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CASE | DECISION | ANALYSIS | JUDGE | FOOTNOTES

Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
IN THE CASE OF  


SUBJECT: Brown Magnolia Community
Development Corporation


DATE: April 16, 2004
 


 

Docket No. A-03-9
Decision No. 1917
DECISION
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DECISION

Brown Magnolia Community Development Corporation (Brown Magnolia) appealed the September 26, 2002 determination by the Administration for Children and Families (ACF or Agency) disallowing $196,363.17 in costs claimed under a community services grant awarded by the Office of Community Services (OCS) pursuant to the Urban and Rural Economic Development Act.

In taking this disallowance, ACF found that Brown Magnolia changed the scope of its grant project and used grant funds authorized for equipment, supplies and personnel for the purchase of real property. ACF disallowed the cost of the purchase of the real property on the ground that Brown Magnolia failed to obtain prior written approval from OCS (the operating division within ACF making the grant award) before making budget and program plan revisions, as required by 45 C.F.R. § 74.25(b) and (c)(1) and (4). ACF also asserted that Brown Magnolia violated a condition of the grant award by spending grant funds in excess of a specified $100,000 limit without first having an approved third party agreement.

As discussed in detail below, we conclude that Brown Magnolia timely requested prior approval from OCS to purchase the real property and that a congratulatory e-mail letter dated March 10, 2000 from the Director of OCS after the purchase was completed may properly be considered to be written approval of Brown Magnolia's request. We further conclude that ACF waived Brown Magnolia's earlier non-compliance with grant terms limiting its expenditures when ACF approved a third party agreement in September 2000. Accordingly, we reverse the disallowance.

Legal Background

The Community Services Block Grant Act authorizes OCS to award and administer grants under the Urban and Rural Economic Development Act. 42 U.S.C. § 9921(a)(2)(A). (1) These grants are intended to alleviate the causes of poverty in distressed communities by creating employment and business development opportunities. Id. The administrative requirements governing the grants are located at 45 C.F.R. Part 74. A grantee is required to "request prior approvals for budget and program plan revisions" in accordance with 45 C.F.R. § 74.25. Pursuant to section 74.25(c):

For non-construction awards, recipients shall obtain prior approvals from the HHS awarding agency for one or more of the following program or budget related reasons.
(1) Change in the scope or the objective of the project or program (even if there is no associated budget revision requiring prior approval)

* * * *

(4) The need for additional federal funding.

"Prior approval" means "written approval by an authorized HHS official evidencing prior consent." 45 C.F.R. § 74.2. Section 74.25(k) specifies that the Head of the HHS Operating Division that made the award is authorized to grant the approval. Brown Magnolia's financial assistance award states that the "awarding office" for this grant was "OCS" and "Donald Sykes, Director, OCS" signed as the approving "Program Official." Thus, under section 74.25(k) an authorized HHS official would include the Director of OCS.

The regulation at 45 C.F.R. § 74.25(i) further provides:

Within 30 calendar days from the date of the receipt of the request for budget revisions, HHS awarding agencies shall notify the recipient whether its requested budget revisions have been approved. If the requested revision is still under consideration at the end of 30 calendar days, the HHS awarding agency must inform the recipient in writing of the date when the recipient may expect a decision.

ACF's Grants Administration Manual (GAM) on post-award changes also provides that "programmatic changes require prior approval." (2) ACF Ex. 17, GAM § 3.10.406 A. Retroactive approval is permitted "in exceptional cases" where:

1. The transaction would have been approved had the approval been requested in advance, and
2. The grantee agrees to institute controls to ensure that prior approval requirements are met in the future.

GAM § 3.10.403 B.

Factual Background

OCS announced the availability of grant awards under the Urban and Rural Economic Development Act on February 24, 1999. ACF Ex. 1. Brown Magnolia submitted an application and on September 15, 1999 was awarded a $350,000 grant to implement a business expansion project producing highway safety products which would employ low income residents. Brown Magnolia Ex. A, ACF Ex. 3. The approved budget included expenses for personnel, equipment and supplies. As part of Brown Magnolia's application, the mayor of Marianna, Arkansas, where the project was to be located, committed to donating both a building and surrounding land for the project. ACF Ex. 1.

Shortly after the grant was awarded, it became apparent that the City of Marianna would not keep its commitment to donate property to Brown Magnolia. Carolyn Elliot, the Executive Director of Brown Magnolia, realized the need to purchase a building to meet grant objectives. Ms. Elliot discussed the situation with Donald Sykes, the Director of OCS, and began a series of communications with OCS staff. Brown Magnolia Ex. B, C and C2. On January 13, 2000, Ms. Elliot sent an e-mail to Mr. Sykes advising him that she had met with an employee at USDA and "told her about the building situation" in the hopes of receiving some alternate finding from USDA. Brown Magnolia Ex. D. On January 22, 2000 Ms. Elliot advised Mr. Sykes that "we will be in business February 16, 2000. That is the day that I can buy the building." Brown Magnolia Ex. D1.

On January 31, 2000, Ms. Elliot both e-mailed and sent a letter to Mr. Sykes, requesting prior approval to purchase a building. Brown Magnolia Ex. E. In those communications, she summarized the developments and provided details about the proposed property purchase. Ms. Elliott stated that she could not start program operations and meet grant objectives until an appropriate building was available and advised OCS that the new building prospect would become available for purchase on February 16, 2000. Id. OCS ultimately treated the foregoing correspondence as a request for prior approval to purchase a building. OCS here alleged that it did not respond to this request until October 2001. ACF Ex. 15.

On February 16, 2000, Brown Magnolia purchased the building referenced in the correspondence with OCS grant funds. Two checks were drawn from the grantee's account; one for $20,000 was written on February 16, the other for $176,363.17 was written when title to the property was transferred nine days later on February 25, 2000. ACF Ex. 8. On March 10, 2000, Mr. Sykes sent an e-mail congratulating Brown Magnolia on "successfully acquiring the building." Brown Magnolia Ex. K.

During July 2000, the DHHS Office of Inspector General (OIG) began an audit investigation of a complaint that Brown Magnolia had misused government monies for its grant. After a site visit by OIG auditors on September 15-16, 2000 and in a final report issued on April 2001, the OIG found that the allegations of the complaint could not be verified. "Review of Allegations of Misuse of Grant Funds by Brown Magnolia Development Corp.," A-12-00-00012 (OIG Audit Report). (3)

According to Brown Magnolia, the Office of Grants Management (OGM) within ACF took over the responsibility for administering Brown Magnolia's grant project in August 2000. Brown Magnolia Exs R, CC. Once this happened, Brown Magnolia said, it was unable to obtain financing from any type of organization or source. Brown Magnolia Exs. R, R1.

On September 15, 2000, Maiso Bryant, the Director of OGM, sent a letter to Ms. Elliott stating:

This is to clarify my verbal instructions to you regarding the unapproved purchase of real property with grant funds and your actions, which led to the real property title being held in the name of an organization other than The Brown Magnolia. You are to immediately transfer title to the property in the name of The Brown Magnolia.

ACF Ex. 12. The letter also required Brown Magnolia to file and record a federal interest in the property. Id. Brown Magnolia complied with these requests and a notice of record protecting the federal interest was dated September 15, 2000. ACF Ex. 14.

In a letter dated September 16, 2000, Brown Magnolia requested that OCS waive "any acts that may be perceived as not meeting regulations." ACF Ex. 13. ACF did not respond to this request until October 2001.

The Deputy Director of OCS provided a written response to Brown Magnolia's February 1, 2000 request for budget modification on October 13, 2001. ACF Ex. 15. OCS stated that it accepted Brown Magnolia's request (dated January 31, 2000) as one for prior approval of a "budget change" to purchase a building between February 16 and 25, 2000. Id.; see also Brown Magnolia Ex. E and ACF Br. at 3. OCS apologized for the delay in responding, stating that it was "prudent to reserve comment until the DHHS Inspector General's office concluded its review and rendered its report." ACF Ex. 15. OCS stated that it denied Brown Magnolia's request to purchase a building with grant funds because Brown Magnolia did not specify how it would obtain equipment necessary to fund the project. OCS further stated that OCS:

is precluded from retroactively approving your request for a budget revision to purchase a building, due to the fact that the reprogramming of your award will cause a need for additional Federal funding to implement the project.

OCS concluded by advising Brown Magnolia that it "is officially notified that it must follow the originally approved line item budget." ACF Ex. 15. OCS also denied Brown Magnolia's request for waiver of any regulatory violation it may have made. ACF Exs. 15 and 13.

OCS advised Brown Magnolia on September 26, 2002 that it was disallowing the $196,363.17 used to purchase the building because Brown Magnolia changed the scope of the project without obtaining prior approval and because it did not comply with the grant term limiting expenditure of any grant funds to a ceiling of $100,000 in the absence of an approved third party agreement.

ANALYSIS
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1. The Director of OCS' congratulatory e-mail letter dated March 10, 2000 properly may be considered to be a "written approval by an authorized HHS official evidencing prior consent" for Brown Magnolia's building acquisition within the meaning of 45 C.F.R. § 74.2.

After losing the building it originally expected would be donated to this project, Brown Magnolia immediately sought to procure new space to house its program operations and within a few months sought to purchase a building that met its specifications. Thus, Brown Magnolia was required to obtain prior approval from the HHS awarding agency (OCS) because the purchase of a building would be a change in the scope of its project and because the purchase might potentially cause Brown Magnolia to require additional federal funding. 45 C.F.R. § 74.25(c). "Prior approval" as used in the regulation was specifically defined as "written approval by an authorized HHS official evidencing prior consent." 45 C.F.R. § 74.2. Furthermore, the regulations provide that an HHS awarding agency has no more than 30 calendar days to respond to a request for prior approval or to notify the grantee in writing when it may expect a decision. 45 C.F.R. § 74.25(i).

Here, Brown Magnolia made a formal written request for prior approval to use grant funds to purchase a building in correspondence dated January 31, 2000 to Donald Sykes, who was then the Director of OCS. Donald Sykes was also listed as the "Program Official" for this particular grant in Brown Magnolia's award notice. ACF Ex. 3, line 29. Thus, pursuant to section 74.25(i), this HHS official (or another authorized official) had until March 1, 2000 to either issue a response or notify Brown Magnolia when it could expect a decision. There is no evidence in the record that Donald Sykes or any other official sent a response in writing to Brown Magnolia within the time frame required by the regulation. However, on March 10, 2000, Mr. Sykes sent a congratulatory e-mail to Brown Magnolia after he learned that it had successfully acquired a new building. The entire e-mail read as follows:

I understand from Wilbor that you successfully acquired the building. How many successes do you need this year? Congratulations!!!!

I'm coming to Baton Rouge for Dr. Fluker's Mid-South meeting in early April will you be there?

Brown Magnolia Ex. K.

Under the particular circumstances of this case, we find that this written response is properly construed as a "written approval by an authorized HHS official evidencing prior consent" within the meaning of section 74.2.

This highly congratulatory communication notifies Brown Magnolia that the OCS Director to whom the requested approval had been addressed approved of the acquisition of the building. It indicates that the Director knew of the completed purchase and suggests by the simple reference to "the building" that he was previously aware of the building and the circumstances surrounding Brown Magnolia's attempts to acquire it. This e-mail also suggests that he "consented" to Brown Magnolia's efforts to acquire the building. Certainly, if he had not viewed Brown Magnolia's efforts to acquire the building favorably and had not "consented" to them when he learned that Brown Magnolia was attempting to acquire the building, he would hardly send such a congratulatory communication as soon as he learned that the acquisition had been completed. Moreover, if he had concluded that there were any approval issues outstanding, he presumably would have notified Brown Magnolia at this time that the purchase was unauthorized and unapproved. Clearly, if the OCS Director had any misgivings about the acquisition of this building, it would have been highly misleading to Brown Magnolia to speak of the acquisition in such laudatory terms, and then fail to make reference to the factors that might undercut what would appear to have been an unqualified approval. Indeed, the regulation required this official to indicate when a decision would be forthcoming in the event that this laudatory communication was not intended to be an approval.

In addition to the wording of the congratulatory communication from Donald Sykes, numerous additional factors support viewing this communication as "written approval. . .evidencing prior consent":

• Not only was Donald Sykes an authorized approving official for the requested change and the "program official" for this grantee, he was also one of the program officials who had been specifically notified of the critical circumstances surrounding the need for and the purchase of the building as well as the related funding issues. In addition to the request for approval addressed to him dated January 31, 2000, the record includes two e-mails to him concerning the possible need for additional HHS and USDA funding to cover the cost of the building (dated January 13 and 22, 2000). The second e-mail also apprised Mr. Sykes that the date for the completed acquisition of the building was February 16, 2000. (4)

• As an authorized approving official for Brown Magnolia's request, Donald Sykes could reasonably be expected to provide testimonial or documentary evidence concerning whether approval was granted on March 10, 2000. Nevertheless, ACF failed to procure testimonial or documentary evidence from Mr. Sykes; instead, ACF asserted merely that he had left federal employment. This factor alone would not be a barrier to Mr. Sykes clarifying the approval actions he took prior to and during the 30-day regulatory deadline and in his congratulatory e-mail on March 10, 2000. ACF was required to respond in 30 calendar days or notify this grantee when it might expect a decision. Under these circumstances, it was incumbent on ACF to find out what approval actions were taken during the regulatory time frame and thereafter. ACF's responsibility did not first arise with the issuance of this disallowance several years thereafter (when this individual had already left federal employment) but rather on the day that a formal written request for approval was submitted to it and for the intervening period until a decision had actually been made.

• Here, a Department regulation imposes a process for approving requests for prior approval. Presuming that the agency acted in accordance with that regulatory mandate is consistent with general principles presuming regularity in administrative actions. To disregard contemporaneous communications from an authorized federal official in order to affirm the later disapproval would require us to find not only that OCS had completely disregarded the regulatory process, but also that it had failed completely to act in a timely manner to preserve either the grant project and its potential benefits to the target population, or the federal funds previously committed to the project.

• ACF asserted that, in spite of the 30-day regulatory deadline and this congratulatory e-mail, it had not responded to the grantee's written request until 21 months later on October 13, 2001. ACF Ex. 15. ACF's only explanation for the delay was that "we deemed it prudent. . . to reserve comment until the DHHS Inspector General's (IG) office concluded its review and rendered its report." ACF Ex. 15. The OIG investigation did not begin until July 2000 and a report was issued on April 16, 2001. This left a four-month period before the OIG began its review and a six-month period following issuance of its final report during which ACF would not have been prevented for any reason from providing a response to this grantee's written request. Furthermore, Brown Magnolia still had the responsibility to continue its performance of its grant during the pendency of the OIG investigation and ACF did not point to any legal authority that allowed it to forego its regulatory responsibilities to this grantee while the investigation was pending. Furthermore, the OIG investigation had nothing to do with the objectives of this grant or the specific issues raised by the request.

• In the months following the congratulatory e-mail from Mr. Sykes, ACF took several actions that were consistent with it already having approved the grantee's request to purchase the building. In August 2000, ACF asked Brown Magnolia to take the actions (which it did perform) to protect the federal interest in the building. If ACF had chosen to treat the purchase as unapproved, it should have requested the return of the funding at this time, not merely the institution of legal actions to protect a federal interest in the building. Moreover, during September 2000, ACF gave written approval for the third party agreement required by the grant award. ACF Br. at 18. This approval would have been unnecessary and inadvisable if ACF considered the purchase of the building, which was intended to house the program operations, to lack the requisite agency approval.

• The record demonstrates that as late as March 7, 2001 the Acting Director of OCS still viewed Brown Magnolia's request favorably. In OCS' draft response to the OIG audit on March 7, 2001, the Acting Director of OCS advised the ACF audit liaison that "Brown Magnolia did not intend to misuse or deceive the government. . . . The OCS therefore feels that the retroactive approval should be given." Brown Magnolia Ex. Z1. (Unquestionably, as we stated previously, an OCS official such as the then Acting Director of OCS had the authority to approve Brown Magnolia's request to purchase its building. Section 74.25(k) of 45 C.F.R. provides that any approval from the agency is valid if authorized by the head of the division that made the award (here OCS).) An OCS official (Deputy Director) issued the October 13, 2001 letter denying prior approval and issued the disallowance letter on September 26, 2002. ACF Ex. 15.

• Viewing the OCS Director's congratulatory e-mail as an approval under the circumstances of this case is consistent with the purpose behind having an approval deadline in the subject regulation. By allowing an agency no more than 30 days to respond to a request for revision in budget or program plans, the regulations assure that the agency will provide timely oversight and guidance when a grantee proposes to make revisions. Such guidance and oversight was particularly important here since Brown Magnolia either had to find an alternate building to house its operations or relinquish its grant. Moreover, to the extent that Brown Magnolia would have to substitute funding intended for its operations in order to purchase or lease a building, Brown Magnolia would also have to consider whether it needed to locate additional funding for its program operations either from HHS, another governmental entity, or a lending source. The record suggests that at the time it requested a budget revision, Brown Magnolia had several options to locate funding for its program operations aside from supplemental funding from OCS. (5) Brown Magnolia thus needed a timely response from OCS on the revision request to assist it in taking an appropriate course of action under the circumstances here both to purchase a building to house its operations and to find alternate sources of funding.

• Once having lost the original building that had been promised to it, Brown Magnolia acted reasonably by immediately exploring alternate ways to house its program operations. ACF never here asserted that Brown Magnolia should have followed a different course of action to locate an alternate building or that the price of the purchased building was unreasonable or that the building was unnecessary for the performance of the grant objectives. In addition, to the extent Brown Magnolia was able to purchase the building below its fair market value (as the record here indicates, ACF Ex. 11 at 1) Brown Magnolia needed to act quickly in completing the purchase or risk losing the building.

• On September 15, 2000 ACF required Brown Magnolia to transfer title to the property into the name of Brown Magnolia and to file and record a federal interest in the property. Brown Magnolia complied in September 2000 and thus the federal government's interest in this property has been protected. No issue is currently raised by ACF about what happened to the building after the time for performance under the grant expired. Notwithstanding our decision reversing the disallowance here, Brown Magnolia will still retain the responsibility to account for the federal interest in the building. 45 C.F.R. § 74.32. (6)

Accordingly, based on all of the foregoing factors, the Director of OCS' congratulatory e-mail letter dated March 10, 2000 properly may be considered to be a "written approval by an authorized HHS official evidencing prior consent" within the meaning of section 74.2.

2. ACF erred in relying on Brown Magnolia's delayed execution of a third party agreement as an alternate basis for this disallowance.

As the second basis for disallowance, ACF stated that --

the FAA [financial assistance award] prohibited the Brown Magnolia from spending more than $100,000 'until a detailed third party agreement is submitted and approved (by OCS).' The Brown Magnolia failed to submit the required third party agreement.

September 26, 2002 disallowance letter; see also ACF Ex. 3, line 26 (Misc. provision); ACF Br. at 17.

The third party agreement was a condition imposed by ACF as part of the grant. ACF Ex. 3, line 26. The letter states:

Grantee is approved to spend up to $100,000, the remaining $250,000 is restricted until a detailed third party agreement is submitted and approved.

A third party agreement is not defined in either the award or anywhere else in the record.

In its briefing, ACF conceded that it received a third party agreement from Brown Magnolia on August 21, 2000 and that it approved the agreement on September 15, 2000. ACF Br. at 17-18, citing Brown Magnolia Exs. O, O1, ACF Ex. 11. The approved agreement includes a description of Brown Magnolia's equity investment in "pavement marking tape," the supplies low income employees were to use to make items for highway use. The stock equities are described and the agreement is between Brown Magnolia and the manufacturer of the marking tape. ACF Ex. 11. Brown Magnolia asserted that it submitted the identical third party agreement to ACF prior to its purchase of the building in February 2000. Brown Magnolia Ex. F.

Regardless of when the third party agreement was first submitted to ACF, ACF knew, when it approved the third party agreement, that Brown Magnolia had exceeded the $100,000 expenditure limit to purchase a building in February 2000. Nonetheless, ACF not only approved the agreement, it released an additional $20,000 in funds over and above the $350,000 in funds it had already released. While Brown Magnolia was arguably in violation of the expenditure limitation in its assistance award until ACF approved the agreement, ACF's approval of the third party agreement ended Brown Magnolia's failure to comply with this requirement. By its subsequent approval, therefore, ACF effectively waived Brown Magnolia's earlier non-compliance with this particular term of the award.

Moreover, the factors that led us to conclude above that the OCS Director had approved of the building purchase would also support the conclusion that Brown Magnolia should not be subjected to a disallowance for having temporarily exceeded the spending limitation in order to purchase the building.

Conclusion

For the foregoing reasons, we reverse the subject disallowance.

JUDGE
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Judith A. Ballard

Cecilia Sparks Ford

Donald F. Garrett
Presiding Board Member

FOOTNOTES
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1. 42 U.S.C. § 9921 et seq. does not distinguish between a grant award for property or an award for other purposes.

2. An additional requirement for prior approval is found at OMB Circular A-122 which provides that "capital expenditures for land or buildings are unallowable as a direct cost except with the prior approval of the awarding agency." Att. B, ¶ 15c (1998).

3. The draft audit report contained a recommendation that ACF determine whether it would be appropriate to retroactively approve the purchase of the building. OCS recommended to ACF that retroactive approval be granted. Brown Magnolia, Ex. Z1. ACF nevertheless requested that the OIG not include a recommendation to grant retroactive approval. Brown Magnolia Ex. BB. This recommendation was not included in the final audit report.

4. Carolyn Elliott also alleged in her brief that she had had extensive communications with subordinate OCS officials concerning the building and related funding issues beginning with November 1999. Brown Magnolia Ex. B, C, C2. These officials could have notified Mr. Sykes about developments with this grantee on the basis of these communications.

5. In March 2000 Brown Magnolia represented that it was tentatively approved for a $761,000 loan and that it had secured agreement to receive a loan from Southern Bancorp of Arkadelphia. ACF Ex. 9.

6. Thus, for example, Brown Magnolia must either receive approval from the awarding agency to use the property for other purposes which are consistent with the purposes of the original assistance award or it must compensate the awarding agency for the federal interest in the building under a disposition alternative chosen by the awarding agency. See Grants Policy Directive (GPD) Part 3.04, ¶ C.2.g.

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