Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Alabama Commission on Aging
DATE: May 13, 1993
Docket No. A-93-22
Decision No.1411
DECISION
The Alabama Commission on Aging (ACOA) appealed a disallowance by
the
Administration on Aging (Agency) of $166,050 in federal funding
under
Title III of the Older Americans Act (Title III) attributable to
an
attorney's fee. ACOA paid the fee to a private attorney under
a
contingency fee agreement for recovering money from a food
service
supplier in settlement of a contract dispute. The Agency
disallowed
federal funding in the fee on the grounds that it was not
necessary and
reasonable for the proper and efficient administration of the
Title III
grant program as required by Office of Management and Budget
(OMB)
Circular A-87. As discussed below, we find that ACOA wholly
failed to
justify the amount of the fee in terms of the hours the private
attorney
worked or the specific services he rendered. We also find that
ACOA
failed to show that the attorney's services were reasonably necessary
to
settling the dispute with the supplier. Accordingly, we conclude
that
the fee was not reasonable and necessary for ACOA's Title III
program,
and we sustain the entire disallowance.
Facts
Alabama law permits the Attorney General of Alabama to designate
private
attorneys to represent Alabama and any of its departments,
agencies,
boards and commissions in particular legal matters. The
private
attorney who received the disallowed fee had been designated by the
then
Attorney General in 1987, and was authorized to work on matters
assigned
by the Attorney General.
On August 10, 1990, the attorney signed an agreement with the
then
Attorney General to represent ACOA in a dispute with a supplier of
meat
products used in meals that ACOA provided to senior citizens as part
of
its Title III program. ACOA Exhibit (Ex.) J, Attachment (Att.)
2. The
dispute arose after ACOA discovered that the supplier's meat
products
included textured vegetable protein (TVP), rather than 100% meat,
as
required by the supplier's contract with ACOA. The fee agreement
called
for the attorney to investigate the supplier's use of TVP and
take
whatever steps were necessary to recover funds for the State of
Alabama.
The agreement also required the attorney to determine whether
the
supplier could be considered a responsible bidder for future
food
service contracts. As compensation, the contract provided that
the
attorney would receive a contingency fee of 25% of the total
amount
recovered from the supplier, as well as expenses.
On August 17, 1990, the attorney signed a settlement agreement with
the
supplier on behalf of ACOA by which the supplier agreed to pay
ACOA
$1,005,000 for the release of claims arising from the use of TVP in
the
meat products sold to ACOA. ACOA Ex. B. Out of that
settlement, the
attorney received a 25% contingency fee of $251,250.
ACOA reported the
$1,005,000 settlement to the Agency in a letter dated
February 27, 1991,
and proposed to utilize the funds remaining after payment
of the
attorney's fee for ACOA's meals for the elderly program. ACOA
Ex. D.
Although the Agency initially indicated that it might disallow the
federal
share of the entire settlement amount, it subsequently agreed
that ACOA could
use, for nutritional services, that portion of the
settlement which remained
after payment of the attorney's fee and which
was attributable to ACOA's
Title III grant. The Agency advised that
this portion could only be
used to increase nutritional services, and
could not be used as a match for
any federal program. ACOA Ex. E.
However, the Agency questioned the
reasonableness of the attorney's fee.
In a letter to ACOA dated February 4,
1992, the Commissioner on Aging
requested that ACOA show either that the
attorney's appointment and
contingency agreement clearly preceded the
settlement, or that the fee
paid to the attorney was justified in terms of
the hours he expended and
the customary hourly charges for legal work of that
nature. ACOA Ex. I.
The Agency subsequently disallowed $166,050, the
portion of the legal
fee that was attributable to Title III funds, on the
grounds that it was
not necessary and reasonable for the proper and efficient
administration
of Alabama's Title III program. 1/ The disallowance
letter stated that
ACOA had failed to demonstrate that the fee agreement
preceded the
substance of the settlement (if not its final execution), or
that the
fee was justified in terms of the hours expended.
Applicable law, regulations, and policy
Title III of the Older Americans Act, 42 U.S.C. . 3001 et seq.,
provides
for grants to states to foster development and implementation
of
comprehensive programs to provide services to older individuals.
The
regulations under the Older Americans Act incorporate the
requirements
of 45 C.F.R. Part 74, "Administration of Grants," and 45 C.F.R.
Part 92,
"Uniform Administrative Requirements for Grants and
Cooperative
Agreements to State and Local Governments." 45 C.F.R. .
1321.5(b). The
regulations provide that grantees are generally required
to disburse
program income, rebates, refunds, contract settlements, and
audit
recoveries before requesting additional cash payments from a
federal
agency. 45 C.F.R. . 92.21(f)(2).
The cost principles of OMB Circular A-87, "Cost Principles for State
and
Local Governments," are incorporated by 45 C.F.R. . 74.171.
Legal
expenses required in the administration of grant programs generally
are
allowable under OMB Circular A-87, Att. B, .
B.16. To be allowable,
costs must be necessary and reasonable for the
proper and efficient
administration of the grant program. OMB Circular
A-87, Att. A, .
C.1.a. The Board has repeatedly held that a grantee
bears the burden of
documenting the existence and allowability of its
costs. Nisqually
Indian Tribe, DAB No. 1210 (1990); Lac Courte Oreilles
Tribe, DAB No.
1132 (1990); West Central Wisconsin Community Action Agency,
Inc., DAB
No. 861 (1987).
Contentions
ACOA contended that the attorney's appointment and the contingency
fee
agreement were justified because of his extensive experience
in
litigation and in dealing with Alabama agency and contract matters,
and
that his skill as a negotiator was evident from the amount of
the
settlement and how quickly it was reached. ACOA maintained that the
fee
was reasonable because ACOA received a settlement approximately
five
times the amount of money that the supplier had saved by using TVP
in
its meat products. It was speculative, ACOA argued, to assume
that
another attorney, including one on Alabama's payroll, could
have
produced the same results. ACOA maintained that it had been
important
to settle the dispute quickly because the supplier's food
service
contract had been nearing its end, and ACOA had needed to ensure
that
food services for senior citizens were not interrupted or
discontinued
during a protracted disagreement.
ACOA further argued that there was no need to address the issue of
the
hours that the attorney worked and the customary charges for such
work,
since the Commissioner on Aging had given ACOA the choice of
showing
instead that the fee agreement preceded the settlement. ACOA
asserted
that there was no evidence to suggest that settlement of the dispute
had
been a seriously viable alternative prior to the final execution of
the
fee agreement, and noted that the supplier had initially offered
only
$100,000 to settle the dispute, in August 1990. The attorney
had
rejected this offer as inadequate, ACOA explained, and had
been
instructed to proceed with litigation.
ACOA also asserted that it should be able to retain that portion of
the
settlement that exceeded actual damages, including the amount paid
to
the attorney, because the funds were not "program income"
under
applicable regulations requiring that program income be deducted
from
the amount of expenditures for which federal funding is claimed.
The Agency argued that ACOA failed to show that the attorney devoted
a
significant amount of time to the case, or that any special skills
were
needed or utilized in reaching the settlement. The Agency
maintained
that the attorney could not have devoted more than 100 hours to
this
matter. The Agency further asserted that the attorney's fee
was
excessive and unreasonable in relation to the work performed since
the
food supplier had admitted the contract violation long before
the
attorney's involvement and had been working to identify all
the
instances in which TVP had been used. The Agency maintained that
the
supplier had a strong incentive to settle the dispute on terms
favorable
to ACOA because it wished to bid on a new food service
contract. The
Agency implied that it was these circumstances, rather
than any
extraordinary skill or effort of the attorney involved, that brought
the
parties to a negotiated agreement only one week after the
contingency
agreement was signed. 2/
Analysis
While legal expenses may be allowable charges to a federal grant
program,
they must, like all charges, be necessary and reasonable for
the proper
administration of the program. OMB Circular A-87, Att. A,
.
C.1.a. Here, as discussed below, ACOA was unable to show either
that
the $251,250 paid to the attorney was a reasonable fee for his work
on
this matter, or that his services were reasonably necessary to
settling
the dispute with the supplier. Accordingly, we concur with the
Agency
that the fee was not a necessary and reasonable cost for
the
administration of ACOA's Title III program.
1. ACOA has not shown that the amount of the
fee was reasonable for
the attorney's services.
ACOA did not take issue with the Agency's assertion that the
attorney
could have expended no more than 100 hours on this matter.
ACOA did not
dispute the Agency's position that the resulting fee of over
$2,500 an
hour was far in excess of those allowed under various federal
statutes
that provide for the payment of attorneys' fees. ACOA also did
not
provide any detailed account of the activities performed by the
attorney
in reaching the settlement with the supplier, or any specific
evidence
on the amount of hours that those activities entailed.
Accordingly,
ACOA provided no basis to determine what portion, if any, of
the
attorney's fee could reasonably be charged to federal funds.
The only evidence of the attorney's efforts that ACOA provided
consisted
of his affidavit, two memoranda that he prepared for his file in
this
matter, and his notes of two conversations from July 1990. ACOA
Ex. J.
However, these materials are very sketchy and provide no basis
to
determine the amount of hours reasonably expended on this matter.
The
affidavit indicates only that the files were turned over to the
attorney
in July 1990, that the contingency fee contract was signed August
10,
1990, that the supplier's initial settlement offers of $100,000
were
rejected as inadequate, that the Attorney General instructed
the
attorney to prepare to proceed with litigation, and that he was able
to
negotiate a quick and financially beneficial settlement. The
first
memorandum to the file, dated August 13, 1990, indicates that
the
attorney met with the Attorney General to discuss whether the
supplier
could be considered a responsible bidder for the purpose of bidding
on
the new food service contract. A second memorandum, dated August
17,
1990, indicates that the attorney had been involved in
negotiations
during the entire week. The notes reflect two
conversations, one with a
representative of another company that wished to
bid on the food service
contract, another with a representative of the
Attorney General.
The materials the ACOA provided indicate that much of the attorney's
time
was spent on the question of whether the supplier could be
considered a
responsible bidder, rather than on effecting a settlement.
None document any
particular number of hours that the attorney devoted
to this matter, or
demonstrate that the fee was reasonable in relation
to his efforts.
While OMB Circular A-87, Att. B, . B.16 allows federal funding for
legal
expenses required in the administration of grant programs, it does
not
provide any standard by which the reasonableness of attorneys fees
may
be assessed. However, the Circular provides elsewhere that
compensation
for personal services is considered reasonable to the extent
that it is
comparable to that paid for similar work in the labor market in
which
the employing government competes for the kind of employees
involved.
OMB Circular A-87, Att. B, . B.10. Here, ACOA failed to show
that the
$251,250 fee paid pursuant to a contingency fee agreement was
comparable
to legal expenses typically paid for such services in a
government
contract dispute.
We note that the Agency could have allowed a reasonable fee, had ACOA
been
able to provide evidence of the time the attorney expended, and
what a
comparable fee or rate of pay would have been for those services.
However,
ACOA failed to file a reply to the Agency's brief which
presented its
objections to the fee, and thus the record is devoid of
any evidence
documenting the reasonableness of the fee. Accordingly,
the Agency
properly disallowed the entire amount attributable to federal
funds.
ACOA asserted that it did not have to provide information on
the
attorney's time and activities, or on the customary charges for the
work
he performed, because it showed that the attorney's fee
agreement
preceded the settlement, as had been requested by the Commissioner
on
Aging. However, the Commissioner's request for information on the
dates
of the fee and settlement agreements did not eliminate
ACOA's
obligation, as a recipient of federal grant funds, of demonstrating
the
allowability of its expenses under applicable policies, including
OMB
Circular A-87's requirement that charges to federal funds be
reasonable
and necessary for the proper administration of the federal
grant
program. The Commissioner's request also did not bar the Agency
from
disallowing expenses charged to ACOA's Title III grant which did
not
meet this basic standard of allowability. Additionally, the
Agency's
disallowance letter and brief in this appeal clearly raised
the
requirement that the fee be reasonable and necessary under OMB
Circular
A-87. Accordingly, the mere showing that the contingency fee
agreement
preceded the settlement does not demonstrate the allowability of
the fee
paid to the attorney. Further, as discussed in section 2 below,
the
Agency presented evidence indicating that the attorney's services
were
not necessary to reaching a settlement with the supplier, since
the
supplier had conceded the contract violations before the fee
agreement
was signed. 2. ACOA has not
shown that the attorney's services
were necessary to settling the dispute
with the supplier.
ACOA asserted that it was not obliged to provide information on
the
attorney's hours and the customary charges for his work since it
had
shown that the contingency fee agreement preceded the
settlement.
However, the Agency presented uncontroverted evidence that the
fee
agreement did not precede the substance of the settlement, since
the
supplier had admitted violating the food service contract well
before
the attorney's involvement. This evidence indicates that the
attorney's
services were not necessary to recover the funds that were due
ACOA as a
result of the supplier's breach of its food service contract.
Since
they were not necessary, the fee paid to the attorney was not
reasonable
and necessary for the administration of ACOA's Title III
program.
The Agency introduced the affidavit of a special agent of the
U.S.
Department of Agriculture (USDA) who reported meeting with
Alabama
officials on May 10, 1990 to discuss the supplier's use of TVP in
its
meat products. (USDA provided funds to ACOA under the Older
Americans
Act.) Agency Ex. O. At that meeting, the agent was
informed by the
Alabama officials that they had been alerted to the use of
TVP by a
manager of the supplier in late 1989 or early 1990. The USDA
agent
stated that he had also been told by an ACOA official that the
supplier
had provided a list of its products which contained TVP.
Similarly, a
special agent of the Department of Health and Human Services
also
reported attending the May 10, 1990 meeting, at which it was made
clear
that ACOA was aware of substantial evidence of the supplier's
contract
violation. Agency Ex. P. Both special agents also stated
in their
affidavits that ACOA would be accepting bids that summer for the
next
food service contract, and that ACOA had the power to recommend that
the
supplier not be permitted to bid on the contract.
ACOA did not respond during the course of the appeal to the
Agency's
evidence that the supplier had already conceded its culpability
well
before the attorney's involvement. Certainly the admission of
the
breach of contract was a major milestone in effecting a settlement
with
the supplier, and would have reduced any litigation to merely a
question
of damages. The fact that the admission occurred before the
attorney
was asked by the Attorney General to represent ACOA supports
the
Agency's view that the settlement was not directly attributable to
the
attorney's efforts.
ACOA also did not refute the Agency's argument that the supplier's
desire
to bid on the next food service contract -- which it was awarded
after the
settlement -- provided a strong incentive to settle the
dispute on terms
favorable to ACOA, independent of the attorney's
involvement. Indeed,
the attorney's August 13, 1990 memorandum to his
file states that he met with
the Attorney General and recommended
issuing an opinion that the supplier not
be considered a responsible
bidder for the new food service contract unless
the supplier was able to
restore its integrity through "some affirmative
act." ACOA Ex. J, Att.
3. This memorandum bolsters the Agency's
position that the impending
contract provided strong leverage for ACOA to use
in getting the
supplier to settle the dispute which was unrelated to the
attorney's
involvement or any particular abilities that he may have brought
to this
matter. The existence of this leverage casts further doubt on
the
importance of the attorney's efforts in reaching the settlement.
Other than arguing that the contingency fee agreement preceded the date
of
the settlement, ACOA asserted only that the attorney's fee was
reasonable
because of the size of the settlement that the supplier
agreed to pay, which
it said far exceeded the amount of money the
supplier actually saved by using
TVP. However, the fact that the
settlement may have exceeded actual
damages does not show that the
$251,250 fee paid to the attorney who executed
the settlement agreement
was necessary and reasonable for the proper and
efficient administration
of the federal grant program. Although the
settlement may have greatly
benefited the ACOA and the State of Alabama, the
federal government
should not have to share in any costs claimed in reaching
the settlement
that do not meet the basic standards of allowability.
We also note that while contingency fees by their very nature
are
potentially higher than fees based on hourly rates, they are
not
appropriate where, as here, the supplier had conceded liability and
had
a strong incentive to settle. Accordingly, we find that the fee
paid to
the attorney for his services was not a reasonable and necessary cost
of
the proper and efficient administration of ACOA's Title III program,
as
required by OMB Circular A-87.
3. ACOA was not authorized to keep the contract settlement funds.
Although ACOA had agreed, prior to the disallowance, to apply
the
settlement funds remaining after payment of the attorney's fee
to
providing nutritional services to elderly persons, it argued here
that
it was authorized to keep the settlement funds to spend as it
wished.
If ACOA was able to keep all settlement funds instead of spending
them
on providing program services, then presumably ACOA could also
retain
the funds spent on the attorney's fee (although ACOA did not
explicitly
argue this point). While the Agency never contended that the
settlement
funds were program income, ACOA devoted a section of its appeal
brief to
an argument that since the settlement funds were not program
income,
their use was unrestricted. .Whether these funds were program
income is
really a non-issue since, as both parties noted, the regulations
require
that contract settlement funds, as well as rebates, refunds,
audit
recoveries, and program income, be disbursed before a grantee
requests
additional cash payments. 45 C.F.R. . 92.21(f)(2). The
only reasonable
meaning of this requirement is that the funds must be
disbursed in
support of the federal grant program. To interpret the
regulation as
permitting any disbursement authorized by a grantee, as ACOA
apparently
did, would render it meaningless by essentially removing all
conditions
on the use of such funds. Here, consistent with the
regulation, the
Agency required that ACOA disburse the settlement funds on
grant
purposes: providing nutritional services for senior
citizens. Since
ACOA spent a portion of the settlement on legal
expenses it could not
show were reasonable and necessary, the Agency would be
forced to
participate in program costs that would otherwise have been paid
out of
the settlement. Accordingly, we concur with the Agency that ACOA
was
not permitted to retain the funds from the settlement with the
supplier
or spend them on the attorney's fee.
Conclusion
ACOA failed to show that the attorney's fee was necessary and
reasonable
for the administration of its program under the Older Americans
Act.
Accordingly, the disallowance of $166,050 in federal funds
attributable
to the fee is sustained.
Donald F. Garrett
Norval D. (John) Settle
M. Terry Johnson Presiding Board Member
1. Allotments of funds to states under the Older Americans Act
are
determined based on the proportion of a state's population that is
aged
60 or older. 42 U.S.C. . 3024. ACOA did
not dispute the Agency's
determination that $166,050 of the fee was
attributable to federal Title
III funds.
2. The Agency also noted that ACOA had refused to pay a
contingency
fee claimed by the same attorney in another matter. In that
case, the
current Attorney General instructed the attorney to withdraw from
a
matter that he had worked on under a 25% contingency fee agreement
with
the prior Attorney General. The attorney then sued for 25% of
an
approximately $13 million settlement. In response, Alabama argued
that
the attorney's claim was unreasonable as he had merely filed a
complaint
which was subsequently withdrawn and was not related to
the
administrative proceeding that resulted in the settlement. The
Agency
asserted that it was therefore disingenuous of ACOA to claim that
the
fee here for which federal funding was claimed was a
reasonable
expenditure. The Agency also argued that the contingency fee
agreement
in the instant case was not warranted under standards for the use
of
such agreements that Alabama cited in defense of the suit in the
other
case. However, since we find that ACOA failed to show that the
fee paid
to the attorney met the basic federal standards of allowability, we
will
not address these