Hestia Education Group, Llc et al v. John King

MOTION for Summary Judgment

N.D. Cal.October 6, 2016

NOTICE AND MOTION FOR SUMMARY JUDGMENT C 15-1463 DMR 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 BRIAN J. STRETCH (CABN 163973) United States Attorney SARA WINSLOW (DCBN 457643) Chief, Civil Division MELANIE L. PROCTOR (CSBN 228971) Assistant United States Attorney 450 Golden Gate Avenue, Box 36055 San Francisco, California 94102-3495 Telephone: (415) 436-6730 FAX: (415) 436-7169 melanie.proctor@usdoj.gov Attorneys for Defendant UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA OAKLAND DIVISION HESTIA EDUCATION GROUP, LLC dba BLUSH SCHOOL OF MAKEUP, et al., Plaintiffs, v. JOHN KING, Secretary of the United States Department of Education, Defendant. ) ) ) ) ) ) ) ) ) ) ) Case No. C 15-1463 DMR DEFENDANT’S NOTICE OF MOTION AND MOTION FOR SUMMARY JUDGMENT PURSUANT TO FED. R. CIV. P. 56 Date: November 10, 2016 Time: 11:00 am Place: The Honorable Donna M. Ryu Courtroom 4, 3rd Floor Case 4:15-cv-01463-DMR Document 86 Filed 10/06/16 Page 1 of 19 NOTICE AND MOTION FOR SUMMARY JUDGMENT C 15-1463 DMR i 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 TABLE OF CONTENTS TABLE OF AUTHORITIES ...................................................................................................................... ii I. INTRODUCTION ...........................................................................................................................1 II. ISSUES PRESENTED.....................................................................................................................1 III. BACKGROUND .............................................................................................................................2 A. Elite Progressive School of Cosmetology ...........................................................................2 B. Blush School of Makeup ......................................................................................................6 IV. LEGAL BACKGROUND ...............................................................................................................7 A. Summary Judgment .............................................................................................................7 B. Administrative Procedure Act..............................................................................................8 C. Title IV Programs ................................................................................................................9 V. ANALYSIS ......................................................................................................................................9 A. The Department’s Denial of Blush’s Initial Certification Did Not Constitute a De Facto Debarment Because Mansour Was Permitted to Enter Contractual Agreements with Other Federal Agencies. ..........................................................................9 B. The Department’s Denial of Blush’s Initial Certification Was Not Arbitrary And Capricious, Because it Was Based Upon Mansour’s Omission of a Material Fact And His Previous Breach of Fiduciary Duties as Elite’s President And Owner. ........................................................................................................11 VI. CONCLUSION ..............................................................................................................................14 Case 4:15-cv-01463-DMR Document 86 Filed 10/06/16 Page 2 of 19 NOTICE AND MOTION FOR SUMMARY JUDGMENT C 15-1463 DMR ii 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 TABLE OF AUTHORITIES Cases Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) .......................................................................................................................... 7, 8 Bowman Trans. Inc. v. Arkansas-Best Freight System, 419 U.S. 281 (1974) .............................................................................................................................. 9 Califano v. Sanders, 430 U.S. 99 (1977) ................................................................................................................................ 8 Camp v. Pitts, 411 U.S. 138 (1973) .............................................................................................................................. 9 Celotex Corp. v. Catrett, 477 U.S. 317 (1986) .......................................................................................................................... 7, 8 Center for Biological Diversity v. Bureau of Land Management, -- F.3d --, 2016 WL 4269899 (9th Cir. 2016) ....................................................................................... 8 Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402 (1971) .............................................................................................................................. 8 Fence Creek Cattle Co. v. U.S. Forest Service, 602 F.3d 1125, 1131 (9th Cir. 2010) .................................................................................................... 2 Hestia Educ. Grp., LLC v. King, 2016 WL 1323079 (N.D. Cal. Apr. 5, 2016) ...................................................................................... 10 Hestia Educ. Grp., LLC v. King, 2016 WL 362226 (N.D. Cal. Jan. 29, 2016) ....................................................................................... 10 Inland Empire Pub. Lands Council v. Schultz, 807 F. Supp. 649 (E.D. Wash. 1992) .................................................................................................. 11 KRL v. Moore, 384 F.3d 1105 (9th Cir. 2004) .............................................................................................................. 8 Marsh v. Oregon Nat. Res. Council, 490 U.S. 360 (1989) ............................................................................................................................ 11 Matsushita Electric. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986) .............................................................................................................................. 8 Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983) ............................................................................................................................ 8, 9 Nat’l Career Coll. v. Spellings, 371 Fed. App’x 794 (9th Cir. 2010) ....................................................................................... 10, 11, 14 Case 4:15-cv-01463-DMR Document 86 Filed 10/06/16 Page 3 of 19 NOTICE AND MOTION FOR SUMMARY JUDGMENT C 15-1463 DMR iii 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 O’Keeffe’s, Inc. v. U.S. Consumer Prod. Safety Comm’n, 92 F.3d 940 (9th Cir. 1996) ................................................................................................................ 11 Redondo-Borges v. U.S. Dep't of Hous. & Urban Dev., 421 F.3d 1 (1st Cir. 2005) ................................................................................................................... 11 Staacke v. U.S. Department of Labor, 841 F.2d 278 (9th Cir. 1988) ................................................................................................................ 8 Taylor v. List, 880 F.2d 1040 (9th Cir. 1989) .............................................................................................................. 8 Thornhill Publ’g Co. v. Gen. Tel. & Elec. Corp., 594 F.2d 730 (9th Cir. 1979) ................................................................................................................ 8 TLT Const. Corp. v. United States, 50 Fed. Cl. 212 (2001) ........................................................................................................................ 10 Administrative Decisions In the Matter of Art of Beauty College, Dkt. 94-151-ST (Mar. 28, 1995) ......................................................................................................... 12 Statutes Administrative Procedure Act, 5 U.S.C. § 701 ....................................................................................................................................... 8 Freedom of Information Act, 5 U.S.C. § 552 ....................................................................................................................................... 2 Higher Education Act of 1965, 20 U.S.C. § 1070 ................................................................................................................................... 1 5 U.S.C. § 706(2) ........................................................................................................................................ 8 20 U.S.C. § 1094(a) .................................................................................................................................... 9 28 U.S.C. § 2401(a) .................................................................................................................................. 12 Rules Fed. R. Civ. P. 56 ........................................................................................................................................ 1 Fed. R. Civ. P. 56(c) ................................................................................................................................... 7 Regulations 2 C.F.R. § 180.125 ...................................................................................................................................... 9 2 C.F.R. § 180.925 ...................................................................................................................................... 9 Case 4:15-cv-01463-DMR Document 86 Filed 10/06/16 Page 4 of 19 NOTICE AND MOTION FOR SUMMARY JUDGMENT C 15-1463 DMR iv 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 2 C.F.R. § 3485.12 ...................................................................................................................................... 9 34 C.F.R. § 85.125 .................................................................................................................................... 10 34 C.F.R. § 85.200 .................................................................................................................................... 10 34 C.F.R. § 85.930 .................................................................................................................................... 10 34 C.F.R. § 600.10(b) ................................................................................................................................. 4 34 C.F.R. § 600.20(a).................................................................................................................................. 9 34 C.F.R. § 668.13(a).................................................................................................................................. 9 34 C.F.R. § 668.14 ...................................................................................................................................... 9 34 C.F.R. § 668.24(b) ................................................................................................................................. 5 34 C.F.R. § 668.24(c).................................................................................................................................. 5 34 C.F.R. § 668.54(a).................................................................................................................................. 5 34 C.F.R. § 668.82 .................................................................................................................................... 13 34 C.F.R. § 668.82(a).................................................................................................................. 7, 9, 11, 14 34 C.F.R. § 668.82(b) ................................................................................................................................. 9 34 C.F.R. § 668.82(b)(1) ........................................................................................................................... 11 34 C.F.R. § 668.113 .................................................................................................................................. 12 34 C.F.R. § 668.164(e)................................................................................................................................ 6 34 C.F.R. § 668.165(b)(1) ........................................................................................................................... 5 Case 4:15-cv-01463-DMR Document 86 Filed 10/06/16 Page 5 of 19 NOTICE AND MOTION FOR SUMMARY JUDGMENT C 15-1463 DMR 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOTICE OF MOTION AND MOTION FOR SUMMARY JUDGMENT PLEASE TAKE NOTICE that on November 10, 2016, at 11:00 a.m., or as soon thereafter as the matter may be heard in Courtroom 4, of the United States District Court for the Northern District of California, located at 130 Clay Street, Oakland, CA 94612, before Honorable Donna M. Ryu, Defendant John King, Secretary of the U.S. Department of Education (“Defendant”), will move for summary judgment in Defendant’s favor, pursuant to Rule 56 of the Federal Rules of Civil Procedure. This motion is based on this Notice, the accompanying Memorandum of Points and Authorities, the administrative record, and any oral argument that may be presented to the Court. I. INTRODUCTION This action arises from the Department of Education’s (the “Department”) February 12, 2014, denial of Plaintiff Manhal Mansour’s (“Mansour”) application for initial certification for Title IV student financial aid funding, pursuant to Title IV of the Higher Education Act of 1965, as amended, 20 U.S.C. § 1070 et seq. (“Title VI programs”), on behalf of Plaintiff Blush School of Makeup (“Blush”). On March 31, 2015, Mansour sued the Department, claiming its denial of Blush’s application for initial certification constituted a de facto debarment and was made on an arbitrary and capricious basis. To the contrary, one agency’s denial of one application to participate in a federal program does not constitute de facto debarment. The Department’s denial of Plaintiffs’ application was based on a lengthy history demonstrating lack of fiduciary capacity. The Court should grant summary judgment to Defendant. II. ISSUES PRESENTED 1. Under the debarment regulation, a debarred party cannot seek to enter into any contract with any federal agency. Can the Department deny a single application for participation in the Title IV programs without providing a debarment proceeding? 2. Fiduciaries of Title IV funding must act at all times with the highest standard of care and diligence in administering the programs and in accounting to the Secretary for the funds received under those programs. Did the Department properly deny Title IV certification to Plaintiffs where Mansour’s prior institution had over a decade of administrative discrepancies, including submission of inconsistent audits, disbursement of funds to students at an uncertified location, and use of Title IV funding for non- program purposes? Case 4:15-cv-01463-DMR Document 86 Filed 10/06/16 Page 6 of 19 NOTICE AND MOTION FOR SUMMARY JUDGMENT C 15-1463 DMR 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 III. BACKGROUND A. Elite Progressive School of Cosmetology From 1990 to December 2008, Mansour was the president and owner of Elite Progressive School of Cosmetology (“Elite”), a school with locations in Sacramento, Stockton, and Concord, California. AR 3.1 Only the Sacramento location was certified to participate in Title IV programs. AR 18, 34. In April 1996, the Department took an emergency action against Elite to withhold Title IV funds because the Accrediting Commission of Career Schools and Colleges of Technology (“ACCSCT”) had withdrawn Elite’s accredited status. AR 619-621. In May 1996, the Department notified Elite that it intended to terminate eligibility based on the loss of accredited status. AR 617-618. In June 1996, the Department terminated eligibility because of the loss of accreditation. AR 616. At some point between 1996 and 2005, Elite regained both ACCSCT accreditation and Department certification; however, on December 9, 2005, the ACCSCT again issued an order to show cause why Elite’s accreditation should not be revoked. AR 588-595. The ACCSCT based its order on Elite’s failure to demonstrate compliance with accrediting standards, including, among other things, failure to document student achievement; failure to demonstrate the school’s facility was sufficient to provide adequate student space; and advertising that was not in compliance with accrediting standards. AR 588‐595. On June 9, 2006, after reviewing Elite’s response to its December 2005 letter, the ACCSCT voted to continue the order to show cause until August 2006. AR 596. In October 2006, the Department placed Elite to the Heightened Cash Monitoring 2 (“HCM2”) method of payment “because [Elite] failed to submit any compliance audit or financial statement for the fiscal years ending December 31, 2003, December 31, 2004, and December 31, 2005.” AR 471. In February 2007, the Department received from Elite its requisite audited financial statements for the 2003, 2004, and 2005 fiscal years ending December 31 of each year. AR 21. The FY 2003 statement 1 The abbreviations AR and SAR refer to the administrative record and supplemental administrative record filed in this action. ECF 24-27, 62-63. Plaintiffs have filed a “supplemental administrative record” comprised of documents obtained through the Freedom of Information Act, 5 U.S.C. § 552. ECF 65. Those documents are outside the scope of the limited discovery allowed in this case and the Court’s order dated January 29, 2016. ECF 45. In addition, Plaintiffs have not moved to expand the administrative record to include them. Fence Creek Cattle Co. v. U.S. Forest Service, 602 F.3d 1125, 1131 (9th Cir. 2010). Case 4:15-cv-01463-DMR Document 86 Filed 10/06/16 Page 7 of 19 NOTICE AND MOTION FOR SUMMARY JUDGMENT C 15-1463 DMR 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 was due June 30, 2004, and was not received until February 22, 2007. Id. The FY 2004 statement was due June 30, 2005, and was not received until February 19, 2007. Id. The FY 2005 statement was due June 30, 2006, and was not received until February 23, 2007.2 Id. In March 2007, the ACCSCT issued a letter to Elite informing the school that it would remain on probation for a number of reasons, including Elite’s failure to “provide a convincing explanation as to why the school had failed to submit audited financial statements and compliance audits to [the Department],” resulting in the school being placed on HCM2 method of repayment. AR 612. The ACCSCT also cited significant discrepancies between the audits submitted by Elite to the ACCSCT and the Department, causing the ACCST to be “gravely concerned that Elite [had] failed in its responsibility to operate in compliance with federal requirements.” AR 612-613. With respect to the latter issue, the ACCSCT found that the statement of cash flows submitted to the Department for the 2003 and 2005 fiscal years (“FY”) did not show any capital deductions from the cash recorded in the beginning of the fiscal year; however, the statements submitted to the ACCSCT for those years showed deductions of $432,902 for FY 2003 and $3,258,653 for FY 2005. AR 613. The ACCSCT also found that the December 31, 2005 statement of cash flows submitted to the Department showed a net increase in cash of $3,327,774, while the statement submitted to the ACCSCT for the same year showed a net increase in cash of only $69,325. Id. The ACCSCT found similar discrepancies between the statements submitted to the Department and the ACCSCT for the 2004 and 2003 fiscal years. Id. The ACCSCT further found that “Elite’s financial statements [were] replete with accounting errors and were not prepared in accordance with Generally Accepted Accounting Principles . . . as required by [the Department] and the ACCSCT Standards of Accreditation.” Id. The ACCSCT included examples of these errors, such as the fact the balance sheet of the December 31, 2005 recorded unearned tuition as an asset, when standards specifically required it to be recorded as a liability. Id. Elite also failed to submit a financial plan that demonstrated its capability to fulfill its obligations to students while operating on the HCM2 method of repayment. AR 614. On August 27 2007, the Department conducted an onsite program review of Elite. AR 466. On 2 Following this pattern, the FY 2006 statement was due June 30, 2007, but was not received until February 19, 2008. Id. Case 4:15-cv-01463-DMR Document 86 Filed 10/06/16 Page 8 of 19 NOTICE AND MOTION FOR SUMMARY JUDGMENT C 15-1463 DMR 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 May 22, 2008, the Department denied Elite’s applications for certification of eligibility for its Concord, California location and an OPE-ID number for a location in Stockton, California, for three reasons: (a) Elite disbursed student financial assistance funds at an unaccredited location (Stockton) during the 2005-2006 award year; (b) Elite failed to provide the Department with proper notice of changes in its accreditation status; and (c) Elite failed to demonstrate that it possessed sufficient administrative capability at its main location to support an extension of Title IV eligibility to additional locations. AR 231. On August 6, 2008, the Department notified Elite that it had completed its review of Elite’s FY 2007 audited financial statements, and found that Elite failed to meet regulatory requirements in the administrative of Title IV funds. AR 21. The Department required Elite to post a letter of credit in the amount of $905,368, representing 100% of the Title IV funds received by Elite during the most recently completed fiscal year. AR 23. On November 20, 2008, the Department informed Elite that it would deny Elite’s application for recertification for Title IV participation. AR 15. The Department noted that it had never received Elite’s compliance audit for FY 2002, and that the compliance audits for the 2003-2007 fiscal years were all late. AR 17. The audits revealed large liabilities and “significant statutory and regulatory violations.” Id. The Department found that Elite did not submit timely financial statements. AR 19. The Department also noted that Elite had elected to not post the letter of credit required in August 2008, and instead informed the Department that it was negotiating a sale. Id. On December 12, 2008, after having provided Elite with the program review report (“Report”) and an opportunity to respond to the issues raised therein, the Department issued an Final Program Review Determination (“FPRD”) to Elite.3 AR 27-71. The FPRD quoted the Report in italics before each finding. Id. The FPRD sustained thirteen program review findings, including the following representative sample: (1) Elite improperly disbursed Title IV funds to students attending its ineligible Stockton location, in violation of 34 C.F.R. § 600.10(b). The Report explained that in preparation for their site visit, the program reviewers obtained data from the National Student Loan Data 3 Plaintiffs do not contest the findings in the FPRD. ECF 81, p. 3; First Amended Complaint (“FAC”), ECF 74, ¶¶ 27-29, 36. Case 4:15-cv-01463-DMR Document 86 Filed 10/06/16 Page 9 of 19 NOTICE AND MOTION FOR SUMMARY JUDGMENT C 15-1463 DMR 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 System (“NSLDS”) that revealed a high number of Title IV recipients who lived in or near Stockton. The Report further stated that “[o]n the first day of the site visit, the owner assured the reviewers that Elite had not disbursed Title IV funds to students enrolled at the Stockton location.” Further, by the third day of the review, reviewers had interviewed a number students or family members who confirmed they had attended the Stockton location exclusively. When files for the students were received, they clearly indicated the students attended the Stockton location. AR 31-35. (2) Elite failed to properly verify information used to calculate expected family contributions for Federal Pell Expected Family Contribution, in violation of 34 C.F.R. § 668.54(a). The Report explained that “[f]undamental administrative capacity requires an institution to establish a system to discovery” inaccurate information submitted by students in response to this basic eligibility issue. The FPRD found that $364,829.06 in Title IV funds were disbursed to students for whom verification was required. AR 35-39. (3) Elite failed to maintain student accounts on a current basis, in violation of 34 C.F.R. § 668.24(b). The program reviewers found that Elite’s accounting records “were internally inconsistent, not maintained on a current basis and failed to accurately report the balances of the students.” AR 40-44. (4) Elite failed to maintain records that properly documented students’ eligibility for Title IV funds that would provide the amount, date, and basis of an institution’s calculation of any refunds due to or on behalf of the student or the treatment of Title IV program funds when a student withdraws, in violation of 34 C.F.R. § 668.24(c). The Department required Elite to locate missing documents and to perform the Return to Title IV (“R2T4”) calculations required. AR 44-45. (5) Elite used Title IV funds for non-program purposes without the express consent to the borrower by billing students for “bookkeeping fees” ranging from $472 to $611, in violation of 34 C.F.R. § 668.165(b)(1). Elite charged these fees to every student whose file was reviewed; none of the files contained the requisite express student authorization to do so. Elite also did not post these charges to the student ledgers in the RGM system. AR 45-47. Case 4:15-cv-01463-DMR Document 86 Filed 10/06/16 Page 10 of 19 NOTICE AND MOTION FOR SUMMARY JUDGMENT C 15-1463 DMR 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 (6) Elite retained credit balances of Title IV funds instead of disbursing the funds to the students within the regulatory time frames, in violation of 34 C.F.R. § 668.164(e). The Department found that Elite retained credit balances until students graduated, instead of disbursing the credit balance to the student as required by the regulations. The Department could not determine the full liability without Elite’s response to the third finding. AR 47-49. Except with respect to the first finding in the Report, Elite did not respond to the Report and notified the Department that it would not do so. AR 35, 39, 44, 45, 47, 49, 52, 54, 55, 58, 61, 63, 66. Elite’s failure to cooperate stymied the Department in its efforts to ensure a full accounting for Title IV funds disbursed by Elite. See, e.g., AR 44 (“After review of Elite’s response, the [FPRD] letter will provide Elite with repayment instructions for the return of funds due to the Department.”), 45 (“Liability for this finding, if any, will be determined after review of Elite’s response to this Report.”), 49 (“Upon review of Elite’s response to Finding #3, the [FPRD] letter will provide Elite with repayment instructions for the return of funds due, if any, to the Department or to students.”). The FPRD ultimately established liabilities that totaled $1,066,752.25 million owed to the Department, after removing duplicated liabilities. AR 68. In conjunction with liabilities owed from other reviews, Elite’s total liabilities equaled $1,665,140. AR 110. On December 10, 2008, B&H Education, Inc. (“B&H”) purchased Elite from Mansour. AR 110. On January 5, 2009, B&H entered a settlement agreement to directly pay the Department the $1,665,140 in outstanding liabilities owed by Elite, as is required before any sale of a school that wishes to continue its participation in the Title IV programs. AR 110, ¶ 1. As part of the settlement agreement, B&H (and Elite) also agreed that it would not employ Mansour or any of Elite’s officers and administrators in any capacity related to the administration of the Title IV programs. AR 111, ¶ 6. B. Blush School of Makeup On January 3, 2014, Mansour, on behalf of Blush, applied for initial certification to participate as an eligible institution in the Title IV programs. AR 5. Mansour signed an application certification in which he acknowledged that the Department may deny the institution’s request for eligibility to participate in the Title IV programs if he provided false or misleading information. AR 14, 215-16. Mansour also acknowledged that providing false or misleading information material to the receipt and Case 4:15-cv-01463-DMR Document 86 Filed 10/06/16 Page 11 of 19 NOTICE AND MOTION FOR SUMMARY JUDGMENT C 15-1463 DMR 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 stewardship of Title IV funds could result in a fine, imprisonment, or both. AR 14. The application required Mansour to disclose whether he or any owner of Blush either 1) held a position at or 2) owned greater than twenty-five percent of another institution that currently participated in or ever participated in the federal student financial aid programs. AR 8, 215-16. If so, the application required Mansour to disclose the name of these individuals, the name of the institution that is or was owned, and any liability currently owed to the Department. AR 8, 215-16. Mansour listed himself as Blush’s Chief Executive Officer and complete owner of Hestia Education Group, LLC (“Hestia”). AR 215-16; ECF 74, FAC, p. 3 ¶¶ 6-7. Hestia is Blush’s sole owner. ECF 74, FAC, p. 3 ¶ 6. Mansour additionally disclosed that Christina Grimm (“Grimm”) was a co-owner of Blush. AR 215. Although Grimm was an owner of two Tint Schools of Makeup & Cosmetology (“Tint”), at the time of Mansour’s application, neither of her schools owed a liability to the Department. Id. Mansour, however, failed to disclose his previous ownership Elite. Id. On February 12, 2014, the Department denied Mansour’s application for initial certification for Blush because Mansour failed to disclose material information regarding its previous failure to satisfy the fiduciary code of conduct as required by 34 C.F.R. § 668.82(a). AR 214. On March 21, 2014 and May 16, 2014, Mansour sought reconsideration of Blush’s application. Id. In his letters to the Department requesting reconsideration of the denial, Mansour suggested that he would sell Blush to Grimm or have Rafael Gonzalez Management (“RGM”) act as a third-party servicer to the institution. AR 197-98, 217. The Department denied each of these requests, because these “controls and conditions” did not provide the Department with assurance of Blush’s future compliance with the Title IV requirements. AR 197, 216-17. IV. LEGAL BACKGROUND A. Summary Judgment A motion for summary judgment should be granted if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). The moving party bears the initial burden of establishing there is no genuine issue of material fact. See Anderson, 447 U.S. at 248; Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). There is no genuine issue of fact if, on the record taken as a whole, a Case 4:15-cv-01463-DMR Document 86 Filed 10/06/16 Page 12 of 19 NOTICE AND MOTION FOR SUMMARY JUDGMENT C 15-1463 DMR 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 rational trier of fact cannot find in favor of the nonmoving party. Matsushita Electric. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). To defeat a motion for summary judgment, the responding party must present admissible evidence sufficient to establish any of the elements that are essential to the moving party’s case and for which that party will bear the burden of proof at trial. Celotex Corp., 477 U.S. at 323; Taylor v. List, 880 F.2d 1040, 1045 (9th Cir. 1989). It is insufficient for the nonmoving party to produce a mere “scintilla” of evidence in support of the nonmoving party’s position. Anderson, 477 U.S. at 252. Additionally, the mere suggestion that facts are in controversy, in combination with conclusory or speculative testimony in affidavits and moving papers, is insufficient to defeat summary judgment. See Thornhill Publ’g Co. v. Gen. Tel. & Elec. Corp., 594 F.2d 730, 738 (9th Cir. 1979). Instead, the responding party must set forth, by affidavit or other admissible evidence, specific facts demonstrating the existence of an actual issue for trial. See KRL v. Moore, 384 F.3d 1105, 1110 (9th Cir. 2004). B. Administrative Procedure Act Under the Administrative Procedure Act (“APA”), 5 U.S.C. § 701 et seq., a court “hold unlawful and set aside agency action, findings and conclusions found to be . . . arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law.” 5 U.S.C. § 706(2). The APA does not provide an independent jurisdictional basis. Califano v. Sanders, 430 U.S. 99, 107 (1977); Staacke v. U.S. Department of Labor, 841 F.2d 278, 282 (9th Cir. 1988). Rather, it merely provides the standards for reviewing agency action once jurisdiction is otherwise established. Staacke, 841 F.2d at 282. The standard of review is highly deferential. Center for Biological Diversity v. Bureau of Land Management, -- F.3d --, 2016 WL 4269899, at *6 (9th Cir. 2016). The Court may find an agency’s action to be arbitrary and capricious if the agency “relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.” Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983); see Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416 (1971), abrogated on other grounds by Califano, 430 U.S. 99. The Court should uphold a decision “if the agency’s path may reasonably be discerned.” Motor Vehicle Mfrs. Case 4:15-cv-01463-DMR Document 86 Filed 10/06/16 Page 13 of 19 NOTICE AND MOTION FOR SUMMARY JUDGMENT C 15-1463 DMR 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Ass’n of U.S., Inc., 463 U.S. at 43, quoting Bowman Trans. Inc. v. Arkansas-Best Freight System, 419 U.S. 281, 285 (1974); see Camp v. Pitts, 411 U.S. 138, 142-43 (1973). The focal point for the Court’s review is the record already in existence, not “some new record made initially in the reviewing court.” Camp, 411 U.S. at 142. C. Title IV Programs To participate in the Title IV programs, a school must execute a contract with the Department known as a program participation agreement (“PPA”). 20 U.S.C. § 1094(a); 34 C.F.R. § 668.14. The Department executes such contracts only after it performs a thorough review of an institution's administrative capability and financial responsibility, determines that an institution satisfies statutory eligibility requirements, and renders a decision that the institution is capable of acting as the Department's fiduciary. See 34 C.F.R. §§ 600.20(a); 668.82(a), (b). An institution which seeks certification must demonstrate that it qualifies as an eligible institution, meets the standards of financial responsibility, and meets the standards for participation, as set forth in the regulations. 34 C.F.R. § 668.13(a). Neither the statute nor the regulation provides a particular procedure for administrative review of denial of certification; as such, there is no requirement for an administrative hearing. 20 U.S.C. § 1094(a); 34 C.F.R. § 668.13(a). V. ANALYSIS The Department’s denial of Mansour’s application for Title IV funding did not constitute a de facto debarment, and its finding that Mansour is incapable of fulfilling his fiduciary duties was proper. See 34 C.F.R. § 668.82(a) (“To participate in any Title IV, HEA program, the institution or servicer must at all times act with the competency and integrity necessary to qualify as a fiduciary.”). A. The Department’s Denial of Blush’s Initial Certification Did Not Constitute a De Facto Debarment Because Mansour Was Permitted to Enter Contractual Agreements with Other Federal Agencies. Debarment is the exclusion of individuals who are prohibited from conducting business with the government because they are unable to protect the integrity of federal programs. 2 C.F.R. §§ 180.125, 180.925, 3485.12. To prove that an individual has been debarred, the individual must show that he is prohibited from participating in any federal funding program. Nat’l Career Coll. v. Spellings, 371 Fed. Case 4:15-cv-01463-DMR Document 86 Filed 10/06/16 Page 14 of 19 NOTICE AND MOTION FOR SUMMARY JUDGMENT C 15-1463 DMR 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 App’x 794, 796 (9th Cir. 2010).4 In National Career College, a private institution and its owners challenged the Department’s denial of its application to participate in the Title IV programs. The Department in that case denied the institution eligibility when a review revealed that the owner-applicant forged financial statements submitted to the Department when he was owner of another institution. Id. at 796. The applicant argued that rejection of his application constituted a de facto debarment without receiving due process. Id. The appellate court affirmed the denial. Id. The Ninth Circuit held that, because the applicant was not barred from entering other contractual agreements with the Department or with other federal agencies, the Department’s denial was not a clear error of judgment and was therefore proper. Id. at 795-96. The appellate court further reasoned that a single denial to contract with the federal government was insufficient to prove de facto debarment, because “[w]hen a party is debarred, that party cannot seek to enter into any contract with any federal agency.” Id. at 96 (citing 34 C.F.R. §§ 85.125, 85.200, 85.930); see also TLT Const. Corp. v. United States, 50 Fed. Cl. 212, 215 (2001) (“To succeed, [a plaintiff bringing a debarment claim] must demonstrate a systematic effort by the procuring agency to reject all of the bidder's contract bids.”) (internal quotation marks and citations omitted). Here, the Department’s denial of Blush’s initial certification for Title IV funding was not a de facto debarment because Blush has been approved to participate in other federal programs with Mansour as its president. The Department of Homeland Security approved Blush to provide education to non- immigrant foreign students, and the Department of Veterans Affairs approved Blush to train eligible veterans and dependents under the GI Bill and Dependents Education Assistance Program. Hestia Educ. Grp., LLC v. King, 2016 WL 362226, at *7 (N.D. Cal. Jan. 29, 2016) (“Mansour cannot claim that he has been debarred, since the record clearly shows that he has not been barred from transactions with other federal agencies.”). 4 Plaintiffs’ motion for leave to file motion for reconsideration of the Court’s discovery order (ECF 45) was denied in part because the court found that the government properly relied on the definition of debarment set forth in an unpublished Ninth Circuit decision. Hestia Educ. Grp., LLC v. King, 2016 WL 1323079, at *2 (N.D. Cal. Apr. 5, 2016) (“Plaintiffs’ contention that the court erred in its weighing of “persuasive” authorities is nothing more than a thinly veiled attempt to reargue its original motion. This fails to meet the standard for reconsideration based on manifest failure by the court to consider . . . dispositive legal arguments.”) (internal citations omitted). Case 4:15-cv-01463-DMR Document 86 Filed 10/06/16 Page 15 of 19 NOTICE AND MOTION FOR SUMMARY JUDGMENT C 15-1463 DMR 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Like the plaintiffs in National Career College, Mansour failed to show that he was denied the ability to participate in other federal funding programs. The denial of certification described in the Department’s letters is not a blanket exclusion from all federally-funded programs. AR 176-179, 214‐220. Instead, the Department’s well-substantiated decision is one instance where Mansour was denied the ability to enter into a contractual agreement with the government. This is insufficient to prove a de facto debarment. Nat’l Career Coll., 371 Fed. App’x at 796 (“This single instance is insufficient to prove a de facto debarment.”); see also Redondo-Borges v. U.S. Dep't of Hous. & Urban Dev., 421 F.3d 1, 9 (1st Cir. 2005) (“A single incident is insufficient to establish a pattern or practice of exclusion (and, thus, to establish even a de facto debarment).”). Therefore, this Court should grant summary judgment in the Department’s favor. B. The Department’s Denial of Blush’s Initial Certification Was Not Arbitrary And Capricious, Because it Was Based Upon Mansour’s Omission of a Material Fact And His Previous Breach of Fiduciary Duties as Elite’s President And Owner. In deciding whether an agency decision was “arbitrary or capricious, the reviewing court must consider whether the challenged agency decision was based upon a consideration of the relevant factors and whether there has been a clear error of judgment.” Inland Empire Pub. Lands Council v. Schultz, 807 F. Supp. 649, 651 (E.D. Wash. 1992) (citing Marsh v. Oregon Nat. Res. Council, 490 U.S. 360, 378 (1989)). The court’s inquiry is limited to the agency record, and the court is prohibited from conducting inquiries into the matter de novo. Inland Empire Pub. Lands Council, 807 F. Supp. at 651. The reviewing court must defer to the agency’s judgment absent a showing that the agency’s decision was unlawful. O’Keeffe’s, Inc. v. U.S. Consumer Prod. Safety Comm’n, 92 F.3d 940, 942 (9th Cir. 1996); Nat’l Career Coll., 371 Fed. App’x at 795. To participate in any Title IV program, that institution must “at all times act with the competency and integrity necessary to qualify as a fiduciary.” 34 C.F.R. § 668.82(a). The Department has a duty to ensure that participating institutions fulfill the fiduciary standard of conduct, which subjects them “to the highest standard of care and diligence in administering the programs and in accounting to the Secretary for the funds received under those programs.” 34 C.F.R. § 668.82(b)(1); see Nat’l Career Coll., 371 Fed. App’x at 796. Three times the Department reaffirmed its conclusion that Mansour had a record of falling short of the fiduciary standard of care. AR 176-179, 214-220. Mansour not only failed to disclose his Case 4:15-cv-01463-DMR Document 86 Filed 10/06/16 Page 16 of 19 NOTICE AND MOTION FOR SUMMARY JUDGMENT C 15-1463 DMR 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 past affiliation with Elite, but demonstrated his understanding of the question posed, because he did disclose Grimm’s ownership of two Tint Schools of Makeup & Cosmetology. AR 14, 215-216. The Department’s administrative record is replete with instances of Mansour’s failure to meet the standard of conduct required of a fiduciary for the Title IV programs.5 See AR 15-622. As detailed above, while Mansour was president and owner of Elite, the institution improperly disbursed more than $2.2 million in Title IV funds to 328 students enrolled at its unaccredited Stockton location. AR 216. As owner of Elite, it was Mansour who owed a duty to act as the Department’s fiduciary. See, e.g., In the Matter of Art of Beauty College, Dkt. 94-151-ST (Mar. 28, 1995), pp. 2-3, available at http://oha.ed.gov/cases/1994-151st.html (last visited Oct. 5, 2016), (finding that, in the context of meeting its fiduciary duty, the ultimate responsibility for ensuring that Title IV requirements are met lies with the school’s owner).6 Elite also routinely failed to comply with the program rules even with RGM as a third-party servicer: (1) rarely posted students’ cash payments to the RGM system; (2) failed to properly and timely pay tuition refunds and credit balances; and (3) failed to maintain required documentation. AR 444-45. Requisite annual compliance audits, though filed late in each instance, showed that Elite’s auditor made repeat serious findings year after year. For the fiscal years ended December 31, 2003 (AR 279), December 31, 2004 (AR 235), December 31, 2005 (AR 330), December 31, 2006 (AR 292), and December 31, 2007 (AR 354), the audits each contained multiple findings, with liabilities for misspent Title IV funds in the hundreds of thousands of dollars. See also AR 382, 400, 410, 422. Rightfully, the Department was also disturbed by Mansour’s frequent inconsistencies in his attempts to excuse the Elite omission. See AR 215-220. Mansour orally represented that he was aware that Elite “did wrong” and asked for a “second chance,” however, in written communications, Mansour persisted in denying that Elite intentionally disbursed Title IV funds to the unaccredited Stockton 5 Any collateral attack on the integrity of the program review is foreclosed by the passage of time. See 28 U.S.C. § 2401(a). Elite had the right to appeal the December 12, 2008 FPRD by no later than January 26, 2009, but failed to do so. AR 24-25; see 34 C.F.R. § 668.113. As a result, the FPRD was a final agency action as of that date, and by the time Plaintiffs filed the instant action, more than six years had passed. 6 For the convenience of the Court, a copy of this administrative decision is attached as an appendix to this motion. Page references are to the Bates numbers applied to the appendix. Case 4:15-cv-01463-DMR Document 86 Filed 10/06/16 Page 17 of 19 NOTICE AND MOTION FOR SUMMARY JUDGMENT C 15-1463 DMR 13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 location. AR 215. When confronted, Mansour stated that he could not determine whether the Stockton location received Title IV funds. AR 216. Mansour then again denied impropriety in a July 22, 2008 letter regarding Elite’s application to add an additional location in Concord, California. Id. And finally, in Mansour’s Reconsideration Request for the Department’s decision to deny Blush initial certification, he took the position that any students at the Stockton location receiving Title IV funds were enrolled at the main, accredited campus but received appropriate instruction at an unaccredited location. AR 120 n.4 (“Elite’s position on this issue was that it enrolled these students at its eligible main campus and that it was appropriate for Elite to provide a portion of their instruction at an ineligible branch campus.”). The Department found that this was directly contradicted by evidence its program reviewers collected that demonstrated students at the Stockton location had their enrollment contracts printed with the Stockton address or had “Stockton” handwritten at the top, and completed their entire educational programs exclusively at the Stockton location. AR 216, 440-41. The Department found these misrepresentations and inconsistencies to fall short of the high standard of care required of a fiduciary, see 34 C.F.R. § 668.82, and therefore appropriately denied Mansour’s application to certify another school. Plaintiffs have asserted that Mansour was informed by an auditor that Elite’s Stockton students were improperly receiving financial aid, and that upon the auditor’s advice, “disbursements to students attending the Stockton campus were voluntarily stopped by Mansour in July 2006.” ECF 75, FAC pp. 7- 8 ¶ 22. Elite made a similar assertion in response to the program review report, when Elite asserted that its audits had “either discovered some liabilities or involved probable liabilities (for the 2007 Compliance Audit) for some of the students involved” in the finding that Elite had improperly disbursed funds to Stockton students. AR 34. Yet none of the audits submitted to the Department reveal such findings: The 2004 Compliance Audit did not reveal any disbursements to Stockton students. AR 240- 249. The 2006 Compliance Audit did not reveal any disbursements to Stockton students. AR 302-315. In its discussion of FY 2005 findings, the 2006 Compliance Audit did not cite any disbursements to Stockton students. AR 317-332. Notably, each audit stated “[t]he extent and nature of the findings of this audit report would indicate that the administrative capabilities of the Institution are in question.” AR 249, 315, 331. Simply put, there is no evidence of the auditor’s alleged discovery. AR 240-249, 302- Case 4:15-cv-01463-DMR Document 86 Filed 10/06/16 Page 18 of 19 NOTICE AND MOTION FOR SUMMARY JUDGMENT C 15-1463 DMR 14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 315, 317-332. The record is equally devoid of any evidence that Elite voluntarily notified the Department of the issue; nor did Elite make any voluntary efforts to ensure the return of the improper disbursements. AR 1-622. Plaintiffs have conceded the issues addressed in the FPRD. ECF 81, p. 3; FAC, ECF 74, ¶¶ 27-29, 36. While Plaintiffs downplay these serious issues as “Title IV administration errors,” the FPRD is ample evidence that Plaintiff Mansour lacks fiduciary capability: as a fiduciary, an institution is “subject to the highest standard of care and diligence in administering the program.” 34 C.F.R. § 668.82(b)(1). Accordingly, even if Mansour was unaware of the improper disbursement of funds and the other findings in the FPRD, he was not acting with the competency and integrity required of a fiduciary. 34 C.F.R. § 668.82(a). Indeed, the record is filled with evidence from the Department, from the ACCSCT, and from Elite’s own auditor, that Mansour lacks fiduciary capability. AR 21, 27-71, 231, 471, 588-595, 611‐613. The Court should defer to the Department’s decision to deny Mansour’s application because the decision was not arbitrary, capricious, an abuse of discretion, or contrary to law. Nat’l Career Coll., 371 Fed. Appx. at 796 (holding that the Department “did not err in considering all relevant circumstances, including [the appellant’s] previous breach of fiduciary duty.”). VI. CONCLUSION For the stated reasons above, Defendant is entitled to judgment as a matter of law. DATED: October 6, 2016 Respectfully submitted, BRIAN J. STRETCH United States Attorney /s/Melanie L. Proctor MELANIE L. PROCTOR Assistant United States Attorney Attorneys for Defendant Case 4:15-cv-01463-DMR Document 86 Filed 10/06/16 Page 19 of 19 Appendix 1 Case 4:15-cv-01463-DMR Document 86-1 Filed 10/06/16 Page 1 of 7 In re Art of Beauty College, Dkt. No. 94-151-ST http://oha.ed.gov/cases/1994-151st.html[10/4/2016 10:36:48 AM] IN THE MATTER OF Docket No. 94-151-ST ART OF BEAUTY COLLEGE, Student Financial Assistance Proceeding Respondent. DECISION Appearances: Jack L. Simms, Jr., Esq.,of Leesville, Louisiana, for the Respondent. Denise Morelli, Esq., Office of the General Counsel, U.S. Department of Education, for the Office of Student Financial Assistance Programs. Before: Thomas W. Reilly, Administrative Law Judge BACKGROUND The Respondent, Art of Beauty College (ABC), filed a timely notice of appeal and request for hearing contesting a notice of intent to terminate the school's eligibility to participate in and receive further funds under several programs authorized in Title IV of the Higher Education Act of 1965, as amended (Title IV), 20 U.S.C. §1070 et seq. The termination action is based upon the school's failure to submit its most recent compliance audit, on its repeated violations of Title IV program requirements, and also upon the fact that the school filed for bankruptcy. Respondent also contests a notice of intent to fine the school $36,900 for certain Title IV violations. On September 23, 1994, ABC appealed the Department's proposed termination and fine, and requested a hearing. This proceeding is governed by 34 C.F.R. Part 668, Subpart G, and the Department has the "burden of persuasion" (34 C.F.R. 668.88(c)(2)). The hearing on the record was conducted in Shreveport, Louisiana, on March 1, 1995. Both sides were represented by counsel. Counsel stipulated that all exhibits identified by both sides could be received into evidence without objection to admissibility, including some identified for the first time at the hearing.See footnote 1 1/ However, some of ABC's exhibits were never discussed by either witnesses in testimony or by counsel in argument at the hearing and, accordingly, will not be discussed in detail here as they appear to have limited materiality to the legal issues in this proceeding. (These include, for example, personal medical statements relating to the condition of Patricia Diane Ford, the owner of the subject school, who was the only witness on behalf of ABC to testify at the hearing.) Counsel for ABC argued that Respondent does not dispute or contest the facts set forth in the exhibits and basic documents of the Student Financial Assistance Programs (SFAP or ED), nor does he seriously contest that ED can take the action it proposes so far as the law and the regulations are concerned. However, the basic thrust of his position is that there are "mitigating circumstances" that should be considered by the Judge, and that the Judge has the discretion to set aside ED's proposed actions in view of the attendant circumstances and the hardship ABC's owner has already undergone and will undergo in the future if she does not have access to additional Federal education funds that would 1 Case 4:15-cv-01463-DMR Document 86-1 Filed 10/06/16 Page 2 of 7 In re Art of Beauty College, Dkt. No. 94-151-ST http://oha.ed.gov/cases/1994-151st.html[10/4/2016 10:36:48 AM] allow the school to continue in operation, as well as to pay off the fines or assessments now demanded by ED, and to make student loan refunds still outstanding and unpaid. CHRONOLOGY ABC is a proprietary school owned and operated by Ms. Patricia Diane Ford, offering courses in cosmetology. The college operated a main campus in Leesville, Louisiana, with branch campuses in DeRidder, Louisiana, and Jasper, Texas. However, there was testimony from Ms. Ford that only the Leesville campus would remain open. The college has been participating in Title IV programs since 1985, and its most recent program participation agreement was signed July 22, 1991. On March 31, 1994, the school was required to file a compliance audit for the period July 1, 1991-June 30, 1993, with the Department's Office of the Inspector General (OIG). The audit was not filed on the due date. As of the present time, the required audit has not been filed with the Department. (See testimony of John Kucholtz, ED Audit Coordinator in the Inspector General's office, Dallas, Texas.) All participants in Title IV are required to have periodic audits performed which review the school's compliance with Title IV program requirements. 20 U.S.C. §1094(c); 34 C.F.R. 668.23(c). On April 21, 1994, the school filed a petition for bankruptcy with the U.S. Bankruptcy Court for the Western District of Louisiana. The bankruptcy petition lists the debtor as "Patricia Diane Ford, d/b/a Art of Beauty College." Originally filed under Chapter 13 of the Bankruptcy Laws, it was later changed to a petition under Chapter 11. (ED Ex.4) The Department of Education conducted a program review in January 1994, and ED issued a Final Program Review Determination (FPRD) on June 23, 1994, citing several violations of Title IV. The violations included failure to make timely Federal Family Education Loan (FFEL) and Federal Pell Grant (Pell) refunds. The FPRD noted that similar violations were found in the school's compliance audit for award years 1989-1991. (ED Ex.6) The Department assessed $14,171 in liabilities for those violations. The school did not appeal the findings in the FPRD. To the present time, the school has not paid those outstanding liabilities. On September 2, 1994, the Department issued a Notice of Intent to Terminate the Eligibility of the school to participate in Title IV programs, based upon the school's failure to submit the required compliance audits for award years 1991- 1992 and 1992- 1993, and its repeated violations of Title IV program requirements specified in the June 1994 FPRD. (ED Ex.10) Also, the Department assessed fines totalling $36,900 for the Title IV violations. On November 4, 1994, the Department amended its termination notice to include the bankruptcy filing as a separate grounds for termination. (ED Ex.11)See footnote 2 2/ DISCUSSION Two witnesses testified for the Department of Education -- John Kucholtz, from ED Region VI, Office of the Inspector General, Dallas, Texas; and Michael Wade, an Institutional Review Specialist from the Institutional Review Branch, Office of Student Financial Assistance, ED Region VI, Dallas, Texas. The ED witnesses discussed and were further questioned about the missing compliance audits and the program review documents relating to the ABC school review. Mr. Wade conducted the program review and issued the FPRD on June 23, 1994. Ms. Patricia Diane Ford, sole proprietor and owner of the Art of Beauty College, was the only witness for the respondent school. She tesified to the problems she has been having lately and her intention to do the right thing, but that lack of funds prevented her from doing all that was required by ED. She testified that her ex-husband took care of the administrative and financial aid matters before their divorce. She also testified that she had paid a CPA to do the required audits, but that he never sent them in. She thinks he requested an extension of time but cannot be sure that he did so. She does not now have the funds to pay the overdue student aid refunds. Counsel for the school argues (brief, Dec. 21, 1994) that "in neither of (the bankruptcy) proceedings has the debtor attempted to include or seek relief against the U.S. Department of Education, or any other state or Federal agency," and that "the institution has not filed for bankruptcy, but that the owner, individually, has filed" the subject petitions. 2 Case 4:15-cv-01463-DMR Document 86-1 Filed 10/06/16 Page 3 of 7 In re Art of Beauty College, Dkt. No. 94-151-ST http://oha.ed.gov/cases/1994-151st.html[10/4/2016 10:36:48 AM] However, I find this to be a distinction without a difference. The sole owner of the subject school is Ms. Patricia Diane Ford; judging by her testimony this is her only business and has been for some 13 years. The title of the original petition in bankruptcy was "Patricia Diane Ford, d/b/a Art of Beauty College," and it clearly deals with debts incurred by Ms. Ford through and in connection with her operations of the school. So, in essence, it is the institution that is in bankruptcy and clearly its operations are directly affected by the bankruptcy filing. Ms. Ford owns, manages and directs the policies and day-to-day activities of the institution. (Cf., 20 U.S.C. §1088(4)(A).) The argument is also made that terminating the institution's eligibility (to continue in business and receive more Federal funds) "is in direct conflict with the provisions of the U.S. Bankruptcy Code which prohibit...discrimination against persons who have filed bankruptcy proceedings by effectively preventing them from engaging in business." However, the "automatic stay" provisions of the bankruptcy laws (11 U.S.C. §362(b)(16)) specifically exempt from the stay "any action by a guaranty agency, as defined in §435(j) of the Higher Education Act of 1965 (20 U.S.C. 1001 et seq.) or the Secretary of Education regarding the eligibility of the debtor to participate in programs authorized under such Act." To be eligible to participate in Title IV programs, a school must meet the definition of an "institution of higher education." See 20 U.S.C. §1094(a). The definition of an "institution of higher education" includes proprietary schools such as the Art of Beauty College. 20 U.S.C. §1088(a). However, the same statute specifically excludes from that definition institutions which file for bankruptcy. 20 U.S.C. §1088(a)(4): (4)An institution shall not be considered to meet the definition of an institution of higher education in paragraph (1) if -- (A)the institution, or an affiliate of the institution that has the power, by contract or ownership interest, to direct or cause the direction of the management or policies of the institution, has filed for bankruptcy. It follows that by filing for bankruptcy on April 21, 1994, this school effectively removed itself from the Title IV definition of an "institution of higher education", and it is thereby ineligible to participate in Title IV programs. 20 U.S.C. §1094(a). There is no discretion available here for the Judge to substitute his judgement for the clear mandate of the statute. Respondent's counsel also makes the argument that the term "file for bankruptcy" is "vague and non-specific," and thus any attempt to make those provisions the basis of an action against any entity is "an unconstitutional deprivation of the entity's right to due process of law" (citing the U.S. Constitution). I simply find that argument to be without merit. See footnote 3 3/ There are other separate and independent grounds for terminating the eligibility of this school from participation in Title IV programs. To participate in these programs, the school signs a program participation agreement with the Education Department which specifies various requirements that must be complied with by the school. 20 U.S.C. §1094. The Secretary has the authority to terminate a school's eligibility based on the school's violation of any Title IV regulation. See 34 C.F.R. 668.86. In this case, the school failed to file its required compliance audits for award years 1991-1992 and 1992-1993. Compliance audits are essential to the Department's ability to ensure that institutions properly account for Title IV funds, and they are required by both law and regulations. 20 U.S.C. §1094(c); 34 C.F.R. 668.23(c), 668.90(a)(3)(iv). Title IV regulations require the termination of a school's eligibility for failing to meet auditing requirements prescribed in 34 C.F.R. 668.23(c). As expressed in 34 C.F.R. 668.90(a)(3)(iv): In a termination action against an institution based on the grounds that an institution has failed to comply with the requirements of §668.23(c)(4), the hearing 3 Case 4:15-cv-01463-DMR Document 86-1 Filed 10/06/16 Page 4 of 7 In re Art of Beauty College, Dkt. No. 94-151-ST http://oha.ed.gov/cases/1994-151st.html[10/4/2016 10:36:48 AM] official must find that termination is warranted. (Emphasis added.) For cases wherein the above point has already been ruled upon by the Secretary, see In re San Francisco College of Mortuary Science, Dkt.No.92-8-ST, U.S. Dept. of Education (December 31, 1992), affirmed by the Secretary (March 26, 1994), and In re Institute of Multiple Technology, Dkt.No.92-26-ST, U.S. Dept. of Education (Nov.26, 1993), affirmed by the Secretary (April 18, 1994). In addition to the termination action, the school has been assessed a series of fines totalling $36,900 as punishment for violation of the Title IV auditing requirements ($18,500 fine), and for repeated violations of refund requirements under the Pell grant and FFEL funds regulations ($18,400 fine). If a student withdraws from an institution prior to the completion of its educational program, the institution is required to refund unearned tuition to the appropriate lender or Title IV program account. 34 C.F.R. 668.22, 682.606, 682.607. Refunds of unearned Pell funds must be made within 30 days from the date the student officially withdraws, and refunds of unearned FFEL funds must be made within 60 days after the student's withdrawal. The documentary evidence (Findings 1 & 2 of the FPRD and Finding 6 of the 1989-1991 compliance audit) clearly establishes that this school repeatedly failed to comply with the refund requirements. The maximum possible fine is $25,000 per violation, 34 CFR 668.84(a), and the amount of the fine is to reflect "(t)he gravity of the violation ... and (t)he size of the institution." 34 C.F.R. 668.92(a). Although respondent's counsel argues that the $36,900 total fine appears to be "some arbitrary figure somebody pulled out of the air," See footnote 4 4/ the testimony of the ED witnesses, the ED documentary exhibits and the nature of the violations (some repetitive) indicate that the fines have been fairly and reasonably calculated. It is not that the Judge has no sympathy for the problems the school owner has had to deal with -- domestic problems, medical problems, and IRS problems -- but the Judge simply has no discretion to disregard a mandatory statute and regulation that removes eligibility from a proprietary school whose sole owner has filed for bankruptcy. Nor does the Judge have the option to eliminate fines for clear violations of Title IV requirements. Just as the school has a fiduciary relationship toward the Federal funds and loan funds it receives, so a Federal agency has a fiduciary relationship toward the Federal funds (tax dollars) it is authorized to grant or lend. For the past couple of years this school has had its financial books and records not carefully monitored with regard to the Federal HEA funds it has been charged with dispensing and tracking, particularly with regard to required refunds, when and to whom they must be paid. And the failure to have timely required audits conducted is an ominous portent for a school requesting to be kept in the Title IV program, and requesting additional Federal education funds. I recognize that Ms. Ford's ex- husband took care of all these financial and administrative matters before he departed, with Ms. Ford simply handling the teaching aspect of the business. I also recognize her disappointment in the non-performance of the CPA upon whom she relied. However, the ultimate responsibility for ensuring timely audits is hers, as owner/manager of the school. Furthermore, sympathy and understanding cannot substitute for good business management, and a Federal agency that would continue to dispense Federal funds to a school in such a state of record-keeping disarray would be ignoring its own fiduciary duty to those Federal funds. FINDINGS AND CONCLUSIONS After due consideration of all the testimony and evidence of record, and for the reasons discussed above, I find that the Department has met its burden of persuasion in establishing that its proposed termination of eligibility of the respondent school is clearly warranted on the dual grounds (each independently sufficient to support termination) of: (1) the filing for bankruptcy of the school's sole owner, and (2) the school's failure to submit its most recent compliance audit, and repeated violations of Title IV program requirements relating to failure to make timely required refunds. I further find and conclude that the fines assessed against respondent are warranted for the violations involved, and have been reasonably and fairly calculated in accordance with the standards and criteria set forth in the applicable regulations. 4 Case 4:15-cv-01463-DMR Document 86-1 Filed 10/06/16 Page 5 of 7 In re Art of Beauty College, Dkt. No. 94-151-ST http://oha.ed.gov/cases/1994-151st.html[10/4/2016 10:36:48 AM] ORDER It is hereby ORDERED that the eligibility of the Respondent school to participate in Title IV HEA programs be TERMINATED in accordance with the earlier directions from the U.S. Department of Education to the Respondent Art of Beauty College. IT IS FURTHER ORDERED that the Respondent school, Art of Beauty College, pay the total fine of $36,900 for the cumulative violations of Title IV program requirements, the fine to be paid in accordance with the directions earlier transmitted to the school by the U.S. Department of Education and the Administrative Billing & Collections Section, USDA, OFM, NFC (see Respondent's Exhibit 3). ______________________________ Thomas W. Reilly Administrative Law Judge Issued: March 28, 1995. Washington, D.C. --------------------------------- S E R V I C E L I S T --------------------------------- A copy of the attached INITIAL DECISION was sent to the following by Certified Mail, Return Receipt Requested, on the 28th day of March 1995: Jack L. Simms, Jr., Esq. 100 East Texas Street P.O. Box 1554 Leesville, Louisiana 71496-1554. Denise Morelli, Esq. Office of the General Counsel U.S. Department of Education -- FOB-10B 600 Independence Ave.,S.W.-- Rm.5215 Washington, D.C. 20202-2110 Footnote: 1 1/ ED exhibits are numbered 1 thru 19, and are briefly described either in an accompanying list (1 thru 10) or by counsel orally on the record of hearing (11 thru 19). Respondent's exhibits were not numbered, but each of the four is briefly described below: (1)Medical report of Dr.Taghi Shafie, M.D., dated 2/7/95, five pages.(1st page mistake in date:"'94".) (2)Medical report of Dr. Cyrus Sajad, M.D., dated 2/28/95, two pages. (3)Notice to Debtor letter from USDA/OFM/NFC, with payment instructions, one page. (4)Ltr. from attorney Simms to Vernetta Stevenson, ED, dated 10/4/94, one page. Footnote: 2 2/ On Nov.4, 1994, the Department also imposed an emergency termination action based upon the 5 Case 4:15-cv-01463-DMR Document 86-1 Filed 10/06/16 Page 6 of 7 In re Art of Beauty College, Dkt. No. 94-151-ST http://oha.ed.gov/cases/1994-151st.html[10/4/2016 10:36:48 AM] bankruptcy filing of April 21, 1994. (See ED Ex.12.) That action was contested but affirmed by Judge Canellos in a decision issued February 10, 1995, Dkt.#94-205-EA, Emergency Action Show Cause Proceeding. Footnote: 3 3/ The arguments of Respondent's counsel are summarized in his post-hearing brief with four main points: (1) that the termination on the grounds of filing for bankruptcy is premature; (2) that termination for failure to file audits should be changed to an order of suspension; (3) that termination for failure to pay refunds should be dismissed on the grounds that it violates the Bankruptcy Code, and in the alternative the eligibility should merely be suspended until the refunds have been paid; and (4) that the action to impose fines should be dismissed because they are excessive, out of proportion to the offense, out of proportion to the size of the institution, and in violation of the Bankruptcy Code. Alternatively, any fine should be in a lesser amount. Footnote: 4 4/ Hearing transcript, at 110. Also, in his Original Brief for Respondent, counsel asserts that "the fines proposed by the Department are arbitrary and are out of touch with reality. They have absolutely no basis, and constitute excessive punishment." 6 Case 4:15-cv-01463-DMR Document 86-1 Filed 10/06/16 Page 7 of 7 PROPOSED ORDER C 15-1463 DMR 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 BRIAN J. STRETCH (CABN 163973) United States Attorney SARA WINSLOW (DCBN 457643) Chief, Civil Division MELANIE L. PROCTOR (CSBN 228971) Assistant United States Attorney 450 Golden Gate Avenue, Box 36055 San Francisco, California 94102-3495 Telephone: (415) 436-6730 FAX: (415) 436-7169 Melanie.Proctor@usdoj.gov Attorneys for Defendant UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA OAKLAND DIVISION HESTIA EDUCATION GROUP, LLC dba BLUSH SCHOOL OF MAKEUP, et al., Plaintiffs, v. JOHN KING, Secretary of the United States Department of Education, Defendant. ) ) ) ) ) ) ) ) ) ) ) C 15-1463 DMR PROPOSED ORDER ON DEFENDANT’S MOTION FOR SUMMARY JUDGMENT Plaintiffs Hestia Education Group and Manhal Mansour (“Plaintiffs”) challenge the Department of Education’s (“Department”) denial of their application for initial certification for Title IV student financial aid funding, pursuant to Title IV of the Higher Education Act of 1965, as amended, 20 U.S.C. § 1070 et seq. (“Title VI programs”). Plaintiffs contend that the denial constituted a de facto debarment, and that the decision was arbitrary and capricious. Defendant moves for summary judgment. Debarment is the exclusion of individuals who are prohibited from conducting business with the government because they are unable to protect the integrity of federal programs. 2 C.F.R. §§ 180.125, 180.925, 3485.12. To prove that an individual has been debarred, the individual must show that he is Case 4:15-cv-01463-DMR Document 86-2 Filed 10/06/16 Page 1 of 5 PROPOSED ORDER C 15-1463 DMR 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 prohibited from participating in any federal funding program. Nat’l Career Coll. v. Spellings, 371 F. App’x 794, 796 (9th Cir. 2010). In addition, a single incident is insufficient to establish a pattern or practice of exclusion. Redondo-Borges v. U.S. Dep't of Hous. & Urban Dev., 421 F.3d 1, 9 (1st Cir. 2005). Here, Plaintiffs cannot show debarment because Hestia Education Group participates in other federal funding programs, and Plaintiffs challenge a single denial. The Court therefore GRANTS Defendant’s motion for summary judgment on Plaintiffs’ second cause of action. In deciding whether an agency decision was “arbitrary or capricious, the reviewing court must consider whether the challenged agency decision was based upon a consideration of the relevant factors and whether there has been a clear error of judgment.” Inland Empire Pub. Lands Council v. Schultz, 807 F. Supp. 649, 651 (E.D. Wash. 1992) (citing Marsh v. Oregon Nat. Res. Council, 490 U.S. 360, 378 (1989)). The reviewing court must defer to the agency’s judgment absent a showing that the agency’s decision was unlawful. O’Keeffe’s, Inc. v. U.S. Consumer Prod. Safety Comm’n, 92 F.3d 940, 942 (9th Cir. 1996); Nat’l Career Coll., 371 F. App’x at 795. The standard of review is highly deferential. Center for Biological Diversity v. Bureau of Land Management, -- F.3d --, 2016 WL 4269899, at *6 (9th Cir. 2016). The Court may find an agency’s action to be arbitrary and capricious if the agency “relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.” Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983); see Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416 (1971), abrogated on other grounds by Califano, 430 U.S. 99. The Court should uphold a decision “if the agency’s path may reasonably be discerned.” Motor Vehicle Mfrs. Ass’n of U.S., Inc., 463 U.S. at 43, quoting Bowman Trans. Inc. v. Arkansas-Best Freight System, 419 U.S. 281, 285 (1974); see Camp v. Pitts, 411 U.S. 138, 142-43 (1973). The focal point for the Court’s review is the record already in existence, not “some new record made initially in the reviewing court.” Camp, 411 U.S. at 142. Here, the administrative record before the Department amply demonstrates that Plaintiff Mansour’s lacks fiduciary capacity. Over the course of twelve years, while Plaintiff Mansour served as president and owner of Elite Progressive School of Cosmetology (“Elite”), the institution lost Case 4:15-cv-01463-DMR Document 86-2 Filed 10/06/16 Page 2 of 5 PROPOSED ORDER C 15-1463 DMR 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 accreditation and having regained it, nearly lost it again. AR 588-595, 619-621. Elite’s accreditor determined that Elite’s audits contained significant discrepancies between the version submitted to the accreditor and the version submitted to the Department. AR 612-613. Between 2002 and 2005, Elite failed to timely submit mandated financial and compliance audits. AR 21. In 2008, the Department found that Elite improperly disbursed more than $2.2 million in Title IV funds to 328 students enrolled at its unaccredited Stockton location. AR 216. Elite also routinely failed to comply with the program rules because Elite: (1) rarely posted students’ cash payments to the RGM system; (2) failed to properly and timely pay tuition refunds and credit balances; and (3) failed to maintain required documentation. AR 444-45. Requisite annual compliance audits, though filed late in each instance, showed that Elite’s auditor made repeat serious findings year after year. For the fiscal years ended December 31, 2003 (AR 279), December 31, 2004 (AR 235), December 31, 2005 (AR 330), December 31, 2006 (AR 292), and December 31, 2007 (AR 354), the audits each contained multiple findings, with liabilities for misspent Title IV funds in the hundreds of thousands of dollars. See also AR 382, 400, 410, 422. Notably, Plaintiffs have conceded the issues addressed in the 2008 Final Program Review of Elite. ECF 81, p. 3; FAC, ECF 74, ¶¶ 27-29, 36. The FPRD sustained thirteen program review findings, including the following representative sample: (1) Elite improperly disbursed Title IV funds to students attending its ineligible Stockton location, in violation of 34 C.F.R. § 600.10(b). The Report explained that in preparation for their site visit, the program reviewers obtained data from the National Student Loan Data System (“NSLDS”) that revealed a high number of Title IV recipients who lived in or near Stockton. The Report further stated that “[o]n the first day of the site visit, the owner assured the reviewers that Elite had not disbursed Title IV funds to students enrolled at the Stockton location.” Further, by the third day of the review, reviewers had interviewed a number students or family members who confirmed they had attended the Stockton location exclusively. When files for the students were received, they clearly indicated the students attended the Stockton location. AR 31-35. (2) Elite failed to properly verify information used to calculate expected family contributions for Federal Pell Expected Family Contribution, in violation of 34 C.F.R. § 668.54(a). The Report Case 4:15-cv-01463-DMR Document 86-2 Filed 10/06/16 Page 3 of 5 PROPOSED ORDER C 15-1463 DMR 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 explained that “[f]undamental administrative capacity requires an institution to establish a system to discovery” inaccurate information submitted by students in response to this basic eligibility issue. The FPRD found that $364,829.06 in Title IV funds were disbursed to students for whom verification was required. AR 35-39. (3) Elite failed to maintain student accounts on a current basis, in violation of 34 C.F.R. § 668.24(b). The program reviewers found that Elite’s accounting records “were internally inconsistent, not maintained on a current basis and failed to accurately report the balances of the students.” AR 40-44. (4) Elite failed to maintain records that properly documented students’ eligibility for Title IV funds that would provide the amount, date, and basis of an institution’s calculation of any refunds due to or on behalf of the student or the treatment of Title IV program funds when a student withdraws, in violation of 34 C.F.R. § 668.24(c). The Department required Elite to locate missing documents and to perform the Return to Title IV (“R2T4”) calculations required. AR 44-45. (5) Elite used Title IV funds for non-program purposes without the express consent to the borrower by billing students for “bookkeeping fees” ranging from $472 to $611, in violation of 34 C.F.R. § 668.165(b)(1). Elite charged these fees to every student whose file was reviewed; none of the files contained the requisite express student authorization to do so. Elite also did not post these charges to the student ledgers in the RGM system. AR 45-47. (6) Elite retained credit balances of Title IV funds instead of disbursing the funds to the students within the regulatory time frames, in violation of 34 C.F.R. § 668.164(e). The Department found that Elite retained credit balances until students graduated, instead of disbursing the credit balance to the student as required by the regulations. The Department could not determine the full liability without Elite’s response to the third finding. AR 47-49. These issues are not insignificant, and support the Department’s decision. The Court therefore finds that the Department’s decision was not arbitrary, capricious, or otherwise contrary to the law, and GRANTS Defendant’s motion on Plaintiffs’ first cause of action. /// Case 4:15-cv-01463-DMR Document 86-2 Filed 10/06/16 Page 4 of 5 PROPOSED ORDER C 15-1463 DMR 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Defendant’s motion for summary judgment is hereby GRANTED. IT IS SO ORDERED. Dated: _________________________ DONNA M. RYU United States Magistrate Judge Case 4:15-cv-01463-DMR Document 86-2 Filed 10/06/16 Page 5 of 5