In the Matter
Financial Assistance Proceeding
Appearances: Carol Schade , Loveland, CO., for Cosmetology
Denise Morelli, Esq., Office of the General Counsel, United States Department of Education, Washington, D.C., for Student Financial Assistance Programs.
Before: Judge Ernest C. Canellos
The basic facts are not in dispute. In July 1992, Mrs. Carol Schade, then owner of College, sold College to Mr. Richard Szanto. Mr. Szanto apparently operated the school until December 4, 1992, when College ceased providing educational instruction. As a result of the closure, on March 31, 1993, ED notified College that since it had ceased operations, it must fulfill a number of regulatory requirements in order to close-out its participation in the federal student financial assistance programs authorized under Title IV of the Higher Education Act of 1965, as amended, 20 U.S.C. § 1070 et seq. (Title IV). On April 7, 1994, the Department issued the FPRD based on College's failure to meet the regulatory requirements identified in the March 31, 1993, close-out letter. The FPRD found that despite passage of a year in which to meet those close-out requirements, College failed to perform any of the actions called for in the letter. In particular,
College failed to submit a close-out audit covering the period, July 1, 1990, to December 4, 1992
(the last audit which College submitted was for the July 1, 1989, - June 30, 1990, period). Based
on College's failure to submit the audit, ED directed College to return all Title IV funds for that
period. These included $161,252 in Pell funds and $257,042 in Federal Family Education Loan
funds. In filing College's appeal, Mrs. Schade did not dispute these facts. She argued, however,
that she had no personal liability, attributing such liability to the subsequent owner, Mr. Szanto.
Mrs. Schade asserts that after the sale of the College, she did not work at the College and claims
she retained no ownership interest and no control of records for the College after that date. She
contends that after the purchase, on September 9, 1992, Mr. Szanto applied for and received
approval from the State of Colorado, Division of Private Occupational Schools, for a change of
ownership and, on September 21, 1992, he received such approval from the National Accrediting
Commission of Cosmetology Arts and Sciences. He did not, however, complete or submit a
requesting change of ownership from ED. Subsequently, on December 4, 1992, Mr. Szanto
surrendered the College's license to the State of Colorado, relinquished all student financial
records to the State; and permanently closed down the College's operations. Mrs. Schade claims
that she neither knew about nor approved of Mr. Szanto's actions.
Mrs. Schade disputes any personal liability claiming she had no duty to file the close-out audit.
She also claims no ability to conduct a close-out audit as she lacks the records that were
relinquished to the State. Mrs. Schade's argument about the lack of records is unpersuasive. See
Indiana Barber/Stylist College, Dkt. 94-111-ST, U.S. Dep't of Educ. (March 23, 1995). In that
case, relying on 34 C.F.R. § 668.116(d), which provides that a school must satisfy its
proving that questioned expenditures were proper, the judge found that an institution could not
excuse its failure to comply with Title IV regulations by claiming that changed ownership
occurred and records were unavailable.
To participate in Title IV programs, an institution must enter into a program participation
agreement (PPA) which sets forth various requirements which must be met by the school. An
institution must account for the federal student assistance funds by submitting to ED periodic
compliance audits. 34 C.F.R. § 668.23(c). Additionally, when an institution ceases to
educational services or otherwise loses its eligibility to participate in the Title IV programs, it
must submit close-out audits to ED. 34 C.F.R. § 668.25(c). This audit report must be
to ED within 90 days from the date the school ceases operation. 34 C.F.R. § 668.25(c).
College's case, the close-out audit was to cover the time period from the time of the previous
audit, July 1, 1990, to December 4, 1992, the date of closure.See footnote 1
The evidence clearly indicates that College lost its eligibility to participate in Title IV programs
when it closed in December, 1992. In both the March 31, 1993, close-out letter and the later
FPRD, Mrs. Schade was put on notice that any change in ownership could not relieve College or
her from meeting regulatory requirements. Specifically, the letter pointed out that while a
of ownership was reported to ED, no change of ownership had been approved by ED.
Furthermore, the school's participation in Title IV programs occurred based upon a PPA
executed by Mrs. Schade as the owner and she was responsible for the proper administration of
federal funds drawn down by the school. Despite these communications, Mrs. Schade and the
College failed to respond to these requests for the close-out audit.
This current proceeding is not a change of ownership case. This is, rather, a closed school case
in which College has failed to make the necessary accounting for federal funds it received. The
regulations governing participation in the Title IV programs clearly require College to provide
with a close-out audit. Accordingly, I find that College's failure to provide a close-out audit or
make any effort to properly account for any of the Title IV funds it received during the
1990-92 period renders it liable for the return of all such funds . See In the Matter of National
Broadcasting School, Dkt. No. 94-98-SP, U.S. Dep't of Educ. (December 12, 1994), In the
Matter of Matter of Lehigh Technical School, Dkt. No. 94-193-SP , U.S. Dep't of Educ. (March
17, 1995) and In the Matter of Macomb Community College, Dkt. 91-80-SP, U.S. Dep't of Educ.
(May 5, 1993). Absent the filing of the close-out audit, the College has failed to effectively
account for any of the Title IV funds it received.
I will not address the question of personal liability of Carol Schade for the repayment of funds
her apparent trouble with the subsequent owner because it is not within my jurisdiction. The
ultimate question regarding personal financial liability for funds owed to ED is a matter to be
resolved between the respective contestants.
Based on the foregoing findings of fact and conclusions of law, it is hereby ORDERED that
Cosmetology College pay to the United States Department of Education the sum of $161,252 in
Pell Grant funds and to refund $257,042 to the appropriate FFEL lenders.
Judge Ernest C. Canellos
Dated: August 23, 1995
On August 23, 1995, a copy of the initial decision was sent by certified mail, return receipt
requested to the following:
P.O. Box 5182
Loveland, CO. 80539
Denise Morelli, Esq.
Office of the General Counsel
U.S. Department of Education
600 Independence Avenue, S.W.
Washington, D.C. 20202-2110