Lamec, Inc. v. Alexander
U.S. Court of Appeals for the First Circuit
Lamec, Inc. v. Alexander
Opinion
USCA1 Opinion
June 8, 1992 [NOT FOR PUBLICATION]
____________________
No. 92-1140
LAMEC, INC.,
Plaintiff, Appellant,
v.
LAMAR ALEXANDER, ET AL.,
Defendants, Appellees.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Juan M. Perez-Gimenez, U.S. District Judge]
___________________
____________________
Before
Breyer, Chief Judge,
___________
Aldrich and Coffin, Senior Circuit Judges.
_____________________
____________________
A. J. Amadeo Murga with whom Antonio J. Amadeo Semidey was on
____________________ __________________________
brief for appellant.
Maria Hortensia Rios Gandara, Assistant United States Attorney,
_____________________________
with whom Daniel Lopez Romo, United States Attorney, and Stephen M.
_________________ __________
Kraut, Counsel, Office of Student Financial Assistance, U.S.
_____
Department of Education, were on brief for appellees.
____________________
____________________
COFFIN, Senior Circuit Judge. This appeal concerns the
_____________________
efforts of appellant Lamec, Inc. (Lamec) to participate in the
Pell Grant Program of Title IV of the Higher Education Act of
1965, 20 U.S.C. 1070-1099, which provides financial
assistance for students at qualified schools. The district court
denied a request for injunctive relief to protect Lamec's
participation in the program at several campuses of a trade
school that it recently acquired in Mayaguez, Puerto Rico.
Lamec challenges adverse rulings on two causes of action.
In the first, Lamec seeks a preliminary injunction enjoining the
United States Department of Education ("the Secretary") from
terminating its eligibility to participate in Title IV programs
because of allegedly improper uses of Pell Grant funds and from
levying a $450,000 fine resulting from such uses. In the second
cause of action, Lamec seeks a mandatory injunction requiring the
Secretary to certify two branch campuses as eligible to
participate in Title IV programs.
After due consideration and perusal of the record, we
affirm, with a single exception, the court's judgments on both
causes of action. With respect to the court's sub silentio
____________
ruling that appellant did not fulfill the requirements for
preliminary injunctive relief against the imposition of the
$450,000 civil penalty, we simply have no basis for decision on
this record and remand to the district court for hearing and an
articulated determination.
We begin with appellant's first cause of action. The
district court noted this claim in its opinion. But after
observing that most of the evidence presented at the preliminary
injunction hearing had concerned the second cause of action, the
court went on to discuss only the second claim. The decision
concluded with a blanket denial of the request for relief.
In the absence of findings from the court, we confine our
review to determining from the record whether it permits any
result but affirmance. See In re Rare Coin Galleries of America,
___ _____________________________________
Inc., 862 F.2d 896, 900 (1st Cir. 1988). More specifically, the
____
question is whether the court, on this record, could have found
that Lamec had demonstrated a likelihood of success in
establishing that the Secretary improperly terminated its
eligibility. We have no difficulty in concluding that such a
finding would lack support.
The skeletal facts are the following. After a year of
negotiations, Puerto Rico Technology and Beauty College (PR Tech)
sold its Mayaguez campus to Lamec on June 30, 1987. Under the
accreditation policy of the National Association of Trade and
Technical Schools (NATTS), a private accreditation commission, a
branch campus that is sold as an independent school must be re-
accredited as a "free standing" institution. Lacking such
accreditation at the time of sale, Lamec's campus was not
eligible for Title IV funding programs. Lamec, however, had
assumed that its students would pay their tuition and fees with
Title IV funds. Perhaps in anticipation of this problem, a
-3-
clause was inserted into the sales contract requiring PR Tech to
permit Lamec "to use its federal permits and licenses to collect
all the federal grants of the enrolled students" pending Lamec's
receipt of new permits and licenses. From August 1987 through
July 1988, PR Tech used its own Pell Grant eligibility to obtain
$403,875 in Title IV funds, which Lamec used to pay itself for
the tuition and fees owed by its students.
Although Lamec eventually was declared eligible, the
Secretary in July 1990 sought to terminate its eligibility and to
impose fines on both PR Tech and Lamec. A hearing on the
proposed termination was held before an Administrative Law Judge.
The relevant legal standards are set forth in two
regulations. The first, 34 C.F.R. 668.82 (c), states:
An institution's failure to administer the Title IV,
HEA programs, or to account for the funds it receives
under those programs, in accordance with the highest
standard of care and diligence required of a fiduciary,
constitutes grounds for a fine, or the suspension,
limitation or termination of the eligibility of the
institution to participate in those programs.
The second, 34 C.F.R. 600.31, formerly 668.18 (1987),
provides:
(a) An eligible institution, or a previously
eligible institution that participated in any HEA
program, that changes ownership resulting in a change
of control is not considered by the Secretary to be the
same institution . . . .
* * *
(c) For the purposes of this part, a change in
ownership of an institution that results in a change of
control means any action by which a person or
corporation obtains new authority to control the
-4-
actions of that institution. That action may include,
but is not limited to --
(1) The sale of the institution;
The ALJ found the following:
The terms of the contract [of sale] appear to be
fulfilled in that the money passed from buyer to
seller. The parties acknowledged to the Puerto Rico
Department of Education a change of ownership. While
it is true PR Tech continued to double check to see if
all federal funds were being managed properly, the day
to day operation seems to have been transferred to
Lamec. The testimony is clear; the parties believed
the employees of Mayaguez to be the employees of Lamec.
These findings would seem to have dictated a conclusion
that, within the meaning of 668.18(c), there had been a change
of ownership. But the ALJ then considered the effect of a Puerto
Rico regulation which, in the absence of a new owner's signing of
certain guarantees, provided that "the previous owners will
continue guaranteeing jointly the commitments made as if no
transfer of ownership had taken place." The ALJ, ignoring the
"as if" clause, interpreted this reservation of responsibility
under Puerto Rican law into a negation of transfer of ownership
under federal law. This is a clear lapse in logic, a non-
sequitur. The Secretary correctly held, reversing the ALJ's
decision, "Clearly, Lamec obtained authority to control the
actions of the Mayaguez school."
We therefore hold that on this record the district court
could not have found that appellant had demonstrated a likelihood
of success in its effort to overturn the Secretary's holding that
"a `change of ownership' did occur as a direct and immediate
result of the June 30, 1987 transaction." We make the same
-5-
determination as to appellant's effort to overturn the
Secretary's termination of Lamec's eligibility to participate in
the Title IV program. Given this record and the ALJ's fact
findings, the only possible conclusion is that Lamec violated the
regulations. As to termination, there are no specific limiting
standards, and nothing to indicate an arbitrary or capricious
decision.*
We find ourselves in quite a different position in reviewing
the assessment of the $450,000 fine. In the first place, the
Secretary did not direct any specific reasoning to this decision,
noting only that some eighteen illegal transfers of funds were
involved in the relevant fourteen-month period; that Lamec bore
some responsibility for PR Tech's receipt of the Title IV funds;
and that Lamec (as well as PR Tech) had falsely represented that
the final sales contract had been executed later than the actual
date, i.e., January 29, 1988, rather than June 30, 1987. The
district court, as we have noted, did not address this issue.
____________________
* The Secretary determined that termination was appropriate based on
the "change of ownership" and the consequent violation of Title IV
regulations when PR Tech transferred funds to Lamec. See 34 C.F.R.
___
668.4 (1987) (institution receiving funds must have state licensing
and accreditation); 34 C.F.R. 668.11 (1987) (institution receiving
funds must enter participation agreement with Department of
Education). See also 34 C.F.R. 668.86 (1991) (Secretary may
___ ____
terminate eligibility if institution violates any provision of Title
IV or any regulation implementing it).
Additionally, however, the Secretary found that the two
institutions violated their fiduciary duties to act "in accordance
with the highest standard of care and diligence" toward the Title IV
program, see 34 C.F.R. 668.82, and concluded that their "acts and
___
omissions[] considered alone would be sufficient to justify the
termination of PR Tech and Lamec."
-6-
The authority of the Secretary to impose a civil monetary
penalty is not entirely without limits. In determining the
amount of a monetary penalty, the Secretary is required to
consider "the appropriateness of the penalty to the size of the
institution of higher education subject to the determination, and
the gravity of the violation, failure, or misrepresentation . . .
." 20 U.S.C. 1094 (c)(2)(B)(ii). The maximum penalty for any
single violation is $25,000. 20 U.S.C. 1094(c)(2)(B)(i). In
this case the Secretary not only chose the more severe
eligibility sanction -- termination, rather than suspension --
but also assessed the uttermost monetary sanction available for
each of the eighteen fund transfers. In other words, the
Secretary administered to Lamec the maximum possible fine without
any explanatory comment.
The government appropriately reminds us of our own statement
that "`[a]n agency's choice of sanction is not to be overturned
unless the reviewing court determines it is "unwarranted in law .
. . or without justification in fact . . . ."'" Broad Street
_____________
Food Market, Inc. v. United States, 720 F.2d 217, 220 (1st Cir.
_________________ _____________
1983) (quoting Kulkin v. Bergland, 626 F.2d 181, 184 (1st Cir.
______ ________
1980) (quoting Butz v. Glover Livestock Comm'n Co., 411 U.S. 182,
____ ___________________________
185-86 (1973))). Our problem is that while the maximum sanction
is warranted in law, we have no way of telling whether it is
justified in fact.
-7-
In saying this, we have in mind the ALJ's findings of
fact.** In discussing whether PR Tech or Lamec had violated the
duty of exercising "the highest standard of care," the ALJ
concluded:
There is no evidence that the funds transferred on the
18 occasions in question were misappropriated, misused,
or otherwise misapplied. No evidence is available to
refute statements from both PR Tech and Lamec which
show the funds being used for the intended purpose --
the education of the students at the Mayaguez school.
These conclusions are at odds with the Secretary's determination
that Lamec's violations warranted the maximum fine. Without
explanation from the Secretary or findings from the district
court, we are unable to review whether the assessment was proper
under the statute. Accordingly, we must remand for the district
court's determination on the propriety of such a substantial
fine.***
We approach the district court's decision on appellant's
second cause of action, seeking to compel the Secretary to
certify Lamec's two new branch campuses as eligible to
participate in Title IV programs, with the benefit of both
hearing and a reasoned decision. The history of the effort to
certify these two branch campuses is one of misadventure at every
turn: first, an application form that was confined to only one
____________________
** As we have noted, these findings do not justify the conclusion
reached by the ALJ on the termination issue. They nevertheless strike
us as relevant to a determination of an appropriate fine.
*** We were told at oral argument that the Secretary had suggested a
remand to enable the district court to make specific findings on the
first cause of action.
-8-
of the campuses; then, after the second form had been submitted,
a discovery that licenses from the Puerto Rico Department of
Education had to be obtained; then, several months later, a
limited grant of eligibility to teach only cosmetology and
sewing; a continually frustrating and attenuated effort to obtain
NATTS accreditation for several additional courses; one report of
satisfactory progress forwarded in Spanish, only to result in a
request for a report in English; then a request for an audit,
which resulted in unsatisfactory information confined to cash
flow; finally, another audit report. The Secretary received this
last piece of information on September 5, 1991. A month later,
the main campus was terminated, removing the underpinning for any
certification of the two branches.
Appellant portrays the above unhappy sequence of events as
evidencing either bureaucratic stupidity and sluggishness or,
worse, malevolent scheming. But the matter has been thoroughly
considered by the district court. It was entitled to credit the
Department of Education for good faith efforts and to lay the
blame for delay on appellant. Although it could be argued that
certification should have occurred after the final piece of
information was provided on September 5, we note that the
representations in the final report had to be carefully verified.
We cannot conclude that the existence of a mere possibility of
faster processing, particularly with the impending termination of
the mother institution, gives appellant a likelihood of success.
-9-
Accordingly, we take the following actions: (1) affirm the
denial of Lamec's request for an injunction suspending
termination of its eligibility for Title IV funding; (2) affirm
denial of its request for an injunction compelling certification
of the branch campuses, and (3) vacate the judgment denying an
injunction enjoining assessment of a civil monetary penalty in
the amount of $450,000, remanding that issue to the district
court for further consideration and an articulated determination.
Affirmed in part, vacated and remanded in part. No costs.
______________________________________________
-10-
Reference
- Status
- Published