UNITED STATES DEPARTMENT OF EDUCATION
WASHINGTON, D.C. 20202
In the Matter of Docket No. 96-15-EA
Cannella Schools of Hair Design
and Emergency Action
Kankakee Academy of Hair Design, Show Cause Proceeding
Edmund J. Trepacz, II, Esq., and Russell B. Wolff, Esq., Office of the General Counsel, U.S. Department of Education, Washington, D.C., for the Student Financial Assistance Programs.
Before: Frank K. Krueger, Jr., Administrative Judge
On March 14, 1996, I issued an order as the show cause official, pursuant to 34 C.F.R.
§ 668.83(e)(5), revoking the emergency action. This decision is issued in support of that order.
In 1986 the Cannella School located at 3646 North Broadway (hereinafter referred to as
the Broadway School) was declared by ED to be eligible for participation in the Title IV
program. On May 11, 1994, the Broadway School moved to 1152 North Milwaukee Avenue. In
1991, a Cannella School located at 3442 South Halsted Street (hereinafter referred to as the
Bridgeport SchoolSee footnote 11) was declared by ED to be eligible for participation in the Title IV
program. On May 11, 1994, the Bridgeport School moved its main campus to 5912 West
Roosevelt Road. Another Cannella school, which was not participating in the Title IV
programs, simultaneously moved into the location vacated by the Bridgeport School. On May
21, 1994, Respondents notified the accrediting agency for these schools, the National
Accrediting Commission of Cosmetology Arts & Sciences, of these moves. The applications for
approval of these moves were not submitted to the accrediting agency until June 23, 1994, since
Respondents were not provided with applications from the accrediting agency until June 21,
1994. Testimony of David R. Adams, tr. at 113, 139. The reasons provided to the accrediting
agency for the move of the Broadway School had to do with the size of the location and the
placement of the school's clinic. Respondents Exhibit 15. The reasons given to the accrediting
agency for the Bridgeport School move had to do with the size of the two student bodies
involved in the moves, and the convenience of the locations to the students. Respondents Exhibit
7. On September 17, 1994, the Broadway School moved back to its original location on North
Broadway. The reason given for this additional move to the accrediting agency was that the
school was unable to find another tenant for the North Broadway location for which it held a four
year lease. Respondents Exhibit 17. Approval was secured from both the accrediting agency and
the state for all of the moves in question. See Respondents Exhibits 8, 9, 11, 12, 13, 14, 16, 18,
On August 13, 1994, Respondents submitted an Application for Institutional Eligibility
and Certification to SFAP seeking approval of the new locations.See footnote 22 See Respondents Exhibit 2.
On December 22, 1994, these applications were returned to the Respondents with an unsigned
handwritten post-it note attached explaining that the forms had been revised and that
Respondent should resubmit the applications on the revised forms. See Respondents Exhibit 12;
testimony of David R. Adams, tr. at 122-123. The revised applications were promptly
resubmitted to SFAP. See testimony of David R. Adams, tr. at 123-134; Respondents Exhibits
13 and 14.
In the meantime, on June 22, 1994, Respondents were placed on reimbursement.
Beginning in September 1994, and continuing for the next eighteen months, Respondents
submitted reimbursement requests for students receiving Pell grants and attending the Broadway
and Bridgeport Schools. The reimbursement packages submitted by the Respondents for the
Broadway and Bridgeport Schools included a manifest form on the front which listed all ten of
the Respondent schools, along with the address for each school and other summary information
of data included in the reimbursement request package. Underneath the manifest form appeared
packages for each of the ten Cannella schools. The first form on each of the individual packages
was an SFAP form called Standard Form (SF) 270, entitled Request for Advance or
Reimbursement. SF 270 contains a number of blocks to be completed for each institution,
including the address of the institution and a Payee ID (PIN) number which is assigned by ED to
each participating institution. Behind the SF 270 was a list of each student for whom
reimbursement was sought, along with the PIN number and address of the institution at which
the student was enrolled. On the cover manifest and the SF 270s submitted for the Broadway
and Bridgeport Schools, the original addresses are given. However, the correct PIN number
appears on both the manifest and SF 270, and the correct address is provided on the back-up
documentation for each student. In addition, the institutional file was submitted for each student,
along with each student's registration contract, in which the proper addresses for the schools are
provided. Each packet for each school contained a form signed by Joe Cannella, one of the
Respondents' owners, certifying to the accuracy of the information submitted. See Respondents
Exhibits 21 and 22; Ed Exhibits 31-46; see also testimony of Donald Grybas, tr. at 60-62;
testimony of David R. Adams, tr. at 150-179; testimony of Steve Berry, tr. at 256-273..
SFAP alleges that, although the state and the accrediting agency approved all of the changed locations in question, since ED was not properly notified, the new locations became automatically ineligible as of the date of the original moves, i.e., May 11, 1994. Moreover, SFAP alleges, since the original locations were vacated without proper notification to ED, the original location likewise became ineligible; thus, the North Broadway location remained ineligible even when the Broadway School returned to that location on September 17, 1994. Since none of the locations for the Broadway and Bridgeport Schools were eligible, and since Respondents submitted reimbursement requests to ED using SF 270s which provided the wrong locations for those schools, SFAP questions the veracity of Respondents in submitting these forms. Thus, although only two of the ten Cannella schools are operating on sites alleged to be ineligible, SFAP contends that the submission of the allegedly false information concerning the Broadway and Bridgeport Schools must lead it to question the submissions for all of the schools.
I find no merit in SFAP's determination that it was justified in imposing the emergency
action in order to prevent a misuse of Title IV funds. Even assuming that SFAP's interpretations
of the applicable regulations are correct, there was strong evidence presented at the show cause
hearing that the Respondents were not attempting to mislead ED and had made an honest, good
faith effort to notify SFAP of the new locations. Since the Respondents are on a reimbursement
method of payment, and since SFAP is now clearly aware of the location changes in question,
there is little likelihood of funds being misused. SFAP would argue that the funds are being
misused because reimbursement requests are being submitted for institutions which are not
eligible because the locations of those institutions became automatically ineligible as of May 11,
1994. However, the regulations relied on by SFAP are sufficiently ambiguous for one to
question SFAP's use of its discretion in imposing the emergency action and its determination
that the risk of misuse of Title IV funds outweighs the importance of awaiting the outcome of a
termination action wherein eligibility is not summarily withdrawn pending a resolution of those
arguments before an independent hearing official and where SFAP bears the burden of proof.
Given the evidence, I doubt the wisdom of even bringing a termination action based solely on the
allegations put forth in the emergency action letter; an audit proceeding to recover alleged
unauthorized Pell funds may be more appropriate.
Under 34 C.F.R. § 600.10(b)(3), the eligibility of an institution to participate in the Title
IV programs does not extend to any location that an institution establishes after it receives its
eligibility notification unless the institution has notified ED of the new location in accordance
with 34 C.F.R. § 600.30(a)(3). Under 34 C.F.R. § 600.30(a)(3), an eligible institution must
notify ED no later than ten days after it changes its location. Under 34 C.F.R. § 600.30(d), the
failure of an institution to provide this notice may result in adverse action against it, including
the loss of eligibility. Section 600.30(d) clearly undermines SFAP's argument that once an
institution fails to notify ED of a change in location, both the old and new locations become
automatically ineligible. When questioned on this point at oral argument, counsel for SFAP
responded that another section, not cited in the emergency action notice, 34 C.F.R. § 600.40, read
in its entirety, would lead to the conclusion that such loss of eligibility is automatic. See also
SFAP's Response to Respondent's [sic] Legal and Regulatory Contentions at 2. I have closely
examined section 600.40; a very sophistic reading of that section standing alone may support
SFAP's position, but that section, read along with section 600.30 would lead one to conclude
that the regulations concerning a change of location are very confusing and is the type of matter
which should be argued in a termination or audit proceeding. Section 600.40, when read along
with Section 600.30, appears to deal with where an institution ceases operations at its main
campus, not where the main campus physically moves to a new location.
For the first several months after the Respondents were put on a reimbursement system of
payment, the reimbursement packages were submitted to SFAP by Gemcor, Inc., a firm
specializing in student financial aid, and functioning as the reimbursement file review agent for
the Respondents. Respondents' account was handled by Steve Berry. Mr. Berry testified that,
when he first started doing the file reviews, he had just recently joined Gemcor and had no first-
hand knowledge of the locations of the various Cannella schools. Mr. Berry testified that he took
the addresses for the schools off of Standard Form 272, which is issued to participating schools
by SFAP, and put the addresses on a SF 270 for each school. He also inserted additional
information on the forms, including the PIN number for each school, which was not likely to
change on a monthly basis. He then Xeroxed the forms and used them each month for the
reimbursement submissions, simply filling in the information which changed on a monthly basis,
such as the period covered by the reimbursement request. After several months, Respondents
decided to do the reimbursement submissions themselves. Mr. Berry then trained Mr. David
Adams, Respondents Financial Aid Director, to do the submissions and gave Mr. Adams copies
of the SF 270s with the addresses and the other constant information written in by Mr. Berry.
Mr. Adams then proceeded to submit the very same forms to SFAP. After the reimbursement
packets were prepared each month, Mr. Cannella signed the certification forms relying on the
representation by Mr. Adams that the information submitted was correct. See testimony of Steve
Berry, tr. at 261-273; testimony of David R. Adams, tr. at 161-179, 190-193, 248-250. . Based
on this evidence, I find that there was no effort or intent by Respondents to mislead ED. In
addition, Mr. Adams testified that he dealt with the SFAP regional office in Chicago on a regular
basis and that SFAP employees in that office were fully aware of the new locations in question.
Testimony of David R. Adams, tr. at 181, 250-252. This testimony is corroborated by two
letters from the SFAP regional office in Chicago sent in December 1995, stating that it had
recommended approval of reimbursement requests submitted for the Cannella school located at
5912 W. Roosevelt Road, Chicago, Illinois, -- the new location for the Bridgeport School.
Respondents Exhibits 24 and 25. .
SFAP cites In re Emergency Action Against Dayton Academy of Hair Design, U.S. Dept.
of Educ. (August 31, 1993), in support of its argument that the Respondents violated their
fiduciary duties to ED by submitting reimbursement requests for the Broadway and Bridgeport
Schools. The Dayton Academy case is inapposite to the case at hand. In Dayton the institution
was operating an unauthorized branch campus created after the main institution's original
eligibility determination and appears not to have notified ED of its existence. The school was
also cited for a number of other egregious violations. Under those circumstances, the show cause
official declined to alter the emergency action. In the case at hand, by contrast, ED was notified
of the changes in locations although, arguably, the notice was late. But see footnote 2, supra.
The regulations are clear that eligibility does not extend to branch campuses, unless those
campuses are also determined as eligible by ED. As noted above, the regulations concerning the
change of location of a main campus are ambiguous as to whether the main campus becomes
ineligible if a move is made without providing ED with notice of the new location within ten
days. In the present case, the evidence indicates a good faith effort by the Respondents to keep
SFAP informed of the changes in locations, although they may have not complied with the
technical requirements of the very complex regulations in this area. Absent a showing of bad
faith and intentional deception, failure to comply with the regulations is not a per se violation of
a fiduciary duty.
March 19, 1996
Frank K. Krueger, Jr.
A copy of the attached decision was sent by registered mail, return receipt requested, to
Stanley A. Freeman, Esq.
Joel M. Rudnick, Esq.
Powers Pyles Sutter & Verville, PC
Third Floor, 1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
Edmund J. Trepacz, II, Esq.
Russell B. Wolff, Esq.
Office of the General Counsel
U.S. Department of Education
600 Independence Ave., S.W.
Washington, D.C. 20202-2110