In the Matter of Docket No. 98-110-SA
CONTEMPO SCHOOL OF BEAUTY Student Financial Assistance Proceeding
Respondent. ACN: 09-95-64084
Thomas J. Spratt, Jr., Esq., Pomona, California, for Contempo School of Beauty.
Judge Ernest C. Canellos
Contempo School of Beauty (Contempo) of Inglewood, California, is a proprietary
institution which offers postsecondary programs in cosmetology. It is accredited by the National
Accrediting Commission of Cosmetology Arts and Sciences, and participates in federal student
financial assistance programs, which are authorized under Title IV of the Higher Education Act
of 1965, as amended, (Title IV), 20 U.S.C. § 1070 et seq. and 42 U.S.C. § 2751 et seq.
On June 16, 1998, the Area Case Director, Southwest Case Management Division, Institutional Participation and Oversight Service, Office of Student Financial Assistance Programs (SFAP) of the U.S. Department of Education (Department), issued a final audit determination (FAD) to Contempo. The FAD took action on the findings of an audit performed by Arthur Andersen, LLP, Certified Public Accountants, dated December 15, 1995, which Contempo submitted to the Department in satisfaction of its annual Title IV audit requirement mandated by 34 C.F.R. § 668.23. The Arthur Andersen review had examined Contempo's administration of the federal student financial assistance programs for the period July 1, 1994, to June 30, 1995. On July 11, 1998, Contempo timely appealed the adverse findings of the FAD and requested a hearing. The parties submitted evidence and their respective briefs, after which I took the case under advisement.
The audit report, FAD, and request for hearing involve two adverse findings. First, it is
alleged by SFAP that Contempo made late payments of certain refunds and failed to establish
that two of its students were eligible for the Title IV aid they had received, resulting in a $3,709
demand. During the briefing process, the parties agreed that $2,640 is owed by Contempo for
this finding. Since there is no issue in dispute remaining, I find that Contempo is liable for the
return of $2,640 for this finding.
In the second finding, SFAP alleged that Contempo erroneously calculated refunds due to 23 students who had withdrawn prior to the completion of their program. Although there were a number of errors originally alleged in the refund calculations, the dispute between the parties relative to this finding has been narrowed. Now, the only issue is whether Contempo can offset a $230 charge for certain equipment and supplies for each of the 23 students. SFAP determined in the FAD that since the school could not document that these students had received the equipment and supplies, it could not deduct anything from the refund calculation for these items. Sometime after the issuance of the FAD, Contempo provided documentation to SFAP which established that such equipment and supplies had been received by each of the students. After receipt of that evidence, however, SFAP altered the basis for its claim relative to this finding. It argued, in its brief for the first time, that the 23 refunds were incorrectly calculated for a new and independent reason. SFAP points out that 34 C.F.R. § 668.22(c)(5)(ii) requires that in order to be able to deduct the cost of equipment and supplies from any refund calculation, such items must have been either not returned by the student or unusable, even if returned. SFAP counsel argued that Contempo did not satisfy its burden of proof as to this issue because nowhere did Contempo establish that the respective equipment or supplies fit either of these categories. Rather, Counsel points out in his argument that all that Contempo showed was that equipment and supplies were signed for by the students.See footnote 1
In an appeal of a finding in a FAD, the respondent institution has the burden of proving
that the Title IV funds in question were lawfully disbursed. 34 C.F.R. § 668.116(d). Before I can
reach that ultimate issue, however, I must decide a threshold question of whether, on the facts of
this specific case, the burden of proof has been effectively placed on Contempo. Specifically, I
must determine whether SFAP can, in its brief, effectively change its theory of recovery from
that which was asserted in the FAD. The significance of such a question is whether there was
adequate notice so as to satisfy the constitutional standard of due process required in any
administrative proceeding. See generally, In re Liberty Academy of Business, Docket No. 96-
132-SP, U.S. Dep't of Educ. (Interim Decision and Order, Dec. 8, 1997.) It is an established
principle of administrative law that adequate notice is a precondition to the imposition of the
burden of production upon the respondent in administrative adjudicatory proceedings. Failure of
such notice, likewise, has been determined to constitute a violation of constitutional due process.
In the present proceeding, Contempo was notified in the FAD (at page 7) that its
calculation of the refunds for 23 students was incorrect because it
It seems abundantly clear that Contempo has successfully rebutted the finding in the FAD
relative to the deductibility of the equipment and supplies. Out of the sample of 28 refunds made
by Contempo, the FAD found fault with 23, while accepting the deduction for 5 students. The
sole difference between the two groups was proof of receipt for the equipment and supplies. If
such proof was available, the deduction was acceptable; if such proof was unavailable, such as in
the cases of the 23 students, the deduction was denied. The demand in the FAD, therefore, is
centered solely on the lack of evidence of receipt. The respondent is entitled to rely on such a
demand, and provide the evidence necessary to rebut it. Having fulfilled that obligation, the
Respondent is entitled to a finding in its favor. To assure finality in the administrative process, I
should not have to ponder, in retrospect, whether the Respondent could have provided evidence to satisfy SFAP's new theory of the case if it had been timely put on notice of that position. In addition, given the fact that there was over a two-year period between the time that the audit was performed and the FAD was issued, during which the parties apparently exchanged information, it appears quite late in the process to now require a new submission from Contempo. Therefore, on the facts of this case, Respondent is relieved of liability for the demand for the return of $230 per student for the 23 students, as alleged in the second finding.
1. Contempo School of Beauty has failed to meet its burden of proof in establishing that
a student was entitled to the Title IV aid provided and, as a result, must return $2,640 to the U.S.
Department of Education.
2. Contempo School of Beauty College is relieved of any obligation to return any sum
for the demand relative to improper calculation of refunds.
Ernest C. Canellos, Chief Judge
Dated: February 3, 1999
A copy of the attached initial decision was sent by certified mail, return receipt requested to the
Thomas J. Spratt, Jr., Esq.
445 N. Garey Avenue, Suite 4
Pomona, California 91767
Russell B. Wolff, Esq.
Office of the General Counsel
U.S. Department of Education
400 Maryland Avenue, S.W.
Washington, D.C. 20202-2110