Community Action Agency of Chambers-Tallapoosa-Coosa, Inc., DAB No. 1066 (1989)

DEPARTMENTAL APPEALS BOARD

Department of Health and Human Services

SUBJECT: Community Action Agency DATE: June 29, 1989 of
Chambers-Tallapoosa-Coosa, Inc. Docket No. 88-148 Decision
No. 1066

DECISION

The Community Action Agency of Chambers-Tallapoosa-Coosa, Inc.
(CTC/Appellant) appealed a determination by the Office of Human
Development Services (OHDS/Respondent) disallowing $58,774 of federal
Head Start grant funds that were garnished by a federal district court
order from Appellant's Head Start bank account to satisfy a court award
in a racial discrimination lawsuit filed by Appellant's former Head
Start Director. An audit performed by OHDS in 1986 found that the
Appellant had charged the $58,774 to the Head Start grant as a salary
expense. In disallowing the costs charged to the grant, the Respondent
notified CTC that federal funds may not be used to settle court
determined costs.

The grant funds in question were clearly not used for allowable
expenditures for operation of the Head Start program; there was no
possible benefit to the grant. Therefore, the funds used to satisfy the
Appellant's court-ordered obligation are not a reasonable or necessary
charge. As discussed below, we uphold the Respondent's disallowance in
full.

Background

The events surrounding the garnishment of the funds at issue are
undisputed. In October 1985, Appellant's former Head Start Director
(plaintiff) won a Title VII racial discrimination suit against CTC. See
Carter v. Community Action Agency of Chambers-Tallapoosa-Coosa, Inc.,
C.A. No. 84-T-1343-E (M.D. Ala. 1985). In that case, the court found
that CTC, acting through its Executive Director, ostracized the
plaintiff and usurped her duties. Further, the court found that not
only were the plaintiff's recommendations for the Head Start program
rejected, but she was also excluded from decisions involving the
program. As a result, the court found that CTC forced the plaintiff to
resign her position and then refused to accept plaintiff's withdrawal of
that resignation. The court awarded the plaintiff back pay and other
employment benefits that she would have received had her employment not
been illegally terminated. Additionally, the court allowed her to file
a request for reasonable attorney fees. On December 5, 1985, the
parties reached a stipulated settlement of the amount of the damages;
CTC did not appeal the judgment. See Appellant's ex. 12, par. 2. The
amount at issue consists of the stipulated damages for back pay and
benefits, attorney fees, and interest. Subsequently, CTC contacted the
Respondent and requested additional grant funds to pay the judgment. In
February 1986, OHDS informed CTC that it would not provide additional
funds to pay the judgment, and that the judgment would not be an
allowable cost of the Head Start program. See Appellant's ex. 4c. When
OHDS denied the Appellant's request, CTC then requested a modification
of its current Head Start budget so that the costs could be paid from
that grant. Appellant's ex. 4e. On April 4, 1986, OHDS denied CTC's
request to use existing funds to pay the judgment. See Appellant's ex.
4h.

Because of the Appellant's inability to pay the judgment, additional
court proceedings were initiated. On April 28, 1986, the court
requested briefs and scheduled a hearing on enforcement of the judgment.
Appellant's ex. 3. In May 1986, counsel for CTC filed a brief and
exhibits, and on May 20th, the court held a hearing. CTC's counsel
advised the court that "CTC was trying to devise creative ways to raise
the necessary funds, but would need more time." Appellant's brief, p.
3. On May 29, 1986, the judge dismissed without prejudice the
plaintiff's motion for enforcement. Appellant's ex. 6. However, the
next day, the plaintiff's attorney applied for and received a writ to
garnish CTC's Head Start bank account for the settlement amount plus
interest. Appellant's ex. 7. The bank tendered a check to the clerk of
the court on June 6, 1986. Appellant's ex. 8. Plaintiff motioned the
court, on June 13, 1986, for permission to withdraw the funds.
Appellant's ex. 10. On June 16, 1986, the court requested briefing on
plaintiff's motion from CTC and the garnishee bank. Appellant's ex. 11.
On June 23, 1986, the counsel for CTC submitted a response, which
stated, in part:

5. The funds paid into Court by the Bank of Dadeville were
federal funds for the Headstart Program of Defendant. All funds
of said Defendant are federal funds. Defendants object and/or
question whether federal funds are subject to garnishment or
liens.

Appellant's ex. 12.

Prior counsel for CTC made no other substantive arguments to the court
concerning the legality of the garnishment. Pursuant to court orders of
June 26, 1986 and July 24, 1986, the funds were disbursed to plaintiff
and her attorney. Appellant's exs. 13 and 15.

Applicable Authority

The cost principles at 45 C.F.R., Subpart Q, section 74.170 (1986)
provide, in part:

Grant funds may be used only for allowable costs of the activities
for which the grant was awarded. This subpart identifies the
principles to be used in determining allowable costs.

Section 74.174 of 45 C.F.R. provides that the principles to be used to
determine the allowable costs of activities conducted by nonprofit
organizations, such as CTC, are contained in Office of Management and
Budget (OMB) Circular A-122. OMB Circular A-122, Att. A, A. 2. states:

Factors affecting allowability of costs. To be allowable under an
award, costs must meet the following general criteria:

a. Be reasonable for the performance of the award and be
allocable thereto under these principles.

Further, OMB Circular A-122, Att. B, No. 14, states:

Fines and penalties. Costs of fines and penalties resulting from
violations of, or failure of the organization to comply with
Federal, State, and local laws and regulations are unallowable
except when incurred as a result of compliance with specific
provisions of an award or instructions in writing from the awarding
agency.

Appellant's Position

The Appellant contended that its relationship to the Head Start funds at
issue in this case was one of a trustee of the federal funds. CTC
asserted that case law on this subject is clear, that until a grantee
disburses the funds it receives from the federal government to the
ultimate beneficiaries, the funds in its "possession" are federal funds,
and the grantee is a trustee of those funds. Appellant's brief, p. 5.
Further, the Appellant maintained that its obligations as a trustee of
federal funds were to exercise good faith, due care, and diligence, and,
if it fulfilled its obligations as a trustee, then it can not be held
liable by OHDS for the garnished funds.

The Appellant maintained that the lead case, In Re: Joliet-Will County
Community Action Agency, 874 F. 2d 430 (7th Cir. 1988), supports its
position that it was only a trustee of federal funds. In that case, the
court considered whether the cash (and personal property purchased with
federal and state grant funds) was an asset of the grantee and therefore
was available for distribution to creditors in bankruptcy or whether it
was an asset of the federal and state agencies. The court found that
the grantee was merely a trustee of the funds. Additionally, the
Appellant asserted that it "clearly" fulfilled its trustee obligations.
The Appellant alleged that, in accordance with the requirements of 45
C.F.R. 74.11, Head Start funds, when drawn down, were placed by CTC in a
separate bank account. CTC then drew money from that account by check
when the funds were needed. Appellant's brief, p. 8. Moreover, the
Appellant maintained that the bases cited for the disallowance, OMB
Circular A-122 and 45 C.F.R. Part 74 are inapplicable because the
Appellant did not "charge" the disallowed amount to the grant. Rather,
the amount at issue was taken from CTC's bank account by a third party.

The Appellant argued that the federal court in the discrimination suit
was on clear notice that the money garnished from CTC's Head Start bank
account consisted entirely of federal funds, but the court still
required the funds to be paid to the plaintiff. In addition, the
Appellant cited a number of cases for its position that federal funds
such as CTC's Head Start account can not be garnished. CTC maintained
that it did everything it reasonably could be expected to do as a
trustee of federal Head Start funds to safeguard those funds. The
Appellant argued that it maintained a separate bank account, hired an
attorney, kept OHDS and the court informed of its efforts to pay the
judgment, and it put the court on notice that a garnishment would be
improper. Appellant's brief, p. 9. The Appellant stated that, "to put
it bluntly, a federal district judge just blew it." Appellant's brief,
p. 7. In essence, the Appellant maintained that releasing the garnished
federal funds to the plaintiff was the federal district court's mistake
and, since CTC attempted to protect the funds, it should not be
penalized by the Respondent for the court's error.

Finally, the Appellant argued that, while federal agencies participated
in proceedings to protect their funds in several of the cases it cited,
OHDS made no attempt to intervene in the court proceedings to protect
the funds now at issue.

Analysis

The Appellant is accountable for all Head Start funds and must
return funds that are not allowable program expenses.

The issue is whether CTC must repay OHDS for the funds removed from its
Head Start bank account by court-ordered garnishment. As discussed
below, we find that, under the applicable regulations, the
responsibilities of the Appellant are greater than that of a trustee.
Further, we find that even if the court committed reversible error, this
does not eliminate the Appellant's obligation to the Head Start program.
Therefore, we find that the Appellant is liable for the funds in
question here, which were not used for allowable program purposes.

We agree with the Respondent that the Appellant improperly characterized
its obligation in this situation as being only that of a trustee and
accountable only to a trustee's standard. As OHDS stated:

Federal statutes, regulations, grant awards, OHDS policy manuals,
and OMB Circulars define the allowable costs under Head Start
grants. If these provisions are not met, the funds must be repaid
to the Federal treasury. By accepting the grant, CTC agreed to
these terms. In the instant case, its grant funds were used to pay
damages for racial discrimination. It makes no difference that the
judgment was satisfied through garnishment, rather than writing a
check.

Respondent's brief, p. 4.

It is clear that the cost principles require that grant funds be used
only for the activities for which the grant was awarded. 45 C.F.R.,
Subpart Q, section 74.170. See also Economic Opportunity Council of
Suffolk, Inc., DAB No. 679 (1985), at p. 3. Although the Appellant
maintained that it requested approval for a budget revision to pay the
judgment, it did not receive one. CTC was therefore on notice that
payment of the judgment from Head Start funds was not an allowable
expense. Contrary to the Appellant's assertions, these provisions apply
regardless of how the funds were removed. An important element that the
Appellant's argument neglects is that the program did not receive any
benefit from this money. Additionally, as required by OMB A-122, Att.
A, A. 2. a., the use of the Head Start funds in this manner was not
reasonable for the performance of the award and not allocable thereto.
Moreover, while the Appellant argued that actual services to children in
the 1985-1986 school year were completed, even the Appellant did not
deny that the loss of the funds had a "negative impact" on CTC's
operation. Appellant's response, p. 6.

In addition, in Hualapai Tribal Council, DAB No. 597 (1984), at pp. 3-5,
we said, in part:

The Board in previous decisions has stated that an elementary
principle of grants administration is the requirement that a
grantee have documentation that claimed expenditures were incurred
to further the purposes of the project. University of Minnesota,
DAB No. 44, at p. 3, (1978); Bullock County Health Services, Inc.,
DAB No. 360 (1982). . . . Furthermore, Grantee can not avoid
liability by claiming that the disallowance was somehow due to the
embezzlement of funds. The legal relationship created by a grant
award is between the Agency and the Grantee. Grantee is
responsible to the Agency for documenting its expenditures in
accordance with Agency requirements.

Similarly, in this case, once the Respondent established that the funds
were not used for program purposes, the Appellant must account for those
funds. On occasion, money is embezzled from a grant program or
legitimately paid to contractors who do not deliver the contracted
services; however, the federal program can not be expected to bear these
costs when the program has not received any benefit. Moreover, contrary
to the Appellant's analogy, this is not a situation where a bank robber
walked in and robbed the bank where the Appellant's funds were kept. In
that situation, the funds would probably have been insured and the
grantee would not have suffered a permanent loss. Instead, this is a
situation where CTC was found to have discriminated against one of its
employees. The discrimination was clearly something within CTC's
control. The Appellant can not reasonably expect the federal government
to, essentially, support CTC's discriminatory action by paying the court
award. If the federal government made such a payment, the Appellant
would lose any incentive not to discriminate. Moreover, the
communications in February and April 1986, between CTC and OHDS, (see
Appellant's exs. 4c and 4h), put the Appellant on notice that the
judgment would not be an allowable cost of the Head Start program.

Aside from the fact that these costs were not allowable because they
were not reasonable for the performance of the award and allocable
thereto, OMB Circular A-122, Att. B, No. 14, specifically prohibits the
payment of fines and penalties resulting from violations of, or failure
of the organization to comply with federal laws and regulations, except
in certain situations not applicable here. The applicable federal
requirements require something more than, as the Appellant stated, a
trustee's duty to exercise good faith, due care, and diligence; they
require an adherence to applicable laws. Moreover, even if the court
judgment in the discrimination case was not specifically a fine or
penalty, we find that it is analogous to such fine or penalty in that
part of its purpose was to deter further discriminatory actions.

Further, we find that CTC is responsible for the funds even if they were
removed from the Appellant's Head Start bank account as the result of a
court-ordered garnishment. As OHDS stated, while CTC's position is that
garnishment of grant funds to satisfy a judgment for unallowable costs
is improper, it happened in this case. CTC argued that the prior
counsel presented a fully adequate case on behalf of CTC on the
garnishment issue. Appellant's reply brief, pp. 6-7. However, while
current counsel for CTC cited nine cases in support of its position that
federal grant funds in the hands of a grantee retain their federal
character until used for grant purposes and can not properly be
garnished, as the Respondent noted, CTC's prior counsel in the
garnishment proceeding did not cite any authority to the court in
protesting the garnishment. All CTC's prior counsel did was state to
the court:

The funds paid into Court by the Bank of Dadeville were federal
funds for the Headstart Program of Defendant. All funds of said
Defendant are federal funds. Defendants object and/or question
whether federal funds are subject to garnishment or liens.

We do not presume to read the court's mind in that case; however, we
think the court's conclusion was reasonable. Without any additional
evidence or case law on the garnishment issue, the court could have
considered, as we do, the statement by CTC's counsel quoted above to be
conclusory and deserving of little or no weight. Furthermore, in
response to the Board's request for information, the Appellant admitted
that it did not appeal the court's ruling even though it believed it to
be clearly erroneous. Appellant's reply brief, p. 14. We agree with
the Respondent's position that the court was not required to perform
legal research for the Appellant. Finally, while the Appellant asserted
that OHDS did not intervene in the garnishment proceedings to protect
its funds, the fact that other federal agencies have intervened in other
types of proceedings provides no support for the Appellant's argument.
We agree with the Respondent that it had no obligation to intervene in a
grantee's dispute with its employee. Moreover, it was not necessary for
the Respondent to intervene in order to disallow costs which are
unallowable. Conclusion

We conclude that federal funds cannot be used to pay for Appellant's
discriminatory action. We, therefore, uphold the disallowance in full.

_____________________________ Cecilia Sparks Ford

_____________________________ Donald F. Garrett

_____________________________ Alexander G. Teitz Presiding Board
Member


Concur (on jurisdictional issue in n. 2)

_____________________________ Norval D. (John) Settle