Skip Navigation


Department of Health and Human Services
Appellate Division

SUBJECT: Brownsville Community Development Corporation


DATE: February 23, 2004



Docket No. A-03-62
Decision No. 1910


The Brownsville Community Development Corporation (Brownsville) appealed an April 22, 2003 determination by the Office of Community Services (OCS), a part of this Department's Administration for Children and Families (ACF). OCS determined to terminate a $500,000 grant awarded to Brownsville pursuant to the Community Services Block Grant (CSBG) Program. OCS based its decision to terminate on its finding that Brownsville had materially failed to meet the terms and conditions of the grant award.

The record in this case consists of the parties' briefs and evidentiary submissions. Based on the analysis below, we sustain the OCS decision to terminate the grant.


I. Statute and Regulations

The Secretary is authorized to employ a competitive process to make grants to private, nonprofit, community development corporations in order --

to provide technical and financial assistance for economic development activities designed to address the economic needs of low-income individuals and families by creating employment and business development opportunities.

42 U.S.C. § 9921(a)(2).

Pursuant to this authority, the Secretary annually publishes a Program Announcement soliciting grant applications.

CSBG awards are subject to the provisions of 45 C.F.R. Part 74. See OCS Ex. J; Brownsville Ex. 2. The regulation at 45 C.F.R. § 74.61(a)(1) provides that awards may be terminated in whole or part, without the consent of the grant recipient, by the "awarding agency, if a recipient materially fails to comply with the terms and conditions of an award". See also 45 C.F.R. § 74.62(a)(3). Under 45 C.F.R. § 74.62(a), the "terms and conditions" may be stated in a "Federal statute or regulation, an assurance, an application, or a notice of award."

II. The Program Announcement

Based on a June 20, 2000 Program Announcement (Announcement) (65 Fed. Reg. 38,336), Brownsville applied for a CSBG. The Announcement provided that grants were to be awarded "to encourage . . . projects intended to provide employment and business opportunities for low-income people through business, physical or commercial development." Id. at 38,340. Brownsville's grant was awarded under Sub-Priority Area 1.1 of the Announcement which provided funding -

for specific projects . . . [which required] the submission of business plans or work plans, where applicable, that meet the test of economic feasibility.


Applicants for funding under this Sub-Priority Area who proposed to use some or all of their OCS funding to enter into third party agreements in order to make an equity investment or loan to an organization or business entity were required to include in their business application their business plan as well as a copy of the signed third party agreement for approval by OCS.

The Announcement required that, at a minimum, third party agreements covering an equity investment contain -
1) The type of equity transaction; 2) Purpose(s) for which the equity investment is being made; 3) Cost per share; 4) Number of shares being purchased; 5) Percentage of ownership of the business; and 6) Number of seats on the Board, if applicable. Id. at 38,338.

Further, the Announcement required that, at a minimum, third party agreements covering a loan transaction contain - 1) Purpose(s) for which the loan is being made; 2) Rates of interest and other fees; 3) Terms of loan; 4) Repayment schedules; 5) Collateral security. 65 Fed. Reg. 38,338. The Announcement continued:

. . . If a signed third party agreement is not available when the application is submitted, the applicant must submit as part of the narrative as much of the above-mentioned information as possible in order to enable reviewers to evaluate the proposal. . . . [The] portion of a grant, which will be used to fund a third party agreement, will not be released until the agreement has been approved by OCS.

Id. at 38,339.

Additionally, the Announcement set out other application requirements and selection criteria. As pertinent here, grant applications were to contain full and accurate descriptions of the proposed use of the requested federal financial assistance. Applicants documenting the value of cash and/or in-kind contributions valued at an amount equal to the OCS funds requested were to receive a maximum number of points under the review criterion. Cash resources (i.e., cash or loans contributed to the project) were required to be documented by letters of commitment from the third parties making the contributions and third-party, in-kind contributions (e.g., equipment or real property) were required to be documented by an inventory in the case of equipment and a deed or other legal document for real property. Moreover, the Announcement provided specifically that "[f]uture or projected program income such as gross or net profits from the project or business operations will not be recognized as mobilized or contributed resources." 65 Fed. Reg. at 38,344-45.

III. Brownsville's Grant Application

In its October 20, 2000 grant application, Brownsville described itself as an organization which, for the previous 30 years, had spearheaded community initiatives in the areas of education, economic development and anti-poverty. Brownsville also referenced at least one community health service initiative. (1) Brownsville indicated that the grant would assist in the formation of Brooklyn Cabling, LLC (Brooklyn Cabling). Brooklyn Cabling would install fiber optic cables for telecommunication and computer systems and would "provide significant employment opportunities to residents of the Brownsville Community." Brooklyn Cabling aimed to provide "livable wages of $42,000 per year" to non-custodial fathers and mothers participating in TANF. (2) Brownsville would own 75% of Brooklyn Cabling. ACF Ex. B at 1-2.

Brownsville admittedly had no experience in either cable installation or the telecommunications industry. Consequently, Brooklyn Cabling would be a joint venture with Thornhill Communications, Inc. (Thornhill), a regional telecommunications firm specializing in designing telephone networks. Generally, Thornhill was to bring its knowledge of the telecommunications industry and expertise in network design to the project. More specifically, Brownsville's application assured OCS that Thornhill would provide Brooklyn Cabling with 85% of its sales in its first year of business. Thornhill would provide Brooklyn Cabling with training and office start-up support. Thornhill would also identify, supervise and continue to train experienced installers. ACF Ex. B at 5, 34, 40, 46, 52 and 138-139.

Describing Brooklyn Cabling's potential, Brownsville indicated that it had -

put together a Development Team that provides us with several advantages over our competition. First, Brooklyn Cabling's relationship with Thornhill provides us with technical expertise and knowledge of the industry. Secondly, our relationship with C-Tech ensures that our employees will have the most-to-date training and expertise. Third, our unique marketing strategy will take advantage of federally funded, New York State funded and New York City funded work with minority-controlled business contractors . . .

* * * *

. . . [Brownsville's] experience in training low-income persons, combined with Thornhill's expertise and C-Tech's classroom curriculum, will enable us to operate a successful cable installation business.

ACF Ex. B at 55.

Brownsville also indicated that it would "match the $500,000 in . . . [grant] funds with $500,000 in cash and credit contributed over the budget period and Thornhill would contribute $16,667 in cash . . . Total leveraged mobilization of resources will be $1,016,667 million." Id. at 61.

In the Narrative Budget Justification accompanying its application, Brownsville indicated that the two partners would invest $516,667 in Brooklyn Cabling. ACF Br. at 4. Brownsville earmarked the expenditure of the $500,000 in grant funds as follows -

. . . $200,000 will be used by . . . [Brownsville] for nonrecurring startup expenses of Brooklyn Cabling, LLC, $50,000 will be used to purchase 75% of the equity of Brooklyn Cabling and $250,000 will be loaned to Brooklyn Cabling through a secured note for the purchase of trucks and equipment . . . Thornhill will purchase the other 25% of Brooklyn Cabling.

ACF Ex. B at 18 and 23.

Brownsville also provided that it would invest $250,000 in Project "Year 1" and $250,000 in "Year 2" to purchase trucks and equipment. Id. at 19-20.

Harvey Lawrence, at that time Brownsville's Executive Vice President, was identified as Brooklyn Cabling's Project Director and the Chair of its Board of Directors. A.J. Ferrari was identified as the President/CEO of Brooklyn Cabling. At this time, Mr. Ferrari was President of Thornhill. The application noted that Mr. Ferrari had over 30 years of experience in the telecommunications industry with Verizon and its various corporate predecessors. ACF Ex. B at 26, 34 and 37.

On August 21, 2001, Brownsville submitted a letter to OCS outlining a revised structure of the Brooklyn Cabling venture to reflect a fully secured loan from Brownsville to Brooklyn Cabling, LLC. A revised term sheet, which was neither dated nor signed, accompanying the letter indicated that -

The ownership of Brooklyn Cabling, LLC will be held by members rather than shareholders. The Members consist of Brownsville . . . as the majority equity-holding member, and Thornhill . . . as a minority-holding member . . .

The requested OCS funds will be used . . . to make a secured $500,000 loan to Brooklyn Cabling, LLC. The proceeds of that loan will be used for the start-up and working capital needs of Brooklyn Cabling.

The loan from . . . [Brownsville] to Brooklyn Cabling, LLC will be for a term of six years at an interest rate of Prime Rate plus 200 basis points for the first three years of the loan . . . .

ACF Ex. C.

IV. The Grant Award

Prior to OCS's decision on the Brownsville grant application, the National Audit Center submitted a memorandum (dated April 13, 2001) to ACF suggesting that Brownsville be placed on the Departmental Alert List (3) and monitored due to identified financial weaknesses. ACF Ex. D. On October 15, 2001, OCS notified Brownsville that it would reserve (i.e., deny) funding due to "substantial doubt about the Corporation's ability to continue as a viable organization." ACF Ex. E. Brownsville sought review of the OCS determination and subsequently addressed OCS's concern about Brownsville's financial viability. See OCS Br. at 8-9; ACF Ex. F.

On March 14, 2002, Brownsville provided OCS with additional information aimed at assisting the application approval process. This documentation included a Memorandum of Understanding (MOU) and letters from prospective minority equity partners and a draft term sheet from a bank outlining possible terms and conditions for a potential $500,000 loan to Brownsville. The first letter from a potential equity partner, dated March 6, 2002, was from Phillip Denny, President of the Denysys Corporation (Denysys). Denysys indicated that it would contribute $20,000 (cash, services and/or equipment) to Brooklyn Cabling in exchange for a 10% interest. An accompanying MOU, dated March 12, 2002, was written on Brownsville letterhead and signed only by Mr. Denny, with no indication of title. The MOU evidenced the parties' intent to form a new entity known as Brooklyn Cabling. Brownsville, either directly or through entities it controlled, would own the controlling interest in Brooklyn Cabling with Denysys a minority partner. The MOU indicated that Denysys would provide training, support the start-up of Brooklyn Cabling's home office, identify installers to be employed by Brooklyn Cabling and provide the same training for Brooklyn Cabling's employees as was available to its own people. ACF Ex. G at 4-7.

A second letter from a potential equity partner, dated March 10, 2002, was from Jerrell Riggins, President and CEO of Telcom Solutions, Inc. The substantive content of this letter and the accompanying MOU were identical to that provided by Denysys. Id. at 6-7.

Additionally, Brownsville provided OCS with a letter from the Banco Popular de Puerto Rico. That letter, apparently in response to an inquiry from Brownsville, provided a preliminary outline of terms and conditions under which the bank "might" consider making a $500,000 loan to Brownsville for what was characterized as expansion. Id. at 8-10.

OCS expressed concerns about Brownsville's March 14th documentation. On April 3, 2002, Brownsville responded with a memorandum from an entity known as the LGR Group "evidencing approval of funding in the amount of $720,000 for the lease of twenty four vans." LGR's approval was subject to finalization of all documents, advance rentals and conditions. ACF Ex. H. at 1-3.

By letter dated August 31, 2002, Brownsville was awarded a $500,000 grant subject to seven special terms and conditions. Brownsville Ex. 2; ACF Ex. J. The special terms and conditions accompanying Brownsville's grant were set out in the notice of grant award and explained in the cover letter as follows:

. . . the documentation you provided shows significant changes with respect to the number of equity partners in Brooklyn Cabling, LLC and a change in the financial arrangements for acquiring vehicles. To assure that the proposed project currently complies with the published program announcement and that the business aspects are still sound and feasible, you are required to submit the following information:

Updated financials and the sources and uses of funds statements consistent with the requirements of Part C of the OCS 2001 Program Announcement, showing the origin and use of all funds expected to be invested in the project. Support designated as in-kind must be assigned a dollar value and the calculations upon which the value is based must also be shown.

Documentation of commitment of all financial support for the Brooklyn Cabling, LLC. These documents should display all terms and conditions.

A draft copy showing the terms and conditions of each third party agreement intended to be entered into by Brooklyn Cabling, LLC or Brownsville CDC regarding Brooklyn Cabling, LLC consistent with the requirements of the OCS 2001 Program Announcement, Part C.

A statement of explanation detailing the reasons for establishing equity partners beyond those identified in the original application.

A statement of explanation detailing the reasons for changing the form of vehicle acquisition from purchase as presented in the original application to lease as presented in your letter to Mr. Thaxton.

A draft copy of each loan to be made or received by Brooklyn Cabling, LLC, including all terms and conditions.

Documentation of substantive contracts in place to support the proposed revenues in the first year for Brooklyn Cabling, LLC.

Brownsville Ex. 2 at 1. Brownsville was to submit this documentation on or before November 1, 2002.

V. Brownsville's Attempt to Satisfy the Grant's Special Terms and Conditions.

On October 4, 2002, Brownsville requested a 30-day extension to provide the information required by the grant's special conditions. ACF Ex. K.

On November 29, 2002, Brownsville submitted additional information to OCS. See ACF Ex. L. At this time, Brownsville notified OCS that Thornhill had decided to pursue other business opportunities and would not be part of the Brooklyn Cabling venture. However, Denysys, a Minnesota corporation, and Telcom, a Massachusetts corporation, were identified as alternative equity partners. See ACF Ex. L at 16 and 18.

In its March 14, 2002 letter to OCS, Brownsville had indicated that Denysys and Telcom would each contribute $20,000 to the project and receive a 10% interest in Brooklyn Cabling. See ACF Ex. G. However, Brownsville's November 29, 2002 submission included a November 26, 2002 letter from Telcom and an undated memorandum from Denysys presenting different investment scenarios for those partners. Telcom's letter indicated that it would have a 5% minority equity position in Brooklyn Cabling. Generally, Telcom described its role as affording technical consultation and subcontract opportunities from $5,000 to $50,000. Further, Telcom would consult and advise on Brooklyn Cabling's back office operation and identify six installers. Denysys would provide management and strategic business consulting services, assist in providing staff and back office expertise and contribute $20,000 in cash or in-kind contributions for an equity position in the venture. In exchange for its service, Denysys would receive "5% equity (ownership)" in the venture as well as management "and strategic consulting fees of $1,200 per/day for an estimate of 3 days per/month." ACF Ex. L at 16-17.

Brownsville's November 29th submission also included a letter from the Action Auto Leasing Corporation (Action Auto) stating that Action Auto had secured $550,000 in vehicle financing for Brownsville. Brownsville offered no explanation for this change and, in fact, referenced the lessors and financiers from its April 3rd submission to OCS at other points in this submission. The Sovereign Bank was identified as the recipient of lease payments. ACF Ex. L at 19 and 25.

Brownsville also submitted a draft third party agreement between Brownsville and Brooklyn Cabling. In that document, Brownsville noted that it would apply $50,000 of the grant funds toward equity investments in Brooklyn Cabling while $250,000 would be available to Brooklyn Cabling as a secured loan. The remaining grant funds ($200,000) would be used for Brooklyn Cabling's start up expenses. The agreement indicated that Harvey Lawrence, Brownsville's Executive Vice President/Chief Operating Officer, would be signing in that capacity for Brownsville and as Chairman for Brooklyn Cabling. The accompanying Sources & Uses Schedule identified the following expenses associated with the Brooklyn Cabling venture: $216,667 in start up expenses; $200,000 in stock; a $100,000 loan to Brooklyn Cabling 2004; and $675,367 for truck lease/purchase. ACF Ex. L at 12, 30, 33-34.

In a February 10, 2003 response to Brownsville, OCS raised several critical issues for which it sought resolution. Citing a potential conflict of interest, OCS questioned Harvey Lawrence's position as signatory for both parties on the draft agreement. Additionally, OCS pointed out that the draft agreement addressed a $50,000 equity investment and $250,000 secured loan to Brooklyn Cabling. However, the Sources & Uses Schedule indicated that $200,000 in grant funds would purchase stock in Brooklyn Cabling, while $100,000 would be used as a loan to Brooklyn Cabling. ACF Ex. M at 1-2, referring to Schedule 8 attached to the November 29, 2002 letter, ACF Ex. L at 12.

OCS questioned the undated agreement with Denysys in which Denysys promised to provide $20,000 in "cash, equipment or in-kind investment in Brooklyn Cabling, Inc." OCS stated that the agreement lacked specificity in regard to the source of the $20,000. OCS cited Denysys' consulting fees, noting that the fees appeared to be an offset for Denysys' $20,000 investment in Brooklyn Cabling. Further, OCS noted that the agreement appeared to commit Mr. Denny personally, rather than the Denysys Corporation. OCS instructed Brownsville to redo the agreement to reflect Denysys corporate commitment. Id. at 2.

Regarding the vehicle lease/purchase, OCS pointed out that the November 29th sources and uses document showed the lease/purchase agreement to be valued at $675,367 over six years, while the accompanying letter from Action Auto indicated that only $550,000 in financing had been secured. OCS requested that the actual lender provide all relevant documentation. ACF Ex. M at 2.

Finally, OCS recounted that Brownsville's original grant application portrayed Thornhill as having substantial experience in the cable system design business in New York and had projected 85% of Brooklyn Cabling's first year revenues to come from Thornhill's business. Given Thornhill's withdrawal from the project, OCS determined that Brownsville had failed to demonstrate solid contract commitments. Id.

Responding on February 13, 2003, Brownsville provided numerous documents including resolutions from its Board, a revised sources and uses statement and an updated letter from Denysys. Although required by OCS, Brownsville did not provide signed contracts documenting the acquisition of business. Brownsville expressed confidence in the success of its venture with its new equity partners (Denysys and Telcom) and warned OCS that it could not accept any further constraints or contingencies on the release of the grant funds that would impair its ability to act. OCS Br. at 18 (citing Brownsville Exs. 2 and 3).

Brownsville's February 13th submission included a new version of the third party agreement between Brownsville and Brooklyn Cabling. This version called for the signatures of Maurice A. Reid as President and Chief Executive Office of Brownsville (instead of Mr. Lawrence) and Mr. Lawrence as Chairman of Brooklyn Cabling. However, this version was not signed. Brownsville also provided two unsigned and undated resolutions from its Board authorizing Mr. Lawrence and Mr. Reid to act on behalf of the respective parties. Brownsville Ex. 3 at Appendix A and ACF Ex. N.

Brownsville's February 13, 2003 submission also included a February 16, 2003 letter from Philip Denny, President of Denysys, to Mr. Lawrence. (4) There, Denysys indicated it would provide Brooklyn Cabling staff with strategic management and direction, assist in setting up back office operations, invest $20,000 of in-kind services, provide experienced installers on a temporary basis and provide sales leads. In return Denysys was to receive a 5% equity interest in Brooklyn Cabling, to vest within one year of the date of the agreement and a consulting service fee of $1,000/day capped at no more than 3 days per month. The letter also noted that Denysys' investment in Brooklyn Cabling was arrived at through a reduction in its $1,750 standard daily consulting fee. The $750 reduction would be applied to Denysys's in-kind investment. In this documentation Denysys and Brooklyn Cabling failed to respond to an earlier OCS inquiry regarding the period of time over which Denysys would be providing consulting services. ACF Exs. L at 17; M at 2 and Brownsville Ex. 3, at 9(unnumbered).

Brownsville also provided a letter from Action Auto confirming that Action Auto would provide 24 Ford Cargo vans to Brooklyn Cabling at a cost not to exceed $574,000 with a $1 buyout at the end of the lease. (5) The letter did not explain the new lease amount. Additionally, Brownsville did not explain what had become of Banco Popular de Puerto Rico, LGR Group, World Capital, Inc. or Sovereign Bank, all of whom had been referenced in prior correspondence between Brownsville and OCS (between March 14, 2002 and November 29, 2002) as participants in various financing scenarios with Brooklyn Cabling. Brownsville also failed to provide documentation from a lender showing actual loan terms and conditions, as OCS had requested. OCS Br. at 20 (citing ACF Exs. G at 9-10; H at 1-3; L at 25; M at 2 and N at 3).

On April 14 and 16, 2003, Brownsville provided executed Board resolutions appointing Mr. Lawrence as Chairman of Brooklyn Cabling and authorizing Mr. Reid to execute legally binding documents on behalf of Brownsville in connection with the Brooklyn Cabling venture. However, the third party agreement remained unsigned. OCS Br. at 20 (citing ACF Ex. O and Brownsville Ex. 3 at 5-6).

VI. Termination of Brownsville's Grant

OCS terminated Brownsville's grant by letter dated April 22, 2003. There, OCS noted that the third party agreement between Brownsville and Brooklyn Cabling had not reconciled the loan amount from Brownsville. See OCS Termination Letter at Par. A.

OCS then questioned the agreement between Brownsville and Denysys. Based on Brownsville's documentation, OCS determined that - 1) Denysys was receiving its equity position in Brooklyn Cabling without cost; 2) Denysys was slated to receive monthly cash payments for an undisclosed period of time and 3) the sources and use statement showing a Denysys equity investment of $16,667 was inconsistent with Denysys' allegation of a $20,000 investment. See OCS Termination Letter at Par. B.

OCS also questioned Brownsville's financing arrangement for the vehicles to be used by Brooklyn Cabling. OCS noted that, at a minimum, Brownsville's financial arrangements were not clear and that it was not evident that the unsigned agreement between Brownsville and Action Auto constituted a valid contract. Thus, OCS concluded that the grant funds were the only viable funding to finance the vehicles. Specifically, OCS asserted that in -

the absence of a declaration by Action Auto that they are in fact the financiers of the leases, coupled with the prior and present references to the bank, we must conclude that either standard financing does not exist or the actual financier has not been disclosed. [Brownsville's] . . . letter describes those amounts above the $574,000 stated by Action Auto as "payment expenses funded by operating proceeds." These dollars are earned income, or in this instance, program income. In fact, according to the pro forma and financial statements, nearly all the payment for the leases is expected to come from this source. The use of projected program income as documentation of additional financing is not acceptable in accordance with OCS Program Announcement No. OCS-2002-10, Part E, Criterion V, which states, "Anticipated or projected program income such as gross or net profits from the project or business operations will not be recognized as mobilized or contributed resources."

See OCS Termination Letter at Para. C.

Assessing Brownsville's Business Plan, OCS determined that the information provided by Brownsville failed -

to provide any substantive data such as letters of intent, purchase orders, contracts, contract negotiation, client market data, industry surveys and historical past or present clients of the partners. There is also no substantive plan or blue print for soliciting clients. The potential partners, both located out of state and a substantial distance from Brooklyn Cabling's target area, do not present anything that describes a New York market penetration or even knowledge of the New York market. There is no evidence that the loss of the 85% revenue expected from the first partner has been back filled.

See OCS Termination Letter at Para. D.

Parties' Arguments

On appeal, Brownsville defended the validity of its Third Party Agreements. Brownsville recounted the purported substance of a May 1, 2003 conference call with OCS which, it indicated, was aimed at resolving this dispute. There, Brownsville alleged that the OCS Project Manager confirmed that the required revisions to the Third Party Agreements had been included in Brownsville's February 13, 2003 submission, but had been overlooked by OCS. According to Brownsville, the Project Manager indicated that OCS did not consider the Agreements because they were not signed. Brownsville alleged that in the call it had indicated to OCS that it could provide signed Agreements the next day. Brownsville also alleged that the OCS Project Manager had overlooked the Sources and Uses Statement included in the February 13, 2003 submission. Further, Brownsville alleged that in the call, OCS conceded that there were no inconsistencies in the various documents pertaining to a loan between Brownsville and Brooklyn Cabling. Brownsville Br. at 1-2.

Brownsville attributed Thornhill's withdrawal from the grant project to the fact that "OCS erroneously advised us that our application would not be funded." Id. at 2. Brownsville asserted that the two replacement equity partners, Denysys and Telcom, represented a "better deal" for Brooklyn Cabling. Brownsville indicated that these two partners would receive 5% interests in exchange for $20,000 contributions. Brownsville maintained that this represented an increase of total partnership equity contributions with a reduction in partnership equity interests from the original grant proposal. Id.

Regarding the vehicle leasing for Brooklyn Cabling, Brownsville stated that it had a firm commitment from Action Auto for a lease/purchase of 24 vehicles at a total cost not to exceed $574,000. Again, Brownsville asserted that OCS was well aware of the parameters of this agreement as early as November 29, 2002. Brownsville also contended that OCS "had verbal confirmation" of the lease agreement on April 18, 2003. Brownsville contended, however, that OCS did not raise objections to the current vehicle lease financing structure until April 22 and May 1, 2003. Brownsville also questioned OCS's refusal to accept the concept that businesses use sales revenues to pay business expenses, that is, that Brownsville would be treating the lease payments as costs of goods sold. Brownsville Br. at 2-3.

Finally, Brownsville asserted that the May 1, 2003 conference call was the first time OCS had "conditioned the termination of the grant award on the absence of signed contracts." Brownsville Br. at 3. Brownsville argued that neither the grant application nor subsequent OCS correspondence had conditioned the grant award on the existence of sales contracts or indicated that such contracts were necessary "to forestall a pre-emptive termination." Brownsville Br. at 3. Brownsville maintained that its original business plan provided letters from potential clients "indicating that they would welcome an opportunity to use Brooklyn Cabling . . ." Brownsville Br. at 3. Brownsville noted that its original submission was supported by extensive market research and contended that it retained confidence in the viability of its proposed enterprise. Brownsville argued that it was "disingenuous of OCS to now mandate sales contracts as a condition of funding, or for the retention of the grant award when in fact OCS's 30 months of errors, inactions, delays and missteps served to undermine any potential sales or contractual opportunities." Id.

In response, OCS argued generally that termination of Brownsville's grant was reasonable and supported by substantial evidence. OCS asserted that Brownsville was unable to conduct the funded project as described in its grant application. Additionally, OCS contended that Brownsville was unable to adequately respond to or comply with the grant's terms and conditions. OCS Br. at 22.


The applicable regulations provide that a grant award may be terminated if the recipient materially fails to comply with the terms and conditions of the award, including terms and conditions in an application or a notice of award. 45 C.F.R. §§ 74.61(a)(1) and 74.62(a). By accepting the grant, Brownsville agreed to comply with the representations in its grant application as well as all special terms and conditions in the notice of award.

The current version of Brownsville's proposed joint venture product has evolved considerably from that described in the grant application and funded by the award. OCS asserted, with support in the record, that Brownsville was unable to demonstrate that the project is still in accord with the representations in the grant application and that it represents a sound and feasible business. As OCS noted, in spite of numerous requests, Brownsville failed to provide a clear and consistent description regarding the use of grant funds or the conduct of the project.

Brownsville's arguments on appeal focus on the purported content of the May 1, 2003 conference call between itself and OCS from which it intimates that the termination was not warranted. Brownsville alleged that an OCS official admitted during that call that he had previously "overlooked" what Brownsville generally characterized as a valid third agreement between itself and Brooklyn Cabling. Brownsville also deduced that this official had overlooked Sources and Uses of Funds Statements which "were consistent with the loan amount" from Brownsville to Brooklyn Cabling. Brownsville Br. at 2. Brownsville's assertions regarding the substance of that call may be correct since it appears that Brownsville did correct the Sources and Uses of Funds Statement (Schedule 8) to show $250,000 in loans to Brooklyn Cabling (rather than $200,000 in stock and a $100,000 loan) as shown in Schedule 8 in the November 29, 2002 submission. Even disregarding these issues, however, there is ample evidence in the record to support the OCS decision to terminate the grant.

From the date of its grant application, October 20, 2000, through the award process and up to the grant termination on April 22, 2003, Brownsville failed to make any viable progress toward the stated grant purpose. Instead, as evidenced by the record, Brownsville continually altered elements of the original grant application, adding and removing equity partners, shifting the stated participation and grant-related obligations of those potential partners, and continually reinventing the financing for vehicles necessary to the furtherance of the grant purpose.

Moreover, Brownsville failed to comply with virtually all of the special terms and conditions governing the grant. As noted above, in sections III through V of the Background, over its course of dealings with OCS, Brownsville consistently failed to provide OCS with updated financials and use of funds statements to document commitment of all financial support for Brooklyn Cabling. For example, the grant award notice clearly required that the statements must be consistent with the Program Announcement and that support designated as in-kind "must be assigned a dollar value and the calculations upon which the value is based must also be shown." Brownsville Ex. 2, at 1. The Program Announcement required that in-kind contributions be documented. 65 Fed. Reg. at 38,345. While Brownsville ultimately provided a letter from Denysys stating that the contribution from Denysys would be in-kind services in the form of a reduction in consulting fees from $1,750 to $1,000 per day, Brownsville provided no documentation that the $1,750 per day was in fact the value of the services. Not only does this amount seem excessive on its face, but the changes from the original Denysys statement raise more questions than they answer. Specifically, the valuation is called into doubt since the payment for services was originally set at $1,200 per day rather than $1,000, and the supposed commitment to contribute $20,000 of in-kind services by the time the 5% equity would vest (within one year) is undercut by the change in wording of how often per month the services would be provided.

In addition, Brownsville did not explain satisfactorily why it was treating the Truck Lease/Purchase as a contribution of funds to Brooklyn Cabling in the form of a loan. By identifying "Truck/Lease Purchase" as a source of $675,367 in funds and referring to an interest rate of 8% in connection with the transaction, Brownsville was implying that it had a commitment for a loan in the amount of $675,367. Brownsville Ex. 3, Appendix A, Schedule 8. Moreover, the cash flow statement submitted on February 13, 2003, shows "Truck Lease/Purchase" both as a source of $637,449 in cash in the first year and as an expense in that amount in the first year. Id. The Action Auto letters, however, indicated that the loan commitment was at most for $550,000 to $574,000. (6) Brownsville Ex. 7 at Appendix C to Brownsville's February 13, 2003 letter to OCS. Brownsville stated in its February 13, 2003 cover letter that the "difference between the "550,000 and the $675,367 contained in the sources and uses statement reflects the portion of the lease payment expenses funded from operating proceeds." Brownsville Ex. 3, at 1 (unnumbered page). Brownsville also provided a detailed schedule for the lease/purchase agreement. Brownsville Ex. 3 (Schedule 10). The schedule explains some of the differences in the figures, but also raises questions which Brownsville did not address. First, the schedule indicates that for each vehicle Brooklyn Cabling would make an "initial payment" of $1,222.18 that would include the per month amount of $598.18 plus a $295 bank fee and charges for documents and the Department of Motor Vehicles. The total for the monthly payments and the initial payments over a period of six years is shown as $675,366.72. This total appears to include interest payments since the per month amount of $598.18 times the 48 months for which payment was required for each vehicle totals more than the cost per vehicle given by Action Auto ($28,712.64 compared to $23,290). Given the lack of specific information about the financing terms, however, it is impossible to determine whether this interest amount tracks with the interest rate of 8% given in the Action Auto letter, nor is it clear whether the $295 bank fee for each vehicle is in addition to, or included in, the 8%. Also, the charging of a bank fee for each vehicle and the fact that the vehicles were being leased on a staggered basis (one per month for a total of 24 months) indicates that the arrangement was not for one loan to be made in a lump sum in the first year, but for a separate loan for each vehicle as added to the fleet.

Second, the schedule shows the $637,449 amount as the remaining amount due under the lease/purchase agreement at the end of the first year (after total payments of $37,917.72). Brownsville's identification of this amount on the cash flow statement as the amount from a cash "source" is inexplicable. For one thing, that amount included amounts for interest/bank fees which would not be covered by any loan amount.

Finally, even assuming that the agreement with Action Auto could be treated as a commitment on its part to provide or obtain loans for Brooklyn Cabling up to $574,000, it is not reasonable to treat it as source of an additional amount of contributed funds up to $675,367 in the first year.

With respect to the third party agreements on equity investments, we find that they did not provide information consistent with the Program Announcement as required. For example, the Program Announcement required that the agreement identify the cost per share and number of shares being purchased. The third party agreements Brownsville provided do not show this information. The documents indicate Brownsville would get a 75% interest for purchasing stock worth $50,000 (and paying startup expenses of $200,000), and its partners Denysys and Telcom would each get 10% (subsequently lowered to 5%) for an investment of $20,000 each. This does not make sense, nor does this information track with Schedule 8 in Brownsville Exhibit 3. That schedule shows $50,000 of stock (presumably the stock held by Brownsville) and an additional $16,667 in stock. (7)

Brownsville argued that it was disingenuous of OCS to premise termination of the award on the absence of signed sales contracts. Brownsville asserted that:

Neither the initial application nor any subsequent correspondence from OCS prior to the [May 1, 2003] conference call ever mandated the existence of sales contracts as a condition of the initial grant award, or that contracts were necessary to forestall a pre-emptive termination of the award. Our original business plan submitted October 19, 2000 provided letters from potential clients indicating that they would welcome an opportunity to use Brooklyn Cabling for their cabling needs.

Brownsville Br. at 3.

There is no merit to Brownsville's assertion that it was unaware, prior to the May 1, 2003 conference call of the need to have contracts in place. The terms and conditions affixed to the notice of grant award and the cover letter both included a requirement for documentation of substantive contracts in place to support Brooklyn Cabling's proposed first year revenues. Moreover, Brownsville was admittedly inexperienced in the cable installation industry. Thus, Thornhill's initial inclusion as an equity partner was obviously a key element in the project's viability. For a 25% equity position in Brooklyn Cabling, Thornhill was to provide cash and general business expertise and its President was to act as Brooklyn Cabling's President and CEO. Additionally, as a New York based company, Thornhill committed to provide 85% of Brooklyn Cabling's sales in its first year of operation. It appears that, well after receiving the grant, Brownsville notified OCS that Thornhill had withdrawn from the project. (8) Thornhill was to be replaced by Denysys and Telcom, who had been brought into the project at some point after Brownsville had been put on the Departmental Alert List and its grant application initially was denied, but before the grant was ultimately awarded. Moreover, there is no support in the record for Brownsville's assertion that the inclusion of Denysys and Telcom, instead of Thornhill, is a "better deal" for Brooklyn Cabling (and, presumably, for the grant as a whole). As evident from the record, in spite of ample opportunity to do so, Brownsville was unable to provide a single clear explanation of the roles these two entities (Denysys and Telcom) were to play in the project. See e.g., ACF Exs. G, L, M & N; Brownsville's Exs. 2 and 3. Moreover, while Brownsville asserted that it had commitments of subcontractors for these parties, the only mention of an intent to subcontract is in Telecom's reference to "subcontract opportunities in the New York footprint from $5,000 to $500,000." ACF Ex. L at 16.

In the application process, Thornhill had been presented to OCS as a "regional telecommunications firm specializing in designing telephone networks." Critically, "Thornhill would provide Brooklyn Cabling with 85% of its sales in its first year of business." That potential business opportunity was lost when Thornhill withdrew. Neither Denysys nor Telcom were based in New York and there was no evidence that either promised to Brooklyn Cabling the same stream of business as had been attributed to Thornhill in the grant application.

As OCS noted, upon Thornhill's withdrawal from the project, Brownsville could not demonstrate the solid job or contract commitments required by OCS. Nothing in the documentation provided by Brownsville to support the inclusion of Telcom and Denysys as equity partners satisfies this condition. Finally, even if OCS's actions contributed to Brownsville's difficulties, the record provides ample evidence of the delays caused by Brownsville's own failures to timely provide required documentation.


The record fully substantiates OCS's determination that Brownsville materially failed to comply with the grant terms and conditions. Accordingly, we sustain the OCS determination to terminate Brownsville's grant.


Cecilia Sparks Ford

Donald F. Garrett

Judith A. Ballard
Presiding Board Member


1. Based on its Certificate of Incorporation, Brownsville was formed to "own and operate a diagnostic treatment center pursuant to Article 28 of the Public Health Law . . . ." ACF Ex. B at 112.

2. Temporary Assistance for Needy Families.

3. The Departmental Alert List is maintained by the Department of Health and Human Services (HHS) and serves "to notify all HHS awarding offices of entities considered high risk/special award conditions by one or more awarding offices and/or those for which the Office of Inspector General . . . has issued an Alert." See HHS Transmittal 99.04, Grant Policy Directive 2.01, ¶B.2. ( (This link no longer functions.)

4. OCS indicated that there was no explanation from Brownsville why the letter from Denysys was dated three days after the date on the Brownsville letter forwarding it to OCS. See OCS Br. at 19, n.6.

5. This letter was dated February 14, 2003, the day after the February 13th letter transmitting it to OCS.

6. The letter from Action Auto, contained in Brownsville's February 13, 2003 submission, stated that the total price per vehicle could vary by up to $100 per vehicle, but this would add at most $2,400 to the total cost for the 24 vehicles, not $24,000 ($574,000 - $550,000). We note, moreover, that the letter's "terms" show the total vehicle cost as "$23,290 +/- $200," rather than +/- $100. Brownsville Ex. 3, at 11 (unnumbered).

7. We note that 1) $16,667 is the amount of cash Thornhill had originally committed to contributing and 2) while Brownsville had explained that some of the equity would go to the employees of Brooklyn Cabling, it never identified what amount of stock would be held for that purpose.

8. OCS argued that it first learned of Thornhill's withdrawal from the project in Brownsville's November 29, 2002 letter. OCS Br. at 25; ACF Ex. L. Brownsville did not timely submit a reply brief and, therefore, did not deny this assertion (which is consistent with the documents in the record).