City of New York v. Shalala, 861
| Decision Date | 13 September 1994 |
| Docket Number | No. 861,D,861 |
| Citation | 34 F.3d 1161 |
| Parties | 94 Ed. Law Rep. 91 The CITY OF NEW YORK, Plaintiff-Appellee, v. Donna E. SHALALA, as Secretary of the United States Department of Health and Human Services; United States Department of Health and Human Services, Defendants-Appellants. ocket 93-6069. |
| Court | U.S. Court of Appeals — Second Circuit |
Sara L. Shudofsky, Ass't U.S. Atty., New York City (Mary Jo White, U.S. Atty. for the S.D. of N.Y., Ping C. Moy, Ass't U.S. Atty., of counsel), for defendants-appellants.
Michael S. Adler, New York City (O. Peter Sherwood, Corp. Counsel of the City of N.Y., Francis F. Caputo, of counsel), for plaintiffs-appellees.
Before: WALKER and JACOBS, Circuit Judges, and DALY, District Judge. *
Defendants Donna E. Shalala (the "Secretary") and the United States Department of Health and Human Services ("HHS") appeal from a judgment of the United States District Court for the Southern District of New York (Robert W. Sweet, Judge ), granting summary judgment to plaintiff the City of New York in a suit challenging HHS's decision to disallow approximately $3 million in
Head Start funds formerly allocated to the City and to assess $1.7 million in interest. We reverse in part, vacate in part, and remand.
This action stems from grants issued under the federally funded Head Start program by the Office of Human Development Services ("OHDS"), an agency of HHS, to the City of New York, specifically its Human Resources Administration Agency for Child Development (collectively "the City"). The Head Start program is aimed at delivering "comprehensive health, educational, nutritional, social, and other services to economically disadvantaged children and their families." 42 U.S.C. Sec. 9831(a). As a "grantee" of the program, the City provides funds to "subgrantees" or "delegate agencies," which are non-profit entities that actually run Head Start programs. See 42 U.S.C. Sec. 9837; 45 C.F.R. Secs. 74.3, 1301.2. The City dispenses funds to sixty or more delegate agencies each year.
The City receives an annual grant from OHDS at the start of each program year. Program years run from February 1 of one year to January 31 of the next year. Relevant to this appeal are program years running from 1976 to 1991. OHDS assigns the letter K to the program year ending on January 31, 1977; L, M, N, and O denote the next four years. P and 16 are used interchangeably to denote the year ending January 31, 1982. The following years are designated solely by number, beginning with 17. After receiving its yearly grant, the City makes monthly disbursements to delegate agencies based on its review of those agencies' expense projections and reports of prior expenditures.
The City is responsible for ensuring that Head Start funds allocated to it are expended and accounted for in a manner consistent with the program's objectives. At the completion of each program year, the City submits audit reports to OHDS pertaining to the City's receipt and disbursement of Head Start funds. OHDS reviews these audits to determine whether they include any disallowable expenditures. In order to be allowable, costs must be necessary and reasonable for the proper and efficient administration of the grant program. If OHDS determines that an audit is proper in all respects, it sends the City a letter stating that the audit is closed. If OHDS concludes that the City received funds in excess of the amount to which it is finally determined to be entitled, the City must return the disallowed funds to OHDS. If dissatisfied with such a finding by OHDS, the City can appeal OHDS's decision to the Department of Health and Human Services Departmental Appeals Board ("DAB"). See 42 U.S.C. Sec. 1316(d); 45 C.F.R. Part 16, App. A, Sec. C ().
This case centers on disallowances that OHDS made with regard to the City's audits for program year ("PY") 16 and PY 19, which ended in 1982 and 1985 respectively. For PY 16, OHDS disallowed an "accounts receivable" balance which had existed for a substantial period of time on the books of the City. The "accounts receivable" balance represented that amount of federal cash drawn down by the City from its grant allowance and advanced to various agencies in excess of allowable Head Start costs incurred by the delegate agencies. It increased from one program year to the next as the City accumulated the delegate agencies' old debts and added on new ones. For PY 19, OHDS again disallowed the City's accounts receivable balance and, in addition, disallowed an "accounts payable" balance. The "accounts payable" balance represented federal cash that was drawn down by the City to pay delegate agencies but never actually disbursed to these agencies to cover their reported expenditures. Like the accounts receivable, this balance also increased over time as the City accumulated new obligations to pay delegate agencies without satisfying its old ones.
The accounts receivable balance appeared in the City's audit reports at least as early as PY K and continued to appear in the audits for PY L and PY M. The audits for these three years were closed in August 1982. By letter dated October 19, 1982, OHDS asked for information on the status of the accounts receivable and accounts payable noted in the audit report for PY N. This precipitated extensive correspondence between OHDS On August 21, 1984, OHDS advised the City that it was disallowing $620,622 in accounts receivable from PY 16. The City appealed to the DAB. The DAB affirmed the disallowance on the basis that the accounts receivable "represent federal grant funds that have not been demonstrated to have been used for allowable program expenditures by the delegate agencies and ... may no longer even be collectible from the delegate agencies." New York City Human Resources Admin., DAB Decision No. 720, Docket No. 84-206 (Jan. 30, 1986). HHS nevertheless agreed to suspend enforcement of this decision pending the outcome of proceedings, by then underway, regarding PY 19.
and the City regarding the latter's efforts to liquidate the accounts. In a February 13, 1984 letter, OHDS informed the City that the PY N audit would be closed "contingent on liquidation of outstanding account receivables" due from delegate agencies; the PY N audit was subsequently closed in May 1984. The audit report for PY O again revealed outstanding accounts receivable, which again led to correspondence between OHDS and the City regarding the City's collection efforts. In closing the PY O audit on August 1, 1984, OHDS stated that the accounts receivable remained unresolved and would be reviewed as part of the audit for PY P (16).
The City's audit reports for PY 17 and PY 18 continued to indicate that there were outstanding accounts receivable due from delegate agencies and also showed accumulated accounts payable. OHDS and the City corresponded in detail about the status of these accounts, with OHDS repeatedly requesting documentation from the City evidencing that it had liquidated both accounts. The audits for PY 17 and PY 18 were respectively closed in August and June 1986.
At the close of the PY 19 audit review, on September 15, 1987, OHDS informed the City that it was disallowing $901,639 in accounts receivable and $1,541,362 in accounts payable. The accounts receivable figure represented the total amount due from delegate agencies for PY K through PY 17 ($1,522,261) reduced by the amount previously disallowed from PY 16 ($620,622). The accounts payable figure reflected obligations owed by the City to delegate agencies from PY K through PY 18. The City appealed these disallowances to the DAB, which affirmed them in full. New York City Human Resources Admin., DAB Decision No. 1199, Docket No. 87-184 (Oct. 4, 1990). The DAB found that the accounts receivable were uncollectible given the age of the balances, and that the accounts payable no longer represented legitimate program obligations. The DAB rejected the City's argument that it had reduced both accounts nearly to zero by offsetting them against each other.
In November 1990, HHS demanded payment from the City of the disallowed amounts from PY 16 and PY 19, plus interest, and subsequently offset this amount of approximately $4.7 million against the City's Head Start grant for PY 26. The City filed the instant action in April 1991, alleging that HHS's disallowances, as affirmed by the DAB, violated the Administrative Procedure Act ("APA"), 5 U.S.C. Sec. 701 et seq. In January 1993, the district court awarded summary judgment to the City on the basis that HHS's disallowance of the accounts in question was inconsistent with its previous acceptance of the City's audit reports. The district court further held that even if the disallowances were proper, HHS was not entitled to recover interest. HHS now appeals.
On appeal from a grant of summary judgment on an APA claim, we review the administrative record de novo and render our own independent judgment, according no deference to the district court's decision. Ward v. Brown, 22 F.3d 516, 521 (2d Cir.1994).
The City argues that HHS's disallowances should be set aside under the APA because they are arbitrary and capricious and in excess of HHS's statutory jurisdiction, authority, or limitations. See 5 U.S.C. Secs. 706(2)(A) and (C). However, the district court found, and the parties do not dispute, that the statutes that provide for HHS to appropriate and administer funds for the Head Start program, 42 U.S.C. Sec. 9831 et seq., do not address the specific question of Our analysis is thus confined to whether HHS has violated Sec. 706(2)(A). The scope of review under this provision of the APA is "a narrow one." Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416, 91 S.Ct. 814, 824, 28 L.Ed.2d 136 (1971). In reviewing the...
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