Institute for Technology Development v. Brown

• Decision Date: 13 September 1995
• Docket Number: No. 94-60432,94-60432
• Citation: 63 F.3d 445
• Parties: 102 Ed. Law Rep. 946 INSTITUTE FOR TECHNOLOGY DEVELOPMENT, Plaintiff-Appellant, v. Ronald H. BROWN, Secretary of Commerce, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 445

63 F.3d 445

102 Ed. Law Rep. 946

INSTITUTE FOR TECHNOLOGY DEVELOPMENT, Plaintiff-Appellant, v. Ronald H. BROWN, Secretary of Commerce, et al., Defendants-Appellees.

No. 94-60432.

United States Court of Appeals Fifth Circuit.

Sept. 13, 1995.

Thomas W. Crockett, Watkins Ludlam & Stennis, Jackson, MS, for appellant.

Lemuel A. Smith, III, Asst. U.S. Atty., George Phillips, U.S. Atty., Jackson, MS Janis C. Kestenbaum, Asst., Barbara C. Biddle, Asst. Director, Sandra M. Schraibman, U.S. Dept. of Justice, Civ. Div., Washington, DC, for appellees.

Appeals from the United States District Court for the Southern District of Mississippi.

Before VAN GRAAFEILAND, ^* E. GRADY JOLLY and WIENER, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

This appeal raises the somewhat technical, yet fact specific question of whether this recipient of federal grants can claim depreciation as an allowable substitute cost. Although somewhat repetitious with other parts of this opinion, the recital of some background initially will place in context the issue we consider.

The Public Works and Economic Development Act bestows on the Secretary of Commerce the authority to make grants for economic development upon application of any state. 42 U.S.C. Sec. 3131(a) (1977). Mississippi sought federal funds to create a nonprofit organization--the Mississippi Institute for Technology Development ("ITD")--to establish university-affiliated research centers throughout the state to conduct and to transfer scientific research into useful commercial applications. The Mississippi Board of Economic Development had approved a plan for the establishment of ITD, and the state's government, business, and academic leaders had agreed to fund half of the capitalization of ITD. S.REP. NO. 206, 98th Cong., 1st Sess. 8 (1983). In response to Mississippi's efforts, the United States Senate Committee on Appropriations, on August 2, 1983, considered the proposal by Mississippi that the federal government contribute funds toward the establishment of ITD. S.REP. NO. 206 at 7. Thereafter, the Committee appropriated funds to the Economic Development Administration ("EDA")--an agency within the Department of Commerce--to conduct a feasibility study (the "Study") of Mississippi's proposal and deferred committing federal funds to support ITD until completion of the Study. Id. On March 30, 1984, the independent research firm hired to conduct the Study submitted its results to the Senate, the House of Representatives, and EDA. The Study discussed in detail the feasibility and potential of ITD, the positive economic contributions that would result from ITD's creation and operation, and the required funding of ITD. Because of the Study's optimistic predictions, the Committee recommended that Congress appropriate a maximum of twenty million dollars over a four-year period to EDA for the establishment of ITD. S.REP. NO. 570, 98th Cong., 2d Sess. 9 (1984).

After Congress appropriated these funds to EDA, EDA distributed the money to ITD in five separate grants. H.R.REP. NO. 6040, 98th Cong., 2d Sess. (1984). After EDA distributed four of these five grants, the Office of the Inspector General conducted an audit of the grants and recommended that certain costs improperly spent under the grants be disallowed. EDA subsequently accepted this recommendation and disallowed a portion of the costs charged against the federal funds. Applicable regulations, however, provided that when claimed expenses were disallowed, a grantee, such as ITD, could substitute and claim reimbursement for other previously unclaimed "allowable" expenses it may also have incurred in the operation of the sponsored project. Pursuant to these regulations, ITD sought reimbursement for some of the depreciation expenses it had incurred, but had not initially claimed for reimbursement under the grants. EDA rejected the claim for reimbursement under the first four grants. ITD then appealed the decision of EDA to the Assistant Secretary for Economic Development, who also rejected ITD's depreciation costs, finding reimbursement for depreciation inconsistent with the purpose and terms of the grants. ITD next filed for review in the district court, which affirmed the decision of the Assistant Secretary.

With regard to the fifth and final grant, EDA disallowed various costs, which ITD appealed to the Assistant Secretary. In the administrative appeal, however, ITD did not claim depreciation as a substitute cost. Nevertheless, ITD attempted to raise this claim for depreciation as an allowable substitute cost before the district court. Here, ITD argues that because applicable regulations recognize depreciation as an allowable substitute cost, the district court erred in granting summary judgment in favor of EDA with respect to all five grants. After examining the Grant Agreements between EDA and ITD, the congressional intent underlying these grants, and the provisions of the Study, we hold that the district court erred in affirming the decision of the Assistant Secretary regarding the first four grants. Accordingly, as to these four grants, we reverse and remand for proceedings not inconsistent with this opinion. Because ITD failed to exhaust its administrative remedies on grant five, we affirm the district court's judgment granting summary judgment in favor of EDA on this final grant.

I

As we have noted, in 1983, Congress appropriated funds to the Economic Development Administration ("EDA") to conduct a feasibility study (the "Study") exploring a proposal by Mississippi to provide federal funding for the establishment of the Mississippi Institute for Technology Development ("ITD"). ITD would develop capabilities for transferring scientific research from Mississippi's universities into useful commercial applications. In 1984, as a result of the Study, Congress appropriated to EDA twenty million dollars to be distributed to ITD through five grant awards over a four-year period. ¹ At the end of this time, Congress expected the organization to be self-supporting. Mississippi appropriated most of the additional funds to support ITD.

Before disbursement of each of the five grants, ITD was required to submit to EDA a "Grant Request" containing a budget proposal for spending the federal funds. EDA would respond with a "Demonstration Grant Offer" to ITD, which reflected the extent of and forms of its approval of the Grant Request. ITD's acceptance of this Offer constituted a "Grant Agreement." Each Grant Agreement incorporated by reference two documents--ITD's Grant Request and a document setting out general "Terms and Conditions" of the agreement. These Terms and Conditions required that the grant "be used only for the research project approved by the [EDA] and inconformity with the approved research budget." Additionally, the Grant Agreements prohibited the use of federal grant funds "to pay for capital assets or other items not treated as expenses under accepted accounting principles." Finally, in determining the allowability of expenses made by ITD, the Grant Agreements provided that both ITD and EDA would adhere to certain Office of Management and Budget Circulars, including Circular A-122.

In 1988, the Office of Inspector General of the Department of Commerce (the "Inspector General") conducted an audit of ITD's first four grants. This draft audit report stated that ITD claimed approximately $4.6 million in unallowable costs in the first four grants and that ITD failed to maintain an accounting system for allocating indirect costs or overhead. In its response to the Inspector General's audit report, ITD contended that a portion of the disallowed costs in fact were allowable. Additionally, Leonard R. Vernamonti, the president and chief executive officer of ITD, met with the Inspector General auditors and argued that ITD should be allowed to substitute depreciation and claim it as an allowable cost for a portion of these unallowable costs. In March 1990, the Inspector General issued its final audit report on the first four grants and reduced the amount of disallowed costs to $1.9 million. The Inspector General failed, however, to address whether depreciation could serve as an allowable substitute cost. In April 1990, ITD submitted a response to the Inspector General's final report, again claiming that depreciation should serve as an allowable substitute cost. EDA issued a final audit determination. EDA stated that depreciation was not an allowable cost under these four grants. EDA further reduced, however, the amount of unallowable costs on these grants to $1,362,142.

On November 8, 1990, ITD appealed EDA's audit determination of the first four grants to L. Joyce Hampers, the Assistant Secretary for Economic Development ("Assistant Secretary"). On August 16, 1991, the Assistant Secretary also denied ITD's request to substitute depreciation for unallowable costs, explaining that "[t]he primary and determinative factor in our decision not to accept depreciation as an allowable substitute cost is that no one intended that depreciation be charged against the ITD grants" ² because the grants were intended only to provide start-up or seed funding to ITD. The Assistant Secretary recognized that under Circular A-122 depreciation is generally an allowable cost, but stated that her position was based only on the parties' intent, not on the "allowableness issue." She reduced still further, however, the amount due EDA on the first four grants to $1.1 million. ITD submitted additional information to the Assistant Secretary and requested reconsideration, but she maintained her position, stating that depreciation was not intended to be charged to the grants. In somewhat different words from her earlier statement noted above, however, she added that "[t]he primary and determinative factor in our decision not to accept depreciation as an allowable substitute cost is that there is no provision in the grants for...