In the Matter
HOLLYWOOD Student Financial
BEAUTY SCHOOL, Assistance Proceeding
Respondent. ACN: 03-34044
Appearances: Edward Benoff, Esq., Philadelphia, PA, for Leonard's
Hollywood Beauty School.
Stephen M. Kraut, Esq., Office of the
General Counsel, United States Department
of Education, Washington, D.C., for Student Financial Assistance Programs.
Before: Judge Richard F. O'Hair
default on a loan made under the Title IV, HEA programs.
Leonard's responds that SFAP was barred from acting upon the
July 28, 1995, FAD
under the doctrines of res judicata, collateral estoppel, issue preclusion, and double
jeopardy because of the terms of an agreement settling SFAP's previous termination and fine
against the school.
Leonard's also argues that it
properly verified those students selected for verification and that it properly awarded the $1,588
Pell Grant at issue here.
Leonard's argues that the present action is barred under the
doctrines of res judicata, collateral estoppel, issue preclusion, and/or double jeopardy
because the issues central to this
action were resolved when a previous termination and fine action brought by ED against the
school was settled on August 11, 1992. According to Leonard's, this settlement agreement
resolved all outstanding matters, including the issues raised in the present action, with the
exception of violations of criminal laws or civil fraud against the United States.
In Article II, Paragraph A, of the settlement agreement, ED
specifically agreed to
withdraw its November 8, 1991, termination and fine notice, in which it sought to terminate the
school's eligibility and to impose a $16,000 fine. In exchange, Leonard's agreed in Article II,
Paragraphs B and D, that its eligibility to participate in the Title IV programs would be
terminated and that it would pay a $500 fine to ED.
Contrary to Leonard's claims, however, the settlement agreement did not resolve all outstanding matters. As SFAP correctly notes, Article III, Paragraph A, of the settlement agreement states as follows:
By this agreement, ED does not waive compliance by the School
with any Federal
or State law or regulation, past, present, or future, applicable to the School's
administration of the Title IV, HEA Programs.
Ex. R-3, at 2.
This language very clearly preserves ED's right to seek redress for the school's prior noncompliance with all applicable Title IV, HEA statutes and regulations. This tribunal has stated previously that in order for res judicata, which is also known as claim preclusion,See footnote 1 1 to apply there must be (1) a final judgment on the merits, (2) an identity of the cause of action between the two actions, and (3) an identity of the parties or their privies in the two actions. In
re Lincoln Technical Institute, Dkt. No. 91-38-SP, U.S. Dep't of Educ. (Interlocutory
Decision) (October 30, 1992), at 14. Termination and fine proceedings under Subpart G are
actions to recover misspent funds, such as this, brought under Subpart H. Therefore, the second
requirement of an identity of the cause of action between the two actions is not satisfied here,
and thus res judicata or claim preclusion does not apply. While the settlement agreement
would bar SFAP from bringing another termination and fine proceeding based upon these
violations, it does not bar SFAP from attempting to recover the allegedly misspent funds.
Leonard's also cannot use the doctrine of collateral estoppel, also
known as issue
preclusion,See footnote 2
to shield itself from the FAD in this case.
In In re Career Education,
Inc., Dkt. No. 91-17-ST, U.S. Dep't of Educ. (August 28, 1992), this tribunal held the
Under the doctrine of issue preclusion, once an issue is actually and
determined by a court of competent jurisdiction, that determination is conclusive
in a subsequent proceeding based on a different cause of action involving a party
to the prior litigation.
Career at 25-26.See footnote 3
Here, the previous termination and fine proceeding was settled by the parties. As a result,
none of the issues in the present case were actually determined in the previous case.
Therefore, collateral estoppel or issue preclusion cannot apply.
Also, the doctrine of double jeopardy is not applicable here. In United States v. Halper, 490 U.S. 435 (1989), the U.S. Supreme Court held that a defendant who already has been punished in a criminal prosecution may not be subjected to an additional civil sanction to the extent that the second sanction may not fairly be characterized as remedial, but only as deterrent or retribution, without violating the double jeopardy clause. In that case, the defendant had been previously convicted in a criminal action, and the government then brought a civil action. The district court had approximated the government's expenses as $16,000, but the government sought to recover $130,000 in the civil action. The Court, while allowing the government to demand civil compensation according to somewhat imprecise formulas, said that the civil compensation sought in that case bore no rational relation to the goal of compensating the government for its loss, but instead appeared to qualify as "punishment." The case was remanded to allow the government to demonstrate its damages.
In this proceeding, not only has there not been a criminal
prosecution, but also SFAP is
seeking only to recover its actual, estimated losses. It cannot be said that the compensation
sought by SFAP bears no rational relation to the goal of compensating the government for its
loss. As a result, the double jeopardy clause does not shield Leonard's from liability for these
Thus, in accordance with Article III, Paragraph A, of the settlement
agreement to withdraw its termination and fine action under Subpart G did not preclude it from
subsequently bringing this audit recovery action under Subpart H.
Finding 4--Failure to determine Pell Grant eligibility prior to certification of Stafford loans
In Finding 4 of the FAD, SFAP seeks the return of $647 which it estimated as its actual loss on a Stafford loan of $2,750 made to a student for whom SFAP alleges the school failed to determine the student's Pell Grant eligibility prior to certifying the Stafford loan. In its brief, however, SFAP states that it subsequently has determined that the student in question had applied, and was found eligible, for a Pell Grant. As a result, SFAP is withdrawing that finding. Accordingly, Leonard's has no liability under Finding 4.
Finding 5--Failure to verify Pell Grant applications
Under 34 C.F.R. § 668.54, an institution must verify the
application information of a
student if that student is selected by ED for verification, or if the institution has reason to believe
that any information contained on the applicant's application is incorrect. Nonetheless, ED
cannot require an institution to verify more than 30 percent of its applicants in any award year.
20 U.S.C. § 1091(f).
SFAP points out that the close-out audit conducted by Leonard's
reported that the school did not verify the information on any of the student applications. ED
Ex. 1-14. Finding 17 of the program review report issued on May 23, 1991, found that students
6, 12, 15, and 16 had been selected for verification, but that the school did not perform any
verification checks on these students. In addition, it stated that there was no evidence that the
school ever verified information provided by student applicants for the Pell Grant program. Ex.
R-2-13. Finding 5 of the FAD alleges that Leonard's did not verify at least 30 percent of its
applicants during the award years in question.
In its initial brief, Leonard's contends that it required applicants
selected by ED for
verification to submit documentation to verify the information used to determine the applicants'
eligibility and that it reviewed all student submissions. To further support its position, the school
also claims that, where applicable, students also completed and filed Verification Worksheets,
and it included Ex. R-6 as an example of what its students submitted. Leonard's also objects to
this proceeding because there has been no showing of an actual loss sustained by ED.
The Verification Worksheet submitted by Leonard's as Ex. R-6 is not for one of the four students questioned in the program review. As a result, it is insufficient to satisfy the school's burden under 34 C.F.R. § 668.116(d) of persuading this tribunal that it complied with the verification requirements. Moreover, as SFAP notes, this student checked on her Verification Worksheet that she had filed an income tax return, yet Leonard's did not include this income tax return with the other verification documents, as required under 34 C.F.R. § 668.54, 668.56(a),
In its reply brief, Leonard's argues again that it verified all
applicants selected by ED for
verification, and it attached as Ex. R-9 the verification worksheets for several additional
students. Only one of these students, however, was among the four students questioned by the
program reviewers, and that verification worksheet was for a different year. The evidence
submitted by Leonard's demonstrates that it verified student 12 for the 1990-91 award year, but
the program reviewers found that this student was not verified for the 1989-90 award year, and
the school has submitted no evidence to refute that assertion.
This tribunal has previously held that although ED is barred by
statute from requiring an
institution to verify more than 30 percent of its Title IV applicants in any given year, the
institution must demonstrate that it verified at least 30 percent of its students selected for
verification. In re Fisk University, Dkt. No. 94-216-SP, U.S. Dep't of Educ. (Oct. 5,
1995), at 3- 4. Since Leonard's failed to do so, it is liable for 30 percent of the Pell Grant awards
because it has not shown these funds were properly expended. I agree with the school, however,
that SFAP's liability figure of $9,567 is incorrect, and that the correct amount is $8,817.30. This
amount is derived by multiplying $29,391, the amount of questioned costs in the FAD (ED Ex.
2-4) by 30 percent. Accordingly, Leonard's must repay $8,817.30 to ED under Finding 5.
Finding 7--Student in default status received Pell Grant funds
In Finding 7, SFAP alleges that a student who was in default on a
Title IV, HEA loan
improperly received Pell Grant funds of $1,588 during the 1987-1988 award year. In order to be
eligible to receive a Pell Grant award, a student may not be in default on any Title IV, HEA
program loan. 20 U.S.C. § 1091(a)(3). SFAP notes that Finding 7 of Leonard's close-out
alerted Leonard's to this situation when it reported that this student's loan application indicated
that the student was in default on a prior student loan. ED Ex. 1-14.
In response, Leonard's concedes that this student received a $1,588
Pell Grant during the
1987-1988 award year, but argues that this occurred before the July 1, 1988, effective date of 34
C.F.R. § 668.7, which contains the no prior default rule. Leonard's contends that it
complied with that regulation. Nevertheless, 20 U.S.C. § 1091(a)(3) also required eligible
students to not be in default on prior Title IV loans, and this statute was in effect during the
1987-88 award year.
Leonard's also submitted a Verification Worksheet dated August 3, 1987, which is contained at Ex. R-6, that bears no indication of this student's default status. Additionally, Leonard's submitted the student's application for a Stafford Loan, contained in Ex. R-7, which was signed on July 31, 1988, and indicates that the student was in default on a Title IV loan at that time. To satisfy its burden of persuasion under 34 C.F.R. § 668.116(d), however, the school needed to submit a student loan application for the 1987-1988 award year or some other document indicating that the student was not in default on a Title IV loan during that award year.
Since it did not do so, Leonard's is liable for the $1,588 Pell Grant awarded to this student.
2. Leonard's has no liability under Finding 4.
3. Leonard's awarded Pell Grant funds to students who were
selected for verification
without verifying those students' application information.
4. Leonard's improperly awarded a $1,588 Pell Grant to a student
who reported that she
was in default on a loan made under the Title IV, HEA programs.
Judge Richard F. O'Hair
Dated: March 19, 1996
A copy of the attached initial decision was sent by certified mail, return receipt requested to the
Edward Benoff, Esq.
9245 Roosevelt Blvd.
Philadelphia, PA 19114-2205
Stephen M. Kraut, Esq.
Office of the General Counsel
U.S. Department of Education
600 Independence Avenue, S.W.
Washington, D.C. 20202-2110