SUBJECT: Lower Brule Sioux Tribe

DECISION

The Lower Brule Sioux Tribe (Lower Brule) appealed a determination by the Substance Abuse and Mental Health Services Administration (SAMHSA) of the Public Health Service disallowing $85,514 in costs charged to a Center for Substance Abuse Treatment (CSAT) grant. Lower Brule had charged the grant $7,500 per month in rent for a facility to provide services under the grant. SAMHSA determined that Lower Brule's lease for the facility was a less-than-arms-length agreement, with the result that Lower Brule was entitled to charge the grant only an amount attributable to the depreciation of the facility.

For the reasons discussed below, we find that Lower Brule's lease of the facility was a less-than-arms-length agreement under the terms of the grant and that any oral approval of the lease that might have been given by a CSAT official was not binding upon CSAT. Accordingly, we uphold SAMHSA's disallowance.

Factual Background⁽¹⁾

SAMHSA's Center for Substance Abuse awarded a three-year Critical Population grant to Lower Brule to establish an adult residential chemical dependency treatment facility. Lower Brule named the project the Sacred Hills Center. The grant's project period was September 30, 1993 through September 29, 1996. Lower Brule received a 12-month no-cost extension which extended the project period to September 29, 1997, but this was subsequently amended to May 31, 1997 due to a lack of funds.

For the performance of its grant project, Lower Brule initially leased space from a convent in Rapid City, South Dakota, at a rent of $7,500 per month. When that lease was terminated in June 1995, Lower Brule bought a thousand-acre property and then purchased, through a separately incorporated entity named the "Lower Brule Motor Pool, Inc.," two double-wide modular units at a cost of $168,000, which it placed on the property. The Lower Brule Employment Enterprise, another division of the Lower Brule Sioux Tribe, then constructed a large deck and a ramp and stairs connecting the two units, adding parking, an access road, and water and sewage connections.

On May 6, 1996, Lower Brule requested an extension of the grant for another 12 months to September 29, 1997. On June 18, 1996, Lower Brule then executed a lease with the Sacred Hills Center, for the period June 21, 1996 through June 21, 1997, under which the Sacred Hills Center would lease from Lower Brule the modular units and accessories at the same monthly rent of $7,500 that had been paid the convent.

When SAMHSA was reviewing Lower Brule's budget for the proposed one-year extension of the grant, it discovered that Lower Brule proposed to spend $90,000 in grant funds for the lease of the modular units. When SAMHSA approved the extension of the grant to September 29, 1997, the Notice of Grant Award included a provision that the $90,000 requested for the lease was restricted and could not be used pending CSAT's approval of the lease. On March 10, 1997, the Notice of Grant Award was amended, changing the end of the grant to May 31, 1997, yet keeping the amount of funding constant even though the budget period had been reduced by four months.

Meanwhile, SAMHSA had informed Lower Brule that it could lease the facility to itself, but that it could not charge the grant more than it was authorized to under the PHS Grants Policy Statement and the cost principles of Office of Management and Budget (OMB) Circular A-87, which limit the recovery of costs of ownership.⁽²⁾

Lower Brule nevertheless charged $90,000 in lease costs for the modular units to the grant.

SAMHSA found that Lower Brule was the legal entity responsible for the CSAT grant, not the Sacred Hills Center, and that the Lower Brule Motor Pool and the Lower Brule Employment Enterprise were parts of the same governmental unit, the Lower Brule Sioux Tribe, with the result that cost principles set forth in section 38 of OMB Circular A-87 were applicable. Section 38 provides that rental costs under less-than-arms-length leases are allowable only up to the amount that would be allowed had title to the property vested in the government unit.

SAMHSA therefore found that, based on the cost of the modular units, the air conditioning, the deck and the ramp, Lower Brule was entitled to charge the grant only $4,486, representing the depreciation costs of the aforementioned items. The disallowance amount of $85,514 was obtained by subtracting the depreciation amount from the $90,000 Lower Brule charged the grant for lease costs. Lower Brule did not dispute SAMHSA's determination of the amount of depreciation costs for the leased facility.

Discussion

In its appeal brief, Lower Brule advanced two arguments why SAMHSA's disallowance should be reversed: 1) the lease for the facility was not a less-than-arms-length agreement because it was between the Sacred Hills Center program and an independent corporation which was not the Lower Brule tribal government; and 2) a CSAT program official had found that Lower Brule was in full compliance with the grant, and Lower Brule had relied on this assurance.

We address each of these arguments below.

I. The lease for the modular units was a less-than-arms-length agreement.

Lower Brule asserted that the lease was not less-than-arms-length because it was between the program and an independent corporation, the Lower Brule Motor Pool, Inc., and not directly with the Lower Brule tribal government. As such, Lower Brule contended, the rental of the facility was an allowable charge to the grant.

There is no evidence in the record to support Lower Brule's contentions. In fact, all the evidence is to the contrary. The lease itself states that the lease is between the Lower Brule Sioux Tribe and the Sacred Hills Healing Center, with the former as the lessor. Lower Brule Ex. I.1.1. In fact, in the 17-page lease agreement, there is not even one mention of the Lower Brule Motor Pool. Id. Moreover, in response to questions from the Board, Lower Brule admitted that its intent to have the Lower Brule Motor Pool become "the separately and independently incorporated lessor never took place." November 11, 2000 Appellant Tribe's Written Submission to Request for Further Development of the Record, ¶ 1.2. Additionally, the Notices of Grant Award specifically state that the grantee is the Lower Brule Sioux Tribe. Lower Brule Ex. I.1.4. Thus, it is evident that Lower Brule, as the grantee, here executed the lease with itself as the lessor. There can be no reasonable doubt that this lease qualifies as a less-than-arms-length arrangement as described in federal cost principles.

Lower Brule, however, asserted that the provisions of OMB Circular A-87 cited by SAMHSA in its disallowance determination are not applicable here because Lower Brule's CSAT grant began on September 30, 1993, and the grant's provisions were "grandfathered" in before the effective date of the revised version of OMB A-87 with its express prohibition on less-than-arms-length lease arrangements. September 20, 2000 Reply Brief at 2. The revised version of OMB A-87 provides, as relates to the costs at issue here, "For other costs, this revision shall be applied to all awards or amendments, including continuation or renewal awards, made on or after September 1, 1995." 60 Fed. Reg. 26,484, 26,490 (May 17, 1995). The prior version of OMB A-87, however, issued in 1981 and in effect when Lower Brule first received the CSAT grant, did not have any references to less-than-arms-length leasing arrangements.

Lower Brule provided no authority for its position that the lease should be "grandfathered" in under the terms of its original grant award. Moreover, as explained below, regardless of which cost principles applied, these costs were unallowable since there was a specific term of the grant which made these costs unallowable.

The version of OMB A-87 effective in September 1995 expressly prohibited less-than-arms-length lease payments over the amount that would be allowed had title vested in the grantee. On July 31, 1995, SAMHSA issued its Notice of Award for the third budget period of Lower Brule's grant, which was from September 30, 1995 through September 29, 1996. The lease was executed during this period. The revision to OMB A-87 stated that the revision should be applied to all awards made after "September 1, 1995." As the budget period for the third year of the grant began, i.e. was made, after September 1, 1995, we find that the revised version of A-87, with its prohibitions on allowable costs under less-than-arms-length leases, is applicable here.⁽³⁾

Moreover, Lower Brule was bound by other explicit authority to forego less-than-arms-length leases. The Terms and Conditions of Lower Brule's Notices of Grant Award for the second and third budget periods, dated September 15, 1994 and July 31, 1995 respectively, provided that --

Grants must be administered in accordance with the PHS Grants Policy Statement (rev. April 1, 1994) . . .

Lower Brule Ex. I.1.4., ¶ 2.

As applicable to the issue before us, the PHS Grants Policy Statement parallels the language of section 38.c of Attachment B to revised OMB Circular A-87. The PHS Grants Policy Statement provides:

Rental costs under less-than-arms-length leases are allowable only up to the amount that would be allowed under the applicable cost principles had title to the property been vested in the lessee. Under such leases, one party to the lease agreement is able to control or substantially influence the actions of the other. Such leases include but are not limited to those between divisions of an organization; organizations under common control through common officers, directors, or members; and an organization and a director, trustee, officer, or key employee of the organization, or his or her family, either directly or through corporations, trusts, or similar arrangements in which they hold a controlling interest.

PHS Grants Policy Statement at 7-11.

Even if we were to accept Lower Brule's contention that the lease was between two separate entities, there would be no question that the lease was between divisions of the same organization, the Lower Brule Sioux Tribe. In past decisions involving Head Start organizations which had received disallowances for rental costs because of alleged less-than-arms-length relationships, the Board has put forth standards for the determination of such a relationship.⁽⁴⁾ The Board has taken the approach that the determination that a less-than-arms-length relationship existed does not necessarily depend on any one uncontroverted fact as establishing that one organization had the ability to control or substantially influence the other, but rather on whether the "totality of the overall relationship" between two organizations supported a finding of substantial influence. Enterprise for Progress in the Community, Inc., DAB No. 1558, at 7 (1996). The Board has looked at such items as the lessor's articles of incorporation, the minutes of the lessor organization's meetings of its Board of Directors, the coordination of activities between the organizations, the lessor's sources of income, and the use of the grantee's personnel to perform many of the lessor's functions for indicia of the independence of the lessor from the grantee. Child Opportunity Program, Inc., DAB No. 1700, at 12, (1999). In cases where the Board has found an arms-length relationship existed between a grantee and a lessor, the independence of the lessors was established by the fact that the lessors had sources of income other than their leases with the grantees. Home Education Livelihood Program, Inc., DAB No. 1598 (1996); East Missouri Action Agency, Inc., DAB No. 1656 (1998).

Here, Lower Brule has provided not one item of evidence for its assertion that the Lower Brule Motor Pool was an entity independent from the tribal government. At best, Lower Brule only offered that the Lower Brule Motor Pool "was intended to have a major, independent role on the Lower Brule Sioux Indian Reservation." November 11, 2000 Appellant Tribe's Written Submission to Request for Further Development of the Record, ¶ 2.4. (emphasis added).

Accordingly, we find that the lease was a less-than-arms-length arrangement, and that Lower Brule was entitled to charge its grant only depreciation costs associated with the facility.

II. SAMHSA is not estopped from disallowing the grant funds used for rental of the modular units even though a CSAT official might have given oral approval for the lease.

Lower Brule contended that it had consulted on the lease issue with a CSAT program officer, who had stated that the proposed leasing arrangement was allowable and allocable to the grant. In support of this assertion, Lower Brule provided a July 9, 1996 facsimile from Senator Tom Daschle's office, in which it is stated that the CSAT program officer "finds that Lower Brule is in full compliance with the administration of the grant in question and that a letter will be sent out in a few days to that effect." Lower Brule Ex. I.1.2. Lower Brule acknowledged that it never received such a letter from the CSAT program officer. April 17, 2000 notice of appeal, second page.

Although it never expressly stated it was making such an argument, it is evident that Lower Brule believed that SAMHSA should be estopped from taking a disallowance because Lower Brule, in making the lease arrangement, relied on the advice of the CSAT program officer.

Even assuming that estoppel against the federal government is possible (which is extremely doubtful as discussed below), there is no basis for estoppel against SAMHSA under the circumstances presented here.

Lower Brule never stated when the CSAT program officer allegedly gave verbal approval to the leasing arrangement. Furthermore, there is no indication that the CSAT official ever reviewed the lease or knew all of its terms.

Additionally, the telefacsimile from Senator Daschle's office, cited by Lower Brule, is at best inconclusive. It is merely a general statement that the CSAT official said that Lower Brule was in compliance with its grant, but makes no mention of the questioned lease at all. There is no indication when the CSAT official made this evaluation, with the possibility existing that it was made before the execution of the lease. Moreover, the promised confirmation of this statement by the CSAT official was never forthcoming.

In contrast to the alleged oral approval of the lease inferred from the July 2, 1996 letter from a congressional office, Lower Brule received direct notice in writing from CSAT not to use grant funds for the lease without first getting CSAT approval. The Revised Notices of Grant Award, dated 7/22/96 and 3/10/97, explicitly state, "Funds in the amount of $90,000 have been included in the "Other" line item for facility lease. These funds are restricted and may not be used pending written approval from CSAT." Lower Brule Ex. I.1.4. (emphasis added). Despite these admonitions, the first of which was received in the month after it signed the lease, Lower Brule continued with the lease. Under the lease, Lower Brule had the ability to exercise a right of termination of the lease, but there is nothing to indicate that Lower Brule ever began the process of termination. Lower Brule Ex. I.1.1. ¶ 4.3.

In short, there is nothing definitive in the record before us that a CSAT official ever reviewed, much less approved, the lease arrangement. Accordingly, we find no basis for any suggestion that SAMHSA may be prevented from taking this disallowance action.

Furthermore, as we have stated in earlier decisions --

There can be no estoppel absent the traditional requirement of a misrepresentation of fact, reasonable reliance, and detriment to the opposing party. Heckler v. Community Health Services of Crawford County, Inc., 467 U.S. 51, 59 (1984); see also Tennessee Dept. of Human Services, DAB No. 1054 (1989). Moreover, estoppel against the federal government, if available at all, is presumably not available absent affirmative misconduct by the federal government. Schweiker v. Hansen, 450 U.S. 785 (1981).

Texas Dept. of Human Services, DAB No. 1344 at 9 (1992) (and cases cited therein). Even where government agents have given private individuals advice directly contrary to controlling federal regulations, the Supreme Court has not permitted estoppel. Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380 (1947); Hansen.

The Supreme Court has said that estoppel will not ordinarily lie against the federal government, especially in cases involving claims for federal funds based on misrepresentations of federal officials. Office of Personnel Management v. Richmond, 496 U.S. 414, 423-34 (1990). Undoubtedly, such a claim, at a minimum, requires more than proof of the traditional elements defined above. The Supreme Court has rejected estoppel claims against the government absent a showing of "affirmative misconduct" on the part of the government officials. Hansen, at 788. Error in oral advice by a government agent has been held insufficient to estop the government. Heckler, at 64. Government agents cannot "by their unauthorized oral or written statements" be held to "obligate the Treasury for payment of funds," without the anomalous effect of giving their erroneous advice "the practical force of law" overriding Congressional intent. OPM v. Richmond at 428.

Conclusion

For the reasons discussed above, we sustain the disallowance.

Donald F. Garrett

M. Terry Johnson

Cecilia Sparks Ford
Presiding Board Member

1. This factual background is derived primarily from SAMHSA's disallowance determination. Lower Brule did not supply the Board with its own statement of the factual history of this case, nor dispute SAMHSA's account of the events leading up to the disallowance.

2. OMB Circular A-87 sets forth cost principles for state, local, and tribal governments. Regulations at 45 C.F.R.

§ 74.27(a) provide that the allowability of costs incurred by tribal governments shall be determined in accordance with the provisions of OMB Circular A-87.

3. Attachment A of the earlier version of the cost principles provided at Section C.1.c. that costs must conform to "any limitations" set forth "in these principles, Federal laws,or other governing limitations as to the types or amounts of cost items." 46 Fed. Reg. 9548, 9549 (January 28, 1981). As discussed below, there was such a limitation in the PHS Grants Policy Statement which applied to make these costs unallowable.

4. Head Start and other non-profit organization are governed by the cost principles set forth in OMB Circular A-122. Paragraph 42.c of Attachment B to OMB Circular A-122 bears the same wording on less-than-arms-length leases as contained in the PHS Grants Policy Statement.