Arizona Dept. of Economic Security v. USDOL, 94-JTP-18 (ALJ Nov. 9, 1995)

DATE: November 9, 1995

CASE NO.: 94-JTP-18

In the Matter of

ARIZONA DEPARTMENT OF ECONOMIC
SECURITY,
          Complainant,

     v.

U.S. DEPARTMENT OF LABOR,
          Respondent.

        DECISION AND ORDER REVERSING IMPOSITION OF SANCTIONS

     This matter arises under the Job Training Partnership Act (JTPA),
29 U.S.C. 1501, et seq., and the regulations promulgated
thereunder at 20 C.F.R. Parts 626-638.  Complainant, Arizona Department
of Economic Security ("ADES"), seeks review of the Final Determination
of Respondent dated February 8, 1994, in which sanctions were imposed on
Complainant pursuant to 29 U.S.C. 1574, and demanding the return of
$80,664[1] in misexpended funds.

                         Procedural History

     A Notice of Hearing and Order dated May 24, 1995, originally set
this matter for hearing in Phoenix, Arizona, on October 11, 1995.  By
letter dated June 13, 1995, the parties agreed to concurrently file
motions for summary judgment in this matter by July 1, 1995, and to file
a response to the opposing party's motion by July 20, 1995.  Each
party's motions and response briefs were timely received by this office.

     Pursuant to a subsequent order dated August 16, 1995, the
undersigned requested that the parties submit supplemental briefs in
support of their respective motions for summary judgment.  It was
requested that these briefs address specific issues deemed pertinent to
the undersigned's ruling in this matter.  Said briefs were timely
received by the undersigned.

     In a Decision and Order dated October 5, 1995, the undersigned
denied both motions for summary decision, finding that there was a
genuine issue as to material fact, the resolution of which was
inappropriate on summary decision.  The parties were informed that the
hearing would be conducted as scheduled on October 11, 1995.

     A telephonic prehearing conference was held between the undersigned
and counsel for both parties on October 5, 1995.  At that time, counsel
for Respondent indicated that he had no witnesses he could present at
trial.  Complainant's counsel indicated an intent to call two witnesses
 

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on Complainant's behalf.  Ultimately, the parties agreed to stipulate to
the facts that these two witnesses would testify to.  The parties also
agreed to submit the contracts executed under the JTPA, along with face
sheets identifying the relevant portions thereof.  A deadline of October
20, 1995, was set for the submission of these documents.  It was further
agreed that the undersigned's decision in this matter would be made upon
the record, including these supplemental documents.

     The stipulation of the parties, as well as the sworn affidavits of
James Salmon and Ronald Sterrett, Complainant's two witnesses, were
received on October 16, 1995.  The contracts and both parties' face
sheets were received on October 20, 1995.  

                          Issues Presented

     Based upon the telephonic prehearing conference and the record
presented, it appears that the following issues require resolution:

     1.  Whether or not the "misexpenditure of funds was due to willful
disregard of the requirements of this chapter [the JTPA], gross
negligence, or failure to observe accepted standards of administration"
(quoting 29 U.S.C. 1574(e)(1));

     2.  Whether or not the fraudulent actions of the two employees are
or are not attributable to WEDCO, the other subrecipients, and/or the
recipients; and

     3.  Whether repayment of misexpended funds through the performance
of in-kind services was appropriate.

                              EVIDENCE

     The evidence considered by the undersigned is contained in the
record presented by Respondent, as well as the documents provided
subsequent to agreements reached at the prehearing conference.  The
undersigned will summarize this evidence herein.[2]

                           Record Evidence

     The State of Arizona entered into an agreement, including several
modifications thereof, with the Respondent under the Job Training
Partnership Act ("JTPA").  This agreement allowed the State of Arizona
to disburse JTPA funds to the City of Phoenix Service Delivery Area
through Respondent (RB p.1).  Such funds were then disbursed by
Respondent to a company by the name of Western Economic Development
Corporation ("WEDCO") (CB p.2; See generally R. pp.107-272).

     Subsequently, it was determined that two employees of WEDCO had
submitted $80,664 in fraudulent claims for on-the-job training
 

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reimbursements (RB p.2 and fn.2).  An investigation was instigated
resulting in a criminal indictment against these two employees (RB p.2). 
One has since pled guilty to the crimes charged, while the whereabouts
of the second employee remain unknown (RB pp.2-3).

     On February 8, 1994, a Final Determination Letter was issued
requesting cash reimbursement of the amounts fraudulently disbursed (R.
pp.9-11).  Respondent's Regional Administrator of the Employment and
Training Administration, based upon a Guidance Letter issued by the
Assistant Secretary of Labor, refused the in-kind services performed by
WEDCO in repayment of this amount (R. p.69; R. pp.82-83).  Complainant
timely requested an administrative hearing in this matter pursuant to 29
U.S.C.  1576 (R. p.4).

                       Complainant's Evidence

     Pursuant to the stipulation of the parties, Complainant's two
witnesses would have testified at trial in accordance with their
affidavits.  The evidence contained therein is also summarized.

AFFIDAVIT OF JAMES SALMON

     James Salmon is the President of WEDCO, whose affidavit indicates
that he first became aware of the fraud perpetrated by two WEDCO
employees on July 26, 1991.  He indicates that he informed the City of
Phoenix of this fraud on July 29, 1991, and that no other employees of
WEDCO had knowledge of or were involved with the fraud committed by the
two employees.

AFFIDAVIT OF RONALD STERRETT

     Ronald Sterrett is the detective with the City of Phoenix Police
Department who originally investigated the allegations of fraud in this
case.  He indicates in his affidavit that the two indicted employees
were the only ones whom he could determine were involved with the
fraudulent contracts.  He further swears that WEDCO's management denied
any knowledge of the fraud perpetrated by the two employees, and that no
employee of the City of Phoenix or Complainant was involved in the
fraud.

                                 DISCUSSION

                          The Applicable Burdens

     The availability of an administrative hearing to review a sanction
imposed by the Secretary is granted under the JTPA at 29 U.S.C. 
1576(a).  Such hearings are governed by the regulations contained at 29
C.F.R. Part 627, Subpart H.  

     Pursuant to these regulations:

     [t]he Grant Officer shall have the burden of production to
     support her or his decision.  To this end, the Grant Officer
     shall prepare and file an administrative file in support of
     the decision which shall be made part of the record. 
     Thereafter, the party or parties seeking to overturn the Grant
     Officer's decision shall have the burden of persuasion.

29 C.F.R.  627.802(e).  In this case, the Respondent would have the
initial burden of production, which once established, would then shift
the ultimate burden of persuasion to Complainant.[3]

                     Respondent's Initial Burden

     As discussed, Respondent has the initial burden of production, in
that it must support the Grant Officer's Final Determination.  In order
to satisfy its initial burden, Respondent must present evidence
"sufficient to enable a reasonable person to draw from it the inference
sought to be established."  State of Maine v. U.S. Department of
Labor, 669 F.2d 827 (1st Cir. 1982) (citing McCormick,
Evidence 789-790 (2d ed. 1972)).  In other words, the Respondent must
initially establish a prima facie case.  Only then will the burden of
persuasion shift to Complainant.

     The JTPA provides for the recovery of funds when it has been
determined that such funds have been misexpended.  In particular, the
JTPA provides in pertinent part:

     (1)  Each recipient shall be liable to repay such amounts,
     from funds other than funds received under this chapter, upon
     a determination that the misexpenditure of funds was due to
     willful disregard of the requirements of this chapter, gross
     negligence, or failure to observe accepted standards of
     administration.  No such finding shall be made except after
     notice and opportunity for a fair hearing.

29 U.S.C.A. §1574(e)(1).

     Respondent has adequately established, and Respondent does not
dispute, that there was a "misexpenditure of funds" in this case. 
However, the Grant Officer never made a specific finding that this
misexpenditure was due to "willful disregard of the requirements of [the
JTPA]," "gross negligence," or "failure to observe accepted standards of
administration."  Rather, the Grant Officer simply found:

     [t]he actions of the Superior Court have already resolved the
     issue of allowability of the costs in question by conviction
     of the individuals involved.  Because the Court [sic] found
     the defendants guilty of the fraudulent schemes and willful
     concealment, the disallowed costs must be remitted to the U.S.
     Department of Labor, Employment and Training Administration in
 

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accordance with Section 164.(e)(1). . .

(R. p.11).  This finding in no way establishes or supports the finding
that WEDCO or Complainant willfully disregarded the requirements of the
JTPA, committed gross negligence, or failed to observe the accepted
standards of administration.  The mere fact that two WEDCO employees
were convicted of fraud does not, in and of itself, establish that WEDCO
was guilty of one of the three prerequisites to a repayment of
misexpended funds.

     Respondent acknowledges this lack of finding in the Grant Officer's
Determination, arguing:

     . . . [w]hile not specifically stating that all of the factors
     in § 1574(e)(1) were violated, the Final Determination,
     when read as a whole, reflects the Grant Officer's finding
     that the misexpenditure of funds was due to . . . WEDCO's
     willful disregard of the requirements of the JTPA, gross
     negligence, and failure to observe accepted standards of
     administration.

          It is the DOL's position that WEDCO, if it had observed
     accepted standards of administration, would have discovered
     the fraud which its employees committed long before the City
     of Phoenix Service Delivery Area (Phoenix SDA) reported the
     issue to DOL's Office of Inspector General.  It is also DOL's
     position that, because the fraud was not discovered under the
     facts of this case, WEDCO is guilty of willfully disregarding
     the requirements of the Job Training Partnership Act (JTPA)
     and gross negligence.

(Respondent's Supplemental Brief at 2-3).

     It is one thing to allege such violations.  But these mere
allegations are not sufficient to meet even the relatively easy to
establish burden of production.  Without some evidence to support these
allegations, it is impossible for the undersigned to "draw from it the
inference to be established."

     Respondent, in agreeing to have the case decided on the record, has
failed to produce any evidence to support its allegations of willful
disregard, gross negligence, and/or failure to observe accepted
standards of administration.  In particular, it has presented no
evidence which would lead the undersigned to infer that WEDCO or
Complainant knew or should have known of the fraud committed by the two
employees.  Nor has any evidence been presented to show that had
accepted standards of administration been followed by WEDCO or
Complainant, the fraud would have been discovered earlier.  Lastly,
Respondent has presented no authority or facts for the proposition that
 

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the fraudulent acts of the two employees is attributable to the
corporate entity, WEDCO.

     Based upon the foregoing, it is evident that Respondent has failed
to carry its initial burden of production.  Therefore, the burden never
shifted to Complainant to persuade the undersigned that the return of
the misexpended funds was not warranted under Section 1574(e)(1) of the
Act.  Because Respondent has failed to establish a prima facie case in
support of the Grant Officer's Final Determination, the sanction imposed
therein must be reversed.

     Arguably, Respondent has presented a prima facie case warranting
the repayment of misexpended funds under Section 1574(d) of the JTPA. 
Establishment of a prima facie case under this section is much easier in
that it does not require proof of willful disregard, gross negligence,
or failure to follow accepted standards.  33 U.S.C. § 1574(d).  But
for whatever reason, the Grant Officer did not base his determination on
this section and therefore, this issue is not properly before the
undersigned.

                          Additional Issue

     As discussed above, an issue as to the appropriateness of repayment
through in-kind services was also presented in this matter.  It is
apparent that Respondent rejected such services performed by WEDCO in
substitution of monetary payment of the sanctions imposed.  This
rejection was based upon written guidance from the Assistant Secretary
of Labor indicating that cash payment is the only acceptable form of
repayment in cases of misexpenditures caused by fraud.  However, as the
undersigned has found that no repayment of any kind is warranted, the
issue as to the form of such repayment need not be addressed in this
decision. 

                                ORDER

     IT IS HEREBY ORDERED that the Grant Officer's Final
Determination Letter dated February 8, 1994, imposing sanctions upon
Complainant in the amount of $80,664.00, be reversed.  

     Entered this 9TH day of November, 1995, at Long Beach, California.


                                   SAMUEL J. SMITH
                                   Administrative Law Judge

[ENDNOTES]

[1] According to Respondent, Complainant has since provided
documentation indicating that real amount in question is $77,016 (RB

p.2, fn.2).

[2] The following abbreviations will be used:
          R.  =  The record submitted in this matter
          CB  =  Complainant's brief in support of motion for               
summary judgment dated June 30, 1995
          RB  =  Respondent's brief in support of motion for                
summary judgment dated June 30, 1995

[3] This regulation is contradictory to the Administrative Procedures
Act (APA), 5 U.S.C. § 551 et seq., which is applicable to
hearings before the Office of Administrative Law Judges.  Section 7(c)
of the APA states that the "proponent of a rule or order has the burden
of proof."  5 U.S.C. § 556(d).  The United States Supreme Court has
recently interpreted this provision as placing the burden of persuasion
on the proponent of the rule or order.  Director, OWCP v. Greenwich
Collieries, 114 S. Ct. 2251 (1994).  As the proponent of the Grant
Officer's order, the APA would place the burden of persuasion on
Respondent.  However, in light of the findings below, the undersigned
finds it unnecessary to address this apparent conflict between the JTPA
regulations and the APA statutory requirement.