Family Care Center of Carondelet, DAB No. 568 (1984)

GAB Decision 568
Docket No. 84-88

August 31, 1984

Family Care Center of Carondelet;
Ballard, Judith; Teitz, Alexander Settle, Norval


The Family Care Center of Carondelet (appellant) appealed a Public
Health Service (PHS, respondent) decision to disallow $17,944.43, a
portion of which was used as part of the appellant's non-federal share
for its Urban Health Initiative grant. /1/ The disallowed amount, PHS
contended, was the federal share of a sale of property acquired through
grant funds. For the reasons discussed below, we uphold this
disallowance.


The Board's Standard of Review

The Board's procedures found at 45 CFR Part 16 (1983) provide for a
special expedited review of appeals of $25,000 or less in which there
has already been a preliminary review process resulting in a written
decision based on a record. 45 CFR 16.12(d). That process applies to
this appeal. The Board's review was restricted to whether the decision
of the preliminary review authority was clearly erroneous. /2/


Background

The appellant acquired an inter-connected, two-building complex on
February 14, 1980. Although the property was acquired on February 14th,
the contract for the sale of the buildings and the financing was
arranged before January 22, 1980 (the date of the notice of grant
award). The complex consisted of a major modern building, formerly a
supermarket, (2) a parking lot, and a smaller historic schoolhouse.The
two buildings shared one common wall. The appellant purchased the
entire property for $230,000, after the seller refused to sell just the
supermarket portion. The appellant raised $50,000 and obtained a loan
for the remaining $180,000.

The notice of grant award was dated January 22, 1980. The appellant
included money in the grant budget for making monthly payments on the
$180,000 loan. There is no dispute that the appellant used grant funds
to pay off the entire loan amount through monthly payments of $1919.58
from March 1980 through November 1981, and then a final lump sum payment
of $175,385.13 on November 12, 1981.

The appellant planned to sell the schoolhouse section of the
property, because it served no useful purpose for the appellant, and
negotiated with two historical organizations for its purchase. The
appellant did, however, use the schoolhouse for Board of Directors
meetings and space for an accountant and his assistant during a period
in 1981. On April 1, 1981, as earlier contemplated by the appellant,
the schoolhouse was sold to two historical organizations for $25,000.
Before the sale could be finalized, the bank released its security
interest in the property because, according to a bank representative,
"it was felt that this portion of the property had little or no market
value and was not considered a significant part of the collateral value
of the property." (Respondent's Appeal File, Exhibit L)

In anticipation of the sale of the property, the appellant, by letter
and attachments dated May 22, 1980, submitted a revised budget to PHS.
The letter discussed what income the appellant felt it could generate,
and the appellant listed the $25,000, but its only description was
"subdivision and sale of newly acquired property." Based on the
appellant's representations, the respondent, by letter and attachments
dated July 9, 1980, sent the appellant a revised Notice of Grant Award
which increased the total grant budget.No further action relevant to
this case was taken at that time.

As a result of an audit in October 1983, the respondent determined
that the entire property was acquired with federal community health
center grant funds awarded under section 330 of the PHS Act (42 U.S.C.
254c). Therefore, the appellant owed PHS $17,065 for the federal share
of the proceeds from the sale of part of the property. In its
calculation, PHS considered administrative expenses and proration for
private donations as follows:

Sale price of building $25,000
Less: Administrative expenses -2,500 in
selling the property (10% of $25,000)

(3)

Less: Proration for private donations $50,000 donations X
$25,000 -5,435 $50,000 + $180,000 donations mortgage paid
w/federal funds Amount to be refunded:
$17,065


Before the Audit Review Committee, the appellant made three major
arguments, which were reasserted here:

1. The Board of the Family Care Center contracted to purchase the
supermarket property, with the appended schoolhouse, prior to the
receipt of any grant of federal funds. This purchase was made with
local funds as a downpayment and a mortgage that was undertaken by the
Family Care Center Board of Directors.

2. The subsequent sale of the schoolhouse property generated $25,000
in program income that was used as the local share in the program's
budget, reflected in the budget revision approved by PHS.

3.The release by the bank carrying the mortgage of any interest in
the schoolhouse property, at the time the property was sold to the
historical societies, indicates that the appended schoolhouse property
never was considered included in the collateral that the bank used or
considered as secondary collateral on the mortgage which was
subsequently paid by the federal government. Thus, the schoolhouse
property cannot be considered to have been acquired with federal funds
where the mortgage that was paid off did not include the schoolhouse
property as part of the mortgaged premises.

The Audit Review Committee denied the appellant's appeal on the basis
of 45 CFR Part 74, Subpart 0, sections 74.130 and 74.134(c).The
Committee quoted that part of section 74.130 which states:

. . . this subpart applies to real property, equipment, and supplies
acquired with grant support. To be considered acquired with grant
support, some or all of the property's acquisition cost must be a direct
cost under the grant . . . .

Since PHS found that the entire property had been purchased with
federal funds, it found that the appellant was required (4) to dispose
of the property in accordance with 45 CFR 74.134(c). Section 74.134(c)
states, in part:

(1) The property shall be sold and the Federal Government shall be
paid an amount computed by multiplying the Federal share of the property
. . . times the proceeds from sale (after deducting actual and
reasonable selling and fix-up expenses, if any, from the sales
proceeds).

The appellant's argument did not address this last regulatory
provision because the appellant contended that the property that was
sold was not acquired with federal support.

Analysis

We conclude that the PHS Audit Review Committee decision was not
clearly erroneous.

The appellant appears to argue that the fact that it paid $50,000 of
non-federal funds for the property in some way makes the cost of the
entire property divisible, and that each section of the property can be
separately assigned a cost. In other words, the appellant appears to
want the Board to make the inference that the schoolhouse section of the
property was valued at $50,000 or less and that the supermarket portion
of the property was $180,000 or more, and that the $50,000 donation paid
for the schoolhouse (if not also a part of the supermarket property);
therefore, the schoolhouse was purchased without the aid of federal
funds. If two purchase agreements had been written on the property, the
Board might have considered making such an inference; however, the fact
that one contract was written on the property, and no values were
individually assigned at the time of the sale to appellant, or at any
time thereafter, means that the Board cannot make that finding now.
Moreover, the facts as a whole point to the opposite conclusion. The
seller specifically declined to divide the property for sale, and the
bank, although later releasing its security interest on the schoolhouse
section of the property, mortgaged the entire property. Although the
bank later submitted a letter stating that it felt that the schoolhouse
had little or no market value, the bank still mortgaged the entire
property. Because the entire property was mortgaged, it was not
necessary for the bank to assign a value to each section of the
property.And, indeed, the appellant did sell the property for $25,000,
indicating that the property did have some value.

The correspondence and resulting actions that occurred from May 22,
1980 to July 9, 1980, pertaining to the revised budget, are not
determinative in this case. The respondent pointed out that all it did
was acknowledge in its revised notice of grant award that more local
funds were anticipated (5) and that the federal share amount remained
the same and not that PHS approved of the appellant's use of the sale
money as non-federal share. A review of the documents in question
indicates that the respondent was acting on the appellant's
representations, and that the revised notice of grant award was not an
endorsement by the respondent. (Respondent's appeal file, Tab D)
Further, we believe that a one line descrption by the appellant stating
"subdivision and sale of newly acquired property" was not a sufficient
description to indicate the surrounding circumstances and allow the
respondent to make a knowledgeable decision on the matter at that time.
A complete review by the auditors allowed the respondent to fully
examine the circumstances and conclude that the sale of the property
entitled the respondent to a share of the proceeds.

The appellant in a telephone conference call, in an attempt to
strengthen its second argument, referred to a memorandum by a member of
the respondent's staff which indicated that the property may not have
been purchased with federal funds. (Respondent's appeal file, Tab G)
The respondent argued that its representative may have been confused
about the purchase and was relying on the appellant's representation.
In any event, the record clearly shows, and indeed the appellant agrees,
that the appellant used federal funds to pay the $180,000 loan balance
on the property.

In the Urban Health Initiative grant program, the federal government
does not provide 100% reimbursement of grant costs. (Appeal File, Tab
G, Revised Notice of Grant Award) The appellant does not deny that its
grant required non-federal participation. Although the appellant is not
required to provide a non-federal contribution for every specific item
purchased, we find as discussed above that the property at issue is not
divisible; therefore, the $50,000 contribution by the appellant was
only a portion of the total property costs. The appellant is entitled
to a share of the proceeds of the sale, but not the entire amount.
Whenever property is purchased with non-federal and federal funds, as in
the case here, the proceeds from the disposition of the property must be
divided on a proportionate basis in compliance with federal regulations.
This finding, however, does not mean that property purchased under a
grant cannot be purchased entirely with non-federal or federal funds as
long as the total non-federal share is met (unless there are special
grant conditions). Each case must be reviewed for its individual
circumstances, as was done here. The appellant has not provided any
substantial evidence to show why the Board should not view the purchase
of the entire property as one transaction. Since PHS provided a portion
of the purchase price, it is entitled to the recoupment envisioned in 45
CFR 74.134(c).

(6) Conclusion

For the reasons discussed above, we have determined that the decision
of the PHS Audit Review Committee was not clearly erroneous. Therefore,
we uphold the PHS decision to disallow $17,944.43. /1/ The auditors
recommended a $17,065 disallowance; the additional amount is
accrued interest. /2/ The Health Resources and Services
Administration (HRSA) of PHS made the decision to require the return of
the money as recommended by an audit report.The appellant appealed that
decision to the PHS Grant Appeals Board, which set up an Audit Review
Committee and issued a written decision upholding the disallowance. The
appellant then appealed the PHS decision to this Board.

JANUARY 08, 1985