IN THE MATTER OF METROPOLITAN CAREER INSTITUTE,
Docket No. 94-6-SP
Student Financial Assistance Proceeding
Appearances: David H. Larry, Esq., and Gregory P. Schaffer,
Esq., of Manatt, Phelps & Phillips, for the
S. Dawn Robinson, 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
This is an appeal under Subpart H of 34 C.F.R. Part 668 contesting a Final Program Review Determination (FPRD) issued on October 28, 1993, 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 $17,423,964 which represented all of the funds disbursed to the Metropolitan Career Institute (MCI or the school) under Title IV of the Higher Education Act of 1965 ("Title IV funds") in the 1989-90 and 1990- 91 award years, and included costs and estimated default losses of $275,019 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. MCI closed on August 30, 1991,See footnote 2 2/ shortly after the issuance of ED's Program Review Report. The
reason given by MCI 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 MCI's operation. SFAP has simplified this
proceeding by concentrating on MCI's failure to account for funds
received (failure to provide a close-out audit), and only for
those last two award years. Therefore, other sources of
liability specified in the FPRD are not included in this review.
The parties have stipulated and agreed: (a) that MCI has not (to
this date) filed the required close-out audit, and (b) that the
sole issue here is the impact of MCI'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 accounting required by
As a threshold matter, Respondent makes the argument (Opening
Brief, at 3, fn.3, & at 5) that the FPRD should be dismissed as
moot "in light of the commitment by NATS to perform a full close-
out audit for MCI" (sometime) "over the next twelve months."
However, I fail to see how a "commitment" is any more compelling
than a mandatory regulation not complied with when the school
closed some three-and-a-half years ago. Under these circum-
stances, a "commitment" appears to be no more than a mere
representation that something may be done sometime in the future.
I recognize that NATS officials tried informally to negotiate
with ED to accept a "truncated" (more abbreviated) audit "as
detailed ... as available cash flow would allow," and that this
offer was rejected. I also understand that the absence of cash
resources was the underlying reason an audit firm was not
retained. But from a legal standpoint, the asserted "commitment"
in no way renders this proceeding "moot."
Respondent also advances the argument that both the Administra-
tive Procedure Act (APA) and the General Education Provisions Act
(GEPA) prohibit enforcing any substantive rule or any regulation,
guideline, interpretation, order or requirement of general
applicability unless it has been subject to public notice and
comment. (APA, 5 U.S.C. §551 et seq.; GEPA, 20 U.S.C. §1232.)
But these are not "new" regulations that are being utilized by ED
in this proceeding. Whatever Notice of Proposed Rulemaking
(NPRM) procedural requirements (including notice and comment) were in effect at the time the
pertinent regulations were enacted
have long ago taken place and been laid to rest.See
Respondent next argues that 34 C.F.R. 668.25 provides no
authority for imposing liabilities amounting to "pay-it-all-back"
refunds in the huge amount involved here ($17,423,964), because
that would amount to a "fine," "sanction," or "penalty" that
be heard only as part of a Subpart G proceeding (which arguably
yields greater procedural protections than Subpart H), and
wherein the maximum civil penalty or "fine" would be $25,000,
citing 20 U.S.C. §1094(c)(3)(B)(i) and 34 C.F.R. 668.84.
However, this is clearly not a fine or civil penalty case, and it
is not being heard under Subpart G.See footnote 4
It is a Subpart H
proceeding seeking reimbursement for Federal funds either not
properly accounted for or not properly disbursed. Respondent had
the choice of either properly accounting for those funds (close-
out audit) or, in the alternative, reimbursing the full amount of
the Federal funds received for which there is no accounting.
Respondent places the shoe on the wrong foot when it argues that
since the Department cannot specify precisely which funds were
improperly disbursed by the school and has no close-out audit
with which to make such review and determination, ergo, the
Department is "out of luck," goodbye Federal funds, because ED
does not have the evidence it needs to prove its case.
To the contrary, the regulations gave MCI, first through the
medium of a close-out audit and later, within the time allowed
for an appeal to be brought, the opportunity to submit evidence
supporting its position and justifying all Title IV expenditures
made. MCI, having full custody of its own records and the means
for its own defense, has the burden of proof in this proceeding, 34 C.F.R. 668.116(d).See footnote 5 By providing an accounting (a
required duty of any fiduciary) for the Title IV funds MCI
administered in award years '89-'90 and '90-'91, MCI could have
totally avoided or reduced the liability asserted in the FPRD,
but to this date it has declined to do so. It has not supplied
an audit or even a "truncated" audit. It cannot, at the same
time, be heard to argue that since it has failed to account, the
Department lacks the necessary evidence to "prove" that it
misused Federal funds. All of the Title IV funds for the two
award years are the expenditures "questioned" by SFAP in the
FPRD, and precisely because MCI has declined to account for them.
It is MCI's burden to prove that the questioned expenditures were
proper and that MCI complied with program requirements in the way
it disbursed those Federal funds.
Because MCI failed to carry its burden of proof, it is liable to reimburse the Department for the full amount of money identified and questioned in the FPRD. In the Matter of Illinois Medical Training Center, Dkt.No.93-87-SA, U.S. Department of Education (ALJ Decision, May 9, 1994), at page 9); accord City of Oakland v. Donovan, 703 F.2d 1104 (9th Cir. 1983) (a grantee that failed to provide a required audit was held liable for all funds received); Montgomery County v. Department of Labor, 757 F.2d 1510 (4th Cir. 1985) (a grantee that could not supply proper documentation of expenditures made was held liable for the entire sum at issue); see also Wooton Land & Fuel Co. v. Ownbey, 265 F. 91, at 99-100 (8th Cir. 1920) (a fiduciary must prove any allowances or credits he claims to have made on behalf of his principal).
The failure of a fiduciary to provide an accounting cannot be
held to insulate that fiduciary from liability for funds supplied
by the principal, nor can it be held that the absence of such
accounting operates to delay or defer the fiduciary's duty to
reimburse such funds.
The recent case of Pan American School, Inc., Dkt.No.92-118-SP,
U.S. Department of Education (October 18, 1994), involved
circumstances similar to those here. SFAP had asked for
documentation to establish the amount of improperly disbursed
Title IV funds over a period of years. Rather than perform the review of all the files of all
recipients, Pan American pleaded
financial hardship and, instead, offered to perform a truncated
review (like MCI herein). SFAP declined the offer and issued an
FPRD which assessed liability for the full amount of Title IV
funds received by the school for the period questioned.
Chief Judge Canellos determined, inter alia, that --
...(U)nder the circumstances of this case, Pan
American's refusal to provide SFAP with the data
requested undercuts the school's position that all
Title IV funds should not be recovered.
. . . .
...SFAP has no choice, in the circumstances such as the ones before me, where the institution fails to provide [the Department] with the requisite data needed to determine whether, and, if so, to what extent, Title IV funds were spent contrary to the requirements of Title IV, other than to require the return of all Title IV funds disbursed during the period at issue.
In Re Pan American School, Inc., Dkt.No. 92-118-SP, U.S. Dept. of Education (October 18, 1994), at 5-6, emphasis added.
ED's reviewers notified MCI that they questioned all of the Title
IV funds MCI received, based upon MCI's failure to account for
those funds. Accordingly, it was reasonable for SFAP to
calculate and, in some cases, to estimate MCI's liability for the
Federal funds it had been disbursed or the loan programs
administered which subjected the Federal Government to expenses
and liability exposure. MCI was allowed, on several occasions,
the opportunity to rebut the estimates made by SFAP, but it
declined to do so, while all the time possessing the very
documents that could form the basis for its rebuttal. Instead,
MCI has chosen to argue that the Department lacks any ability to
assess such liability.
The regulations specify a number of actions a school must take
when it closes. Inter alia, the school must supply all reports
required by each Title IV HEA program in which the school
participated, 34 C.F.R. 668.25(a)(2)(i); it must inform the
Secretary of the arrangements made for proper retention and
storage of all program records, 34 C.F.R. 668.25(a)(3); it must
distribute refunds of unearned institutional charges, 34 C.F.R.
668.25(a)(5), 668.22; it must return to the Secretary and
lenders, as appropriate, unexpended grant funds and undelivered
Guaranteed Student Loan (FFEL) proceeds, 34 C.F.R. 668.25(b); and
it must supply a letter of engagement for an independent audit of
all Title IV HEA program funds it received, "the report of which
shall be reported to the Secretary within 45 days after the date
of the letter of engagement," 34 C.F.R. 668.25(a)(2)(ii). In
addition to the regulations, the Department sent a number of reminder letters to MCI reminding
it of its close-out
obligations. It was not until August 1994 (three years after the
school closed) that an audit firm was retained by NATS, the
parent corporation, to conduct the required close-out audit for
the seven closed schools, including MCI. To this date there has
been no close-out audit filed for MCI. Other regulatory close-
out items remain unperformed.
Regarding Stafford Loan default costs, MCI disputes ED's figures
as to the amount of Stafford Loan funds disbursed by MCI for the
award years in issue. The Department's figures were obtained
from ED's Accounting & Financial Management Service, Program
Finance Branch, ED Ex.1-6 and Ex.1-12. MCI's own data used in
this dispute is data compiled for purposes of this litigation and
at this point appears to have questionable validity.
MCI does not appear to quarrel with ED's use of the school's FY
1991 cohort default rate of 44.2% (ED Ex.1-6) as being a
conservativeSee footnote 6 estimate of default
losses from Stafford
loans. When applied to the total Stafford and Supplemental Loans
for Students (SLS) loan amounts, this results in estimated
default losses of $275,019. (ED 1-6 & 1-12.) MCI apparently
does not dispute ED's evidence that MCI received and disbursed
$16,897,680 in Pell grants and $251,265 in Supplemental
Educational Opportunity Grants (SEOG), although MCI clearly
disputes what it denominates as the "pay-it-all-back" philosophy
Regarding "interest and special allowance costs," MCI disputes
SFAP's estimate. In this case, MCI is in far better position to
determine those costs than is SFAP, being in possession of the
very records needed to make the computation. The costs to the
Department of interest payments made while MCI students were in
school during the 1989-90 and 1990-91 award years depends on the
duration of those students' attendance. Obviously, MCI has ready
access to such records, and the Department does not. But such
elements of the loss calculation as the interest rate on Stafford
loans are public information, and equally available to MCI.
Thus, the importance and critical need of the missing final
FINDINGS AND CONCLUSIONS
After due consideration of all the evidence of record, including
the FPRD, exhibits and briefs of the parties, I find and conclude that MCI is liable for the full
amount of Title IV HEA funds
disbursed in the subject award years for which no accounting has
been made ($17,423,964), less, however, those amounts calculated
or estimated by ED related to the Government's Stafford Loan
default costs and Interest and Special Allowance Costs.
As to those latter items, I have a more flexible remedy. First,
liability for those potential charges and expenses will be more
generally described (as suggested in SFAP's Opening Brief, at 20-
21) rather than expressing liability as a firm, fixed amount,
i.e., the liability of the institution is for whatever amount
would compensate the Department for all interest and special
allowance payments made for loans disbursed to MCI students
during the 1989-90 and 1990-91 award years, as well as default
Secondly, MCI will be allowed until June 14, 1995, to produce a
certified audit limited to those particular items (or as part of
any full audit completed by then). If more precise figures are
arrived at that are documented, credible, reliable and acceptable
to SFAP, then those new audit figures will be accepted as MCI's
liability for the Stafford loan default costs, special allowance
costs, and interest charges. Otherwise, the amounts already
reasonably and conservatively calculated and estimated by SFAP
for those items will be accepted as MCI's liabilities.
I find that MCI has failed to sustain its burden of proving that
it should not be required to return the full amount of Federal
funds disbursed under Title IV of the Higher Education Act, in
accordance with the findings set forth in the FPRD and the
regulations requiring a close-out audit. 34 C.F.R.
I also find that it was proper and appropriate to bring this
proceeding, a review of a Final Program Review Determination,
under Subpart H of 34 C.F.R. Part 668, rather than under Subpart
G as asserted by the Respondent. 34 C.F.R. 668.111 (1992).
Thomas W. Reilly
Administrative Law Judge
Issued: April 12, 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 12th 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