United States Court of Appeals
For the First Circuit
____________________
No. 00-1481
SISTEMA UNIVERSITARIO ANA G. MENDEZ
Plaintiff, Appellant,
v.
RICHARD W. RILEY, SECRETARY OF EDUCATION
Defendant, Appellee.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Juan M. Perez-Gimenez, U.S. District Judge]
____________________
Before
Lynch, Circuit Judge,
Lipez, Circuit Judge, and
García-Gregory, District Judge.
____________________
Leslie H. Wiesenfelder, with whom José E. De La Cruz Skerrett,
Michael B. Goldstein, and Sherry A. Mastrostefano, and Dow, Lohnes &
Albertson were on brief, for plaintiff-appellant.
Sarah L. Wanner, Office of the General Counsel, Department of
Education, with whom Guillermo Gil, U.S. Attorney, and Lisa E. Bhatia
Gautier, Assistant U.S. Attorney, were on brief, for defendant-
appellee.
____________________
December 19, 2000
____________________
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LYNCH, Circuit Judge. The United States Secretary of
Education determined that certain programs run by a private
university system in Puerto Rico did not meet the eligibility
requirements for student financial assistance programs under
Title IV of the Higher Education Act of 1965, as amended, 20
U.S.C. §§ 1070 et seq. (1998). Title IV includes the popular
Pell grant programs. As a result, the university system, the
Sistema Universitario Ana G. Méndez, was held liable for
$1,712,540 in student grant funds1 it had disbursed during the
two fiscal years from July 1, 1989 to June 30, 1991. The
university system sought review of the Secretary's determination
in the U.S. District Court. That court entered summary judgment
for the Secretary of Education, and Sistema appeals. The case
turns on an issue of first impression concerning the interplay
between state and federal law on the question of which
institutions are "legally authorized" to be eligible for Title
IV funds. We hold that the Secretary has discretion to
determine what state actions qualify as "legal authorization"
for purposes of Title IV eligibility.
I.
Sistema is a private university system that includes
three degree-granting universities, Colegio Universitario del
Este (formerly Puerto Rico Junior College, or "PRJC"),
1 Almost all the funds at issue were awarded under the Federal
Pell Grant Program, 20 U.S.C. § 1070a and 34 C.F.R. § 690, which
"awards grants to help financially needy students meet the cost of
their postsecondary education." 34 C.F.R. § 690.1 (2000).
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Universidad del Turabo, and Universidad Metropolitana. Sistema
and its constituent institutions have participated in Title IV
programs for many years, and each university has received
between $7 and $20 million annually in Title IV funding. As a
Title IV participant, Sistema has a fiduciary duty to follow
program requirements and to account for funds obtained. See,
e.g., 34 C.F.R. § 668.82 (1999).
In 1982, PRJC began offering a community-based
extension education program known as PROSEE (Programa de
Servicios Educativos Especiales, or Special Educational
Extension Services Program), and by 1984, Universidad
Metropolitana and Universidad del Turabo had each established
their own PROSEE sites. It is these PROSEE programs that are at
issue. During the early 1980s, Sistema opened approximately 60
new satellite campuses throughout the Commonwealth under PROSEE.
Sistema neither notified the Secretary of the existence of these
PROSEE sites nor obtained the Secretary’s approval of the Title
IV eligibility of the sites, as required by Title IV's
implementing regulations. See 34 C.F.R. § 600.30; id. §
600.10(b)(3); id. § 600.20. Indeed, when Sistema filled out its
usual Title IV eligibility application forms in this period, it
marked "N/A" in response to questions about additional
locations.
Sistema also failed to obtain prior approval from the
Commonwealth’s licensing agency, the Puerto Rico Commission on
Higher Education ("PRCHE"), for most of the locations. In 1985
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PRCHE did grant licenses to certain PROSEE sites that had
already been opened by PRJC, but PRCHE knew of only 25 PROSEE
sites, while in fact PRJC ultimately operated 38 sites. Sistema
obtained no prior approval from PRCHE whatsoever with regard to
any of the PROSEE sites operated by the other two universities
within Sistema. When PRCHE learned of the additional PROSEE
sites, it informed Sistema that Puerto Rico law required Sistema
to get prior campus-by-campus approval for each new site.
Sistema took the position that it was not required to
do so, and a lawsuit ensued in the Commonwealth courts. In
1988, the parties settled that case, agreeing that PRCHE would
undertake a site-by-site review of the PROSEE program and that
Sistema would not open any new PROSEE sites in the interim,
though the settlement allowed the already opened PROSEE sites to
remain open pending review. At the time of the settlement, many
PROSEE campuses had never been reviewed, and the settlement did
not determine that the PROSEE sites met PRCHE’s standards for
approval. In fact, when PRCHE did review the PROSEE sites over
the following two years, it issued certifications in which it
refused to grant approval and listed a series of deficiencies at
the sites. The certifications issued did allow certain of the
PROSEE locations operated by Universidad Metropolitana and
Universidad del Turabo to continue operation for six months, but
only for the purpose of permitting students then enrolled to
complete their programs, and only on the condition that those
sites improve specified deficiencies. There was no evidence
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presented that they ever did so.
In 1992, PRCHE issued a second set of certifications,
which licensed 12 PROSEE sites for prospective operation. But
some 46 sites remained, and as to them the PRCHE said:
Having determined that the institution has complied
with the closing plan that was approved by this
organization, this document certifies for all the
legal effects, the validity of the programs offered
and degrees conferred in the referenced locations,
with the understanding that none of them will continue
operating or enrolling a single student.
Of the 46 sites in question, 43 had already closed and the
remainder were to be closed shortly.
In 1991 and 1992 the U.S. Department of Education
audited Sistema and concluded that the PROSEE sites had not been
eligible to participate in Title IV. After negotiations with
Sistema, the Department agreed to limit liability to the period
from July 1, 1989 to June 30, 1991, and to permit Title IV
status for the 25 PROSEE sites licensed in 1985. The Department
also eliminated from its calculation of liability those funds
for attendance at the PROSEE sites of Universidad Metropolitana
and Universidad del Turabo for those PROSEE students who were
graduates and potential graduates. Through these adjustments,
in the final audit, Sistema's potential liability was reduced
from over $27 million to the $1.7 million now at issue.
II.
Sistema brought an administrative challenge under 34
C.F.R. § 668, Subpart H to the Department's determination that
the PROSEE programs lacked Title IV eligibility. As a result of
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their fiduciary status, institutions bear the burden of proving
that their expenditures of Title IV funds were warranted and
that they complied with program requirements. See 34 C.F.R. §
668.116(d) (1987). After reviewing the record, a DOE
administrative law judge affirmed the $1.7 million liability
asserted against Sistema on the ground that Sistema had not
demonstrated that the PROSEE sites were "legally authorized" by
the PRCHE within the meaning of 20 U.S.C. § 1141(a) (1998).2 See
In re Fundación Educativa Ana G. Méndez, No. 94-30-SA, Decision
of Administrative Judge, at 6 (ED. O.H.A. Dec. 15, 1995). After
2 At all times during the period in issue in this case, 20
U.S.C. § 1141(a) provided in part: "the term 'institution of higher
education' means an educational institution in any State that (1)
admits as regular students only persons having a certificate of
graduation from a school providing secondary education, or the
recognized equivalent of such a certificate; (2) is legally authorized
within such State to provide a program of education beyond secondary
education; (3) provides an educational program for which it awards a
bachelor's degree or provides not less than a two-year program which is
acceptable for full credit toward such a degree, (4) is a public or
other nonprofit institution, and (5) is accredited by a nationally
recognized accrediting agency or association or, if not so accredited,
(A) is an institution with respect to which the Secretary has
determined that there is satisfactory assurance, considering the
resources available to the institution, the period of time, if any,
during which it has operated, the effort it is making to meet
accreditation standards, and the purpose for which this determination
is being made, that the institution will meet the accreditation
standards of such an agency or association within a reasonable time, or
(B) is an institution whose credits are accepted, on transfer, by not
less than three institutions which are so accredited, for credit on the
same basis as if transferred from an institution so accredited...."
When the Higher Education Act was reauthorized in 1998, the statutory
language did not change in substance, but this provision was recodified
at 20 U.S.C. § 1001(a). We will cite to the section numbers from the
relevant time period.
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the Secretary certified this administrative determination,
Sistema appealed the finding to the district court.
The district court reversed and remanded that
determination to the Secretary. The district court found that
the Secretary's determination of liability rested on the premise
that PRCHE had not licensed the PROSEE sites at all. By
contrast, the court determined that the language in the 1992
PRCHE certifications, quoted above (retroactively certifying the
validity of the already closed sites on the condition that they
not reopen), constituted an affirmative licensing of the sites
for the purposes of Puerto Rico law. Since the Secretary failed
to address the effect of these 1992 certifications on the
determination of liability, the district court remanded the
decision to the Department. However, the district court did not
find that the certifications necessarily constituted the "legal
authorization" required by the Higher Education Act; rather, it
remanded the question of whether the Secretary was bound to take
these PRCHE certifications as the equivalent of the required
"legal authorization."
On remand, the DOE administrative law judge again found
Sistema liable, determining that the program was ineligible for
two reasons: (1) the PROSEE sites were not legally authorized,
and (2) Sistema failed to apply for prior approval as required:
As part of the federal government's obligation to
safeguard federal student financial assistance funds,
a tri-partite gatekeeping system has been established.
The participants in this gatekeeping function include:
accrediting agencies which have been approved by the
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Secretary to be the judge of the quality and content
of education programs; state licencing bodies which
oversee the legal existence of educational programs
within their respective states; and ED which has the
overall responsibility to scrutinize the compliance
with federal law of all Title IV participants.
Although accrediting agencies and state licensing
bodies are, indeed, independent entities, they do not
operate in a vacuum in so far as Title IV issues are
concerned -- Congress has delegated to the Secretary
the final and ultimate authority to determine whether
or not compliance with Title IV is achieved.
* * * * *
Separately, I find that Fundacion failed to apply to
ED for approval to offer degree or certificate
programs at its remote PROSEE sites, as required.
In re Fundación Educativa Ana G. Méndez, No. 94-30-SA, Decision
of Administrative Judge, at 4-5 (ED. O.H.A. July 16, 1998). Our
decision, like that of the district court, turns on the first
ground.
III.
The Title IV student financial assistance program is
an instance of cooperative federalism -- its eligibility
requirements rest on both federal and state3 determinations (as
well as private accreditations). To participate in the student
assistance program, an educational institution must be an
"eligible" institution of higher education. 20 U.S.C. § 1094(a).
Under the Department's implementing regulations, a determination
that an institution meets the eligibility requirements applies
only to those locations that are part of the institution at the
3 The Commonwealth of Puerto Rico has the status of a
State for purposes of Title IV. 20 U.S.C. § 1003(16).
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time of the eligibility determination. See 34 C.F.R. §
600.10(b)(3) (1988-92) ("Eligibility does not extend to any
locations that the institution establishes after it receives the
eligibility designation. . . ."). To add new locations, the
institution must apply for a new determination of eligibility.
See id. ("If an eligible institution seeks to establish
eligibility for a new location, the institution shall apply
under Section 600.20."); see also 34 C.F.R. § 600.32 (1991)
(providing procedure for obtaining eligibility determination for
additional locations). The statutory and regulatory provisions
defining eligibility give the states some role to play, insofar
as they preclude from eligibility those institutions which are
not "legally authorized within such State to provide a program
of education beyond secondary education." 20 U.S.C. §
1141(a)(2); see also 34 C.F.R. § 600.4(a)(3). The core dispute
between the parties is that Sistema says it was so "legally
authorized" as to the PROSEE sites at issue and the Secretary
says it was not. The question before us is whether these
provisions vest any discretion in the Secretary in making the
ultimate eligibility determination that an institution is
"legally authorized."
A court reviews such an agency determination under the
Administrative Procedure Act, 5 U.S.C. § 701, et seq., simply to
ascertain whether the agency decision was "arbitrary,
capricious, an abuse of discretion, or otherwise not in
accordance with law." 5 U.S.C. § 706(2)(A). Agency hearing
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determinations are upheld when supported by "substantial
evidence." See id. § 706(2)(E). In the administrative
proceedings, the burden of proof is on Sistema, see 34 C.F.R. §
668.116(d); under "arbitrary and capricious" review, the court
may not substitute its judgment for that of agency officials but
rather must focus on whether "the agency [ ] examine[d] the
relevant data and articulate[d] a satisfactory explanation for
its action including a 'rational connection between the facts
found and the choice made.'" Motor Vehicles Mfrs. Ass'n v.
State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (citation
omitted). In this case the district court upheld the agency
determination on summary judgment. Our review of the district
court’s summary judgement determination is made de novo. Thomas
v. Kodak, 183 F.3d 38, 47 (1st Cir. 1999) (later history
omitted).
Sistema makes arguments on several levels. It begins
by making a procedural argument, arising from the prior history
of the case, that the Secretary was boxed in by the combination
of his prior ruling in the case and the remand order of the
initial reviewing court, such that the Secretary had no leeway
to reach the decision he did after remand. This argument is
frivolous and rests on what can charitably be called a
misunderstanding of the record. The Secretary decided the very
point sent to him on remand.4
4 Sistema argues that the first district judge held that in
1992 the Commonwealth did license the PROSEE program and all of its
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Sistema makes two substantive arguments, both grounded
on the contention that Puerto Rico had legally authorized the
PROSEE sites, either through the 1988 settlement agreement or
retroactively through the 1992 certifications. The first
argument is that the Secretary’s decision that the sites were
unauthorized is flatly contradicted by the statute, 28 U.S.C. §
1141(a), a definitional section which provides:
The term "institution of higher education" means an
educational institution in any State which...(2) is
legally authorized within such State to provide a
program of education beyond secondary education . . .
.
Sistema argues that this statute commits the decision as to
whether a program is legally authorized solely to the states.
Thus this case, Sistema says, stops at the first step of the
analysis under Chevron U.S.A., Inc. v. Natural Resources Defense
Council, Inc., 467 U.S. 837, 842-843 (1984). Since the district
court in the first appeal found that the 1992 certifications
constituted a "license" of the sites for the purposes of Puerto
Rico law, Sistema continues, the Secretary is bound by this
sixty locations, and that because the Secretary did not appeal this
ruling, which of course remanded the matter to the agency, the
Secretary is bound by this decision. We think the Secretary is not
bound by the law of the case doctrine, that it is far from clear there
would have been any appellate jurisdiction to review the interim remand
order, and that the matter is properly before us for review. In any
event, we think the district court did not mean what Sistema attributes
to it. Within the question remanded was the leeway for the Secretary
to conclude that this situation did not amount to the sort of
licensure, if licensure at all, which amounted to a "legal
authorization."
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statutory language to find the sites eligible. In fact, the
argument proceeds, the Secretary has acknowledged that he is
bound by a state’s determination of the legal status of an
institution according to the agency’s own regulations, 34 C.F.R.
§ 600.2 (1988), which provides:
Legally authorized: The legal status granted to an
institution through a charter, license, or other
written document issued by the appropriate agency or
official of the State in which the institution is
physically located.
This argument sets the stage for Sistema's other
substantive argument -- that the Secretary has violated his own
regulations and administrative case law. Sistema contends that
§ 600.2 leaves the Secretary no discretion where the relevant
state agency licenses an institution. Sistema also points to
other regulations, including those which govern what happens
when an institution loses its state accreditation or legal
authorization. See 34 C.F.R. § 600.41 (1990). In such
circumstances, it says, the agency’s hearing officer "is not
authorized to scrutinize the action of the . . . State to
determine whether the removal of . . . the State authorization
was valid . . ." 55 Fed. Reg. 32,180-81 (Aug. 7, 1990).5 In
5 Deflecting an anticipated defense from the Secretary, Sistema
finally argues that its status under state law is not determined by
whether it is licensed. The statute uses the word "authorization," not
"licensure," and the Secretary’s official Handbook acknowledges that "a
school is considered to be legally authorized if state law does not
require it to have a license or other formal approval." The argument
is at odds with Sistema's main theme that it is the states who are
empowered to determine authorization. Puerto Rico has determined that
programs must have licenses. That federal law accommodates other
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fact, Sistema asserts, the Commonwealth of Puerto Rico did
license or otherwise legally authorize all 60 PROSEE sites.
Moreover, to the extent that the Secretary rejected the 1992
certifications as legal authorization on the grounds that they
were retroactive, Sistema argues that such a conclusion violates
established agency case law.
Both the Secretary and Sistema pose the first issue as
a stark one: whether it is the state or the Secretary who gets
to decide what qualifies as "legal authorization" of a program
for the purposes of Title IV. We think a slightly different
formulation of the issue is preferable: whether the statute
means that the Secretary has no discretion to determine what is
"legal authorization" for Title IV eligibility purposes.
The most direct answer is that the Secretary has
discretion. This is a federal program, federal dollars are at
stake, and the most sensible reading of the statute is that the
Secretary has discretion to determine what is "legal
authorization" in order to protect federal interests. The
definitional section, 28 U.S.C. § 1141(a), is consistent with
this reading, and does not bear the contrary weight Sistema puts
on it. This definitional section is simply that, and does not
say that the Secretary, who is expressly charged in the
statutory scheme with determining eligibility, is bound by the
state's determination as to one aspect of eligibility: "legal
states that do not have licensing requirements adds nothing to
Sistema’s argument.
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authorization."6 It simply describes "legal authorization"; it
does not allocate responsibility for determining if the
requirement is met. In any event, even assuming that the
statute does not directly charge the Secretary with assessing
"legal authorization," it is certainly not impermissible or
unreasonable to construe the statute to do so implicitly, and
hence we would defer to the Department's interpretation under
the second step of Chevron in any case.
Sistema's second argument -- that the Secretary
violated the Department's own regulations and administrative
case law -- is misplaced. Sistema relies primarily on two cases
refusing to impose liability in light of retroactive
eligibility: In re Baytown Technical School, Inc., No. 91-40-
SP, Decision of the Secretary, 1994 WL 907417 (ED. O.H.A. April
12, 1994) (allowing retroactive accreditation of branch
locations), and In re French Fashion Academy, No. 89-12-S,
Decision of the Secretary, 1990 WL 357908 (ED. O.H.A. Mar. 30,
1990) (denying liability for period covered by retroactive state
license). These cases are quite distinct from the case at hand.
6 Indeed, the prior notification scheme established in the
statute serves the purpose of ensuring Department oversight before the
expenditure of Title IV funds. See 20 U.S.C. § 1094(a); see also 34
C.F.R. § 600.21(a)(1) (delineating the Secretary's role in determining
whether applicants qualify as eligible institutions). The fact that in
the first administrative hearing, the administrative law judge found
that the violation of the notification provisions here alone not
sufficient to justify a finding of liability does not undercut the fact
that these notification requirements reflect the Secretary's
gatekeeping role in the distribution of Title IV funds.
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First, in these cases, unlike here, the state licensing agencies
had determined that the institution in question was currently
qualified under state standards, that it was so qualified on the
date to which the approval was made retroactive, and that it was
likely to remain qualified in the foreseeable future. Moreover,
both of these cases predated the current regulation requiring
prior approval of eligibility for each new institutional site,
a shift which, the Secretary argues, precludes retroactive
licensing, see 34 C.F.R. § 600.10(a) (eligibility not
established until Department receives all information relevant
to making such a designation). By contrast, that regulation was
in force throughout the time period at issue in this case.
But the states are also given a role in the Title IV
scheme, and were this an instance of the Secretary questioning
the propriety of a license duly issued in the regular course by
a state, a question might well be presented whether a decision
by the Secretary to the contrary of the state’s licensing
determination was arbitrary or capricious or otherwise not in
accordance with law. Questions might also be raised if the
Secretary concluded the state had never issued a license in the
face of unrebutted evidence the state had done exactly that.
This is not those cases.
Here, the only "license," if that, issued by Puerto
Rico was in 1992 -- after the audit period in question. It is
doubtful that a retroactive attempt by a state to license would
usually qualify as "legal authorization." In the normal scheme
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the statute and regulations set up a system of prospective
approval, as is inherent in the prior notification provisions
of the law and in the very word "authorization." The Secretary
argues that any and all retroactive licenses fail to be legally
authorized, regardless of circumstance. We need not reach that
argument.
Apart from the issue of retroactivity, we think the
Secretary had discretion to say that the 1992 events did not
amount to legal authorization. Here, the Commonwealth did not
purport to say in 1992 that it had reviewed the schools and
found them qualified and licensed. It only said that schools
which were closed or about to be closed were certified for their
validity as to programs and degrees, provided none of the
schools kept operating. The history showed that when the PROSEE
campuses were reviewed, they were not approved and they had
deficiencies. As the administrative law judge astutely noted,
the history strongly suggests that Puerto Rico, in the 1992
certification, was attempting to protect the students who had
gone through these programs which Sistema had failed to disclose
to local and federal authorities. That is far different from
saying that Sistema met its obligations for Title IV purposes.
The conclusion is also reasonable that the 1988 settlement
agreement was not a license. The settlement merely
provisionally allowed Sistema to continue to operate the PROSEE
sites previously not disclosed to PRCHE while they were
reviewed. On these facts, the Secretary’s conclusion that these
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schools were not "legally authorized" is hardly unreasonable.
Nor was the second trial judge’s lack of sympathy for Sistema
unreasonable; Sistema not only created this situation but could
well have victimized its PROSEE students by placing their
degrees in jeopardy.
Accordingly, we affirm the judgment and award costs in
favor of the Secretary.
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