DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: Oakwood Child DATE: August 31, 1989
Development Center, Inc. Docket No. 88-151 Decision No.
1092
DECISION
Oakwood Child Development Center, Inc. (Oakwood) appealed a decision by
the Family Support Administration (FSA/Agency) denying a request by
Oakwood for a no-cost, one year extension of a grant under the Community
Services Block Grant Act, Title VI, Subtitle B, of the Omnibus Budget
Reconciliation Act of 1981, Pub. L. No. 97-35, 95 Stat. 357. Oakwood's
grant application was dated February 11, 1987, and funds were awarded on
a non-competing, urgent basis in a notice dated February 25, 1987. The
Project/Program Title in the award notice was "Acquisition and
Renovation of Property at 555 North La Brea Avenue for use as the
Oakwood Child Development Center." A limitation in the grant stated
that:
Funds awarded must be expended in accordance with the approved work
program of the . . .application and for the demonstrable benefit of
low-income people . . . .
Oakwood Exhibit (Ex.) 2.
Oakwood alleged that the Agency's reasons for denying the extension were
not supported by the facts of the case, that the decision to deny the
extension reversed an earlier determination granting the extension, and
that FSA's actions constituted an unexplained and impermissible
departure from its previous policies on no-cost extensions. FSA claimed
that Oakwood failed to make satisfactory progress toward achieving its
original grant objectives during the first year of grant operation.
Therefore, the Agency argued, the denial of the extension was justified.
During this appeal the parties raised a number of subsidiary questions
concerning the motives and intent of various officials of both the
Agency and Oakwood. These questions are largely irrelevant to our
consideration of the basic issue presented by this appeal, which was
whether the Agency's exercise of its discretion in denying the no-cost
extension was reasonable. As we explain below, we find that FSA's
refusal to grant a no-cost extension of Oakwood's grant was reasonable.
The record shows that, during the first year of the grant, Oakwood made
no progress toward achieving the grant's objectives, other than the
purchase of a building. This fact alone was sufficient justification
for FSA's refusal to grant the extension. Contrary to Oakwood's claim
that the Agency had reversed itself, there was no clear Agency
determination that Oakwood should receive a no-cost extension in the
first place. Further, the fact that FSA previously may have granted
no-cost extensions in other cases did not preclude FSA from refusing to
grant an extension when the facts of the case warranted such action.
Background
The following is a summary of the undisputed facts.
The Yeshiva Rav Isacsohn (the Yeshiva) is an educational institution
serving more than 700 children from pre-school through high school in
Los Angeles, California. Oakwood, a separate corporation, is a
non-profit affiliate of the Yeshiva created, at least in part, to
implement this grant project. The focus of this case is on Oakwood's
acquisition and proposed renovation of a building located at 555 North
La Brea Avenue (the Azteca Building) in Los Angeles, for use as a Child
Development Center. Yeshiva Rav Isacsohn is located at 540 North La
Brea Avenue. Oakwood Ex. 1, p. 4. Oakwood described the Azteca
Building as "adjacent" to Yeshiva Rav Isacsohn's facilities. Oakwood
Brief (Br.), p. 3.
Based on its experience, the Yeshiva believed that the surrounding
community would benefit by the services which could be offered by a
Child Development Center. With that goal in mind, the Yeshiva became
aware of the availability of the Azteca Building and in late summer of
1985 set about to acquire that property. At this stage, community
leaders with ties to the Yeshiva agreed to purchase the Azteca Building
with the understanding that the Yeshiva would ultimately put together
the funding to acquire the building. Oakwood Ex. 1, pp. 1-3; Oakwood
Br., p. 3. The Yeshiva's community investors completed acquisition of
the Azteca Building in July 1986. FSA Ex. 5; see also Hearing
Transcript (Tr.) I, pp. 247-249.
In August 1986, Oakwood applied for a Head Start grant. Oakwood's
application indicated that the program would operate from the Azteca
Building and would start in January 1987. FSA Ex. 6. At some point
during the application process, representatives of Oakwood were made
aware of the fact that they would have difficulty in getting the Head
Start grant approved. Consequently, Oakwood decided to abandon its
efforts for a Head Start grant and apply for federal aid through the
Office of Community Services (OCS), a part of FSA. Tr. I, p. 30.
On February 11, 1987, Oakwood applied for a $2.3 million grant under
section 681 of the Community Services Block Grant Act. Oakwood sought
$1.5 million for purchase of the Azteca Building and $800,000 for
renovations. The grant application described the Azteca building as
containing 25,000 square feet. Oakwood's application projected
operating costs for the first two program years to be over $1.9 million,
but indicated that it would raise those funds privately. Oakwood's
application also expressed the need for "an immediate commitment for
acquisition funds" or the building would be lost. Oakwood Ex. 1.
Oakwood's grant was approved on February 25, 1987. The project period
and budget period were both for one year, from 2/26/87 through 2/25/88.
Oakwood received $1.8 million: $1.5 million for acquisition of the
building and $300,000 for renovation. In the terms and conditions of
the grant, Oakwood was required to submit (within 30 days after each
quarter of the grant project period) quarterly progress and financial
reports. Oakwood Ex. 2. Additionally, among its special terms and
conditions, the grant included an Assurance of Non-Sectarian Activity.
In part, the Assurance required that Oakwood agree --
that no portion of any property or facility acquired or
renovated in whole or in part with funds awarded or otherwise
acquired pursuant to this Application will be used for religious
worship, sectarian instruction or any other religious purpose .
. . . Id.
The special terms and conditions required that this Assurance be signed
prior to the drawdown of any funds by Oakwood. Id. The Assurance was
actually signed in California on February 26, 1987. FSA Ex. 10.
Oakwood purchased the Azteca Building from the community members who
were holding the building during late March or early April 1987. The
building was a one story structure with a partial mezzanine containing
approximately 25,000 square feet of space. Oakwood Br., p. 3; FSA Ex.
12. On April 8, 1987, Oakwood's architect wrote David Kirker, then
Director of OCS, requesting advance payment of the $300,000 in grant
funds allocated for renovations. The architect estimated the total cost
for renovations to be $800,000, but indicated that Oakwood had raised
the difference from individual donations. FSA Ex. 14. In a June 22,
1987 letter to Mr. Kirker, Joseph Bobker (Oakwood's Acting Director)
briefly recounted the grant history to that date, noting that the grant
funds had been "expended for the approved purposes" and all special
grant conditions had been met. Mr. Bobker then noted that --
Since our service, financial and space needs were greater than
the amount of the FSA/OCS grant, we are now undertaking the
drive for private funds to expand by adding a second floor.
Therefore, we are informing you of our intention to make the
structural change in the building. This second floor will be
used for education and community purposes, some of which might
be sectarian in nature. The original structure, the single
story building fully described in the grant package, was
acquired with FSA/OCS funds and will continue to be utilized
exclusively for non-sectarian purposes.
Oakwood Ex. 4 (emphasis in original).
Mr. Kirker responded to Mr. Bobker in a June 29, 1987 letter reflecting
his understanding that "the proposed expansion would be accomplished
using private funds exclusively." Mr. Kirker indicated that OCS had "no
objection to this expansion as outlined in your letter." Oakwood Ex. 5.
On July 29, 1987 Mr. Kirker again wrote to Mr. Bobker, noting that in
his June 29 letter he "had focused only on your plans to add an
additional story to the building purchased with Federal funds . . . ."
Mr. Kirker indicated that (presumably after he wrote the June 29 letter)
he became aware that the additional space would likely be used for
religious activities. He informed Mr. Bobker that in view of those
facts, the proposed expansion appeared to violate the Assurance of
Non-Sectarian Activity contained in the grant. Mr. Kirker indicated his
willingness to consider any additional information which Oakwood might
have, but told Oakwood that until further notice it --
should consider the plans referred to in your letter of June 22
to be disapproved to the extent that activities prohibited by
the Assurance would be conducted in the expanded space.
Oakwood Ex. 6.
On September 1, 1987 Mr. Bobker acknowledged OCS's rejection of
Oakwood's proposal to add "a second and possibly a third story" to
the
Azteca Building. Mr. Bobker indicated that Oakwood was considering
transferring to an independent party "that part of the property that
might become subject to improper use." Oakwood intended to use the
proceeds of such a transaction for renovation or operating costs
incurred in connection with the program on the first floor. Oakwood
proposed to transfer air rights sufficient to enable a transferee to own
the space occupied by the second or third floor, the right of subjacent
support, and easements for ingress/egress, utilities, etc. Mr. Bobker
noted that the planning process would be "time-consuming and costly"
and
requested a prompt response to the "general thrust" of the proposal.
Oakwood Ex. 7. Representatives from Oakwood and the Agency discussed
Oakwood's proposal for the building and concluded that it would not be
viable. FSA Br., p. 15; FSA Ex. 29. On January 28, 1988 Mr. Bobker
wrote to Mr. Kirker and indicated that renovation of the Azteca Building
was being delayed due to difficulties in removing a tenant (Azteca
Films) and obtaining OCS approval for the renovations. In view of the
issue raised by sectarian and non-sectarian activities in the same
building, Oakwood then proposed to "swap" the Azteca Building for
three
other buildings in the neighborhood owned by the Yeshiva. Mr. Bobker
indicated that the properties to be exchanged were equal in value, that
the $300,000 would be used to renovate the "new" buildings, and that
those buildings would be operated by Oakwood for non-sectarian purposes.
FSA Ex. 28.
On March 10, 1988 Mr. Kirker (who was by this point Deputy Administrator
for FSA and also Acting Director of OCS) reminded Oakwood's Chairman
that its grant had expired on February 25, 1988. Mr. Kirker said that
since "we know that you have not implemented your project," OCS needed
to know, essentially, how Oakwood intended to meet its grant goals and
how long it would require to fully implement the project. Mr. Kirker
advised Oakwood that no further "obligation or expenditure" of grant
funds was permitted until OCS had approved an extension of the grant
period. Oakwood was instructed to --
respond to the above within 30 days from the date of this letter
so that we may take the appropriate action to extend your
grant's project period.
Oakwood Ex. 14.
In a March 31, 1988 letter, Mr. Kirker rejected Oakwood's swap proposal.
He indicated that OCS had substantial questions about the appraised
value of the properties which Oakwood would acquire. Mr. Kirker noted
that Oakwood had failed to demonstrate how the properties it proposed to
acquire were suited to carrying out the grant purpose. Also, Oakwood
had not submitted a detailed explanation of how the $300,000 earmarked
for renovations would be spent. OCS left open the possibility that it
would approve the swap if Oakwood could submit appraisals showing the
properties to be acquired were at least equal in value to the Azteca
Building and that they were suitable for the grant purpose. Oakwood Ex.
11. Mr. Bobker responded on April 11 indicating that Oakwood "was now
proceeding under the original terms and conditions of the grant . . ."
and expressed his hope to have the child care facility open by
August/September of 1988. Oakwood Ex. 12.
On April 4, 1988, Mary Evert became the Acting Director of OCS. She
became Director on May 8. FSA Ex. 34, p. 1. In an effort to achieve an
orderly transition, Mr. Kirker continued in a liaison role acting as
OCS's contact with Oakwood. Tr. II, pp. 21-22.
On April 27, 1988, Mr. Kirker responded to Oakwood's decision to proceed
under the original grant terms. Mr. Kirker reiterated the Agency's need
to know how Oakwood would meet the original grant goals. Mr. Kirker
again reminded Oakwood of the need to apply for a no-cost extension and
gave Oakwood 14 days to respond. Oakwood Ex. 15. On May 6, 1988
Oakwood provided a detailed listing of how the renovation funds would be
spent, set out its long term goals, and supplied quarterly reports.
However, the breakdown explaining how the renovation funds would be
spent was for a "BUILDING AT APPROXIMATELY 8,000 SQ. FT." This was
less
than one third the area attributed to the building described in
Oakwood's grant application. Oakwood Ex. 16; see also Oakwood Ex. 1.
Oakwood did not request a no-cost extension at this time. On June 21
Ms. Evert informed Oakwood's President, Barry J. Weiss, of the need to
request a no-cost extension and provided a 15 day response time.
Oakwood Ex. 17. On June 30, 1988 Mr. Weiss requested a no-cost
extension of the grant until February 25, 1989. Mr. Weiss noted that
previous correspondence between the parties had identified Oakwood's
problems and progress. Therefore, he assumed that OCS was aware of
Oakwood's status. Mr. Weiss noted that Oakwood expected to complete its
project by February 1989. Oakwood Ex. 18.
On July 6, 1988 Oakwood wrote FSA, projecting a completion date of
November/December 1988. Delay in renovations was now attributed to
failure of an engineering firm to complete seismic testing. The
architect was said to be in the process of submitting final plans. FSA
Ex. 30.
FSA denied Oakwood's request for a no-cost extension on August 6, 1988.
FSA set out the following factors as the basis for its decision:
1) Even though Oakwood received emergency funding on February
26, 1987 it failed to implement its proposed renovation project
in the one year project period; 2) at the time the grant
expired, your organization had not achieved any of its proposed
goals or provided any other benefits to the proposed low-income
beneficiaries of this project; 3) your grant expired on February
25, 1988 and you failed to request an extension until your
letter dated June 30, 1988 even though you had been advised by
phone and by letter to do this promptly; 4) Oakwood failed to
submit any of the required quarterly progress reports on time
and those which were submitted were unacceptably brief and
uninformative; 5) your organization drew down the $300,000 for
renovations of your building in May 1987 and you had not begun
any renovations as of July 6, 1988; 6) there appears to be no
continuity in staff responsibility since every few months we are
asked to direct correspondence to a new person at a new address.
Oakwood Ex. 19.
Oakwood challenged FSA's decision on the following general grounds: 1)
the manner in which FSA reached its decision was arbitrary; 2) Mr.
Kirker had previously granted the extension; 3) FSA offered no support
for its reasons for denying the extension; 4) FSA caused the delay in
implementing the project. Below we first discuss the standard of review
and the manner in which FSA reached its decision. We then address
Oakwood's other arguments.
Analysis
I. STANDARD OF REVIEW; DISCRETION
The parties agree that the denial should be upheld unless it was
arbitrary. We need not discuss here the general principle of
administrative law, that a certain presumption of regularity attaches to
the actions of government officials, since Oakwood accepts the principle
that the decision to deny the extension must be shown to be arbitrary if
Oakwood is to prevail.
Specifically, we note the opening statements of both parties at the
hearing:
Now we have argued in our briefs and will continue to argue that
this decision was arbitrary and, therefore, unjustifiable.
Oakwood's Opening Statement, Tr. I, p. 16.
In our view . . . the grantee must show that this decision was
arbitrary and discriminatory.
FSA's Opening Statement, Tr. I, p. 18.
A. What is arbitrary action
Courts have said that to be considered arbitrary or capricious an
agency's actions must have been unwarranted in law and without
justification in fact. Ai Hoa Supermarket, Inc. v. U.S., 657 F. Supp.
1207 (S.D.N.Y. 1987), citing Willy's Grocery v. United States, 656 F.2d
24, 26 (2d Cir. 1981), cert. denied, 454 U.S. 1148 (1982).
FSA correctly stated the standard for the Board to apply:
was the decision a reasonable decision, not was it the only
decision, or even the best decision, or even the decision that
others might have made . . . [was it simply] a reasonable,
rational decision.
Tr. I, p. 18.
B. OCS Policy on Granting No-Cost Extensions
The record shows that the decision whether to grant a no-cost extension
is a discretionary determination.
We look first to the Departmental Grants Administration Manual (GAM) for
OCS policy on granting no-cost extensions. The grant terms and
conditions included in the Notice of Grant Award (Oakwood Ex. 2) stated
that the grant was subject to the Health and Human Services Grants
Administration Manual. The GAM provisions on no-cost extensions are
found in Chapter 1-85; section 1-85-10 states that this chapter is
applicable to all discretionary grants awarded by HEW [HHS].
Section 1-85-80, entitled EXCEPTIONS FOR NO-COST AND LOW-COST
EXTENSIONS, provides as follows:
If support for a project is ending, the grants officer may
noncompetitively extend the project period for a limited time,
usually a few months, to provide for an orderly phase-out of
Federal support. The grants officer may also extend any budget
period for a few months for administrative reasons . . . .
This section clearly indicated that extensions were discretionary and
would ordinarily be given only for a few months to provide for phase-out
or for administrative reasons.
We consider next whether OCS had any specific supplementary policy of
its own on granting no-cost extensions. It is clear that there was no
specific written policy. Oakwood asserted that FSA had never adopted a
written policy with respect to no-cost extensions. Oakwood Br., p. 22,
n. 8.
David Kirker, Director of OCS when Oakwood received its grant, was
equally positive:
Q. Did you ever issue any written policies on the standards
for granting no-cost extensions?
A. There are no written standards, no.
Tr. I, p. 506.
The unwritten policy in OCS toward no-cost extensions was to treat each
request on its own merits, although every request for such an extension
had in the past been granted. Mr. Kirker's testimony on the policy when
he was the Director of OCS was as follows:
A. Based on the facts and circumstances of the particular
grant, no-cost extensions were uniformly granted, but only after
a review of the facts and circumstances that were involved in
that grant.
Tr. I, p. 453.
The testimony of Mr. Kirker was also definite that it was OCS practice
to have a grantee request an extension in writing; if the request were
granted, it was also in writing:
Q. Wasn't it OCS practice to tell the grantee to put the
request in writing?
A. Yes, normally it was to put it in writing.
Q. As you did in this case.
A. Correct.
Q. And in fact wasn't it your practice not to grant the
extension until it was requested in writing?
A. I believe that was the practice, yes.
* * *
Q. Because each grant award contains a specified project
period, doesn't it?
A. That's correct.
Q. So in order to modify that, you're required to have a
writing to change the project period.
A. That's correct.
Tr. I, p. 504.
It is undisputed that no written approval for an extension was ever
issued.
C. Whether FSA failed to comply with Departmental
regulations
In its opening brief Oakwood claimed the denial of the extension request
was invalid because FSA had failed to comply with the provisions of 45
C.F.R. 74.304. The part relied on by Oakwood was the following:
(a) Granting agencies and other Departmental components attempt
to promptly issue final decisions in disputes and other matters
affecting the interest of grantees. However, they do not issue
a final decision adverse to the grantee until it is clear that
the matter cannot be resolved informally through further
exchange of information and views. (Oakwood's emphasis)
Administrator Wayne Stanton's letter of August 6, 1988, denying the
request for a no-cost extension, was a final decision adverse to
Oakwood. Oakwood's argument was that there was never any effort to
resolve any adverse issue, since prior to the issuance of the letter
neither Mr. Stanton nor any other FSA officer or employee communicated
with Oakwood about the existence of an "adverse" matter.
As FSA pointed out in its brief, the Board rejected this argument in
Vanderbilt University, DAB No. 903 (1987). There, the Board said:
Vanderbilt in our view has not demonstrated that any of
these regulations [including 74.304(a)] would ever require
this Board to reverse the Agency's determination. A reading
of these regulations indicates that they are not intended to
provide sanctions for Agency noncompliance and they
certainly do not offer the remedy of reversing an Agency
determination. They are clearly intended instead as general
guidelines to inform grantees of how the Department's appeal
processes operate. Id. at 86.
We note, also, that prior to Mr. Stanton's letter denying the extension,
there had been ongoing discussions for several months between Oakwood
and OCS about the different proposals that Oakwood submitted with
changes to the original grant project, and the expiration of the grant
period.
D. The actions of the OCS directors
Oakwood contended that consideration of whether FSA acted in an
arbitrary manner had to acknowledge the changed pattern of dealing
between grantor and grantee when Mary Evert replaced David Kirker as
Director of OCS. Oakwood's Closing Argument, p. 10. We find nothing in
the record which indicates that Ms. Evert's actions in recommending
denial of the extension were arbitrary or unreasonable.
Mary Evert and David Kirker obviously had different management styles.
Ms. Evert consulted at length with her staff about Oakwood, while Mr.
Kirker seemed to handle many of the details about the project by
himself, although he did sometimes consult his staff. Ms. Evert tried
to get the files in some semblance of order; Mr. Kirker admitted that he
did not keep records of every telephone call. Mr. Kirker spoke
frequently with Mr. Robert Brandwein, Oakwood's consultant, with whom he
had dealt for years. Ms. Evert's contact with Mr. Brandwein was
apparently limited to an invitation for him to drop in to see her at her
office, relayed through her staff. Tr. II, p. 100.
The Board does not have to decide which method was better since Mr.
Kirker did not make the decision, and Ms. Evert, in effect, did (Mr.
Stanton's decision was based on her recommendation).
Mary Evert testified at length; her testimony covers 129 pages of the
transcript. See Tr. II. She explained in considerable detail every
step she took in the Oakwood matter. When asked at the end of her
testimony to clarify the time frame in which she gave consideration to
the Oakwood extension, this was her reply:
I feel that the entire time from the day I walked into the
office of OCS [April 4, 1988] into the latter part of July
[1988] was a total consideration of that very issue. Id. at
128.
Ms. Evert testified that she at first "would do what I could to make
sure that the grant would proceed." Id. at 20. She went on to say that
"I had every intent that we would try to make this thing right and fix
it so that the grantee could proceed with our money." Id.
Later she referred to "doing everything I could to give the grantee the
benefit of the doubt," in giving Oakwood time to explain what they meant
by going back to the original terms and conditions. Id. at 34.
Ms. Evert at first asked Mr. Kirker to continue as liaison with Oakwood.
In fact, the April 27, 1988 letter to Oakwood, stating that it was
imperative that Oakwood describe how the current goals and benefits
would be achieved as proposed in the original application, was signed by
Mr. Kirker. Oakwood Ex. 15. Toward the end of April Ms. Evert realized
that "we seemed to be getting nowhere fast", and she asked Mr. Stanton
to discontinue Mr. Kirker's liaison role, which was done. Tr. II, p.
35.
Ms. Evert showed an appreciation of the real problem with the grant,
which was that after Oakwood's various changes were rejected, it
purported to go back to its original grant, but on a much smaller scale
with less private funding. She stated that her view was confirmed by
the July 6, 1988 letter of Oakwood (FSA Ex. 30), which projected further
date slippage in completion and included illegible drawings. Id. at
43-45. Her decision to recommend denial of an extension to Mr. Stanton
(she had the authority herself to deny it) was a reasonable one, after
taking into account all the circumstances.
Oakwood argued that FSA's process for considering the no-cost extension
request was flawed, in that it was neither structured nor conducted in
such a way as to give Oakwood fair and reasonable treatment. Oakwood's
Closing Argument, p. 7. Ms. Evert's testimony shows that full
consideration was given to Oakwood before the extension was refused.
Ms. Evert did not contact Mr. Brandwein regularly the way Mr. Kirker
did. As discussed above, this was a difference in management style.
Oakwood refers to the admission of Ms. Evert that the Oakwood grant was
a source of embarrassment to the Department. Tr. II, p. 125, cited at
p. 19 of Oakwood's Closing Argument. She made it clear however, that
"it wasn't just the fact that it was granted, but it was the performance
of the grantee that was at issue." Id.
The parties stipulated more than once that the propriety of the original
grant to Oakwood was not in issue in this appeal. The fact that Ms.
Evert said her motives were to do the best to protect the interest of
her bosses, who were political bosses (Tr. II, p. 126), is of itself of
no consequence. She went on to say that her motives were "to protect
the grantee and to protect my bosses." Id. The question is whether on
the entire record FSA made a reasonable decision to deny the extension.
II. MR. KIRKER DID NOT GRANT AN EXTENSION.
Oakwood's approach in the briefing phase was that Mr. Kirker had in
effect granted an extension to Oakwood. In its opening brief Oakwood
claimed that Mr. Kirker, "prior to his departure from OCS, directed that
Oakwood be granted a no-cost extension of its grant" and that decision
"was never communicated to Oakwood." Oakwood Brief, p. 20. This
conclusion in the brief that Mr. Kirker "directed" that an extension
be
granted is supported by a cite to an interrogatory put to Kirker by
Oakwood, in which he answered "yes" to an inquiry asking if in the
Spring of 1988 he ever "recommended" that Oakwood be granted a no-cost
extension of its grant. Oakwood Ex. 22, Question 6.
A recommendation to grant an extension is hardly the same as a
direction. In fact, the answer to the particular question does not
indicate whether the alleged recommendation was given when Mr. Kirker no
longer occupied a position in which he could grant the extension. The
record shows that he made the recommendation while he was acting in the
role of liaison between the new OCS director and the grantee. His
testimony made it clear that the recommendation was made to Mary Evert
after she took over as Director of OCS, and Mr. Kirker no longer had the
authority to grant the extension. Tr. I, p. 508.
In any event, any possible argument by Oakwood that there was a de facto
grant of an extension is clearly contradicted by Mr. Kirker's testimony
that a grant of an extension required a request in writing and a
response from OCS in writing.
When asked why he had written a letter asking Oakwood to submit a
request, the following appears in the transcript:
A. Because the request was to be in writing.
Q. And haven't you testified previously that you couldn't
grant such a request until you received it in writing?
A. That's correct.
Q. So would it more accurate to say that you told her it
was your intention to grant a no-cost extension?
A. That's correct.
Tr. I, p. 508.
The testimony of Robert Brandwein, a consultant who prepared Oakwood's
original application and assisted in its request for various changes, is
similar. The first request for an extension by Oakwood was in June
1988. While Mr. Brandwein thought it was implied that Oakwood would get
an extension, he admitted that with previous clients he had represented
in connection with no-cost extensions, the extensions were always
requested in writing and granted in writing. There had never been a
no-cost extension granted without a writing so far as he knew. Tr. I,
p. 136. His answer to the question whether Mr. Kirker did in fact
himself grant an extension to Oakwood was: "Officially, no. On paper,
no." Tr. I, p. 135.
Mr. Kirker's attitude toward Oakwood and its grant was a favorable one.
Whether this was due to a belief in the desirability of the grant
project is not dispositive. There could have been other reasons, such
as his belief that the grant was favored by his superiors (Tr. I, pp.
473-474) or that he had known Mr. Brandwein for many years and that Mr.
Brandwein had been recommended by the Department (perhaps with others)
to Oakwood. Tr. I, pp. 522-523. His testimony favorable to Oakwood
could have been colored by his obvious displeasure at being excluded
from the final decision on extension of the grant. Tr. I, p. 510. We
need not speculate on whether, if a request for an extension had come to
him in writing when he had power to grant it, he might then have given
it careful thought and perhaps turned it down.
For our purposes, what is significant is that Mr. Kirker did not grant a
no-cost extension. Therefore, there is no merit in Oakwood's argument
that FSA's refusal to grant the extension constituted an unexplained
reversal of a previous determination. Oakwood Br., p. 17. Mr. Kirker's
testimony indicating that he would have granted an extension if Oakwood
had requested it in writing hardly constituted a determination by OCS.
Ms. Evert saw things differently from Mr. Kirker; she denied the
extension. This was not a reversal of a determination, since none had
been made.
III. THE REASONS FOR DENYING THE GRANT EXTENSION
FSA gave six reasons for denial of the requested no-cost extension of
the Oakwood grant. The three most significant reasons were, in
substance:
Even though Oakwood received emergency funding it failed to
implement its proposed renovation project in the one year
project period;
At the time the grant expired Oakwood had not achieved any of
its proposed goals or provided any other benefits to the
proposed low-income beneficiaries of this project;
Oakwood drew down the $300,000 for renovations of the building
in May 1987 and yet had not begun any renovations as of July 6,
1988.
Oakwood Ex. 19.
Another reason -- that Oakwood failed to request an extension until June
30, 1988, even though its grant expired on February 25 -- is based on
undisputed facts, but we note here that the failure to request the
extension until after the grant expired should not be dispositive by
itself, since FSA was still corresponding with Oakwood about changes
after the expiration date.
A further reason -- the failure to submit quarterly progress reports on
time, with those that were submitted being unacceptably brief and
uninformative -- while not excusable, would, by itself, be a
questionable ground for refusing the extension. The Notice of Grant
Award did provide that failure to submit reports when due would
constitute non-compliance with grant terms "and may be considered
inadequate performance relative to eligibility for future funding."
Oakwood Ex. 2, Grant Terms and Conditions, 4(b). There is doubt if this
would in fact apply to a no-cost extension, since there was no
additional "future funding" involved. But while not a dispositive
basis, FSA could reasonably buttress its decision on other grounds with
this failure.
The sixth ground stated, that there appeared no continuity in staff
responsibility for Oakwood, was not substantially developed in the
record as a basis which would justify FSA's denial.
Thus, we rely below primarily on the combination of the first three
reasons listed above -- that Oakwood had failed to implement the
renovation project in the one year project period, had not achieved its
goals by July 6, 1988, and had in fact not begun any renovations despite
having drawn down the federal funds earmarked for renovations.
IV. THE UNDISPUTED FACTS CLEARLY SUPPORT THE REASONS FORDENYING THE
EXTENSION.
There is no question that FSA's three reasons set out above for denying
the extension are amply supported by the record. While we discuss them
in more detail below, we summarize at this point the record support for
the reasons given for denying the extension.
A. Oakwood failed to implement the renovationproject in the one
year project period.
The record is clear that not only had Oakwood failed to complete its
proposed renovation project in one year, it had not even begun the
actual renovation of the building when the grant period expired.
In its opening brief Oakwood admitted that it "did not complete the
renovation of the facility." Oakwood Br., p. 12. The consultant for
Oakwood, Mr. Brandwein, admitted that no renovation had been done, in
response to a question from the Presiding Board Member at the hearing.
Q. Actually, there -- there was no renovation done on this
building at all in connection with this grant, was there?
A. I - apparently - apparently there was not. The money was not
spent on reno -- there was no renovation.
Tr. I, p. 161.
B. Oakwood had not achieved any of its proposedgoals at the
time the grant expired.
It is undisputed that when the grant expired Oakwood had not achieved
its goal of having a child care center in operation in a renovated
building. Admittedly, Oakwood did purchase a building with federal
funds. While the building was certainly essential to Oakwood's project,
the purchase of the building, by itself, with nothing being done to
renovate it and use it for a child care center, certainly did not create
any jobs for low-income people or provide any other benefits to them,
which was the purpose of the grant. See Oakwood Ex. 1.
Again, the admission of the factual basis for this reason for denying
the extension appears in Oakwood's opening brief. The same sentence in
which Oakwood admits that it "did not complete the renovation of the
facility" goes on to say that "consequently, it was not able to open
and
operate a child care program." Oakwood Br., p. 12.
This second reason listed above also refers to the fact that at the time
the grant expired Oakwood had not provided "any other benefits to the
proposed low-income beneficiaries of this project."
The Community Services Block Grant Act under which the grant was awarded
had provisions for aiding low-income persons. The Grant Terms and
Conditions required that:
Funds awarded must be expended . . . for the demonstrable benefit
of low-income people . . . all jobs created through the
implementation of the approved work program must be filled by
low-income people . . . The employment of low-income people, and
best efforts to employ them when filling grant-supported jobs and
the delivery of Child Development Center benefits to low-income
people, must be documented in each program progress report.
Oakwood Ex. 2 (emphasis in original).
Mr. Kirker was well aware of this requirement for benefit to low-income
people, even if Oakwood apparently was not. In his letter to Oakwood on
April 27, 1988, he said that it was imperative that Oakwood describe how
its goals and benefits would be achieved, in proposing to return to the
original application: "Specifically, the number and kind of jobs that
the project will generate for low-income people." Oakwood Ex. 15.
C. Oakwood drew down $300,000 for renovation of thebuilding,
but had not begun any renovation when the extension was denied.
Here again, there is no dispute about the factual basis for this reason
for denying the extension. Oakwood has always admitted receiving the
$300,000 for renovations. See, e.g., Oakwood Reply Br., p. 4. As we
noted above, the record shows that Oakwood had not begun any renova-
tion on the building when the extension was denied.
V. OAKWOOD CAUSED THE DELAYS IN IMPLEMENTING THE PROJECT.
Oakwood never claimed that it implemented the grant project within the
one year grant period. Rather, it has blamed the delay on FSA. In its
reply brief, it summarizes its arguments in its opening brief as
follows:
Oakwood argued that it could not properly be penalized for failure
to complete the project within the grant period, because the delay
in undertaking renovation was attributable in large measure to the
deliberate efforts of FSA to review and ultimately to reject
Oakwood's alternative proposals.
Oakwood Reply Br., p. 14.
Below we consider, in depth, the facts surrounding Oakwood's arguments.
The central element in FSA's denial of the extension was that, rather
than implementing its grant project as approved, Oakwood spent virtually
the entire project period attempting to win approval of various
structural changes in the Azteca Building. When Oakwood was unable to
obtain approval for these proposed changes, it even went so far as to
propose a "swap" of this building for three other buildings owned
by
the Yeshiva, of allegedly comparable value.
We consider also the existing lease on the Azteca Building, which was a
reason that Oakwood could probably not have completed the grant project
within the grant term even if it had tried to do so. Finally, we
consider how the proposal of Oakwood to return to the original grant
(after the grant term had expired) differed greatly from the original
grant project.
A. Oakwood's proposed changes
We first discuss why we find that the changes which Oakwood first
proposed for modifying the Azteca Building, and then exchanging it,
support the denial of the extension.
The sequence of events involving the various changes in planning for the
building is significant, since both parties rely on some part of the
chronology. We, therefore, review what actually happened from the time
of the original grant. By necessity, we repeat some of the material
already set out in the Background.
Oakwood's post-hearing memorandum, entitled "Closing Argument," opens
with the flat statement that the delay in completing the grant was the
fault of FSA. That this statement is false is apparent once one
examines the record. This argument completely disregards the fact that
it was Oakwood which originated the delay by changing its plans for the
building.
FSA was hardly speedy in acting on Oakwood's several requests for
changes in plans for the building. FSA did reverse itself on the first
request for changes in the building plans. None of this would have
occurred, however, if Oakwood had simply gone ahead with the plans it
submitted for its project in its original application. There would be
no reason to argue about how long FSA took in considering Oakwood's
revisions but for Oakwood's various request for changes.
Oakwood received its grant on February 25, 1987. The application for
the project, which was incorporated by reference in the grant, called
for completion of the necessary renovation by the start of the school
year in September 1987, although the grant was actually for one year.
1. The first proposed change -- addition of a secondfloor
Oakwood acquired the building for the $1.5 million in federal funds at
the end of March 1987, the only part of the grant activity which ran on
schedule without changes. Oakwood first suggested a change in its
structural plans for the Azteca Building in a letter dated June 22, 1987
(Oakwood Ex. 4), almost four months after the grant was awarded and less
than three months before the scheduled beginning of the school year.
This letter called for expansion of the building "by adding a second
floor." Oakwood stressed in the letter, and in argument, that only
private funds would be used for this expansion. That is not really the
point. The Assurance of Non-Sectarian Activity provided that "no
portion of any property or facility acquired or renovated in whole or in
part" with grant funds was to be used "for religious worship, sectarian
instruction or any other religious purpose." An addition of a second
floor, even with private funds, was clearly contradictory to the
Assurance, if the second floor would be used for education and community
purposes, "some of which might be sectarian in nature."
Then came what were clearly unfortunate occurrences, the quick approval
by David Kirker on June 29, 1987 (Oakwood Ex. 5), followed by the recall
of this approval by Mr. Kirker by letter dated July 29th. Oakwood Ex.
6. In his rescission Mr. Kirker pointed out that his approval had
focused only on the expansion, and not on the possible sectarian use of
the expanded space which would appear to violate the Assurance. Mr.
Kirker should have resolved this important issue before sending the
approval; however, his ultimate rejection of the proposal should not
have come as a surprise to Oakwood. Any use of any part of the building
for any sectarian purposes was clearly forbidden by the Assurance.
Oakwood has not even argued that OCS or FSA had any right to waive such
a restriction.
As explained by Oakwood, more delay ensued. Mr. Brandwein and Mr.
Kirker "attempted to reconcile Oakwood's request to expand the building
(with the expanded area possibly to be devoted to sectarian use) with
the government's concern that any such use not transgress constitutional
restrictions on the use of government funds for religious activity."
Oakwood's Closing Argument, pp. 3-4. This led to the next proposal by
Oakwood for changes in the building.
2. The second proposed change -- the "air-rights"proposal
The next proposal by Oakwood (Oakwood Ex. 7) was dated September 1,
1987, but was actually presented to Mr. Kirker in person by Mr.
Brandwein in mid-September. Oakwood's Closing Argument, p. 4; Tr. I, p.
86. This September change suggestion has been referred to as the "air
rights" proposal and is, on its face, extremely complicated. The letter
detailing the proposal deserves careful study. The letter first refers
to Mr. Kirker's letter of July 29, 1987, which stated that the "proposal
to add a second and possibly a third story" to the building purchased
with federal funds appeared to violate the Assurance. The mention of a
"possible third floor" is significant, since all prior correspondence
had referred only to a second floor.
The alternative proposed was "the transfer to an independent party of
that part of the property that might become subject to improper use."
The proceeds would be used for renovation of the first floor and
operating costs of the program on the first floor. This was to be
accomplished by a sale of "an easement of air rights" so that the
transferee could own the second and third floor space, together with the
"right of subjacent support" and "easements for ingress/egress,"
etc.
The transaction "could be structured as a sale or long term lease,"
but
the precise form depended upon California law. Oakwood said it needed
to know if "the general thrust of our proposal would be acceptable"
to
OCS. Mr. Brandwein testified: "We wanted to get some guidance from OCS
as to whether or not this was worth pursuing and would be acceptable . .
. to them before a great deal of work was done." Tr. I, p. 85. Clearly
the original deadline for being in operation by the start of the school
year in September 1987 had slipped by, with no renovation actually done.
The parties agreed that there never was a formal response to this
proposal in writing, although Oakwood knew that it was not acceptable,
apparently by mid-December. OCS should have given Oakwood a written
response, but the fact remains that Oakwood was made aware that the
air-rights proposal was not acceptable. Oakwood's Closing Argument, p.
4, n. 4.
Again, Oakwood stressed the delay on the part of OCS and referred to
testimony by Mr. Kirker that the time spent by FSA in deliberating on
this proposal was unreasonably long. Oakwood's Closing Argument, p. 4,
n. 5. The proposal was hardly simple. Since the Assurance prevented
the use of any part of the building purchased with federal funds for
sectarian purposes, the grantee in effect was going to build another
building on top of the original building, and sell or lease the rights
to this, and use the proceeds for the original purposes on the first
floor.
The complexity of the scheme was certainly enough to justify extended
consideration, although we do not necessarily condone the delay. As for
the denial by OCS, one sentence in the proposal was reason enough to
turn it down. This was the statement that "[t]he planning process
itself will be time-consuming and costly." Oakwood Ex. 7, p. 2. Thus,
even if FSA was tardy in replying to the air rights proposition, its
acceptance would have caused considerably more delay in ever having the
grant project finished.
Oakwood's refusal to accept its blame for the delay, by coming up with
various schemes to do something different from what it agreed to do, is
nowhere more apparent than in its statement about what happened when the
air rights proposal was turned down. Oakwood noted that when the
September 1 proposal was finally rejected, "FSA did not instruct Oakwood
to revert to the original plan as outlined in the grant proposal."
Oakwood's Closing Argument, p. 4. Such an instruction was hardly
necessary. Oakwood had agreed to do something, for which it had
received a total of $1.8 million in federal funds. It was hardly
necessary for FSA to order it to revert "to the original plan as
outlined in the grant proposal."
3. The third proposed change -- the "swap" proposal
Oakwood then came up with a third proposed change in plans, the
so-called "swap" proposal. While Mr. Kirker did agree to consider
this
proposal, it was hardly FSA's idea. As Mr. Brandwein testified, "there
was another--another approach that we wanted to try out." Tr. I, p. 88.
As Mr. Brandwein explained the approach, it was an exchange of the
Azteca Building "for property of equivalent value," and the development
of the child care center would take place at those other properties.
Id.
An examination of the actual proposal (Oakwood Ex. 10) is much more
illuminating than Mr. Brandwein's brief summary. The proposal stated
that "the renovation portion of the grant has not proceeded as rapidly
as we desire." This was because there was "an unresolved issue of
using
private funds to add additional floors to the structure for secretarian
[sic] use." The swap was proposed both to benefit the community and
satisfy the legal requirements of the grant, since "the mixing of
non-sectarian and sectarian activities in the same building raises
difficult issues." Oakwood was still trying to get around the
requirements of the Assurance on January 28, 1988, eleven months after
it had received a one-year grant.
The swap proposal received a categorical denial from FSA. Oakwood Ex.
11 (Letter from Mr. Kirker to Mr. Bobker). After reviewing the
appraisals, Mr. Kirker stated that it appeared that the total value of
the three properties to be exchanged for the Azteca Building would come
to less than $1,000,000, or more than a third less than the $1,500,000
paid for the Azteca property.
This substantial financial inequality was only one reason given by Mr.
Kirker for refusing to approve the swap. He stated that Oakwood had
made no attempt to establish the suitability of the proposed premises
for carrying out the purposes of the grant, and in fact, "there is
evidence to the contrary." Also, Mr. Kirker mentioned specifically
that, based on the appraisals the total available square footage was
less than half "the figure of 25,000 square feet mentioned in the
original application as being available in the original building."
Oakwood Ex. 11.
Other questions raised by Mr. Kirker pertained to marginal electrical
and hot water capacity, as well as lack of central heat and air
conditioning in the buildings to be exchanged for the Azteca Building.
An important factor mentioned was whether, with the three buildings
being two on one side, and one on the other side of the street, small
children would be required to cross the street with any frequency.
Finally, Mr. Kirker pointed out that there was no discussion of what the
plans were for renovations, what renovations were needed, how long they
would take, and how much they would cost, nor even any assurance that
the necessary funds could be raised.
B. The flawed offer to return to the originalproject
On April 11, 1988, Oakwood realized that its swap proposal would not
fly, and that its continued attempts at changing the grant project,
which it claimed were done "to maximize the benefits for the local
community," would not succeed. Oakwood said it was "now proceeding
under the original terms and conditions of the grant." It now hoped "to
have the child care facility open by August/September of this year
[1988]." Oakwood Ex. 12.
Even if there were no other grounds, this statement would be sufficient
reason for denying an extension of the grant. The original grant
application stated that the "renovation work will be completed within
six months, in time for a September 1987 Center opening." FSA Ex. 9,
pp. 36-39. The application even gave this timing as highlighting the
importance of receiving the grant during February (1987).
On April 27, 1988 Mr. Kirker (now Deputy Administrator of FSA) replied
to Oakwood's April 11th letter. He reminded Oakwood that the $300,000
renovation funds could not be used until OCS approved an extension of
the grant period which had expired on February 25, 1988, and that
financial reporting forms "must also be submitted." Mr. Kirker stated
in no uncertain terms what Oakwood was going to have to do about
carrying out its original grant purposes:
It is imperative that Oakwood describe . . . how the current
goals and benefits will be achieved as proposed in the original
application. Specifically, the number and kinds of jobs that
the project will generate for low-income people and any other
community benefits resulting from the grant . . . You should
include a breakdown as to the intended use of the $300,000.
Oakwood Ex. 15.
On May 6, 1988 Oakwood replied to Mary Evert, by then Director of OCS,
as directed by Mr. Kirker. The package sent to Ms. Evert included a
one-page cost estimate and a three-page narrative of long term goals and
benefits for the project. Oakwood Ex. 16. The narrative is sketchy, to
say the least, its three pages contrasting sharply with the forty pages
devoted to the program narrative in the original grant application. See
Oakwood Ex. 9, pp. 10-49. The original application projected 42 direct
permanent jobs and 84 secondary and tertiary jobs in Year 1. Id. at
39-40. The May 6th narrative envisioned definitely reduced employment
for Year l, consisting of 34 direct jobs and 68 secondary and tertiary
positions.
But perhaps the most interesting aspect is what happened to the size of
the grant project. The original project stated that the building
"contains 25,000 square feet of space." Oakwood Ex. 9, p. 27. The
supposed return to "proceeding under the original terms and conditions
of the grant" (Oakwood Ex. 12), now had a cost estimate related to a
"BUILDING AT APPROXIMATELY 8000 SQ. FT." Although Oakwood tried to
minimize this major discrepancy by pointing out that the original
proposal included parking space in the 25,000 square feet, an
examination of the original plans shows that those parking areas
amounted to but a minor part of the total area. Oakwood Ex. 9, p. 33.
Equally as startling is the reduction in the total cost of the
renovation project. The return to the original project now had a total
estimated cost of $322,800, although the original application called for
total estimated costs of $801,000. Oakwood Ex. 9, p. 31. Oakwood had
now ignored its commitment to raise $500,000 in private funds to
supplement the $300,000 given it in federal funds for building
renovations. In fact, when it had asked for advance payment of the
$300,000, its architect had not only certified that the estimate for
renovation and remodeling would be approximately $800,000, but that the
balance of approximately $500,000 had been "raised from individual
donations." FSA Ex. 14 (Letter by Mr. Reed to Mr. Kirker, April 8,
1987).
Standing alone, this confounding change to the original project, both as
to size and as to cost, was ample ground for a denial of the request for
an extension.
We need not decide, as we discuss below, if Oakwood ever intended to go
ahead with its original plans and was therefore guilty of bad faith in
its original grant application. The record shows simply and clearly
that Oakwood never stated that it planned to go ahead with the grant for
which it had applied and which it had received until after the period of
the grant had expired, and even then its plans bore no resemblance to
its original undertaking. Oakwood's Closing Argument stated that there
was testimony that its purpose in proposing to expand the property was
"to maximize the economic benefit to the community." Oakwood's Closing
Argument, p. 7, n. 10. Assuming this to be so, it does not change the
situation that it was Oakwood's desire to change the original plans
rather than to carry out the grant as originally approved, which was the
underlying root cause of the failure to complete the grant purposes in
the grant period.
C. The Azteca Lease
Although FSA's stated rationale for denying the extension did not touch
upon the fact that, for virtually the entire project period the Azteca
Building was occupied by a tenant, development of this issue is useful
to our analysis.
One of the more confusing aspects of this case is the lease to Azteca
Films of the Azteca Building. On December 23, 1986, Yeshiva Properties
(predecessor in title of Oakwood) extended a lease to Azteca Films for
one year from January 10, 1987 to January 10, 1988. The lease was for
the entire building, but contained a provision that six months after
commencement of the lease the landlord was to have access to part of the
premises, the parties having apparently agreed to the portion. Mr.
Bobker attempted to explain at great length why this lease would not
prevent a timely completion of the project, arguing that the grant was
for 12 months and the lease was to extend as to part of the premises for
only six months. The notice offered in evidence with the lease (Hearing
Ex. 3) actually asked for possession of the upstairs portion and the
mezzanine office space, although the original project called for most of
the classrooms (13 out of 17) to be on the first floor. FSA Ex. 9, p.
32.
Mr. Bobker's testimony was not persuasive. Although he was in effect
the project officer, and had handled the prior purchase of the property,
he testified that he had never read the grant application. Tr. I, p.
267. He did not even know the grant period had an expiration date, and
insisted it had not expired when he wrote Mr. Kirker on April 11, 1988
(Oakwood Ex. 12) about proceeding under the original terms and
conditions of the grant. Tr. I, p. 205. He was definitely evasive
about the correctness of the statement in the architect's letter of
April 8, 1987, asking for advance payment of the $300,000 for
renovations, that "[t]he balance of approximately Five Hundred Thousand
($500,000.00) Dollars has been raised from individual donations." FSA
Ex. 14. He finally admitted that the $500,000 had not actually been
raised, but had been pledged, although a pledge was not a commitment.
Tr. I, pp. 277-280.
The significance of the Azteca lease is that its continuation in any
form was a material violation of the terms and conditions of the grant.
The grant's special terms and conditions called for the transfer to the
grantee of "marketable, unencumbered fee simple title" to the North
La
Brea property [the Azteca Building] "free from leases, liens,
encumbrances . . . ." Oakwood Ex. 2, p. 9 of the Grant Terms and
Conditions. Mr. Bobker quibbled about whether a lease was an
"encumbrance" (Tr. I, pp. 293-301), but Oakwood clearly violated the
grant requirement by having a lease on the building when it was
purchased with federal funds. While FSA did not claim that the grant
was null and void, the existence of the lease with a tenant in the
building indicated that Oakwood could not have planned to start the
school year in September 1987 in the renovated building when it applied
for its grant.
VI. THE RELIGIOUS FACTOR AND GOOD FAITH
FSA devoted much of its argument to the religious factor. It claimed
that Oakwood had "improperly devoted itself to the religious objectives
of the Yeshiva," rather than implementation of the purposes of the
grant. FSA further alleged that Oakwood's "overriding goal" was to
circumvent the Assurance of Non-Sectarian Activity so that the Azteca
Building could be made available "for the religious activities of the
Yeshiva." FSA Br., p. 22.
Whether FSA is correct or not, we need not rely on this basis. It was
not a ground specifically stated in FSA's denial of the extension, and
there is ample evidence to support FSA's determination without delving
into the motives of those associated with Oakwood.
Oakwood received $1.5 million in federal grant funds to acquire a
building. It also received $300,000 in federal funds toward renovating
that building so that it could be used for a child care center,
beginning operations in September 1987. Private funds were to make up a
$500,000 match for total renovations of $800,000. Oakwood came up with
three different propositions for changing the original plans for the use
of the building. One was at first approved, but approval was recalled
soon thereafter. The other two proposals never won approval. When
Oakwood said it was giving up on any changes and was going back to the
original terms and conditions of the grant, it proposed a much smaller
useful area at much less cost, with almost the total cost of renovation
to come from federal funds.
This factual scenario could well support a finding that Oakwood never
intended to go through with the grant project as presented to OCS in the
original grant application. It is not necessary for us to make such a
finding, however, to support the denial of the extension. Oakwood
admitted that it "did not complete the renovation of the facility, and
consequently, it was not able to open and operate a child care program."
Oakwood Br., p. 12. It did not carry out the purposes of the grant; any
delays would not have occurred but for its continued proposals for
changes. We need not make a subjective deduction that when it applied
for the grant, Oakwood did not intend to carry out its original plans.
There is still less need for us to find whether Oakwood's continual
requests for changes in the building represented a hidden religious
agenda, to carry out the aims of the Yeshivah rather than the grant
purposes. Oakwood was obviously unhappy with the Assurance of
Non-Sectarian Activity. Oakwood's brief refers to the fact that there
had never been a prior reference to this condition in any of the
published announcements about this grant program, and that the cover
sheet for the Notice of Grant Award omitted any reference to this
special condition. Oakwood Br., p. 4. All this is of course
irrelevant, since Oakwood had to sign the Assurance before it could get
any money.
Oakwood's brief does blame the Assurance for many of its problems. It
argued that the special condition "placed an unanticipated restriction
on the grantee's ability to utilize the property" and therefore "called
for a comprehensive reassessment of development plans." Id. All this
actually has nothing to do with the merits of the case before us. For
our decision it is significant that Oakwood chose not to go ahead with
its original plans but kept devising changes in plans for the building
bought with federal funds. It does not matter whether this was due to
religious motivation or other reasons; what is relevant is that Oakwood,
for whatever reasons may have motivated it, chose not to go ahead with
its original project.
The government's concern for constitutional restrictions on the use of
government funds for religious activity is hardly an unreasonable one,
but it is not an issue in dispute here. Rather, the critical fact here
is the continued attempt by Oakwood to do something different from what
it agreed to do when it received its grant.
VII. THE REMEDY
The letter denying the extension (Oakwood Ex. 19) referred separately to
what Oakwood should do as far as disposition of money advanced and the
real property purchased with federal funds.
Oakwood believed that consideration of a remedy should be deferred until
after the Board ruled on the merits. Oakwood seemed to have no dispute
about the process for dealing with the money, if the Board upheld the
denial of the extension. FSA stated that to close out the grant Oakwood
should return the unobligated balance of $300,000 (plus interest in
excess of the $100 allowed by regulation). In addition, Oakwood should
return all program income, including rental fees from the Azteca
Building not validly expended for program activities. Oakwood proposed
an independent audit to determine what expenditures might properly be
allowed under the grant.
The Board realizes that there may be questions about what expenditures
should be allowed against rental fees received from Azteca Films. As
discussed above (n. 8), it appears that Oakwood may be entitled to
planning expenses related to the project incurred from the date of
receipt of approval for the second floor work to its subsequent denial.
The parties should attempt to work out the various allowable items by
themselves; if they can not do so, alone or with the help of an auditor,
they may return to the Board.
The disposition of the real estate presents a more difficult legal
problem. The letter from Wayne Stanton noted that since the real
property acquired with grant funds was not being used for the purposes
authorized by the grant, as required by 45 C.F.R. 74.134, Oakwood was
directed to dispose of the property in accordance with the provisions of
45 C.F.R. 74.134(c)(1). This provision states:
The property shall be sold and the Federal Government shall be
paid in an amount computed by multiplying the Federal share of
the property . . . times the proceeds from sale (after deducting
actual and reasonable selling and fix-up expenses . . .). Proper
sales procedures shall be used that provide for competition to
the extent practicable and result in the highest possible
return.
There is of course no percentage computation necessary in this case,
since the property was bought entirely with federal funds. Oakwood does
object to acting as a fiduciary for governmental interests with respect
to the sale, and asks that the federal government be a participant in
the sale. There should be little risk to Oakwood in selling the
property; Mr. Bobker testified that the property was worth more than it
cost, depending of course on how it was marketed and how it was sold.
Tr. I, pp. 401-402.
Oakwood in its opening brief raised a legal issue that there was an
apparent inconsistency between the regulation and section 619 of the
Community Services Block Grant Act. This section provided that property
acquired under that section should become the property of the community
development corporation and should not be considered to be federal
property. The federal government retained the right to direct that if
the grant ended the assets purchased with grant funds should continue to
be used "for the purpose for which they were granted." Oakwood Br.,
p.
25.
FSA pointed out that Oakwood was funded under section 681 of subtitle B
of the statute, whereas section 619 was expressly restricted to other
parts of the statute. FSA argued that section 619 was therefore
inapplicable by its own terms. In its reply brief Oakwood referred to a
general condition in the Notice of Grant Award which referred both to
the provisions of Section 681 and Sections 612-633 of the statute (Pub.
L. 97-35). Oakwood continued to contend that section 619(b) applied
here.
FSA, in its Closing Argument, pointed out that the general reference to
a chapter of a statute (including section 619) could not apply where a
specific provision of the statute limited its application to certain
types of grants. We note that Oakwood's original application stated it
was applying for a grant under Title VI, section 681, of the Community
Services Block Grant Act.
The property was never used for the purposes of the grant; therefore the
provisions of 45 C.F.R. 74.134 apply (not section 619), and the grantee
must follow the directions of FSA to sell the property. Since the
property was bought entirely with federal funds, the full proceeds must
be returned.
Conclusion
After consideration of all the evidence in the record, we find the
decision to deny the extension of Oakwood's grant to be a reasonable
exercise of discretion.
We uphold the denial, and direct Oakwood to comply with the directions
of FSA under 45 C.F.R. 74.134 to sell the real estate and return the net
proceeds to FSA.
As for the $300,000, Oakwood should account to FSA within 60 days of
this decision for any amounts it claims it has spent on proper charges
against this amount, as well as for rents received and charges against
those rents. If the parties cannot agree, then either party may return
to the Board on this one issue within 30 days after an impasse has been
reached.
_________________________
Judith A. Ballard
_________________________
Norval D. (John) Settle
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Alexander G. Teitz
Presiding Board