DAB Decision 57
June 15, 1979 Zavala County Health Association; Docket No. 77-21;
Decision No. 57 Malone, Thomas; Mason, Malcolm S. Wilner, Irving
SUMMARY
(The following summary is prepared on the responsibility of the
Executive Secretary of the Board as a convenience to the interested
public. It is not an official part of the decision and has not been
reviewed by the Panel. Similar official summaries of earlier cases
appear in 45 CFR Part 16 Appendix.)
In 1972 the Office of Economic Opportunity awarded grantee a
Comprehensive Health Services grant of $251,000 for the construction of
an ambulatory health facility. Guided by OEO's strong commitment to
affirmative action, grantee entered into a contract with a minority
contractor to construct the facility. Because of the contractor's lack
of established history or credit, grantee was required to guarantee
repayment of a $20,000 loan, in order to qualify the contractor for a
Performance and Payment bond. In 1975 grantee received a separate grant
from the Public Health Service which included $295,000 for the
continuation of the facility's construction. The PHS grant contained a
condition requiring the prior approval of a specific official before
grantee could obligate any of the funds. In 1975-76 the contractor
defaulted on the loan, and grantee paid an amount of $16,107 to the
lender pursuant to its guarantee of the loan. PHS disallowed this amount
on the basis of the special condition in the 1975 grant and alleged poor
grant management by grantee. The record indicated that of the sum
disallowed, $14,225 represented funds from the 1972 OEO grant, while
$1,882 derived from the 1975 PHS grant.
The Panel decided that the prior approval condition in the 1975 grant
could not be given retroactive effort with respect to invalidating a
transaction otherwise within grantee's authority. The 1973 delegation
of authority which transferred OEO's functions to DHEW did not empower
PHS to declare a special condition in a grant it awarded to be
automatically applicable to a consummated transaction under an earlier
grant from another agency. Nor did the Panel find anything in the record
to support the PHS charge that grantee manifested imprudent management.
The record showed that grantee consulted with OEO officials in all
phases of the project, including the selection of the contractor. The
Board stated that grantee 5 guarantee of the loan was eminently
reasonable in light of the existing circumstances and the recognized OEO
policy of promoting minority businesses.
As to the $1,882 attributable to the 1975 PHS grant, however, the Panel
ruled that prior approval from a PHS official was required before
grantee could release the funds, a condition that grantee was not free
to disregard.
Accordingly, the Panel affirmed the disallowance to the extent of $1,882
and sustained grantee's appeal of the remaining $14,225.
DECISION
Zavala County Health Association ("Grantee") appeals from a
determination by the Public Health Service Regional Grant Appeals Board
("PHS") affirming a disallowance by Region VI of an expenditure in
the
amount of $16,107.00 /1/
On June 27, 1972, the Office of Economic Opportunity ("OEO") awarded
grantee a Comprehensive Health Services grant for the period 6/1/72 to
10/3/1973. The grant contained an award of $251,000 for the construction
of an ambulatory health facility. It provided that grantee obtain OEO
approval for release of final payment to the construction contractor.
On May 3, 1973, a contract approved by OEO for the construction of the
health facility was entered into by grantee with Cristal Contractors,
Inc. The obtaining by the contractor of a Performance and Payment bond
was a condition of the contract. Contrary to expectations it appeared
after work on the contract had commenced that the contractor could not
qualify for such bond unless it could show a bank account balance of
$20,000. Unable to show such balance, grantee sought and obtained a loan
of $20,000 from a private lender for the benefit of the contractor. To
obtain this loan, grantee had to guarantee its repayment. This it did
by resolution of its Board of Directors on September 27, 1973.
On December 2, 1975, PHS issued Notice of Grant Award No.
06-H-000214-02 to grantee. That grant included $295,000 for continuation
of construction left unfinished under the 1972 OEO grant. It contained
a condition "that
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grantee submit all obligating documents associated with commitments
under the construction award to Weldon R. Wisian and obtain his approval
prior to actual obligation of the Funds."
Sometime in 1975-6 the contractor defaulted on the greater part of the
loan, and in March 1976, the lender obtained a judgment for $14,267.93
with interest and costs against the contractor. Upon the latter's
continued default, grantee, uncertain of the equities between the
parties, paid the amount of $16,107.09 by check payable to the
contractor and the lender in satisfaction of the judgment, pursuant to
its resolution of guarantee.
PHS defends the disallowance of the entire sum of $16,107 on the basis
of the special condition in the 1975 grant, and upon the more general
contention that the expenditure under review was occasioned through
imprudent management of grant funds by the grantee. We believe that a
consideration of the issues can be materially aided by considering those
relating to the funds of grant No. 60096/OEO, 1972, separately from
those concerning money drawn from the PHS, 1975 grant.
I.
The record supports the conclusion that of the total sum disallowed,
$14,225 represented money retained by the grantee from funds of OEO
grant No. 60096, obligated to the Cristal Contractors under the
construction contract approved by OEO on June 29, 1973. The remaining
$1,882.00 derived from funds provided under the 1975 PHS construction
budget.
We do not think that the prior approval condition in the 1975 grant can
be given retroactive effect in respect of invalidating a transaction
otherwise sustainable as within the authority of grantee. It should be
observed that the 1975 condition is itself prefaced by a statement that
it was to serve as a replacement for a condition "on award dated 5/9/
75," thus limiting its applicability. We note, further, a provision in
the 1972 award to the effect that funds received in connection with the
operation of the program "must be recorded in a separate account in the
accounting records." A recognition of the distinctiveness of each of the
grants herein considered--quite apart from their separate Agency
aspects--is also found in the Audits filed for the relevant periods.
Likewise, in the letter of October 31, 1973, in which PHS advised
grantee of the delegation of Authority from OEO, that agency informed
grantee of authority to extend the current budget period of the OEO
grant for three months, with the understanding that "the project plan,
including any imposed conditions, remain in effect." In the content of
that letter it seems clear that the conditions referred to are those of
the 1972 OEO grant. If intended to refer to PHS conditions they could
hardly be mandated to "remain" in effect.
PHS agrees that both at the time of the adoption of the guarantee
resolution (September 27, 1973) as well as at the time when grantee made
payment pursuant to that resolution (July 20, 1976) the portion of the
payment which
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represented retainage from the contract, ($14,225) had been fully
obligated. In view of this understanding, there is not much substance to
the claim that a condition embodied is a subsequent grant should be
controlling upon action taken under an earlier, distinct grant by virtue
of a Delegation of Authority effective July 6, 1973, from OEO to The
Secretary of Health, Education, and Welfare over the earlier, 1972
grant.
The Memorandum of Understanding pursuant to the Delegation of Authority,
supra, not atypically, recites that DHEW "shall succeed to all
authorities, rights, powers... acquired by OEO by virtue of the
grants... including... the rights and interests established under any
conditions... incorporated into any grant...." It is not unusual for a
successor agency to declare applicable, prospectively, its general
policy to a grant over which it has assumed authority by transfer from
another agency, or even to modify expressly an existing condition in
such grant for future purposes. But we find nothing in the documents
relating to the devolution of authority over OEO grant No. 60096 which
would empower PHS to declare a special condition in a grant it has
awarded to be automatically applicable, by some undefined implication,
to a consummated transaction under an earlier grant from another Agency,
upon its succession to administration responsibility. Especially does
this appear to be true as applied to a case like the present where the
guarantee was given by grantee prior to its being notified of the
delegation of authority to PHS.
A second ground relied upon in support of the disallowance in the full
amount is that by guaranteeing the loan, grantee manifested imprudent
management. Disavowing any purpose to question grantee's good
intentions, PHS nonetheless contends that the effect of a guarantee of
the kind involved here might be that of depriving grantee and its
service population of intended benefits.
The record does not support such a conclusion. Whatever the
uncertainties in the appeal file, there is no doubt that the loan
guarantee was directly related to the progress of the construction
project and in furtherance thereof. When PHS characterizes that
guarantee and payment thereunder as imprudent management it is employing
the term as a euphemism for unreasonableness. But the weight of the
evidence is in refutation of such inference. An OEO official had been
especially designated to superintend the construction project as officer
in charge, and OEO had retained a private architectural consultant to
assist in the project. Grantee asserts and the record discloses no
denial of this assertion--that these persons were specifically consulted
when it became clear that the OEO-approved contractor could not qualify
for a Performance and Payment bond for lack of an adequate cash balance
in its bank account; that they were informed of the plan and decision
to borrow from a private lender, and that they did not object to the
guarantee.
Even if this latter allegation not be deemed to have been directly
proven, much appears in the surrounding circumstances as corroboration
to estop OEO and its successor Agency from arguing that grantee did not
follow a course of prudent management. OEO not only reserved to itself
the right to approve the construction contract wig Cristal Contractors
but it did so with
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full knowledge that this contracting firm had been but recently
organized, and that it had no established history or credit, because of
OEO's strong commitment to affirmative action in furtherance of minority
business and employment. It is also shown that through its designation
of the two persons referred to above, to supervise and assist the
project, OEO acquired an on-going presence. Furthermore, OEO had
approved the construction of the health facility as a "Fast Track"
project in that it permitted the contract to be entered into, and
construction to begin, before completion of the final drawings, due to
the then-existing energy crisis, steel shortage, and escalating
inflation. At the request of the grantee which called attention to the
foregoing conditions and to the urgent need for the health facility in
the community, OEO agreed to waive its normal competitive bidding
requirements, and the record contains the statement of a former OEO
officer in charge of 200 health projects, concerning general policy of
OEO at the relevant period to assist OEO minority contractors in meeting
bonding requirements by interceding with sureties and other agencies
with the object of reducing those requirements.
It is clear that when the contractor herein was denied bond, the choice
for the grantee and OEO was between cancellation of the contract with
Cristal Contractors Inc., with all the delay and substantially higher
cost that it would entail, and proceeding with the approved contract
pursuant to which work had already begun by agreeing to a guarantee for
the repayment of the loan. In light of the existing circumstances, the
choice of the latter course appears as eminently reasonable.
It remains to be added that the condition in the 1972 grant does not
suggest a different conclusion. It is significant that while that grant
requires prior as well as written OEO approval for a number of
enumerated actions, it merely directs that grantee "obtain OEO approval
for release of final payment to the construction contractor."
The audit report (dated, January 29, 1976) for OEO grant No. 60096,
grant period May 1, 1974-April 30, 1975, refers to the guarantee of the
loan by the grantee and to the contingent liability to which it gave
rise. It states at page 10:
"In accordance with the demands of generally accepted accounting
principles, full disclosure of this transaction is being made and
adequate provision is included for their contingent liability in
the encumbrance enumerated in note 2 above. Exercising the right
of set-off, the 10% retainage on the Cristal Contractors Contract
that is being held in escrow by Zavala County Health Association,
Inc., amounting to $14,225.40 will be used to partly pay the
outstanding balance arising out of this transaction, in the event
Ms. Lopez (The Lender) does not secure full payment of this
indebtedness through the current litigation." (Emphasis added).
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A copy of this audit report was forwarded to PHS and received by it in
February 1976, a full five months before grantee paid to the lender the
amount of the judgment plus interest and costs. But PHS does not even
claim that it has challenged grantee for incurring this liability or
that it has directed grantee not to pay it in the manner it did. The
file contains evidence which might reasonably have led grantee to
believe, under all of the shown circumstances, that PHS had impliedly
approved the release of final payment.
II.
As suggested previously, the correctness of the determination of
disallowance in respect of that part which did not derive from OEO grant
60096 must be weighed on its own merits. Unlike the major component
($14,225), the sum of $1,882.00 used by the grantee to satisfy the
judgment against the contractor had its source in a separate PHS grant
account never under the control of OEO officials. In fact, that grant
was for a budget year subsequent to the date of the contract with
Cristal Contractors, and its funds were never obligated to the 1972
contract. Grantee admits that it never had any contacts with PHS
relative to that contract.
It is true that a single check was drawn by grantee for the entire sum
of $16,107 against an account in which funds from both grants were
commingled, in discharge of a unitary obligation. It may even be
conjectured that had the approval of PHS been sought in advance of
payment, in accordance with the limiting condition in the 1975 grant,
its approval might have been given in view of the grantee ' s good faith
and of the fact that the obligation under the guarantee resolution was
incurred for the purpose of serving a proper grant objective. But the
1975 condition was imposed long prior to the date when the actual
expenditure of the $1,882 was made from the PHS grant as well as prior
to the obligating of that sum, and what it exacted was not merely prior
approval, but approval by a particularly designated official. We cannot
say that this condition was an invalid exercise of administrative
authority, or that grantee was free to disregard it.
For the reasons stated we sustain the appeal as to the sum of $14,225,
and affirm the determination of disallowance to the extent $1 882.
/1/ Grantee in its brief raises the question whether PHS has standing
to disallow an expenditure made out of funds awarded under an OEO grant.
We answer this question in the affirmative and, for purposes of this
case, we need refer to no other authority than that conferred by the
Delegation of Authority and Memorandum of Understanding from and between
OEO and the Secretary of DHEW, effective July 6, 1973, copies of which
are included in the Appeal file.
In one of the earlier documents filed by grantee with this Board, it
requested a hearing which would afford it with an opportunity for the
taking of testimony of individuals familiar with the facts. The Board
finds that in the matter of the instant appeal there is no dispute as to
a material fact, the resolution of which would be materially aided by
oral testimony. Pursuant to 45 CFR 16.8, this request of the appellant
is hereby denied. D11 May 15, 1992