Lamec, Inc. v. Alexander

• Court: Court of Appeals for the First Circuit
• Decided: June 8, 1992
• Docket: 92-1140
• Status: Published

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        June 8, 1992            [NOT FOR PUBLICATION]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-