the corporate officials
dealt with and communicated
with by SFAP are the same, and the defending Respondents' law
firms are the same. The only important difference is that the
appeal in MCI was timely filed, while in the Nassau case it appears that it was not.
Had the present appeal been timely filed, in view of the identicality of the defenses on the merits, undoubtedly this Judge's decision on the merits would be the same on all the issues (i.e., adverse to the school's appeal).
In both cases, the Respondent argued that the action ordered in
the FPRD should be held to be "moot" because the school made a
"commitment" (June 14, 1994) to conduct the required full close-
out audit sought by SFAP, asserting that at some time in the
future (within a year after June 14, 1994) the close-out audit
would be conducted on each of the seven closed schools. (See
discussion on that in MCI decision, at 2.)
In both cases, the Respondent argued that the Administrative
Procedure Act (APA) and General Education Provisions Act (GEPA)
required "notice and comment" before such action could be taken.
(Rejected; see discussion on that point in MCI decision, at 2-3.)
In both cases, Respondent argued that 34 C.F.R. 668.25 provides
no authority to SFAP to demand "pay-it-all-back" refunds because
that would amount to a "fine," "sanction'" or "penalty" that
be heard only as part of a Subpart G proceeding, wherein
Respondents have greater procedural protections than under
Subpart H, and wherein the maximum "fine" would be only $25,000
(rather than the $3,172,785 demanded here and $17,423,964 in
In both cases, Respondent argued that ED has the burden of proof
and that ED cannot sustain this burden because it needs the
documents in the missing close-out audit to do so. (See 34
C.F.R. 668.116(d) which places the burden of proof squarely on
the Respondent to prove "that expenditures questioned or
disallowed were proper, and that the institution complied with
program requirements.")See footnote 3
For a fuller discussion of all the above issues, see the MCI decision, which is hereby
incorporated by reference to the extent
that identical Nassau issues exist.
In the present proceeding, Nassau argues that the appeal was timely filed because "Nassau
did not receive the Final Program
Review Determination until shortly after December 14, 1993" when a copy was sent to
Debra Valdez of NATS "at Ms. Valdez's
request." The FPRD was dated and mailed November 6, 1992, by certified mail, return
receipt requested. (ED-10, ED-11.) It
was returned to ED by the Post Office, marked "Refused." An
institution must file its request for review "no later than 45
days from the date it receives the final audit determination or
final program review determination." 34 C.F.R. 668.113(b).
Nassau argues that service on NATS (Nassau's parent corporation)
was not sevice upon Nassau, the institution that is the subject
of the FPRD. But all dealings by the Department involving Nassau
at that time were with NATS officials and all communications were to the NATS address (MacDonell Roehm, President and Chief Executive Officer, NATS) or to the address of Technical Career Institutes, another of the NATS schools (c/of: Debra Valdez, NATS "Corporate Director of Financial Aid" who was handling close-out arrangements for Nassau). Both NATS and Nassau School often had the same mailing address: "120 West 30th Street, New York, New York 10001." (Cf., Resp.Exs. 2, 3B, 3C, 3D; Exs. ED-2, ED-3, ED-5, ED-6, ED-7, ED-8, ED-9, ED-10, and letterheads therein.)
To put the claim of alleged earlier non-receipt into some
perspective, a review of events as they took place (and the
people involved) might be helpful.
On December 3, 1991, ED notified Nassau School that it planned to
conduct a program review beginning December 16th. The program
review of Nassau's Title IV compliance was conducted December 17-
20, 1991. During the review, ED became aware that Nassau
intended to close. ED reminded Nassau of their closed school
requirements under 34 C.F.R. 668.25 by letter of December 24,
1991. (The first letter, 12/3/91, was addressed to Mr.
Stieglitz, president of Nassau School, ED-1; the second letter,
12/24/91, went to Mr. Roehm, NATS president, ED-2.)
The December 24th letter to Mr. Roehm requested a response in 30
days, but there was no reply. ED thereafter sent a follow-up
letter to Mr. Roehm (NATS) on February 24, 1992, reminding him of
the December 24th closed-school letter and the lack of a reply
(ED-3). Nassau School closed February 28, 1992.
On March 6, 1992, ED issued a Program Review Report to Nassau
(this time addressed to Mr. Stieglitz, President of Nassau
School), requesting that Nassau respond within 30 days (ED-4).
On April 29, 1992, ED sent Mr. Roehm (NATS) another letter (ED-
5), again requesting a response to the December 24, 1991 closed-
school letter. This letter warned that a failure of Nassau to
submit the required information within one week "may force this
office to assess liabilities for the 1990-91 award year."
On April 30, 1992, ED sent another letter (ED-6) to Mr. Roehm
(NATS) noting that the Department had not yet received a response
to the March 6th Program Review Report on Nassau School.
On May 8, 1992, on a Nassau School letterhead, Debra Valdez "Corporate Director of Financial Aid" (for the NATS corporation) replied to ED that NATS "is under contract" to "assure an orderly close-out" of Nassau's Title IV matters. She said that "(i)ndependent auditors have been engaged to perform final audits
for the period from the last audited program year to the date of
closing." But she did not specify who the auditors were nor
supply a letter of engagement, as required by the Regulations
(ED-7). 34 C.F.R. 668.25(a)(3)(ii).
On May 20, 1992, ED again wrote to Mr. Roehm (NATS), and again
requested a response to the Nassau Program Review. (ED-8.) ED's
letter warned that if Nassau did not respond by May 29, 1992, ED
would have no alternative but to assess liabilities based on
those found in the Program Review.
On May 28, 1992, ED replied to Ms. Valdez's May 8th letter by a
letter to Mr. Roehm (NATS), informing him that Nassau had failed
to respond to several issues set forth in the closed-school
letter of December 24, 1991, and the letter repeated the closed-
school responsibilities of the Nassau School. The letter also
repeated the warning that if compliance was not demonstrated by
June 10, 1992, "we will have no alternative but to assess
liabilities for the last full year the school was in operation."
On June 8, 1992, an attorney for Nassau and the other six NATS
closed schools sent a letter to ED in Washington, D.C. (Division
of Audit & Program Review, Office of Postsecondary Education),
proposing that ED "formally close" all matters relating to Nassau
and the six other NATS school, asserting that if the Department
pursued claims against the NATS schools "the filing of bankruptcy
petitions would result in their extinguishment, since the
government is at best a general unsecured creditor."(Resp.Ex.3A.)
The penultimate paragraph stated:
Accordingly, we propose that all of the pending
matters be formally closed, that proceedings respecting
those matters now in adjudication be suspended, and
that no further work be required on matters that have
not yet reached the final determination phase. Indeed,
given the fact that the corporate entities comprising
the closed schools lack material resources, these
entities are incapable of expending any further effort
in this regard.
On November 6, 1992, ED issued the subject FPRD for Nassau (ED-
10). The FPRD noted that Nassau had not supplied any response to
the Program Review Report, and had not supplied the required
financial performance reports nor close-out audits required of a
closed school. Accordingly, the FPRD set forth liabilities
approximately equal to the Department's cost of Nassau's
participation in the Title IV SFA programs during award years
1990-91 and 1991-92. (ED-10-3, -4, & App.B.)
ED mailed the Nassau FPRD to Mr. Roehm (NATS president) by certified mail, return receipt requested (ED-10, ED-11).
However, NATS "refused"See footnote 4
delivery of the envelope containing the FPRD, which envelope clearly bore the printed
return name and
address of the U.S. Department of Education, Office of Student
Financial Assistance, Region II, New York City, with whom NATS
and Nassau had been dealing all along regarding the Nassau School
closing and audits. The address used for the FPRD was the one
most often used throughout the correspondence between ED and
Nassau/NATS in the matters relating to the Nassau School, and Mr.
Roehm was the single individual most often communicated with in
matters relating to the Nassau School. (In the latter stages,
another NATS corporate official, Debra Valdez, became a regular
contact with ED over Nassau School matters.)
Over a year after the issuance of the FPRD on November 6, 1992, Debra Valdez, NATS' corporate director of financial aid, initiated contact with ED and requested a copy of the Nassau FPRD (December 14, 1993, Resp.Ex.1). It was thereafter Ms. Valdez and NATS president Mr. Roehm who read the FPRD and executed affidavits about it for use in this proceeding. Throughout the documents in the record it has been only Ms. Valdez and Mr. Roehm who have acknowledged being representatives of Nassau for purposes of this proceeding and the initial close-out negotiations.
A careful review of the correspondence related to the above
chronolgy of events makes it crystal clear that NATS was an
appropriate addressee for the FPRD and other correspondence
relating to the Nassau School, and the argument that something
addressed to the NATS president "should have been" more properly
addressed to Nassau is disingenuous, at best.
The Respondent had 45 days from November 8, 1992, to file its appeal from the FPRD (allowing two days for mail beginning and ending in Manhattan, New York City). Instead, the appeal request was mailed on January 28, 1994. This appears to have been a transparent tactical evasion to gain much more time (over a full year more) for NATS, the parent corporation, and the Nassau School before having to come to grips with the demands of the
FPRD. Any more tolerant view of appeal time limitsSee footnote 5
would open the door to schools (facing adverse FPRD's) to extend
indefinitely their appeal time by the simple expedient of
refusing to accept any mail from the U.S. Department of
There is no question, under all the circumstances of the prior
contacts, prior correspondence and negotiations, and the persons
involved, that it was entirely appropriate for the FPRD to have
been addressed to the NATS president's office.See
The Respondent's Briefs offer not the slightest suggestion as to what
other person such a document should have been sent.
NATS bald assertion that receipt by NATS did not constitute
receipt by Nassau is simply not credible under the circumstances
here. Indeed, it was NATS corporate official Debra Valdez who
finally requested to be sent another copy of the FPRD over a year
later. Beyond this, "refusal" to retain a clearly marked U.S.
Department of Education envelope is tantamount to receipt
followed by immediate rejection, but "receipt" nevertheless.
NATS and Nassau both were keenly aware that the next document
from ED would be the FPRD, as they already had received an
adverse Program Review Report followed by multiple ED requests
A fiduciary cannot simply ignore mail from his principal to avoid
accounting for funds from the principal, nor to extend appeal
time limits for a document questioning the fiduciary's use of the
FINDINGS AND CONCLUSIONS
After due consideration of the entire record and the briefs of
the parties, I find and conclude that the Respondent Nassau
School failed to file its request for appeal of the FPRD within
the 45 days allowed by Regulation, 34 C.F.R. 668.113(b).
I find that the Respondent did, in fact, "receive" the FPRD on or
about November 8, 1992, but when tendered the document by the
U.S. Post Office, with the clearly marked U.S. Department of
Education return address, the Respondent chose to refuse the envelope and not to retain
possession of it. Therefore, the
Respondent is charged with knowledge of the contents as if it had
been accepted in the ordinary, customary and usual course of
business, and cannot evade operation of the regulatory time
limits for appeal by rejection of a document it knew, or should
have known, was on its way.
Accordingly, the Respondent's request for appeal is hereby ORDERED DISMISSED for being filed out of time, and the Respondent is left in the same position as it was when first issued an adverse Final Program Review Determination assessing it with liabilities of $3,172,785 to be reimbursed to the U.S. Department of Education, and as if Respondent had never filed an appeal.
Thomas W. Reilly
Administrative Law Judge
Issued: April 17, 1995.
S E R V I C E L I S T
A copy of the attached INITIAL DECISION was mailed by Certified
Mail -- Return Receipt Requested on this 17th day of April, 1995,
to the following:
David H. Larry, Esq. S. Dawn Robinson, Esq.
Gregory P. Schaffer, Esq. Office of the General Counsel
Manatt, Phelps & Phillips U.S. Department of Education
Suite 700 -- 7th Floor 600 Independence Ave., S.W.
1501 M Street, N.W. FOB-10B, Rm.5215
Washington, D.C. 20005-1702 Washington, D.C. 20202-2110