School Bd. of Broward County, Florida v. Department of Health, Ed. and Welfare, U.S. Office of Ed.

• Decision Date: 07 January 1976
• Docket Number: No. 74--3606,74--3606
• Citation: 525 F.2d 900
• Parties: The SCHOOL BOARD OF BROWARD COUNTY, FLORIDA, Plaintiff-Appellee, v. DEPARTMENT OF HEALTH, EDUCATION AND WELFARE, UNITED STATES OFFICE OF EDUCATION, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 900

525 F.2d 900

The SCHOOL BOARD OF BROWARD COUNTY, FLORIDA, Plaintiff-Appellee, v. DEPARTMENT OF HEALTH, EDUCATION AND WELFARE, UNITED STATES OFFICE OF EDUCATION, Defendant-Appellant.

No. 74--3606.

United States Court of Appeals Fifth Circuit.

Jan. 7, 1976.

Robert W. Rust, U.S. Atty., Miami, Fla., J. Stanley Pottinger, Asst. Atty. Gen., Dept. of Justice, Brian K. Landsberg, Marie E. Klimesz, Attys., U.S. Dept. of Justice, Washington, D.C., for defendant-appellant.

Shaw, Marko, Stephany & Lyons, Edward J. Marko, Ft. Lauderdale, Fla., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before GEWIN, GOLDBERG and DYER, Circuit Judges.

DYER, Circuit Judge:

We have before us for review an administrative finding that the School Board of Broward County, Florida, was ineligible for federal aid under the Emergency School Assistance Program (ESAP) at the time an ESAP grant was made, and an order pursuant to that finding requiring the County to repay to the Department of Health, Education and Welfare all monies paid out under that grant. The district court determined that there was insufficient evidence to support the administrative finding, since that finding was based entirely on hearsay evidence. We reject the reasoning of the district court, and hold that there was sufficient evidence to support the administrative finding. Termination of the grant was therefore proper. We conclude, however, that the administrative order requiring the County to repay all sums paid out under the grant is not properly before us for review, and therefore pretermit discussion of that issue.

The Emergency School Assistance Program was established by Public Law 91--380, to aid local educational agencies in the process of desegregation. ¹ The appropriation contained a limitation, however, providing that

no part of the funds contained herein shall be used . . . to assist a local educational agency which engages, or has unlawfully engaged, in the gift, lease or sale of real or personal property or services to a nonpublic elementary or secondary school or school system practicing discrimination on the basis of race, color, or national origin; . . .

P.L. 91--380, 84 Stat. 804. It is this limitation which created the present dispute.

The School Board of Broward County applied for assistance under the ESAP program on August 10, 1971, and a grant in the amount of $1,737,000 was awarded to the school board on September 1, 1971. ²

On December 6, 1971, the Office of Education of the Department of Health, Education and Welfare notified the school board that its 1971--1972 ESAP grant was subject to termination because of the board's failure to comply with certain assurances made in its application HEW further stated in its notification it would seek a determination that the school board was ineligible ab initio under the ESAP program, because it had sold school property to four private discriminatory schools. Since we conclude that this was a sufficient basis for termination of the grant, we find no reason to address the issues of teacher assignment and the school board's failure to list property transfers in its ESAP application.

for ESAP funds. Those assurances stated that (1) the school board had assigned its teachers so that the ratio of minority to nonminority teachers in each school is substantially the same as the ratio that exists in the faculty of the school system as a whole, as required by 45 CFR § 181.6(a)(4)(vi) and (2) the school board had disclosed all transfers after May 27, 1968, of property or services to any private school, as required by 45 CFR § 181.6(a)(4)(iv)(a).

The hearing examiner after a full hearing, found in pertinent part that the school board had transferred property to Lakeview Christian School, Gold Coast Christian School, Dade Christian School and Central Baptist School, and that at the time of hearing and the time of transfer those four schools all practiced discrimination on the basis of race. The hearing examiner concluded that, as a result of such transfers, termination of financial assistance under ESAP was required. He further concluded that since the school board was ineligible for assistance at the time of its application, the school board must repay all funds received under the ESAP grant.

On Appeal to the Commissioner of Education, the findings of the hearing examiner were affirmed with regard to Lakeview Christian School, Gold Coast Christian School and Dade Christian School. The finding with regard to Central Baptist School was reversed, on the ground that there was insufficient evidence establishing that the sale of property was to the school, rather than the church located on the same premises. The order of the hearing examiner requiring termination and repayment was affirmed in full.

As required by regulations, 45 CFR § 181.15(b)(2), the initial hearing was held pursuant to the Administrative Procedure Act, 5 U.S.C.A. § 554-557. The scope of our present review is likewise governed by that Act, 5 U.S.C.A. § 706, and is limited. Under the Act, we may set aside agency findings only when, inter alia, they are arbitrary, capricious, an abuse of discretion, not in accordance with law, or unsupported by substantial evidence. 5 U.S.C.A. §§ 706(2)(A), 706(2)(E).

Substantial evidence is evidence that affords a substantial basis of fact from which the fact in issue can be reasonably inferred. Watson v. Gulf Stevedore Corp., 5 Cir., 1968, 400 F.2d 649. Other general statements as to the meaning of 'substantial evidence' can be found, ³ but these do not materially aid the present analysis.

The school board does not question the fact that sales to private schools were made. However, the board argues that HEW failed to introduce substantial evidence establishing the discriminatory practices of those private schools at the time of sale. The district court, in reversing the decision of the Commissioner of Education, agreed with the school board and found that the hearing examiner's conclusion that the school board made sales of equipment to schools which discriminated on the basis of race or national origin was unsupported by substantial evidence because: (1) there At the outset, we note that no question is raised as to the admissibility of hearsay evidence in an administrative proceeding. It is settled that the use of hearsay is proper. Cohen v. Perales, 5 Cir. 1969,412 F.2d 44, rev'd on other grounds, 1970, 402 U.S. 389, 91 S.Ct. 1420, 28 L.Ed.2d 842. However, the mere admissibility of such evidence does not answer the question of when and under what circumstances hearsay can constitute substantial evidence.

was no substantial evidence to show that the three schools discriminated at the time of sale ⁴ and (2) the evidence before the hearing examiner was purely hearsay, and as such could not constitute substantial evidence. We conclude that hearsay, standing alone, under proper circumstances may constitute substantial evidence in an administrative proceeding, and that substantial evidence exists in the present record to support the findings of the Commissioner of Education.

In determining that, as a matter of law, hearsay cannot constitute substantial evidence, the district court relied primarily on the statement in Consolidated Edison Co. v. NLRB, 1938, 305 U.S. 197, 230, 59 S.Ct. 206, 83 L.Ed. 126, that

mere uncorroborated hearsay or rumor does not constitute substantial evidence.

This principle, known as the residuum rule, requires a reviewing court to set aside an administrative finding unless the finding is supported by some evidence which would be admissible in a jury trial. Under this rule, the legal character of the evidence as hearsay is determinative; no consideration is given to the reliability of the evidence or the circumstantial setting in which it arises. See K. Davis, 4 Administrative Law Treatise § 14.10, at 292 (1958). The school board urges us to reaffirm this rule, and to hold that, regardless of probative value, hearsay alone may never constitute substantial evidence.

Neither the district court nor the school board considered the effect of Richardson v. Perales, 1970, 402 U.S. 389, 91 S.Ct. 1420, 28 L.Ed.2d 842, on the continuing vitality of the residuum rule. Perales was a social security benefits case in which the plaintiff had been denied disability benefits on the basis of sworn affidavits of treating physicians. When Perales was before this Court, Cohen v. Perales, 5 Cir. 1969, 412 F.2d 44, we analyzed in depth the judicial treatment of the residuum rule, and concluded in accord with Consolidated Edison, supra, that mere uncorroborated hearsay or rumor cannot constitute substantial evidence. On petition for rehearing, 416 F.2d 1250, we made clear our position:

Our opinion holds, and we reaffirm, that mere uncorroborated hearsay evidence as to the physical condition of a claimant, standing alone and without more, in a social security disability case tried before a hearing examiner, as in our case, is not substantial evidence that will support a decision of the examiner adverse to the claimant, if the claimant objects to the hearsay evidence and if the hearsay evidence is directly contradicted by the testimony of live medical witnesses and by the claimant who testify in person before the examiner, as was done in the case at bar. This is especially true if the claimant requests that the absent medical witnesses of the HEW who authored the hearsay evidence, be subpoenaed to testify at the hearing and the examiner fails or refuses to summon them.

We noted, however, that where these conditions were not present, nothing would prevent an examiner from basing his opinion on hearsay evidence, if such evidence had sufficient probative force to support the decision. At least some crack in the residuum rule was recognized.

Mr. Justice Blackmun, in reversing the decision of this Court, widened the crack The Court...