|
|
UNITED STATES DEPARTMENT OF EDUCATION
WASHINGTON, D.C.
20202
____________________________________
In the Matter of Docket No. 02-4-SA
CLIMATE CONTROL INSTITUTE,
Student
Financial
Assistance
Proceeding
Respondent. ACN:
ARB-0200009
____________________________________
Appearances: Lee Thompson, Esq., Wichita, Kansas, for
Climate Control Institute.
Steven
Z. Finley, Esq., Office of the General Counsel, United States Department of
Education, Washington, D.C., for Federal Student Aid.
Before: Richard F. O’Hair, Administrative
Judge
DECISION
The
Respondent in this proceeding, Climate Control Institute (CCI), operated two
trade schools, one in Wichita, Kansas, and the other in Memphis, Tennessee, and
both schools participated in the federal student aid programs authorized under
Title IV of the Higher Education Act of 1965 (Title IV, HEA), as amended. 20 U.S.C. §§ 1070 et seq. and
42U.S.C. §§ 2751 et seq. These programs are administered by the
Office of Federal Student Aid (FSA) (formerly designated the Office of Student
Financial Assistance Programs (SFAP)), U.S. Department of Education (ED). CCI appealed two of the three findings in
FSA’s Final Audit Determination dated October 30, 2001. CCI did not appeal the assessment of $37
contained in Finding One, arising from five unresolved FSA compliance audits,
therefore, this amount will be included in the final award of this
decision. Finding Two addresses CCI’s
failure to perform a close out audit and Finding Three addresses CCI’s failure
to make refunds to FSA for students who withdrew prior to completing their
field of study. For all three findings,
FSA demands the return of $774,167.
CCI’s financial/administration problems became public in
1998. In February 1998, FSA conducted a
program review of CCI’s compliance with Title IV regulations and also
re-examined its five prior compliance audits covering the period July 1, 1993,
to December 31, 1997, which were all considered unresolved. At about the same time, CCI began receiving
its Title IV funds by means of the reimbursement method, a method utilized by
ED when there are questions about the integrity of the operation of an
institution. In September 1998, the
Nebraska Student Loan Program (NSLP), a student loan guaranty agency, initiated
an administrative action against CCI for failing to make timely reimbursements
to NSLP for students withdrawing from school prior to completing their
training. This action was vacated when
CCI voluntarily terminated its instructional operations on November 2, 1998,
and entered into a “teach-out agreement” with Vatterott College, Inc. Under this agreement, the latter agreed to
assume all teaching responsibilities for currently enrolled CCI students. This
authorized Vatterott to receive payment for all student financial assistance
due to those students. On October 20,
1998, federal enforcement agents, representing the ED Office of Inspector
General (OIG), executed a search warrant and seized all of CCI’s business and
student aid records. This was conducted
pursuant to a criminal investigation into CCI’s owner’s failure to pay refunds
to ED.
Following CCI’s execution of its “teach-out
agreement,” FSA notified CCI of its
responsibility under its Title IV Program Participation Agreement to submit a
close out audit performed by an independent auditor for the period January 1,
1998, through November 1, 1998. This audit was not filed and, in Finding Two of
the Final Audit Determination, FSA demands the return of $485,499 in Title IV
funds disbursed during that period. CCI
raises the defense of impossibility for its failure to submit the close out
audit, explaining that it was impossible for its auditor to prepare this audit
because it was not given access to all of its business and student
records. CCI maintains that at all
relevant times the records remained in the hands of the ED Office of Inspector
General, which served as a custodian for the U.S. Department of Justice (DOJ)
which was pursuing the criminal prosecution of CCI’s owner. CCI argues that despite repeatedly
contacting OIG and the Office of the U.S. Attorney in Wichita, Kansas, asking
for an opportunity to copy or obtain copies of the necessary records it was
repeatedly denied access. Additionally,
CCI complains that its records were being held at a number of geographic
locations, further complicating CCI’s efforts to view and copy them. During the middle of 1999, CCI’s attorney
made repeated oral and written requests to DOJ on behalf of the school to obtain
permission to be given access to the records.
After conflicts of the business schedules of CCI’s owner and the
custodian of the records were resolved, DOJ reported to CCI’s counsel on
October 1, 1999, that the documents were going to be retained until they were
ordered by court to return them, CCI’s owner entered a plea agreement, or CCI’s
owner was convicted. This letter
further explained that DOJ would authorize CCI’s owner to have access to these
documents to copy them, but that the copying would be at the owner’s expense.
CCI’s second line of defense to the demand for a close
out audit is that such an audit was not necessary because technically the
school did not close on November 2, 1998, it merely transferred all operations
to another institution, Vatterott College, Inc., via the “teach-out
agreement.” Its third position is that
an audit was not necessary because it was placed on the reimbursement basis in
February 1998 and, thus, all disbursements were approved by ED from that date
forward.
Countering CCI’s complaint that following their seizure
in October 1998 its records were not available to be provided to an auditor,
FSA submitted an affidavit from one of its program review specialists who was
familiar with the records’ availability during the time in question. The specialist stated he was unaware of any
instance in which OIG denied CCI access to its records. In fact, he continued, every time CCI’s
representatives asked for access to the records they were allowed to review
them and make any necessary copies, free of charge, despite DOJ’s position that
CCI could not have free copies of the records.
The last date on which a CCI representative requested and was given
access to the records was December 10, 2001; the records were returned to CCI
in late March or early April 2002. The
specialist said CCI has not submitted an audit for the time in question and has
not requested additional time in which to complete an audit.
One of the contractual obligations CCI accepted when it
signed the Program Participation Agreement and began participating in the
federal student aid programs was to act as a fiduciary in the administration of
the Title IV programs. 34 C.F.R. § 668.82.
This agreement requires that it demonstrate that all questioned expenditures
were proper and that it complied with program requirements. 34 C.F.R. §
668.116(d). The accepted method
for CCI to demonstrate that all of its expenditures were proper for the
ten-month period beginning January 1, 1998, is to submit a close out
audit. There is ample case support for
the proposition that, in the absence of a close out audit or other relevant and
reliable evidence of a proper disbursement of Title IV funds, the institution
is liable to repay all funds for the period of time from its last submitted
audit. In re Stenotopia Business
School, Docket No. 01-26-SP, U.S. Dep’t of Educ. (July 31, 2002); In re
Southern College and Southeastern Academy, Docket Nos. 01-42-SA and
01-42-SP, U.S. Dep’t of Educ. (April 29, 2002); In re Midland Career
Institute, Docket Nos. 96-140-SP and 96-141-SP, U.S. Dep’t of Educ. (July
30, 1998); In re Magic Touch Beauty Institute, Docket No. 97-161-SP,
U.S. Dep’t of Educ. (July 2, 1998).
CCI has claimed it was impossible for it to produce a
close out audit for its last 10 months as a participant in the Title IV
programs because OIG retained all of the relevant records at two different
locations and would not give CCI copies of these records. FSA satisfactorily has negated this
complaint by showing that it acceded to CCI’s request to view and make free
copies of these records whenever such requests were made. Additionally, these records were returned to
CCI in March or early April 2002. It
should be noted that in an October 21, 2001, letter from CCI’s counsel to FSA,
counsel explained that CCI’s owner “has pled guilty to a violation of federal
law relating to failure to pay refunds to DOE.” Apparently after this date, CCI did not avail itself of the
opportunity to view and make a copy of these records for its auditor, and no
audit was filed. Albeit several years
late, CCI could have secured the services of an auditor subsequent to the
return of the records and submitted an audit which might have eliminated the
need for this hearing.
Assuming
CCI was correct in its position that OIG refused to give it or its accountant
reasonable access to all necessary records, this would not have served as a
defense to the instant proceeding. See
In re Magic Touch Beauty Institute, supra.
The requirement for submission of a close out appears to be absolute
when an institution ceases operation.
Even though CCI was placed on the reimbursement basis in February 1998,
and from that date forward had to substantiate its claims for Title IV funds,
this is not a substitute for the audit.
Furthermore, CCI was not on the reimbursement basis for the entire 10
month period addressed here, and there is some question as to whether all
necessary reimbursement requests were submitted to FSA to support its claim for
Title IV funds during that period of time.
Additionally, when Vatterott College entered the teach-out agreement,
for all intents and purposes, CCI ceased participation in the Title IV programs
and this triggered the requirement for a close-out audit.
CCI has not satisfied its burden of proof that all
expenditures of federal funds during the period of January 1 to November 2,
1998 were proper. 34 C.F.R. § 116(d).
One may argue that during its last ten months of operation, CCI was
providing a satisfactory education to its students. One may further argue that
if they ultimately graduated following the completion of their studies with
Vatterott College, this should satisfy FSA’s concern that the federal funds
were appropriately expended. If such
were true, then it would seem to be an unjust enrichment to FSA if it were to
recover all funds disbursed when, in fact, they were expended pursuant to
regulatory standards. In this case,
however, such a determination can be made only from objective facts and an
audit covering that period of time is the only reasonable alternative for
acquiring those objective facts.
Accordingly, in the absence of the submission of a close out audit, CCI
must reimburse FSA $485,499 for Title IV funds it received during the first ten
months of 1998.
The third finding in the Final Audit Determination
addresses a total file review of all students who withdrew from CCI prior to
completing their program of study between June 1994 and November 2, 1998. The reviewers, after conducting a student by
student calculation of student payments and withdrawals, concluded that CCI
owed ED refunds of $366,676. Recognizing there was some duplication by
virtue of the demand for all funds disbursed during 1998, the reviewers
recomputed the amount of unpaid refunds originating during the period June 1994
and December 31, 1997. This
recalculation resulted in an amount due of $288,631.
CCI objects to this liability assessment and asserts that
it is based upon calculations of funds which were never disbursed to the students,
and that ED cannot identify which students withdrew and necessitated the
current payment of refunds. It also
argues that this assessment is contrary to the guidance found in 34 C.F.R. §§
668.23(g)(2)(ii) and 668.95(c) which authorize the Secretary of the U.S.
Department of Education to use an administrative offset to collect the funds
owed in these proceedings. CCI
maintains that ED owes it $187,741.14 for previously submitted requests for
reimbursements and that ED should deduct its current assessment from that
amount.
As mentioned previously, CCI bears the burden of proving
that its federal funds were properly disbursed, and this includes proving it
made the proper payment of refunds to ED for students who withdrew prior to
completing their course of study. 34
C.F.R. § 668.116(d). In the face of
student specific compilations of student refunds, CCI makes the general
objection that the computations are incorrect because they are based upon
improper assumptions; CCI, however, has not performed a full file review to
counter FSA’s calculation and demand.
Additionally, it should be noted that CCI’s owner pleaded guilty to “a
violation of federal law relating to failure to pay refunds to DOE.” In connection with that guilty plea, the
owner is under a restitution order to pay ED $120,000. In the absence of any submission by CCI to
contradict the conclusions of the OIG file review, I must conclude that CCI has
failed to meet its burden of persuading me that the Final Audit Determination
is incorrect. CCI owes ED refunds in
the amount of $288,631 as demanded in the Final Audit Determination.
ORDER
On the basis of the foregoing, it is hereby ORDERED that Climate Control Institute pay to the U.S. Department of Education the sum of $774,167.
_________________________________
Judge Richard F. O'Hair
Dated: November 14, 2002