Delta Foundation, Inc. v. U.S.
| Decision Date | 20 August 2002 |
| Docket Number | No. 01-60592.,01-60592. |
| Citation | 303 F.3d 551 |
| Parties | DELTA FOUNDATION, INC., Plaintiff-Appellant, v. UNITED STATES of America; Tommy Thompson, Secretary, Department of Health & Human Services; The United States Department of Health and Human Services, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Robert Arthur Graham (argued), Reno & Cavanaugh, Washington, DC, for Plaintiff-Appellant.
Feleica Lockhard Wilson, Oxford, MS, Debra Lynne Hollis (argued), U.S. Dept. of Health & Human Services, Washington, DC, for Defendants-Appellees.
Appeal from the United States District Court for the Northern District of Mississippi.
Before GARWOOD and DENNIS, Circuit Judges, and LITTLE, District Judge.*
I. Procedural History
In December of 1997, the Office of Inspector General ("OIG") for the Department of Health and Human Services ("HHS") completed an investigative audit report of four grants awarded by HHS to the Delta Foundation ("Delta") in 1991, 1993, 1994 and 1995 under the Community Services Block Grant program. On the basis of the audit report, the Administration of Children and Families ("ACF") within the HHS issued an Audit Determination Letter to Delta setting forth the government's findings that Delta had violated various HHS regulations and other administrative requirements in its implementation of the four grants, resulting in a disallowance of $1,225,291 in grant expenditures. ACF ordered Delta to repay this amount to HHS.
Delta filed an appeal with the HHS Departmental Appeals Board ("DAB" or "the Board") disputing the findings of the ACF decision and seeking reversal of the ACF order. On 23 November 1999, the DAB affirmed the initial agency determination.
On 2 May 2000, Delta filed a complaint to reverse the pay-back order in the United States District Court for the Northern District of Mississippi claiming that the DAB violated the Administrative Procedure Act and the Due Process Clause of the Fifth Amendment. The district judge referred the complaint to a magistrate. The magistrate issued a report and recommendation suggesting that the district court uphold the DAB's decision and finding that Delta had waived other arguments by not presenting them to the DAB. After hearing objections to the report, the district court adopted the magistrate's report and recommendation and affirmed the DAB's order. The present appeal followed.
Today we decide whether the DAB proceedings are sufficiently adversarial so that failure to raise an issue before the DAB constitutes waiver under Sims v. Apfel, 530 U.S. 103, 120 S.Ct. 2080, 147 L.Ed.2d 80 (2000). We also review the DAB's decision to determine whether the decision was arbitrary and capricious. We find that the DAB's decision was not arbitrary and capricious, and we affirm the DAB's decision.
II. Background
Delta is a Mississippi nonprofit corporation formed to stimulate economic opportunities for the economically disadvantaged Mississippi Delta region. Delta has developed manufacturing companies in Mississippi and Arkansas, with concentrations in electronics, apparel, wood products, and industrial parts. Delta's economic development activities are managed by two for-profit subsidiaries: Delta Enterprises, Inc. ("Delta Enterprises"), which establishes and acquires manufacturing businesses, and Delta Capital Corporation ("Delta Capital"), a venture capital company that provides financial and management services to Delta-based businesses.
Through the Office of Community Services ("OCS"), HHS offers competitive grants under the Community Services Block Grant Program, 42 U.S.C. § 9901 et seq., to private nonprofit community development corporations that have as their principal purpose the planning, developing, or managing of community development projects intended to promote the creation of full-time, permanent jobs or business development opportunities for low-income residents. Between 1991 and 1995, Delta applied for and received four grants from HHS, totaling $1.43 million. The HHS grant applications completed by Delta required that applicants demonstrate that their proposed projects would create full-time permanent jobs of which seventy-five percent would be filled by low-income residents. Grant applicants were instructed that at the end of the prescribed grant periods, varying from twelve to seventeen months, all businesses must be in place and operational. It was required that any critical issues or potential problems that could negatively affect the projects be communicated by the applicant. The grant announcements specified that in selecting applicants, preference would be given to projects that had secured outside funding in an amount equal to some percentage, varying by the grant, of the proposed grant amount.
The administration of the grants is governed by various cost and accounting principles set forth in federal regulations and in Office of Management and Building ("OMB") circulars. By accepting a grant award, the grantee agrees to comply with the federal regulations and OMB circulars governing the administration of the grants. In general terms, these provisions require, inter alia, properly documenting expenditures for goods and services. They also require prior approval for any changes within the scope or objectives of the project.
In December of 1997, the OIG of HHS conducted an audit of the four grants awarded to Delta. The OIG faulted Delta for (1) failing to create full-time permanent jobs, (2) using federal funds for purposes unrelated to the objectives of the grants, (3) failing to provide the private capital and in-kind services as contemplated in the grant applications to ensure the success of the grants, and (4) submitting programmatic and financial reports to HHS that were often untimely and inaccurate. The audit concluded that Delta did not administer the grants in accordance with the grant proposals and submitted inaccurate progress reports. The resulting recommendation was that Delta be required to refund $1.43 million to the federal government. The audit detailed the failings of the administration of each of the grants.
In 1991, Delta applied for and received a grant from HHS in the amount of $220,000 to expand its existing railroad spike manufacturing project, Great River Spike, by activating a second production line and consequently creating an additional twenty-five new jobs. Pursuant to the grant terms, Delta would transfer $204,000 of the grant money to its for-profit subsidiary, Delta Enterprises, and retain $16,000 to cover grant administration costs. Delta Enterprises would use the funds to make an equity investment in its wholly-owned subsidiary, Rail Products, Inc., which would then transfer the money to Great River Spike. Great River Spike was a joint venture with another railroad spike manufacturer, Spike Industries, but Rail Products, Inc. was the majority owner.
At the time of the grant application, Delta represented that it would achieve access to $220,000 of private capital. Delta referred obliquely in its application to a pre-existing loan from the Arkansas Industrial Development Commission ("AIDC"), but Delta omitted information concerning the loan's payment status and the loan's after-acquired property clause that would encumber by a primary lien, mortgage, or privilege any property purchased by Great River Spike with the grant funds. Also at the time of the application, Delta's for-profit corporate subsidiary, Delta Enterprises, through which grant funds were to be transferred to Rail Products and then to Great River Spike, had been administratively dissolved by the State of Mississippi on 16 February 1990. This fact was not disclosed by Delta in its grant application.
Contrary to the representations made in the grant proposal, Great River Spike did not use the funds to start a second production line. The funds were instead used to build a second spike machine to be used while the business' other spike machine was repaired. In addition, Delta failed to obtain the private capital that it claimed would be invested in the project. In connection with this project, Delta hired only eight additional employees but did not document whether those hired during the project period were low-income workers as required by the grant award.
As a result of substantial operating loss, Great River Spike terminated operations in January of 1994, six months after the close of the extended grant period.1 Great River Spike did not report its closing to HHS. In October 1994, the AIDC foreclosed on property pledged as collateral for its loan of $495,000 to Great River Spike. Included in the foreclosed property was the new spike-making machine purchased with the grant funds. AIDC sold this property at public auction for $85,000. At auction, Jim Smith, general manager of Great River Spike and Delta's venture partner, purchased the equipment. HHS was not informed of the foreclosure or the sale. On 17 February 1995, Delta filed a Property Inventory and Disposition Statement claiming that Great River Spike still retained the spike machine purchased with the grant funds.
In 1993, HHS awarded Delta a grant of $460,000 to create New Threads, Inc., an apparel manufacturing company in Greenville, Mississippi (subsequently re-named Greenville Apparel). The goal of Greenville Apparel was to take over the excess sewing work from Fine Vines, an existing apparel manufacturer owned by Delta Enterprises, and to pursue an opportunity to produce the Arizona line of blue jeans for J.C. Penney Co. Delta predicted that Greenville Apparel would create sixty-two new private sector jobs — the vast majority of which would be filled by low-income individuals. Delta represented that $260,340 in private capital would be contributed to the project. It was Delta's view that the imminent passage of NAFTA was a minimal risk for the...
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