Salt Lake Community Action Program, Inc. v. Shalala, 92-5171
| Decision Date | 28 December 1993 |
| Docket Number | No. 92-5171,92-5171 |
| Citation | 11 F.3d 1084 |
| Parties | , 88 Ed. Law Rep. 48 SALT LAKE COMMUNITY ACTION PROGRAM, INC., Appellee, v. Donna SHALALA, Secretary, U.S. Department of Health and Human Services, et al., Appellants. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
On Appeal from the United States District Court for the District of Columbia (No. 92cv00054).
James L. Feldesman, Washington, DC, argued the cause for appellee. With him on the brief were Michael B. Glomb, Arlington, VA, and Edward T. Waters, Washington, DC.
W. Mark Nebeker, Asst. U.S. Atty., Washington, DC, argued the cause for appellants. With him on the briefs were J. Ramsey Johnson, U.S. Atty., John D. Bates and R. Craig Lawrence, Asst. U.S. Attys., Washington, DC.
Before: WALD, EDWARDS, and SENTELLE, Circuit Judges.
Opinion for the Court filed by Circuit Judge HARRY T. EDWARDS.
The Department of Health and Human Services ("HHS") appeals from a District Court order permanently enjoining HHS from requiring Salt Lake Community Action Program, Inc. ("SLCAP") to reimburse certain costs charged to SLCAP's Head Start grant. SLCAP has been a recipient of Head Start grant funds since 1965. In 1991, after discovering that some $40,000 of SLCAP's grant monies had been applied to costs that were not allowable under agency regulations, HHS advised SLCAP that it would be required to repay the sum from non-grant funds. SLCAP appealed this decision to HHS' Departmental Appeals Board ("DAB") and the DAB upheld the disallowance.
SLCAP filed the instant suit in the District Court, alleging, inter alia, that the relevant cost allowance principles were both unconstitutional and arbitrary and capricious. SLCAP also claimed, for the first time, that the DAB did not have jurisdiction to hear its appeal. The District Court agreed that the DAB lacked jurisdiction and held that SLCAP instead was entitled to a full and fair hearing before an administrative law judge ("ALJ") under42 U.S.C. Sec. 9841(a)(3) (Supp. III 1991). Salt Lake Community Action Program, Inc. v. Sullivan, 785 F.Supp. 1013 (D.D.C.1992). HHS appeals, arguing both that SLCAP's jurisdictional claim was not properly before the District Court and that, in any event, the trial court erred in holding that the DAB lacked jurisdiction to adjudicate the disallowance.
We agree that SLCAP should have presented its jurisdictional challenge to the agency before raising it in the District Court, and that the District Court erred in concluding that the DAB lacked jurisdiction to adjudicate the disallowance in this case. Normally, the waiver issue alone might dispose of this appeal; we address the merits because it appears that in the proceeding below, the number and complexity of questions presented and the procedural posture of the case so obscured the waiver argument that the District Court did not take notice of the issue and did not address it. Thus, we address the merits of the jurisdictional issue because the parties and the District Court focused on it below, and because we seek to avoid any recurrence in future cases of the error made in this case.
Under the Head Start Act ("Act"), 42 U.S.C. Secs. 9831-52 (1988 & Supp. III 1991), HHS is responsible for administering grants to private nonprofit and public agencies wishing to implement Head Start programs. To that end, HHS has adopted the principles set forth in Office of Management and Budget ("OMB") Circular A-122 which determine what costs a grantee properly may charge to its grant ("allowable" costs). See 45 C.F.R. Sec. 74.174 (1992); 45 C.F.R. Sec. 1301.10(a) (1992) (). Head Start grantees receive advance payments which they apply to the allowable costs of their operations; when HHS determines, as it did in this case, that certain charges are improper under the principles set forth in Circular A-122, those charges are said to be "disallowed" and the monies must be returned to the agency.
The underlying dispute in this case turns on the cost principles applicable to a Head Start grantee's ownership or lease of the physical space in which it administers its Head Start programs. Under Circular A-122, a property owner may charge to its grant either a use allowance or the cost of depreciation and operating expenses, but the cost of interest on a mortgage is never an allowable charge. By contrast, grantees who do not own property may charge the grant such rental fees as are reasonable in light of market conditions. Rental costs incurred under a less-than-arms-length transaction are allowable only up to the amount that would be permitted had title to the property vested in the organization. 1
SLCAP, a nonprofit organization, has been a Head Start grantee since 1965. Prior to 1980, SLCAP rented space to house its operations. In 1980, SLCAP purchased a building and charged its Head Start grant for space allocated in the building to SLCAP's administrative functions. In 1988, needing additional space for its Head Start service programs, SLCAP purchased a second building, financed largely by a mortgage. Because Circular A-122 prohibited SLCAP from charging the cost of its mortgage payments to its Head Start grant, and SLCAP otherwise could not afford to meet its payments, SLCAP sold both buildings to a separate entity for a nominal sum and leased the space back.
Following a 1989 audit, HHS' Office of Human Development Services ("OHDS") advised SLCAP that it could not charge its Head Start grant rental fees in excess of depreciation and operating expenses for the two buildings, because the sale-and-leaseback had not been an arms-length transaction. OHDS calculated that $40,323 in costs already charged were impermissible and instructed SLCAP to repay the sum from non-grant funds.
SLCAP appealed the disallowance to the DAB pursuant to regulations that specifically vest that body with jurisdiction to hear disallowance disputes. See 45 C.F.R. Part 16, App. A, Sec. C(a)(1) (1992). Before the DAB, SLCAP argued, inter alia, that its leases were in fact arms-length, that the rental costs charged to the government were reasonable, and that it should be granted a waiver from Circular A-122. It is undisputed that SLCAP never contended before the DAB that any other statute or regulation deprived the DAB of jurisdiction to determine the validity of the disallowance or that SLCAP was entitled to a hearing before an ALJ.
The DAB affirmed the disallowance in full on the grounds that the sale-and-leaseback transaction had been less than arms-length. Salt Lake Community Action Program, Decision No. 1261 (D.A.B.1991), reprinted in Appendix for Appellants ("A.A.") 200-05. The DAB noted that, under 45 C.F.R. Sec. 16.14, it was bound by all applicable regulations and, therefore, was required to uphold the disallowance regardless of the reasonableness of the rental charges. The DAB further stated that it had no power to direct OHDS to waive the applicable cost principles, but suggested that OHDS consider SLCAP's request. Id. at 5-6. OHDS thereafter denied SLCAP's request for a waiver and demanded repayment of the disallowance.
SLCAP then filed this action against HHS and OMB in the District Court seeking declaratory, injunctive and other relief. SLCAP did not contest the DAB's determination that the leaseback was not an arms-length transaction; rather, SLCAP raised various challenges to the constitutionality and legality of the cost principles that had been applied to it. Specifically, SLCAP alleged that the "anti-purchase policy" of Circular A-122 both violated the Fifth Amendment's equal protection component and was arbitrary and capricious under the Administrative Procedure Act ("APA"); SLCAP also claimed that Circular A-122 could not be applied to SLCAP because it was invalidly promulgated. Alternatively, SLCAP argued that HHS unlawfully refused to grant its request for a waiver, and that the DAB did not have jurisdiction in the first instance to hear SLCAP's appeal of the disallowance.
The District Court reached only the last of these claims. Following a hearing on SLCAP's motion for a preliminary injunction (at which the District Judge indicated that he was disinclined to reach the merits of the case), the court permanently enjoined HHS from seeking to collect the disallowance. Purporting to rely on this court's decision in East Arkansas Legal Services v. Legal Services Corp., 742 F.2d 1472 (D.C.Cir.1984), cert. denied, 470 U.S. 1028, 105 S.Ct. 1395, 84 L.Ed.2d 784 (1985), the District Court held that the disallowance constituted a "termination" of funding within the meaning of 42 U.S.C. Sec. 9841(a)(3) and that, by the terms of that statute and its implementing regulations, SLCAP was entitled to a full and fair hearing before an ALJ. 2 Salt Lake Community Action Program, 785 F.Supp. at 1014. The trial court held that DAB jurisdiction was expressly precluded where " 'some other hearing process is established pursuant to statute' " and that HHS therefore had relied erroneously on regulations purporting to vest the DAB with jurisdiction over the disallowance claim. Id. . The District Court denied HHS' motion for reconsideration.
On appeal, HHS argues that SLCAP waived its objection to the DAB's jurisdiction by failing to raise that claim before the agency and that, even if there was no waiver, the District Court erred in concluding that a routine fiscal disallowance constitutes a "termination" within the meaning of 42 U.S.C. Sec. 9841(a)(3). We agree on both counts.
HHS argues that because SLCAP failed to contest the DAB's jurisdiction before the...
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