INTERNATIONAL JUNIOR COLLEGE OF BUSINESS AND TECHNOLOGY, INC., d/b/а International Junior College; L’Image Educational Corp., d/b/a Rogie’s School of Beauty Culture, Plaintiffs, Appellants, v. Arne DUNCAN, in his official capacity as Secretary of the United States Department of Education, Defendant, Appellee.
No. 13-2547
United States Court of Appeals, First Circuit
Sept. 16, 2015
797 F.3d 101
Rosa E. Rodríguez-Vélez, United States Attorney, with whom Nelson Pérez-Sosa, Assistant United States Attorney, and Jennifer L. Woodward, Office of the General Counsel, United States Department of Education, were on brief, for appellee.
Before THOMPSON, KAYATTA, and BARRON, Circuit Judges.
THOMPSON, Circuit Judge.
The United States Department of Education (“DOE“) Secretary decided through an administrative proceeding that International Junior College of Business and Technology, Inc. (“International“) could not participate in certain federal student
We disagree, and so for the reasons discussed below, we affirm the court‘s summary judgment dismissal of International‘s claims.1
BACKGROUND
These facts are not disputed by the parties, unless otherwise noted. From 2005 to 2008, the relevant timeframe for this case, Title IV of the Higher Education Act of 1965,
Under Title IV, for-profit, post-secondary educational institutions (“proprietary institutions of higher education“) were permitted to participate in the Title IV aid programs if they met certain requirements. One such requirement was that they had to earn “at least 10 percent of [their] revenues from sources that are not derived from funds provided under [Title IV].”
While the Title IV statute set out some of the requirements for the 90/10 rule, it also charged the DOE Secretary with implementing regulations to address (among many other things) the standards for proprietary institutions’ compliance with the 90/10 rule (and the DOE‘s enforcement of same). See
Failure to comply with the 90/10 rule meant a school would lose its Title IV eligibility, but the loss of eligibility only became effective the fiscal year following the non-compliant fiscal year (we note that the fiscal year ran from July 1 to June 30). See
Therefore, if a school failed the 90/10 requirement in, say, the year that ran from July 1, 2004 through June 30, 2005, it was no longer Title IV-eligible as of July 1, 2005. The school would also have to repay any Title IV funds it received from July 1, 2005 through June 30, 2006. The regulations also relied on schools to self-report to the DOE any noncompliance with the 90/10 requirement.
Naturally, the DOE reviewed the audit reports the institutions submitted, after which the DOE prepared its own “final audit determination,” or “FAD.” In a FAD, the DOE would notify an institution if it concluded that a school had violated any Title IV expenditure laws, and, if so, whether the school would be required to refund any Title IV funds it should not have received during a non-compliant year. The institutions could appeal these final audit determinations to the agency by requesting an administrative hearing before an agency hearing officer. If an institution was dissatisfied with the hearing officer‘s decision, it could then appeal to the DOE Secretary.
International and Its Title IV Woes
International was a for-profit community college based in Puerto Rico.5 The school operated four campuses on the island, offering non-degree programs (e.g., allied health, technology, and cosmetology) and associate degree programs. According to International, for a while, all of its educational programs qualified for Title IV funding (and, as will become apparent, much of the school‘s funding ended up coming from Title IV aid).6 According to
In early May 2006, International submitted to the DOE its independent auditor‘s report for the fiscal year ending June 30, 2005, wherein the auditor certified that the school had received exactly 90 percent of its revenues from Title IV programs. But shortly after the audit was submitted, the DOE noticed in a footnote in the auditor‘s report that International had actually received 90.26 percent of its revenues from Title IV funds, and that the auditor had rounded the figure down to 90 percent. According to the DOE, this rounding practice was not permitted, and the DOE informed International of same in a letter dated May 8, 2006.
The letter also informed International that because it had exceeded the 90 percent threshold, it would be placed on “Heightened Cash Monitoring 2” funding, or “reimbursement funding,” effective immediately, until the DOE could complete its full review of International‘s financials.7 This meant the school could no longer receive the usual upfront disbursement for its students’ Title IV aid, and would instead have to make funding disbursements to students from its own cash, and then submit a reimbursement request. According to International, it received “very few Title IV funds” from that point on; in fact, the school was only able to stay afloat through the fall semester because sometime between May and December 2006, one of its shareholders loaned the school $1.5 million to front the aid disbursements made to students.
Sometime in the next few months, the DOE completed its full review of International‘s Title IV eligibility, and in a letter dated November 8, 2006, notified International that because the school had not complied with the 90/10 rule during the fiscal year ending June 30, 2005 (i.e., fiscal 2005), and did not timely submit audits for either that year or the year prior, the DOE was denying the school‘s application to renew its Title IV participation fоr fiscal 2006. Thus, according to the letter, International‘s Title IV eligibility lapsed on July 1, 2005 (the first day of fiscal 2006). The letter also informed International that it could dispute the DOE‘s decision by demonstrating that the DOE‘s reasons for rejecting the recertification application were flawed.
International responded to the letter, but did not challenge the DOE‘s findings. In fact, International conceded that “its 2004 and 2005 audits were filed late, and that its fiscal 2005 Title IV revenue exceeded 90% of all of its relevant tuition revenue.” Still, International asked the DOE to reconsider the decision not to renew the school‘s Title IV certification, and to adopt one of the several repayment plans International proposed; without Title IV aid, the school would have to close, International asserted.
The DOE declined, and in December 2006, informed International in another letter that it would not reconsider at that time its decision to deny the recertification application. The letter also stated that International would have to repay an estimated $1.4 million the school received during fiscal 2005 (the year it was Title IV-ineligible), and could not participate in Title IV again unless (and until) it not only repaid the liability, but also demonstrated that it “met the 90/10 Rule in a subsequent year.” The letter reminded International that the DOE still had to “establish the exact amount of International‘s liability,” so International was required to engage an auditor to conduct a “closeout” audit of all
Apparently out of cash, the school closed in December 2006 (and, according to the DOE, without ever submitting a closeout audit). After a deal to sell the school fell through,8 in August 2007, DOE made a final audit determination against International, concluding that International was not Title IV-eligible for the year ending June 30, 2006 for failing to comply with the 90/10 rule in the prior fiscal year. The DOE also determined that International was liable for the more than $1.3 million in Title IV funds that it received after July 1, 2005.9
The Administrative Appeals
International appealed the FAD, and after a hearing, an administrative law judge affirmed the decision that International violated the 90/10 rule. The hearing officer concluded that 90.34 percent of International‘s fiscal 2005 revenues derived from Title IV sources. Relying on
International appealed the hearing officer‘s decision to the DOE Secretary, arguing that the officer‘s “interpretation of [34 C.F.R. § 600.5(d)(1)] is overly restrictive” because the regulation “permits an institution to include revenue from students taking courses in Title IV-eligible programs on a less than a[sic] half-time basis.” The Secretary concluded that whether or not a student was enrolled in a Saturday course was irrelevant; rather, what mattered was whether the student was also enrolled in a Title-IV eligible program. The Secretary therefore remanded the case back to the hearing officer to conduct additional factfinding as to how many students at International were actually enrolled in a Title-IV eligible program.
On remand, the administrative judge affirmed again, finding that International presented “no convincing evidence” that the “Saturday-only students [were] enrolled in any Title IV-eligible programs.”
International appealed (again) to the Secretary, and on this second аppeal, raised an additional argument—that even if the Secretary were to agree with the hearing officer that International violated the 90/10 rule, the Secretary should allow International to remedy the violation (and also forgive the $1.3 million liability), as he did in his recent decision concerning another school in a similar circumstance.10
This go-round, though, the Secretary affirmed, rendering the final audit determination a final agency action. While the Secretary questioned the adequacy of the hearing officer‘s factfinding, he nonetheless affirmed the 90/10 determination because International did not “straightforwardly challenge [the hearing officer‘s] fact-finding.” The Secretary also declined to forgive International‘s liability, concluding that International‘s case was too distinguishable from the case it was relying on to request that remedy.11
Still dissatisfied, Internаtional brought an APA action in the Puerto Rico district court,12 asking for a declaratory judgment that the DOE‘s final audit determination was arbitrary and capricious, as well as a stay on the DOE‘s enforcement of the FAD.13 Specifically, International made the following relevant claims: (1) the DOE Secretary acted arbitrarily and capriciously because he would not forgive International‘s 90/10 violation, even though he did forgive a “similarly situated” school‘s 90/10 violation; (2) the DOE‘s 90/10 determination against International was incorrect because the calculation improperly excluded the revenue from the students enrolled in the Saturday-only courses; and (3) the DOE should have allowed International to cure its 90/10 default.14
The case ensued, and International moved to compel the DOE to produce documentation of the policies and procedures leаding to its decision, but a magistrate judge denied that request. Relying on the administrative record, the DOE then moved for summary judgment, asking the court to dismiss International‘s complaint. International also moved for summary judgment in its favor. The magistrate judge granted the DOE‘s motion and denied International‘s, thus dismissing the action. Specifically, the magistrate judge found that the Secretary‘s definition of “revenues” was reasonable; that the Secretary‘s affirmance of the FAD was not an abuse of discretion; and that the Secretary did not err in rejecting International‘s attempts to cure its 90/10 violation.
This timely appeal followed.
STANDARD OF REVIEW
We review a trial court‘s grant of summary judgment de novo. Morón-Barradas v. Dep‘t of Educ., 488 F.3d 472, 478 (1st Cir. 2007). But when reviewing an agency decision, “[b]ecause both the district court and this court are bound by the same standard of review, ... our review is ... in effect, direct review of the [agency‘s] decision.” Atich v. Riordan, No. 14-1947, 797 F.3d 135, 138 (1st Cir. Aug. 14, 2015).
The summary judgment “rubric” also “has a special twist in the administrative law context.” Associated Fisheries of Me., Inc. v. Daley, 127 F.3d 104, 109 (1st Cir. 1997). When, as here, the governing statute “incorporates the familiar standard of review associated with the Administrative Procedure Act,” “judicial review, even at the summary judgment stage, is narrow.” Id. That is because “the APA standard affords great deference to agency decisionmaking,” and “the Secretary‘s action is presumed valid.” Id. Thus, “a court may set aside an administrative action only if that action is arbitrary, capricious, or otherwise contrary to law.” Id.;
DISCUSSION
International‘s appellate claims fall into three camps. First, International argues that the DOE regulations, as promulgated, wrongly interpreted the 90/10 rule because their definition of “revenues” was too narrow for purposes of calculating a school‘s 90/10 compliance. Even if the regulations were valid, International argues, the Secretary arbitrarily and capriciously applied them to International‘s case, and so the DOE‘s 90/10 assessment was improper. Second, International claims that even if the agency‘s 90/10 calculation were correct, the Secretary should have let International try to cure its default. And third, International argues that the magistrate judge erred by denying it the chance to conduct discovery.
We address each of International‘s arguments.
A. The Secretary‘s 90/10 Calculations
As we noted above, International first argues that in promulgating the implementing regulations, the Secretary did not correctly interpret the 90/10 statutory provision,
As we mentioned above, Title IV requires that a proprietary institution ensure that “at least 10 percent of the school‘s revenues [come] from sources that are not derived from funds provided under [Title IV], as determined in accordance with regulations prescribed by the Secretary.”
An institution satisfies the [90/10] requirement ... by examining its revenues under the following formula for its latest complete fiscal year:
[Title IV] program funds the institution used to satisfy its students’ tuition, fees, and other institutional charges to students
[divided by]
[t]he sum of revenues including [Title IV] program funds generated by the institution from: tuition, fees, and other institutional charges for students enrolled in [Title IV] eligible programs as defined in 34 CFR 668.8; and activities conducted by the institution, to the extent not included in tuition, fees, and other institutional charges, that are necessary for the education or training of its students who are enrolled in those eligible programs.
International argues that this regulation constitutes an erroneous interpretation of the term “revenues,” as it was used in the Title IV statute, because “revenues,” taking its ordinary meaning, “would include all non-title IV income received for tuition ... regardless of its source.” Specifically, International wanted the DOE to include the cash payments it received from the students enrolled in the individual Saturday courses, even if they were not necessarily enrolled in an academic program.
The Supreme Court‘s two-step framework, as laid out in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), directs our review of this claim. When reviewing an agency‘s interpretation of a federal statute, we first look to see if “Congress has directly spoken to the precise question at issue.” Id. at 842. “If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” Id. at 842-43. “If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation.” Id. at 843. “Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency‘s [action] is based on a permissible construction of the statute.” Id. And when Congress explicitly leaves “a gap for the agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation.” Id. at 843-44. These “legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute.” Id. at 844.
In stating that “at least 10 percent of the school‘s revenues” had to come “from sources that are not derived from funds provided under [Title IV], as determined in accordance with regulations prescribed by the Secretary,”
International does not directly address this part of the Chevron inquiry, but does (scantly) argue that the definition of “revenues” should have been more broad because Congress intended to “put pressure on schools like International to attract students willing to pay out of pocket for education based on the quality of education that school provides,” and so “cash payments from students willing to pay out of pocket for individual courses certainly ties directly tо Congress’ intent to identify the quality of an institution‘s education by requiring that some of its tuition revenues come from sources other than the Title IV programs.” But International, while proffering a potential alternative definition, does nothing to address the actual legal standard—that is, whether the definition of “revenues” that the Secretary chose, and implemented via regulation, was unreasonable or otherwise contrary to Congressional intent.15
International arguably waived this argument by failing to develop it. See United States v. Zannino, 895 F.2d 1, 17 (1st Cir. 1990). Waiver aside, wе think International‘s claim falters on the merits. Clearly the statutory term “school‘s revenues” cannot mean literally all revenues of any type (such as, for example, donations, licensing fees, grants, etc.). Given the need to draw a line, and Congress‘s aim to have institutions demonstrate a private market demand for the subsidized programs at proprietary institutions, the exclusion of tuition payments by persons picking and choosing only parts of the eligible Title IV programs rather than the actual program itself would seem to be within the boundaries of a non-arbitrary line that comports with the statute‘s intent. See Career Coll. Ass‘n v. Riley, 70 F.3d 637, at *2 (D.C. Cir. 1995) (per curiam) (unpublished) (“It is reasonable to infer ... that when Congress added the 15% requirement it intended to ensure higher quality in the very programs it was subsidizing under that title, namely the eligible ones.“).
Application of the Regulations
Moving from the general to the specific, we next address International‘s claim that the DOE misapplied the 90/10 regulations in this case. Despite the fact that International admitted early on in the administrative proceedings that it violated the 90/10 rule, International now insists that the DOE should have included in its calculations of International‘s total income the cash tuition payments the school received from students who were enrolled in the individual Saturday courses (even if the students were not necessarily enrolled in a degree or non-degree program), and that if the DOE had considered those payments, its revenues from non-Title IV sources would have exceeded 10 percent of the school‘s total income.
As we explained above, the Secretary‘s regulation defined a school‘s overall “revenues,” in relevant part, as those funds deriving from “tuition ... for students enrolled in eligible programs as defined in 34 C.F.R. § 668.8.”
The precedent International relies on is a single administrative decision, Sinclair Community College, U.S. Dep‘t of Educ., No. 89-21-S, 75 Educ. L. Rep. 1296 (May 31, 1991) (aff‘d by the Sec‘y, Sept. 26, 1991), where the DOE held that even if a student had not yet declared a major, her tuition payments would still be considered revenue for Title IV purposes if she was enrolled in an eligible program. To be sure, “[d]eparture from agency precedеnts embodied in prior adjudicative decisions can constitute an abuse of discretion if the reasons for the failure to follow precedent are not explained.” River St. Donuts, LLC v. Napolitano, 558 F.3d 111, 117 (1st Cir. 2009). But even if we assume, without deciding, that Sinclair has precedential value in this case,17 Sinclair would not help International—the school in Sinclair “verif[ied] that its students were enrolled in programs of study leading to a degree or certificate,” and the students simply had not yet declared a major. Sinclair, 75 Educ. L. Rep. 1296. Here, International has not asserted that the students enrolled in the individual courses were “enrolled in programs of study leading to a degree or certificate,” so we do not see how Sinclair is even persuasive—a distinction certainly exists between students taking just one course and students who have already committed to a whole program. Given that International makes no other arguments as to how the DOE misapplied the regulations in determining that International had violated the 90/10 rule, we conclude that the Secretary did not abuse his discretion in this regard.
B. International‘s Attempts to Cure
Next, International argues that the Secretary erred in rejecting its attempts to cure its 90/10 violation because one, the Title IV statute required the Secretary to give the school an opportunity to fix its mistake, and two, the Secretary‘s decision was inconsistent with his prior treatment of a similarly situated school, which he did allow to cure its 90/10 violation.
The DOE Secretary‘s 2009 decision in Gibson Barber & Beauty College provides the backdrop for this set of arguments. In 2005, the DOE issued a final audit determination against Mississippi-based Gibson Barber & Beauty College (“Gibson“) for violating the 90/10 rule in fiscal 2002. See U.S. Dep‘t of Educ., No. 05-49-SA (Nov. 25, 2009). The DOE determined that the school had derived 92 percent of its revenue from Title IV sources (exceeding the 90 percent threshold by $3,850) and sought the return of about $186,000 of Title IV funds the school had received the following year, fiscal 2003. Id. at *2.
In appealing the FAD to a hearing officer, Gibson pointed out that because the school anticipated in 2002 that it would not comply with the 90/10 rule, that same year, the school‘s owner loaned the school $3,850 (which she later converted to a donation) with the purpose of making the school
Gibson appealed to the DOE Secretary. Id. The Secretary reversed the FAD, concluding that although the donation did not count as revenue, “requiring [Gibson] to repay $186,958 because [it] exceeded the 90/10 calculation by $3,850 is not in accord with [Gibson‘s] effort to execute corrective measures to bring the institution within compliance of the 90/10 rulе.” Id. at *2. The Secretary relied on
Here, International urged the Secretary to take the same course as in Gibson, that is, to forgive the school‘s $1.3 million liability. But the Secretary rejected that argument, finding that International‘s case was tоo distinguishable from Gibson‘s, such that “[t]he scope of the equitable remedy authorized in [Gibson] does not encompass the facts of” International‘s case. Specifically, the Secretary found that International‘s case was distinguishable from Gibson‘s because (1) International exceeded the 90 percent threshold by more than double the amount Gibson had, such that International‘s deficit was not “conspicuously small” like Gibson‘s was; (2) the DOE had already questioned International‘s ability to serve as a responsible fiduciary to the Title IV funds, illustrated by the fact that International had already been placed on Heightened Cash Monitoring; and (3) unlike Gibson, International did not establish that it had anticipated the 90/10 shortfall and then “corrected or cured the error that resulted in liability,” in the same year that the violation occurred, and “in a manner that eliminates the basis of liability.”
International argues that the Secretary‘s decision was erroneous in two respects. First, International claims that a statutory provision,
Next, International argues that even if the decision to permit the school to cure its 90/10 problem was solely the Secretary‘s discretionary call, he arbitrarily and capriciously applied
While not explicitly so, International‘s claim is framed as one that the Secretary arbitrarily departed from prior precedent (i.e., the Gibson decision) in refusing to grant relief from International‘s 90/10 violation.20 And “[d]eparture from agency precedents embodied in prior adjudicative decisions can constitute an abuse of discretion if the reasons for the failure to follow precedent are not explained.” River St. Donuts, LLC, 558 F.3d at 117.
But International‘s claim stands on shaky footing. While an agency must “ex
I do not hold as a general matter that violations of the 90/10 rule are to be considered administrative errors or that such violations are always subject to the extraordinary remedial exceptions of section 668.113(d). Rather, this decision stands for the limited proposition that under circumstances that I deem applicable, I may exercise my authority to accept a correctivе action of an isolated regulatory violation.
Gibson at *2 n. 6. Thus, we do not see (and International has not shown) how Gibson reflected agency precedent, such that the Secretary was even required to explain his reasons for departing from that case in deciding this one.
Even if we assume, however, that the Secretary owed International an explanation, International‘s claim would still fail because the Secretary more than adequately explained why International‘s case was distinguishable from Gibson‘s.21 As we have said before, “[t]he agency‘s actions are presumed to be valid,” P.R. Tel. Co. v. Telecomm. Regulatory Bd. of P.R., 665 F.3d 309, 319 (1st Cir. 2011), and so the Secretary‘s decision to depart from prior precedent need only be “supported by a rational basis,” River St. Donuts, LLC, 558 F.3d at 117. Also, as the Secretary noted, the DOE already had concerns about whether International could operate as a responsible fiduciary (illustrated by the fact that the DOE had placed the school on Heightened Cash Monitoring), which was a concern that did not exist in the Gibson case.22 Further, International did not, as Gibson did, “adopt [] corrective measures that would eliminate the basis for liability.” While International compares the $1.5 million loan the school‘s owner made in 2006 to the $3,850 donation Gibson‘s owner made, as the Secretary notes, the Gibson donation was made during the infracting year, and specifically with the purpose of remedying the 90/10 violation. The loan made to International, however, was not intended to cure the school‘s 90/10 violation—it was made (well after the infracting fiscal year was over) to keep the school afloat as it paid out student funds from its own pocket while the school was on Heightened Cash Monitoring. Thus, the Secretary concluded, the International
All in all, we conclude that the magistrate judge‘s summary judgment affirmance of the FAD was proper.
C. Discovery
Finally, International argues that the magistrate judge should have permitted limited discovery to supplement the administrative record, namely, for the DOE to turn over all the documents it considered in reaching its decision against International. Specifically, International claims that the agency did not provide any of its “internal guidance, policies, procedures, or memoranda.”
This argument has no merit. When reviewing agency decisions, we do not allow supplementation of the administrative record without specific evidence (i.e., a “strong showing“) of the agency‘s “bad fаith or improper behavior.” Town of Norfolk v. U.S. Army Corps of Eng‘rs, 968 F.2d 1438, 1458-59 (1st Cir. 1992) (“Courts require a strong showing of bad faith or improper behavior before ordering the supplementation of the administrative record.“); United States v. JG-24, Inc., 478 F.3d 28, 34 (1st Cir. 2007) (“Normally, we do not allow supplementation of the administrative record unless the proponent points to specific evidence that the agency acted in bad faith.“). Here, International has not even suggested that the agency acted in bad faith, let alone provided evidence of it. Therefore, the magistrate judge did not err in denying the request for discovery.
CONCLUSION
For these reasons, we affirm both the grant of the DOE‘s motion for summary judgment and the denial of International‘s motion for summary judgment. We likewise affirm the denial of the motion to compel.
THOMPSON
UNITED STATES CIRCUIT JUDGE