GAB Decision 419
Docket No. 82-213
April 29, 1983
Chester County Head Start, Inc.;
Ford, Cecilia; Teitz, Alexander Garrett, Donald
Chester County Head Start, Inc. (Chester County) appealed a decision
by the Office of Human Development Services (Agency) disallowing $34,046
in federal funds which had been expended by Chester County's
predecessor, the Community Action Board of Chester County (CAB), under
its Head Start grant. The Agency disallowed three items: $31,312,
which CAB had received in advances and apparently spent for costs
unrelated to the grant; a $1,921 penalty for the late payment of
payroll taxes; and $813 in attorney's fees. Chester County accepted
the Agency's decision to disallow the $813, leaving $33,233 still in
dispute. Chester County contended that both the advances and tax
penalty were incurred by CAB under Head Start Grant No. H-2007-M
(October 1, 1978 - November 30, 1979) (Grant Year M), and argued that,
under the terms of the successor-in-interest agreement it signed,
Chester County could not be held responsible for the expenditure of
federal funds by CAB in Grant Year M.
The Agency argued that the disallowance represented expenditures
attributable to Grant No. H-2007-N (December 1, 1979 - June 30, 1981)
(Grant Year N), and that Chester County had consented to assume all of
CAB's obligations arising out of Grant Year N. Thus, the Agency argued,
Chester County was liable for the disallowance. For the reasons set out
below, we uphold the disallowance in part and we reverse in part.
I. Background
A. Letter of Credit Funding
CAB received grant funds from the Agency by letter of credit,
periodically drawing down funds to meet its expenses. A letter of
credit is an instrument certified by an authorized official which
authorizes a recipient to draw funds needed for immediate disbursement
in accordance with Treasury Circular No. 1075. 45 CFR 74.91 (1979)
Under this funding system, requests for funds are not made directly to
the Agency.
(2) B. The Audits
Audits for both Grant Years M and N were conducted by the same
private Certified Public Accountants. The Audit Report for Grant Year
M, issued March 24, 1980, indicated that CAB had incurred "significant
over-expenditures" by advancing to affiliated agencies a total of
$30,841 in Head Start funds. The auditors noted that the amount not
repaid had been reduced to $18,000 "(at) the issuance of this
report...." /1/ (Audit Report, Grant Year M, pp. 4, 9) The auditors
determined, however, that the grant funds generally had been
administered in a satisfactory manner and they did not recommend any
financial adjustment.
On March 17, 1981 an Audit Report for Grant Year N from December 1,
1979 through October 31, 1980 was issued. Based upon their review, the
auditors calculated that CAB had accumulated costs unrelated to the
grant project totaling $47,308. The auditors determined that, in
general, the costs were due to CAB's financial failure and they
recommended that the Agency disallow the full $47,308. The Auditors
included in the amount recommended for disallowance $31,312 which CAB
had advanced to itself and its delegate agencies "over the years,"
and
which CAB had not repaid after it expended the advances for costs
unrelated to the grant. The auditors also recommended disallowance of
$1,921 in assessed penalties claimed by CAB for late payment of payroll
tax. (Audit Report, Grant Year N, pp. 2, 10)
(3) C. Transfer of CAB's Interest
Pursuant to a successor-in-interest agreement drawn up by the Agency,
Chester County took over this Head Start grant from CAB, effective
November 1, 1980. According to the notice of grant award submitted with
Chester County's notice of appeal, the budget period for Grant Year N
was from December 1, 1979 through June 30, 1981; therefore, Chester
County replaced CAB as grantee during Grant Year N. Paragraph 2 of the
successor-in-interest agreement reads as follows:
2) As of the date on which a new OHDS Form-102 effectuating the
transfer is signed by an authorized CYFD official and countersigned by
the OHDS Grants Officer, all rights, interests and obligations under
Head Start Grant H-2007-N shall be transferred from Community Action
Board of Chester County to Chester County Head Start, Inc. including the
authority to draw-down federal funds. Chester County Head Start, Inc.
agrees that it will be responsible to CYFD, OHDS for all obligations
incurred under Head Start Grant H-2007-N including obligations arising
from disallowance determinations made by OHDS in accordance with OHDS
and HHS (HEW) directives.
II. The Parties' Positions
A. Agency
The Agency contended that the advances were properly attributed to
Grant Year N because CAB closed down in Grant Year N thereby rendering
the advances "uncollectible" during that year. The Agency indicated
that CAB had not submitted monthly requests for the advances as required
by 45 CFR 74.96(a) (1979). Further, the Agency stated that it would not
have approved requests for these advances since the advances were not
spent for expenses related to the grant project. The Agency argued that
it took the disallowance when it became clear that the closing of CAB
"... rendered the advances uncollectible." The Agency argued that
even
if it did not disallow the unrepaid advances at the end of Grant Year M,
the obligation to repay the funds continued to exist until they were
repaid. "These funds remained an outstanding obligation to the federal
government under Grant H-2007-N." Thus, the the Agency concluded, since
the advances were properly disallowed in Grant Year N, Chester County
was liable for their repayment under the terms of (4) the
successor-in-interest agreement. (Agency Response to Board Questions,
pp. 3 - 6)
B. Chester County
Chester County contended that it should not be held responsible for
this disallowance. In support of its position, Chester County relied
principally upon paragraph 2 of the successor-in-interest agreement
(above). Chester County argued that this paragraph had limited Chester
County's retrospective liability to obligations arising under Grant Year
N, and that the advances were obligations arising under Grant Year M.
Chester County maintained that the Agency should have tried to recover
the advances when it first became aware of them at the close of the
Grant M program year. Chester County contended that it did not know
about the unrepaid advances until March 31, 1981, when it received the
Audit Report for the period ending October 31, 1980. Chester County
also contended that the language of the successor-in-interest agreement
did not specifically refer to advances, nor did it require Chester
County to repay obligations incurred in grant years other than Grant
Year N. According to Chester County, an obligation carried over from a
previous year is not the same as one "incurred" in a current year.
III. Analysis
A. The Advances
The language of the successor-in-interest agreement is somewhat
ambiguous. While paragraph (2) of the successor-in-interest agreement
specifically states that "... all rights, interests and obligations
under Head Start Grant H-2007-N shall be transferred from Community
Action Board of Chester County to Chester County Head Start, Inc," the
paragraph also states that "Chester County Head Start, Inc. agrees that
it will be responsible... for all obligations incurred under Head Start
Grant H-2007-N..." (emphasis added). However, the Agency did not argue
that Chester County should be liable for all obligations incurred by CAB
under all awards designated by Grant No. H-2007, i.e., awards for grant
years A - M as well as grant year N. The successor-in-interest
agreement uses the term "Grant H-2007" in paragraphs (4) - (7) when
referring generally to the transfer of property, insurance policies,
leases, and the grant records. On the other hand, paragraph (2) and
paragraphs (8) - (10), which discuss the transfer and payment of
accounts payable and receivable and provide (5) that CAB shall submit to
Chester County a final audit report, all refer only to "Grant H-2007-N."
We think this selective use of the terms Grant H-2007 and Grant
H-2007-N evidences an intent to differentiate between the grant as a
whole and a particular budget period. Therefore, we conclude that
Chester County is responsible for the obligations of CAB only when
incurred in Grant Year N.
We do not agree with Chester County that the Agency was required to
actually disallow the overexpenditures when it learned of them, as long
as CAB was still in operation and could repay at a later time. However,
we do not agree with the Agency that, merely because the Agency
disallowed the overexpenditures after Grant Year N, Chester County is
liable. The language in paragraph (2) of the agreement relating to
disallowances is limited by the preceding phrase "obligations incurred
under Grant H-2007-N including...."
The Audit Report for Grant Year M clearly indicated that, at the
close of that grant year, CAB had amassed overexpenditures of federal
funds totalling $30,841. The Audit Report found that this was a debt
that had to be repaid in the future. The Agency has presented no reason
why we should not consider this an obligation that was "incurred"
in
Grant Year M or a prior year, rather than Grant Year N. Thus, we
conclude that at the end of Grant Year M CAB had incurred in an
obligation to repay overexpenditures in the amount of $30,841.
The Audit Report for Grant Year N stated that "over the years" CAB
had received advances totalling $31,321 and that this amount was
unrepaid at the close of the period audited (October 31, 1980). Since
we have already concluded that $30,841 of this amount was obligated by
CAB at the close of Grant Year M, only $471 remains as incurred in Grant
Year N. We agree with the Agency that CAB's duty to repay the $30,841
continued into Grant Year N, but the question here is whether that duty
was transferred to Chester County. We think not.
The Agency has relied on no written requirement that a
successor-in-interest grantee must agree to be responsible for the debts
and unauthorized and unallowable expenditures made by a predecessor
grantee. Here, where Chester County did not know of these improper
advances when it agreed to take over as grantee, the parties could not
actually have intended the language of the agreement to cover these
advances. Absent the parties actual (6) agreement, we see no authority
requiring us to conclude that Chester County must reimburse the Agency
for unauthorized expenditures attributed to the budget period in which
Chester County took over, but incurred by CAB during an earlier budget
period. Interpretation of the provision in question to exclude debts
arising out of earlier budget periods is consistent with the fact that
Chester County took over during budget period (Grant Year) N; a smooth
transition from one grantee to the other could logically require Chester
County to take responsibility for rights, obligations, and interests
incurred in that budget period.
Where the Agency drafted the agreement it had the responsibility to
clearly spell out the parties' responsibilities. The Agency had the
audit report for year M and, therefore, was aware of CAB's use of the
advances. To the extent that there are ambiguities in the agreement
regarding liability for the advances, the burden of those ambiguities
should fall on the Agency. Thus, we conclude that under the terms of
the successor-in-interest agreement, the Agency cannot require Chester
County to repay obligations incurred in Grant Year M. We also conclude
that $30,841 was incurred by CAB as an obligation in Grant Year M.
Therefore, Chester County should be responsible only for $471 in
unrepaid advances.
B. Penalties
The Audit Report for Grant Year N revealed that CAB had incurred
$1,921 in penalties assessed by the Internal Revenue Service for late
payment of payroll taxes and had paid these penalties with federal
funds. (Audit Report, Grant Year N, p. 10) The applicable federal
regulation at 45 CFR Part 74, Appendix F, G.14 (1979) provides:
Costs of fines and penalties resulting from violations of, or failure
of the institution to comply with, Federal, State, and local laws and
regulations are unallowable except when incurred as a result of
compliance with specific provisions of the grant or contract
instructions in writing from the awarding agency.
Chester County has offered no specific evidence or agreement on this
issue. It merely noted the fact that this cost had been disallowed and
included the cost in that portion of the disallowance which it appealed.
(Chester County Brief, p. 2) Therefore, we presume that, as with the
advances, Chester County does not dispute the fact of the disallowance
but the fact that the Agency is (7) attempting to collect the disallowed
funds from Chester County.
These costs are clearly unallowable. They are costs identified for
the first time by the Audit Report for Grant Year N, and, therefore,
must have been incurred in Year N. Thus, by the terms of the
successor-in-interest agreement, Chester County is liable to the Agency
for their repayment.
IV. Conclusion
For the reasons discussed above, we find that Chester County is
liable to the Agency for $471 of the unrepaid advances drawn down by
CAB, as well as the $1,921 in tax related penalties incurred by CAB.
Therefore, we uphold this disallowance, as modified, in the amount of
$2,392, and reverse in the amount of $30,841. /1/ Nothing in the record
shows how the advances had been reduced, nor what the account
balance was at any other point during Grant Year N. Thus, the $18,000
figure does not appear to reflect the result of any scheduled repayment.
Rather, it merely reflects an existing balance between total funds drawn
down and proper expenditures incurred. The auditors' state ment does
not necessarily imply, and the Agency did not argue, that unallowable
costs of approximately $13,000 were incurred later in Grant Year N. We
think that the statement most likely means that CAB had incurred proper
expenditures up to that point in Grant Year N sufficient so that it
could have drawn down more federal funds than it had drawn down at that
point in time and thus could be considered to have paid back some of the
improper advances from the previous period. This is consistent with our
conclusion (developed below) that the obligation to pay back $30,841 was
incurred in Grant Year M.
JULY 07, 1984