Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Community Action Agency of Franklin County, Inc.
Docket No. A-96-10
Decision No. 1581
DATE: June 20, 1996
DECISION
The Community Action Agency of Franklin County, Inc.
(CAAFC) appealed a decision by the Administration for
Children and Families (ACF) disallowing $10,308.50 in
federal funds claimed under the Head Start Act. CAAFC
claimed the disallowed funds for attorney fees it
incurred for its representation in a denial of refunding
action for the Head Start budget period beginning on
September 1, 1993.
For the reasons set forth below, we conclude that these
attorney fees were subject to the daily fee limit set
forth in 45 C.F.R. 1303.3(a) and that ACF properly
disallowed the fees which exceeded that limit.
Therefore, we uphold this disallowance.
Statutory and Regulatory Background
The Head Start program is designed to deliver early
developmental intervention, along with comprehensive
educational and supportive services, to low income
preschool children and their families. See 42 U.S.C.
9831 and 45 C.F.R. 1304.1-3 (1992). ACF provides
funds to grantees to serve as Head Start agencies within
designated communities and reviews their performance in
meeting program and fiscal requirements. See generally
42 U.S.C. 9846.
If a grantee fails to meet certain program or fiscal
requirements, ACF may deny refunding of its Head Start
grant. 45 C.F.R. 1303.15. Upon notification that ACF
intends to deny refunding, a grantee may file an appeal
and request a hearing. Id. The Head Start regulations
at 45 C.F.R. Part 1303 set forth the procedures governing
such an appeal. 1/ Section 1303.3(a) provides that, in a
denial of refunding proceeding, certain attorney fees are
chargeable to the Head Start grant. It states:
All parties to proceedings under this part,
including informal proceedings, have the right to be
represented by an attorney.
(1) Attorney fees may be charged to the program
grant in an amount equal to the usual and customary
fees charged in the locality. However, such fees
may not exceed $250.00 per day, adjusted annually to
reflect the percentage change in the Consumer Price
Index for All Urban Consumers (issued by the Bureau
of Labor Statistics) beginning one year after the
effective date of these regulations. The grantee or
delegate agency may use current operating funds to
pay these costs. The fees of only one attorney may
be charged to the program grant with respect to a
particular dispute. Such fees may not be charged if
the grantee or delegate agency has an attorney on
its staff, or if it has a retainer agreement with an
attorney which fully covers fees connected with
litigation. The grantee or delegate agency shall
have the burden of establishing the usual and
customary fees and shall furnish documentation to
support that determination that is satisfactory to
the responsible HHS [Health and Human Services]
official.
ACF adopted the $250 daily limit in a 1992 amendment to
section 1303.3(a). 57 Fed. Reg. 59,260, 59,265 (1992).
Under the prior version of section 1303.3(a), a grantee
could not pay an attorney more than "$100 per day without
the express written approval of the responsible HHS
official." 45 C.F.R. 1303.3(a) (1990). The validity
of the 1992 amendment of section 1303.3(a) was upheld in
Meriden Community Action Agency, et al. v. Shalala, 880
F.Supp. 882 (D.D.C. 1995), aff'd, No. 95-5092, 95-5093
(D.C. Cir. April 9, 1996). There the court found that
the plaintiffs established that, prior to the 1992
amendment, HHS had consistently waived the $100 attorney
fees limit. Because the plaintiffs showed a settled
course of agency conduct, the court concluded that HHS
must give rational reasons for the 1992 change in its
policy. In reviewing the record, the court determined
that the change was supported by the reasons HHS set
forth in the Notice of Proposed Rulemaking and in the
preamble to the Final Rule. Id. at 886. The court
relied on the following reasons as justification for HHS'
adoption of a non-waivable $250 daily limit:
o HHS represented that its prior policy involving a
limit which could be waived generated excessive
disputes about what costs should be allowed.
o HHS had concluded that limiting the fee while
providing for an inflation adjustment was
reasonable and would result in a uniform and
equitable application of the provision throughout
the country.
o HHS "stated that attorney's fees were being
limited because `the funds involved are scarce
social service funds appropriated by Congress to
provide valuable services to a population in need
of them.'" Id. at 887 (quoting Notice of Proposed
Rulemaking, 57 Fed. Reg. 3394, 3395 (1992)).
o HHS had concluded that the limit would not
prevent Head Start programs from obtaining
representation because the local legal community
would likely assist Head Start programs by
providing free or reduced fee services.
The court also rejected the plaintiffs' argument that the
fact that attorney fees are not limited in disallowance
cases but are limited in suspension, termination, and
denial of refunding cases violated the equal protection
rights of Head Start grantees. The court concluded that
"the attorneys' fee regulation has a rational
relationship to the appropriate governmental purpose of
determining how to expend the scarce social service funds
available in the Head Start program." Id. at 888.
Facts
CAAFC is a community action agency that receives federal
funds to administer a Head Start program in Franklin
County, New York. On October 15, 1993, CAAFC was
notified by ACF that ACF intended to deny CAAFC's Head
Start refunding for the 1993-94 program year. CAAFC
retained the law firm of Feldesman, Tucker, Leifer,
Fidell & Bank to represent it in the denial of refunding
action. On October 28, 1993, CAAFC filed an appeal of
ACF's denial of refunding with the Departmental Appeals
Board (Board). This appeal was subsequently settled by
the parties on June 26, 1994.
By letter dated November 14, 1994, ACF requested an
itemized schedule of attorney fees incurred by CAAFC
during the Head Start budget period beginning on
September 1, 1993 and ending August 31, 1994 which were
related to the denial of refunding proceedings and which
were to be charged to its Head Start grant. ACF Ex. 1.
Counsel for CAAFC prepared a detailed list of its bills.
For this period, CAAFC claimed $34,501 in attorney fees,
not all of which were related to the denial of refunding
proceeding. ACF Ex. 3.
By letter dated September 13, 1995, ACF notified CAAFC
that it was disallowing $10,308.50 in attorney fees
claimed by CAAFC for the period September 1, 1993 through
August 31, 1994. ACF disallowed these fees on the
grounds that they were paid for legal services which were
related to CAAFC's appeal of ACF's denial of refunding
and that they exceeded the limit imposed by 45 C.F.R.
1303.3(a).
The fees which ACF disallowed were those in excess of the
regulatory limit for services rendered between October 18
and October 28, 1993 and between February 28 and April
15, 1994. The October fees involve services for
preparing CAAFC's appeal, such as reviewing the legal
background for an appeal, conferring with the Executive
Director on refunding, reviewing Head Start regulations,
discussing strategy for the appeal, and drafting and
filing the Notice of Appeal and motions. ACF Ex. 3, at
6-7. The February - April fees concern services for
settling the case, such as conferring with CAAFC,
negotiating with opposing counsel, and reviewing
settlement documents. Id. at 11-12.
The Parties' Arguments
CAAFC argued that the disallowed fees were allowable
costs because they were not subject to the limit in 45
C.F.R. 1303.3(a). CAAFC relied on the portion of
section 1303.3(a) which states that "parties to
proceedings under this part" are subject to the limit.
CAAFC argued that --
[t]he plain language of the regulation contemplates
that only those services which are necessary for the
participation in an appeal proceeding, such as the
preparation for argument or a hearing before the
Board, are subject to limitation.
CAAFC Br. at 4.
Based on this construction of section 1303.3(a), CAAFC
argued that fees for services for preparing to file an
appeal were outside the scope of section 1303.3(a).
CAAFC reasoned that, in preparing to appeal, it was not a
party to "proceedings under this part" as required by
section 1303.3(a) because the proceeding did not begin
until CAAFC actually filed its appeal on October 28,
1993.
CAAFC also argued that the fees incurred for settlement
activities were paid for "purposes other than
participation in appeal proceedings." Id. at 5. First,
CAAFC reasoned that, because the deadlines in the appeal
proceeding were extended for settlement discussion, there
was no appeal proceeding during that period and therefore
these services were not subject to the fee limit.
Second, CAAFC reasoned that 45 C.F.R. Part 1303 and 45
C.F.R. Part 16 "outline the nature of the proceedings
that are subject to the limit on fees." CAAFC Br. at 5.
CAAFC argued that nowhere in these regulations is there a
provision for settlement or a requirement that settlement
discussions take place. Therefore, CAAFC concluded that
settlement discussions are outside the appeal proceeding
and are not subject to the fee limit.
CAAFC also asserted that the limit in section 1303.3(a)
should be construed narrowly for the following reasons.
As a general rule, fees for professional services may be
paid with Head Start funds as long as the fees are
"reasonable." Office of Management and Budget Circular
(OMB Cir.) A-122, Att. B., 34. The HHS Discretionary
Grants Administration Manual specifically provides that
the legal costs of pursuing an administrative action,
such as a grant appeal, are allowable. HHS Discretionary
Grants Administration Manual, Ch. 3, D. at 3-6. In the
context of Head Start grants, there is no limit on the
allowability of reasonable attorney fees outside of 45
C.F.R. 1303.3(a).
ACF argued that, under the plain language of section
1303.3(a), all appeal-related attorney fees were limited
by that section. ACF contended that --
CAAFC's receipt of ACF's notice of denial of
refunding commenced the initiation of appeal-related
activity and any legal services performed in
connection with CAAFC's appeal up until the
termination of these proceedings before the
Departmental Appeals Board may be considered
"appeal-related."
Based on this construction, ACF concluded that attorney
fees for preparing the appeal and for settling the appeal
were subject to section 1303.3(a).
Analysis
For the reasons discussed below, we conclude that ACF's
construction of its regulation is reasonable and entitled
to deference. Therefore, we uphold this disallowance on
the grounds that the fee limit set forth in 45 C.F.R.
1303.3(a) applied to the fees at issue in this case.
Where a regulation is subject to more than one
interpretation, a federal agency's interpretation of its
own regulation is entitled to deference as long as the
interpretation is reasonable and the grantee had adequate
notice of that interpretation or did not reasonably rely
on its own contrary interpretation. New Jersey Dept. of
Human Services, DAB 1549, at 7 (1995); Washington
Counties Opportunities, Inc., DAB 1464, at 8 (1994),
Illinois Dept. of Families and Children, DAB 1335, at 17
(1992).
We find that ACF's construction of section 1303.3(a) is
reasonable for the following reasons:
o ACF's construction is consistent with the plain
language of the regulation. The term
"proceeding" in the phrase "proceedings under
this part" can reasonably be read as beginning
with ACF's notice of adverse action and as
encompassing all activities which are related to
a party's participation in such proceedings.
Therefore, in preparing to file an appeal in
response to ACF's notice of denial of refunding
and in engaging in settlement discussions, CAAFC
can reasonably be considered to be a party to
"proceedings under this part."
o ACF's construction is consistent with the purpose
behind the rule: to restrict the amount of Head
Start funds which could be redirected from the
provision of services to children to payment for
attorney fees in termination, suspension, or
denial of refunding proceedings. By construing
"proceedings under this part" to include all
appeal-related legal services, ACF is simply
giving full effect to a policy decision it made
concerning the allocation of limited Head Start
funds.
o ACF's construction avoids one of the problems
occurring under the prior fee limit: disparate
applications of the limit. By construing the
present limit as applicable to all appeal-related
activity, ACF lessens the risk that HHS regions
will develop different standards for determining
which attorney fees are subject to the limit.
o ACF's construction is consistent with a common
understanding of what is entailed in representing
a client in an appeal proceeding: a lawyer
prepares and files the appeal; a lawyer may try
to settle the appeal; if a lawyer does not settle
the appeal, he or she completes the case under
the procedures of the relevant forum.
o CAAFC relied on OMB Cir. 122, Att. B. 34 and
the HHS Discretionary Grants Administration
Manual, Ch. 3, D. for the proposition that
reasonable attorney fees are allowable Head Start
expenditures. However, OMB Cir. A-122, Att. A.
3.b. provides that one of the criteria for
determining whether a cost is "reasonable" is
whether it meets requirements imposed by federal
regulation. Thus, in this case, the general
provision authorizing expenditures for attorney
fees is modified by the specifically applicable
program provision of 45 C.F.R. 1303.3(a).
Since the fees disallowed in the case exceed the
limit imposed by that regulation, they are
necessarily not reasonable and not allowable
under OMB Cir. 122, Att. B. 34. Similarly, the
HHS Discretionary Grants Administration Manual,
Ch. 3, D. at 3-3 provides that the listed costs
are "examples" of allowable costs but that
grantees should "consult the appropriate cost
principles for specific guidance on allowable and
unallowable costs . . . ."
ACF's reasonable construction is entitled to deference
because there is no indication in the record that CAAFC
incurred the disputed fees in reliance on the
construction of the regulation it presents in this case.
Rather, CAAFC incurred these fees as a necessary part of
its representation in the denial of refunding proceedings
and not because it had determined, in 1993 and 1994, that
these fees were not subject to section 1303.3(a). See
DAB No. 1464 (in which the Board remanded a disallowance
of staff bonus payments made by a Head Start grantee
pursuant to its understanding of applicable federal cost
principles).
Moreover, we find that CAAFC could not have reasonably
relied on the construction of the regulations that it
offers here because that construction is unreasonable in
the context of these particular regulations. Section
1303.15(c)(3) requires the appellant in its initial
appeal filing to "fully set forth the grounds for the
appeal and be accompanied by all documentation that the
grantee believes is relevant and supportive of its
position." If CAAFC's construction were accepted, all
attorney fees connected with formulation of an
appellant's case would be exempt from the fee limit.
Furthermore, if attorney fees incurred during settlement
negotiations were also exempt, an appellant could
possibly manipulate settlement negotiations to further
bypass the limit. Thus, CAAFC's construction could
potentially exclude a large part of the appellant's
preparation for the entire case.
Finally, we note that CAAFC was incorrect when it argued
that "nowhere in Part 1303 or . . . 45 C.F.R. Part 16 . .
. is there a provision concerning settlement" and
therefore that "settlement is outside of the appeals
process." CAAFC Br. at 5. Section 1303.15(b)(1) of 45
C.F.R. provides that, to the extent they are not
inconsistent with Head Start regulations, the Board's
procedures at 45 C.F.R. Part 16 govern denial of
refunding appeals. Section 16.4 of 45 C.F.R. informs
parties that "the Board makes maximum feasible use of
preliminary informal steps to refine issues and to
encourage resolution by the parties." Section 16.18
informs parties that they may request a mediator "to aid
in resolving the dispute." Finally, the acknowledgement
letter that the Board sent to the parties at the very
beginning of CAAFC's denial of refunding proceeding
informed CAAFC and ACF that --
[a]lthough the appeal is now pending, the parties
may negotiate to resolve the dispute informally.
The Board will assist in any way appropriate, and
can provide mediation services. See 16.18.
Acknowledgement Letter of November 3, 1994 (Board Docket
No. A-94-12). Clearly under 45 C.F.R. Part 16,
settlement discussions by the parties, with or without
the Board's assistance, can be an integral part of the
Board's process. The fact that a case is necessarily
stayed so that parties can engage in settlement
discussions does not remove such discussions from
"proceedings under this part."
Therefore, we conclude that CAAFC's claims for attorney
fees incurred for preparing its appeal and for settling
its appeal are subject to the fee limit in 45 C.F.R.
1303.3(a).
Conclusion
For the preceding reasons, we uphold this disallowance in
full.
__________________________
Donald F. Garrett
__________________________
Norval D. (John) Settle
__________________________
M. Terry Johnson
Presiding Board Member
1.
These regulations also govern appeals concerning
suspension or termination of funding.