GAB Decision 749
April 30, 1986
Orange-Chatham Comprehensive Health Services, Inc.;
Docket No. 85-174;
Audit Control No. 04-16710
Ballard, Judith A.; Settle, Norval D. Teitz, Alexander, G.
The Orange-Chatham Comprehensive Health Services, Inc. (Grantee)
appealed the Public Health Service (PHS) Review Committee's decision to
sustain a determination issued by the Health Resources and Services
Administration (Agency), disallowing $87,620 in costs charged as
supplies to Grantee's Community Health Center grant during the period of
1974 through 1977. The basis of the disallowance was that these costs
were unallowable because the $87,620 was embezzled by an employee of the
Grantee and, as a result, was not spent for grant purposes.
Based on our analysis of the record, we uphold the disallowance.
Facts
An employee used grant funds for his own purposes instead of paying
for
supplies for the Grantee. When Grantee learned of the embezzlement,
at
a meeting on July 8, 1977 it confronted the employee, who at
first
offered to make restitution. Grantee reported the matter to PHS
by
phone and in writing within three days of the confrontation.
An
investigation by PHS eventually resulted in criminal action against
the
employee in November 1977. He pleaded guilty to part of the charges
and
was sentenced to prison without any provision for restitution.
The Agency considered for a long period of time whether the
government
should bring a civil suit against the employee for recovery of
the
missing funds, and eventually decided against it in October 1979.
Grantee then brought civil suit in January 1980 against the
employee.
Judgment was obtained for a substantial amount, the balance
being
presumably barred by a statute of limitations(2) because of the
time
lapse. Grantee has not been able to collect anything on its
judgment.
/1/
Grantee claimed that when it first discovered the embezzlement
the
employee had some $40,000 in a bank account and, in any event,
had
family members who could and would reimburse Grantee if he could
not.
/2/
The Grantee essentially argued that PHS, because of its actions,
should
be precluded from requiring Grantee to repay the embezzled funds.
Discussion
As a result of the embezzlement, $87,620 in federal grant funds were
not
spent for allowable costs. Consequently, the program has not
received
any benefit from the funds claimed. The legal principles are
clear;
the cost principles applicable to a non-profit organization such as
the
Grantee state that bad debts are not an allowable cost of a
federal
grant. (45 CFR Part 74, App. F, G. 2 (1977), now OMB Circular
A-122,
Attachment B, paragraph 2, applicable to HHS grants by 45 CFR
74.174.)
Moreover, the regulations implementing this grant program
(authorized by
section 330 of the PHS Act) provide at 42 CFR 51c.107 (1976)
that any
funds granted must be expended as follows:
solely for carrying out the approved project in accordance
with
section 330 of the Act, the applicable regulations of this part,
the
terms and conditions of the award, and the applicable cost
principles
prescribed in Subpart Q of 45 CFR Part 74.(3)
Prior to 1976, 42 CFR 51.408 set forth the same requirements for
the
section 314(e) program which preceded the section 330 program.
The only issue before us then is whether, despite the fact that the
costs
are clearly unallowable, Grantee was somehow relieved of its
obligation to
account for the misappropriated funds. The Grantee
presented three
alternative arguments, discussed below.
a. Whether the Agency agreed to accept the misappropriated funds as
an
account receivable to the Agency.
The Grantee claimed that there was an agreement, more specifically
a
binding "contract," between the Grantee and the Agency that the
Agency
would accept the misappropriated funds as its own account
receivable
while Grantee pursued collection of the funds from the
embezzler. The
record, however, does not support a finding that the
Agency agreed to
accept the misappropriated funds as an account
receivable. The record
shows that a Regional official in an internal
Agency memorandum to
another Public Health Service official stated, "we
recommend the $87,620
embezzled . . . be established as an accounts
receivable due DHHS. . ."
Respondent's Exhibit G. This statement, however,
was only a
recommendation and clearly does not indicate that the Grantee
was
relieved of its obligation to repay these funds. Moreover, this was
an
internal Agency memorandum and was not intended for the Grantee.
While
there was testimony from an official of the Grantee at the hearing
that
the Grantee had received a copy of this memorandum, the official
also
testified that it understood that this was a
recommendation.
Transcript, p. 19. The Grantee, however, based its
argument that there
was an agreement on the fact that it had never received
notice that the
recommendation was not to be followed. The Grantee
failed to show how
this fact, alone, amounts to a binding "contract" between
the parties.
Consequently, we cannot find that the Agency agreed to accept
the
embezzled funds as an account receivable.
b. Whether the Agency may be equitably estopped from recovering
the
misappropriated funds.
While the Grantee contended that equitable considerations should
prevent
the Agency from recovering the funds, the record does not support
a
finding of estoppel here. At the very least, the record must show
that
the elements necessary to estop a private party are present.
The
doctrine of equitable estoppel precludes a party from establishing
an(4)
essential element of its claim because of its own misrepresentations,
on
which the opposing party relied to its own detriment. Thus, the
Grantee
must establish the basic elements of equitable estoppel:
The party asserting estoppel must show more than that he was
ignorant
about some matter. Among the more important requirements of
estoppel
are that the party to be estopped has misrepresented or
wrongfully
concealed some material fact and that this party acted with
the
intention that the asserting party rely to his detriment on
his
misunderstanding.
State of New Jersey v. Department of Health and Human Services, 670 F.
2d
1284, 1297 (3rd Cir. 1982), quoting from United States ex. rel. K&M
Corp.
v. A&M Gregos, Inc., 607 F.2d 44, 48 (3rd Cir. 1979). See
also
Montana Department of Social and Rehabilitative Services, Decision
No.
171, April 30, 1980 and cases cited therein.
Here, however, the element that a clear misrepresentation or
wrongful
concealment must have been made on which the party claiming
estoppel
relied on to his detriment is not present. The record fails to show
that
the Agency stated to the Grantee that it was relieved of its
obligation
to account for misappropriated funds. Moreover, the record
fails to
show that the Agency told the Grantee that it was precluded
from
accepting restitution from the embezzler or that the Grantee
was
precluded from enforcing its own legal rights to the embezzled
funds
against the embezzler. The fact that the Agency may have
considered
initially the possibility of filing a civil suit against the
embezzler
but decided almost two years later against it, in and of itself, is
not
a representation that Grantee was relieved of its obligation or
was
precluded from pursuing action on its own. Thus, the Grantee has
not
established the traditional elements of estoppel.
Finally, even if the Grantee had established the traditional elements
of
estoppel, something more is required to estop the federal
government.
The Supreme Court has stated that "it is well settled that
the
Government may not be estopped on the same terms as any other
litigant."
Heckler v. Community Health Services of Crawford County, 467 U.S.
51, 60
(1984). The Supreme Court has refused to decide whether
even
"affirmative misconduct" will suffice to estop the federal
government.
See Schweiker v. Hansen, 450 U.S. 785 (1981); INS v.
Hibi, 414 U.S. 5,
8 (1973). What is clear is that the federal
government cannot be
estopped in the absence of "affirmative misconduct." The
Supreme Court
has never defined "affirmative misconduct," but it clearly
requires
something more than inaction over 5)
Here, we have no evidence of affirmative misconduct on the part of
the
Agency. If there is anything here, it is that the Agency took its
time
deciding whether it would bring a civil suit against the employee.
This
alone, however, does not amount to an intentional misrepresentation
or
wrongful concealment of a material fact.
c. Whether the doctrine of laches is applicable here.
The Grantee argued that the doctrine of laches should be applied here
to
prevent the Agency from collecting these funds from the Grantee.
The
Grantee based its argument on allegations that there was a time lapse
of
seven years between June 1977, the time Grantee first notified
the
Agency of the embezzlement, to August 31, 1984 when, the
Grantee
contended, it was first notified that it was responsible for paying
back
these funds.
As we stated in Maryland Department of Human Resources, Decision No.
519,
February 29, 1984, it is well settled that the federal government
is not
subject to the defense of laches in enforcing its rights. United
States v.
Summerlin, 310 U.S. 414, 416 (1940).
We stated in Maryland, supra, that the doctrine of laches is:
designed to promote justice by preventing surprises through
the
revival of claims that have been allowed to slumber until evidence
has
been lost, memories have faded, and witnesses have disappeared.
The
theory is that even if one has a just claim it is unjust not to put
the
adversary on notice to defend within the period of limitation and
that
the right to be free of stale claims in time comes to prevail over
the
right to prosecute them.
See Maryland, supra, page 4, quoting Telegraphers v. Railway
Express
Agency, 321 U.S. 342, 348-49 (1944). Even if we were to find
that
laches could be applied to the federal government, we could not
find
that laches should be applied here. The record just does not
support a
finding that there was a seven year lapse before Grantee was
notified
that it would be held responsible for these funds. To the
contrary, the
record shows a letter from the Agency dated October 17, 1979
that
states:
However, we do feel that Orange-Chatham CHC, Inc. is responsible
for
returning these funds to the project. The procedure by which
you
accomplish this . . . is your decision.(6)
See Attachment III to Grantee's Response to the Order to Show
Cause.
Moreover, the record shows that the Grantee had received the
Audit
Report (Audit Control No. 04-16710) containing the Agency's
monetary
findings concerning the embezzled funds prior to September 21,
1981.
See Attachment III to Grantee's Appeal File. Consequently, as
early as
October 1979, the Grantee had notice that it was responsible to
return
this money to the grant, and later, in 1981, had further notice that
the
embezzled amount had been questioned by the Agency auditors
as
unallowable costs of the grant.
Moreover, the Grantee has not shown that the fact that the
disallowance
was not issued until August 1984 precludes the Agency from
enforcing its
claim. The Grantee analogized that the federal statute of
limitations
for a debt claim is six years. However, the Grantee has not
shown that
the federal statute of limitations is applicable here or to this
type of
proceeding. We concluded previously in Maryland, supra, that
the
federal government is not bound by a statute of limitations except
where
Congress expressly provides otherwise. Maryland, supra, pp. 3-4,
and
cases cited therein. Consequently, the Grantee has not shown that
a
disallowance issued seven years after the discovery of
the
misappropriated funds is unenforceable either under a laches or
statute
of limitations argument.
There is no question that the Grantee acted appropriately in terms
of
conducting audits and exercised due diligence in monitoring the
funds
and taking follow-up action once the embezzlement was discovered.
However, we have no basis for finding that the Agency is precluded
from
recovering the misappropriated funds.
Conclusion
For the reasons stated above, we uphold the disallowance. /1/ The
PHS
Review Committee mistakenly
stated that Grantee had actually
recovered the amount of its judgment.
However, this was not the basis
of the Committee's
decision. /2/ The PHS offered no
evidence to
contradict these statements by Grantee. Under our approach
to this case
all this material is irrelevant. However, it is arguable
whether the
Grantee could have reached employee's funds even if it acted
promptly.
Grantee admitted there were probably other claims, and in fact,
there
were tax claims which prevented Grantee from collecting on its
judgment.
It is certainly speculative whether others would in fact have come
to
the employee's rescue even if they had the money.
MARCH 28, 1987