GAB Decision 251
January 31, 1982 Hyde Rural Health Department; Docket No. 80-181 Ford,
Cecilia; Garrett, Donald Settle, Norval
Hyde Rural Health Corporation (Grantee) appealed a Public Health
Service (PHS) Grant Appeals Board decision upholding the disallowance of
$18,500 which Grantee had attempted to charge to its operating budget
for a PHS grant. The disallowed funds were part of a $20,000
downpayment Grantee paid under an agreement which Grantee contended was
for lease of a modular dental unit, but which PHS determined was for
purchase of the facility.
The key issues on appeal are whether the $20,000 is a reasonable
charge to the grant or is otherwise allowable because PHS had knowledge
of Grantee's agreement which either constituted prior approval of the
agreement or estops PHS from disallowing the $20,000.
For reasons stated below, we have concluded that it was not
reasonable to charge $20,000 as rental costs to a grant which benefited
only to the extent of three months occupancy of the facility; and that
PHS did not have sufficent knowledge of the agreement to constitute
prior approval or a basis for estoppel. Accordingly, we uphold the
disallowance, except to the extent of $360 which we reserse, subject to
the conditions stated below.
Background
Grantee was awarded funds for a Rural Health Initiative Program,
serving the populace of Hyde County, North Carolina. In the first
program year (July 1, 1978 - June 30, 1979), Grantee's budget contained
a renovation fund. The purpose of this fund, which contained $20,000,
was to enable Grantee to renovate an existing building, thus providing
it with a suitable operating facility. In October 1978, because Grantee
could not find an acceptable building, the renovation fund was
eliminated, with PHS approval, and a lease fund simultaneously created.
In February 1979, Grantee entered into an agreement to lease a
modular dental health building. The building was to be constructed
according to terms previously agreed to by Grantee and Lessor and would
be located upon land Grantee had rented from Hyde County at a nominal
charge. Under the terms of the agreement, Grantee was required to pay
Lessor $20,000 uppon acceptance of the building (April 1, 1979), with a
(2) series of 105 monthly payments of $500 to begin on April 1, 1980.
The downpayment was made from the lease fund available for the budget
for Grantee's first program year. Grantee conceded that the $20,000
payment was an inducement to Lessor to provide the needed facility
(Grantee's Brief, pp. 23-24, hereafter, Brief).
PHS issued a notice of disallowance on May 13, 1980. From references
within both the notice itself and Grantee's Exhibit 14, it is clear
that, for approximately one year after occupancy of the facility,
Grantee and PHS had engaged in extensive correspondence concerning the
nature of the agreement as well as the propriety of the downpayment. In
the notice of disallowance PHS took the position that only the monthly
rent for the remainder of the budget year was proper. Although the
agreement indicated that no rent was to be paid until one year after
occupancy, PHS used the monthly rent due when payments were to begin as
a reasonable rental value for the facility. PHS allowed Grantee to
charge three months occupancy ($1,500) to the grant.
Grantee appealed to the PHS Grant Appeals Board. The PHS Board
upheld the disallowance, finding that Grantee had entered into an
unauthorized lease-purchase agreement and that the amount to be paid by
Grantee exceeded the estimated purchase price of the facility by
approximately $20,000. The PHS Board did allow the $1,500 rent charge
to stand. Grantee then appealed to this Board.
Discussion
The PHS position in this case may be summarized as follows:
- The agreement is an unauthorized lease-purchase agreement and,
therefore, the costs are unallowable under applicable policies.
- Even if the agreement was a proper rental agreement, the $20,000
downpayment would be unallowable as a prepayment of a legal obligation
without prior approval.
- Regardless of the nature of the agreement or property, Grantee may
charge a reasonable rental value for three months use of the facility.
Grantee did not dispute the PHS positions that costs of a
lease-purchase agreement are unallowable and that prepayment of a rental
obligation would require prior approval. Grantee contended:
- Under state law, the agreement was for rent of the facility, not
purchase.
(3) - Alternatively, the facility may be considered personal property
which could be purchased under the grant.
- Regardless of the nature of the agreement or the property, PHS had
knowledge of the agreement which either constituted prior approval or
estops PHS from taking this disallowance.
PHS denied that it had knowledge of, or had approved, the agreement
provisions. Moreover, PHS contended, and we agree, that if the facility
were personal property prior approval would still be required. (PHS
Grants Policy Statement, 1976, p. 27; hereafter, Policy Statement)
Also, even if we adopted Grantee's position that the agreement was for
rent of the facility, the downpayment would still be subject to a test
of reasonableness.
Thus, the key issues on appeal are --
I. Whether the $20,000 downpayment was a reasonable charge to the
grant; and
II. Whether PHS had sufficient knowledge of the agreement to
constitute either prior approval or a basis for estoppel. /1/
I. REASONABLENESS
Reasonableness is a major consideration in determining cost
allowability. For purposes of this appeal, the controlling definition
of cost reasonableness is contained at 45 CFR Part 74, App. F, B.38(a):
Rental costs of land, building, and equipment and other personal
property are allowable if rates are reasonable in light of such factors
as rental costs of comparable facilities and market conditions in the
area, the type, life expectancy condition and value of the facilities
leased, options available and other aspects of the rental agreement . .
. .
Grantee contended that the $20,000 payment was reasonable in light of
the entire transaction (Brief, pp. 23, 20-21). In support of its
position, Grantee compared its cost of occupancy (based upon its annual
cost per square foot) to that of other Rural Health Initiative (4)
facilities in similar geographic areas of North Carolina (Brief, pp.
21-22). While Grantee's average annual cost might be comparable to
those facilities, the issue here is the allowability of the substantial
downpayment, which Grantee has not shown or even alleged is a common
element of a lease. In addition, the fact that the size of the
downpayment was precisely the amount available in Grantee's lease fund
is too coincidental not to indicate that the availability of funds was a
major factor in determining the amount of the downpayment.
While the downpayment arguably might appear reasonable when judged in
terms of the entire transaction, the issue here is the reasonableness of
the $20,000 downpayment as a charge to a specific grant, awarded for a
specific budget period of Grantee's project.
At the time Grantee initially occupied the facility, only three
months remained in the budget period for which the grant in question was
awarded. Thus, the grant for this budget period benefited from the
payment only to the extent of three months use of the facility.
Grantee's arguments concerning the reasonableness of the transaction as
a whole simply are not convincing on the issue of the reasonableness of
charging $20,000 to a grant which benefited only to this limited extent.
(See, also, 45 CFR Part 74, App. F, B.3 and B.4.)
II. PRIOR APPROVAL AND ESTOPPEL
Grantee argued that the lease was signed with PHS knowledge and
approval, and therefore PHS was estopped from disallowing costs incurred
under the lease (Brief, pp. 31-32).
Grantee's argument on this issue was two-pronged. First, Grantee
argued that the PHS transfer of funds from the renovation to lease
category was sufficient to establish prior approval. We believe Grantee
seeks to give a routine ministerial act a significance unwarranted by
the context in which it occurred. The record indicates merely that this
transfer allowed the Grantee to use the funds for leasing rather than
renovating a facility; it does not relate to any specific cost or
particular application of the funds. Grantee's Exhibit 9 is a letter
from the Grants Management Officer requesting justification for
transferring renovation funds. The letter notifying Grantee of the fund
transfer (Exhibit 10) does not indicate that the requested justification
was provided, nor that the transfer was made with any knowledge of the
lease. Moreover, at the time the transfer of funds was made, eight
months remained in the budget period and there was no way to predict
when a lease would begin or how much money would be involved. In fact,
there was a lapse of approximately four months from the date the funds
were transferred to the date the lease was executed. In short, Grantee
has not shown that (5) at the time the lease fund was created, PHS had
knowledge of how those funds would be applied.
Second, Grantee maintained that the PHS Project Officer was aware of
the terms and conditions of the lease and that his knowledge should be
imputed to PHS.
Although allegedly aware of the lease and its conditions, Grantee
maintained that PHS failed to voice objections to the agreement until
well after the downpayment was made. Grantee claimed that the PHS
failure to act in a timely manner estopped PHS from challenging the
validity of the lease.
A substanital question exists as to whether the Federal Government
may be estopped in these circumstances. /2/ Moreover, as we pointed out
in our Order to Show Cause (p. 3), a Grantee alleging estoppel must
satisfy each of the following criteria:
(1) the party to be estopped must know the facts; (2) he must intend
that his conduct be acted on, or must so act that the party asserting
estoppel has a right to believe it is so intended; (3) the latter must
be ignorant of the true facts; and (4) he must rely on the former's
conduct to his injury. /3/
Grantee has not persuasively demonstrated that estoppel should apply
to the facts of this case. The issue in this disallowance is the
downpayment. The evidence generally shows that the Project Officer knew
of the facility Grantee would occupy, but there is no evidence to show
that he or any other PHS official knew of the downpayment provision.
Even if the Project Officer knew of the downpayment, Grantee cannot
establish estoppel without showing that the Project Officer had
authority to approve the costs and Grantee reasonably relied on his
knowledge. Grantee fails on this point for the same reasons that
Grantee fails on the issue of prior approval.
Prior approval is a concept well delineated in the Policy Statement,
(p. 4):
Prior Approval --- Written permission provided by an authorized
official in advance of an act that would (6) result in either (1) the
obligation or expenditure of funds . . . Prior approval must be
obtained from the the designated Grants Management Officer for the grant
involved, . . . .
The Grants Management Officer is "(the) individual designated to
serve as the PHS official responsible for the business management
aspects of a particular grant project(s)." (Policy Statement, p. 4) The
Project Officer is "(the) PHS official who is responsible for the
technical, scientific, and programmatic aspects of a grant project."
(Policy Statement, p. 5) Further, Grantee was notified, by the cover
letter attached to the Notice of Grant Award, that questions concerning
fiscal or grants management should be directed to the Office of Grants
Management.
Thus, no matter what the Project Officer knew, prior approval of this
expenditure had to be given, in writing, by the Grants Management
Officer. Grantee has not demonstrated, nor even alleged, that the
Grants Management Officer provided prior approval for the downpayment as
required in the Policy Statement.
Moreover, given the explicit requirement in the Policy Statement,
Grantee could not reasonably rely on the Project Officer's knowledge as
a basis for establishing allowability of the charge. Knowledge of an
unauthorized official cannot support estoppel where Grantee clearly was
put on notice that proper approval could only be obtained from an
authorized official and was required to be in writing.
Grantee failed to show that the cost incurred was reasonable, or that
PHS had sufficient knowledge to constitute prior approval or estoppel.
/4/
III. GRANTEE'S REQUEST FOR A HEARING
Grantee requested an evidentiary hearing to prove its case regarding
the questions of prior approval and estoppel. Under applicable
procedures, /5/ the Board would hold a hearing when it determines that
(7) "there exists a dispute as to a material fact the resolution of
which would be materially assisted by oral testimony." (45 CFR 16(b)(
2)) For the seasons outlined below, we find that resolution of these
issues would not be aided by a hearing.
Grantee maintained that the cumulative effect of the following facts
was sufficent to establish prior approval by PHS, and to estop PHS from
disallowing the downpayment.
1. Grantee alleged that the transfer of funds from the renovation to
lease category constituted prior approval of the downpayment. While we
accept the existence of the transfer as a matter of fact, we do not
agree that approval of this transfer constituted prior approval to incur
the downpayment. Thus, further evidence on this point is unnecessary.
2. Grantee alleged that the exchange of correspondence between
itself and PHS provided sufficient notice to estop PHS from denying the
the validity of the lease. In spite of ample opportunity to do so,
Grantee has failed to submit any documents to us which would have put
the PHS Grants Management Officer on notice that Grantee intended to
charge $20,000 for three months' occupancy of the facility. Grantee has
not alleged that any other documents existed which would have
established a basis for our finding prior approval in this instance. In
light of the insufficiency of the documentation currently before us,
testimony on this issue would be of little value.
3. Grantee alleged that the Project Officer's knowledge of the
agreement was sufficient to establish prior approval. Even if Grantee
could show that the Project Officer knew of the the downpayment
provision, this fact would be insufficient as a basis for reversal of
the disallowance given the explicit terms in the PHS Policy Statement,
as discussed above.
Taken collectively, the alleged facts, even if proven, would be
inadequate to demonstrate prior approval by PHS or to justify reliance
by Grantee sufficient to estop PHS from disallowing the lease costs.
It is our opinion that further elaboration upon these facts would not
materially advance Grantee's case.Therefore, Grantee's request for a
hearing is denied.
IV. AMOUNT OF THE DISALLOWANCE
Our Order to Develop the Record, issued for this appeal, suggested
that the proper monthly rental value of the facility might be $620/
month ($72,500 (total lease value) divided by 117 months of occupancy).
(8) We asked PHS if this figure could be considered a reasonable
rental rate for the three months in question. Responding to our
inquiry, PHS stated that it would not oppose a $620/month charge if
Grantee could prove that the total rental charges would not exceed the
cost of the property had the lessee (Grantee) purchased it on the date
the agreement was excecuted and the square foot rental is comparable to
similar type units in the geographical area.
Since PHS did not take the position that $620/month would be an
unreasonable charge, we reverse the disallowance to the extent that we
will allow Grantee to charge $620/month to the grant for the three
months in question, $360 more than the total allowed by PHS, subject to
the following condition: If it wishes, PHS may require Grantee to
submit the requested documentation. If a further dispute arises
regarding the propriety of the $620 rental charge, Grantee will have the
right to appeal that question alone to this Board.
Conclusion
For the seasons outlined above we uphold the disallowance except to
the extent of $360 which we reverse subject to the conditions noted in
IV above. /1/ In view of our holding below, we do not need to reach the
issues of the nature of the agreement, or of the property. Even if we
adopted Grantee's position on these issues, we would uphold PHS because
Grantee has shown neither reasonableness nor sufficent knowledge on the
part of PHS to render the costs allowable. /2/ See, Schweiker v.
Hansen, U.S. , 101 S. Ct. 1468 (1981). /3/ Montana Department
of Social and Rehabilitation Services, Board Decision No. 171,
April 30, 1981 and cases cited therein. /4/ However, PHS might consider
Grantee's equitable arguments as evidence of good faith in determining
whether Grantee should be permitted to carryover the unobligated
balance, resulting from this disallowance, to cover subsequent years
rental costs. /5/ Under the Board's new procedures, effective
September 30, 1981, (46 Fed. Reg. 43816) the Board grants a hearing if
it finds there are complex issues of material facts in dispute the
resolution of which would be significantly aided by a hearing, or if the
Board determines that its decisionmaking otherwise would be enhanced by
oral presentations and arguments in an adversary, evidentiary hearing.
(45 CFR 16.11)
OCTOBER 22, 1983