San Juan City College v. United States

United States Court of Appeals for the Federal Circuit

03-5180

SAN JUAN CITY COLLEGE and
AMERICO REYES MORALES, (on his own behalf and
as President of SAN JUAN CITY COLLEGE INC.),

Plaintiffs-Appellants,

v.

UNITED STATES,

Defendant-Appellee.

Yolanda R. Gallegos, Gallegos Legal Group, of Albuquerque, New Mexico,
argued for plaintiffs-appellants.

Hillary A. Stern, Attorney, Commercial Litigation Branch, Civil Division, United
States Department of Justice, of Washington, DC, argued for defendant-appellee. With
her on the brief were Peter D. Keisler, Assistant Attorney General, David M. Cohen,
Director, and Mark A. Melnick, Assistant Director.

Appealed from: United States Court of Federal Claims

Senior Judge Eric G. Bruggink
 United States Court of Appeals for the Federal Circuit
03-5180

SAN JUAN CITY COLLEGE and
AMERICO REYES MORALES, (on his own behalf and
as President of SAN JUAN CITY COLLEGE INC.),

Plaintiffs-Appellants,

v.

UNITED STATES,

Defendant-Appellee.

______________________________

DECIDED: December 9, 2004
______________________________

Before NEWMAN, Circuit Judge, FRIEDMAN, Senior Circuit Judge, and SCHALL,
Circuit Judge.

FRIEDMAN, Senior Circuit Judge.

The petitioners San Juan City College, Inc. and Americo Reyes Morales,

President of the College (collectively, “the College”), contend in this suit for damages

that the United States Department of Education (“the Department”) breached a contract

with the College to provide student aid funds. The United States Court of Federal

Claims granted summary judgment dismissing the complaint on the ground that, under

the particular contract and as a matter of law, the College cannot recover damages for a

breach. San Juan City Coll., Inc. v. United States, 58 Fed. Cl. 26, 30 (2004). We reject

that conclusion, vacate the dismissal of the suit, and remand with instructions to decide,
first, whether the Department breached the contract with the College and, second, if a

breach did occur, what damages, if any, the College may recover.

I

A. The underlying facts, as the Court of Federal Claims stated them, are

undisputed. From 1977 until it closed permanently in 1996, the College was a private,

for profit, post-secondary educational institution, operating several campuses in Puerto

Rico and primarily serving low-income students. 58 Fed. Cl. at 27. In 1984, the College

entered into a Program Participation Agreement (“the Agreement”) with the Department

to participate in student financial aid programs under the Higher Education Act, Pub. L.

No. 89-329, 79 Stat. 1219 (1965) (codified as amended at 20 U.S.C. §§ 1070 et. seq.)

(“Title IV”), including the Pell Grant Program under 20 U.S.C. § 1070a (2000). 58 Fed.

Cl. at 27. At oral argument, the College described these federal funds as the “lifeblood”

of the institution, critical to its continued operation.

In February 1995, representatives of the Puerto Rico tax office made an

unannounced visit to the College campuses to conduct an inventory related to an

alleged tax debt. The tax officials padlocked the school’s doors, forcing students to

leave and the College to suspend all classes for approximately two weeks between

February 8 and February 25. At the end of this temporary recess, the padlocks were

removed and students returned. The College resumed classes on February 27, and

later made up all missed classes by extending the term. Id.

On or around February 14, 1995, Department officials sent by certified mail,

return receipt requested, a “closed school letter” to the College stating that the

Department had been “advised” that the College had “ceased operations at all its

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branches effective on February 6, 1995,” and indicating that the Department regarded

the College as permanently closed. Id. at 28. Subsequently, the Department placed

the College on its “closed school list,” issued a “freeze memo” instructing that Title IV

funds be withheld from the College because “INSTITUTION CLOSED EFFECTIVE

FEBRUARY 6, 1995,” and stopped processing reimbursement requests from the

College. Id. (The Department contends that under 34 C.F.R. § 668.26(a)(1), the

College ceased to qualify for Title IV funding when it temporarily shut down for the

inventory and thus “close[d] or stop[ped] providing educational programs for a reason

other than a normal vacation period or a natural disaster . . .” 58 Fed. Cl. at 28.)

It is “undisputed” that the College never received the February 14 letter; the

government did not produce the return receipt for the certified mailing. Id. Instead, at

some point between February 27 and March 23, the College ceased receiving expected

Title IV funds and learned that it had been placed on the closed school list. The College

immediately began challenging that action. Between March 23 and June 12, the

College and its counsel called and wrote to various Department officials numerous

times to inform them that the College was not closed. Id. at 28-29. Despite these

efforts, there is no evidence that any Department employee independently verified that

the College was open until late June of 1995, after Puerto Rican Congressman Carlos

Romero-Barceló had written to the Secretary of Education about the matter. Id. at 29.

In July 1995, the Department advised the College that it had confirmed that the

College was open and operating. Shortly thereafter, the Department removed the

College from the closed school list and resumed providing Title IV funds. Id. In July

1995, the Department also paid all funding requests received from the College since

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February 10, 1995. Appellee’s Br. at 10; J.A. at 111, 171. In 1996, the College closed

permanently. 58 Fed. Cl. at 27.

B. In February 2001, the College filed the present suit in the Court of Federal

Claims. The complaint contained three counts. Count One alleged that the Department

breached the Agreement by withholding Title IV funding for six months without

“follow[ing] the notice and hearing requirements of 20 U.S.C. § 1094 and 34 C.F.R.

§ 668, Subpart G.” The complaint then stated:

40. Defendants’ breach of contract resulted in Plaintiffs
suffering severe and substantial damages including, but
not limited to, lost profits Plaintiffs would have earned
had it not been forced by ED to close.
41. Such damages were foreseeable to Defendants at the
time they entered into the program participation
agreement with SJCC.

J.A. at 30.

Count Two alleged that the defendants had violated Title IV of the Higher

Education Act of 1965, 20 U.S.C. §§ 1070 et seq., “[b]y failing to provide SJCC with the

notice and hearing required by 20 U.S.C. § 1094 and 34 C.F.R. § 668, Subpart G, when

it ceased providing funding to SJCC beginning in February 1995[.]” Count Two then

repeated the allegations of Count One quoted above regarding the damages the

plaintiffs had suffered from “[s]uch violation” and the foreseeability of those damages.

J.A. at 31. Count Three alleged that these actions by the Department constituted a

taking of the plaintiffs’ property, for which they sought just compensation. J.A. at 31-32.

The prayer for relief sought declaratory relief and “damages including consequential

damages for lost profits resulting from Defendants’ actions[.]”

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 C. On cross motions for summary judgment, the court granted the government’s

motion and dismissed the suit. The court stated that the College made a “compelling

case that [the Department] breached the agreement,” as well as a “powerful argument”

that the temporary withholding of funds “foreseeably caused dramatic economic

consequences to plaintiffs — to wit, closing of the school.” 58 Fed. Cl. at 27. The court

found it unnecessary to determine whether the Department had breached the

Agreement, however, because it concluded that “as a matter of law, violation of the

agreement, insofar as it involves a failure to offer a hearing under 34 C.F.R. § 668.86,

creates a right only to equitable relief.” Id. at 32. “[T]he agreement, even if viewed in

traditional contract terms, does not, as a matter of law, permit the recovery of the type

of damages they seek.” Id. at 30.

The court stated that “the contract ‘right’ plaintiffs seek to enforce, although

incorporated into a contract, comes from the applicable regulations”, id. at 7, and that

the Agreement “did no more than make the regulations applicable to the school.” Id. at

31. According to the court, when the Department “executed the agreement . . . it

agreed to do no more than abide by the law.” Id. The court ruled that “in signing the

agreement” the Department had not “opened itself up to traditional contract remedies[.]”

Id. The court further stated:

There is no reason to think that the agency contemplated
any commitment other than that set out in the regulations.
The agency’s commitment, in short, was to do what the
regulations required. The regulations, however, embody
their own limited remedy for “breach” – namely, either an
administrative appeal, as provided for in 34 C.F.R.
§ 668.111-121, or a suit in the district court seeking
declaratory or injunctive relief . . . . It follows that the parties
never agreed to bind the agency to exposure to
consequential damages . . . . We rule that, as a matter of

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 law, violation of the agreement, insofar as it involves a failure
to offer a hearing under 34 C.F.R. § 668.86, creates a right
only to equitable relief.

Id. at 31-32.

The court also rejected the College’s claim that the Department denied it due

process by terminating its participation in the Title IV Program without a hearing

because the court has no jurisdiction over damage claims based on due process

violations. Id. at 29. The court did not discuss or explicitly rule on the College’s taking

claim or its allegation of statutory violations, but it necessarily rejected those claims

when it dismissed the complaint. Since the College in its appeal challenges only the

denial of its breach of contract claim, we need not consider or discuss the dismissal of

those other claims.

II

Without deciding whether the Department had breached the Agreement, the

Court of Federal Claims dismissed the suit seeking damages for such breach on the

ground that damages were not available as a remedy for such breach, and that the only

remedy was equitable relief. Although there might be cases in which a court

appropriately may dismiss a suit for breach of contract without adjudicating the merits

because there is no theory of damages on which the plaintiff could recover, cf.

Albemarle Bank & Trust Co. v. United States, 12 Cl. Ct. 704, 706-07 (1987), this is not

such a case.

A. The governing statute requires, as do the Department’s regulations, that

educational institutions seeking to participate in the Title IV student financial aid

programs under the Higher Education Act must enter into “a program participation

03-5180 6
agreement with the Secretary,” which “shall condition the initial and continuing eligibility

of an institution to participate in a program upon compliance with” numerous specific

and detailed requirements the statute lists. 20 U.S.C. § 1094(a); see also 34 C.F.R.

§ 668.14 (“An institution may participate in any Title IV, HEA program, other than the

LEAP and NEISP programs, only if the institution enters into a written program

participation agreement with the Secretary” and listing conditions to which the institution

agrees by entering said agreement).

Pursuant to these requirements, the College and the Department entered into a

formal written “Program Participation Agreement,” consisting of 11 articles setting forth

detailed requirements and signed by both parties. Although it may well be, as the Court

of Federal Claims stated, that most (and perhaps all) of these contractual provisions

were required by and incorporated the governing regulations, that does not make them

any less contractual obligations or provisions, or constitute a valid reason for not

treating them as such.

We see nothing in either the Agreement itself or in the governing statute or

regulations that supports the Court of Federal Claims’ view that the parties understood

that damages would not be available in the event of breach. Normally contracts do not

contain provisions specifying the basis for the award of damages in case of breach, with

the exception of provisions governing damages in particular situations, such as

liquidated damages for delay or other specified breaches.

The fact that this contract covers government financial grants does not warrant a

different standard. If the government has breached the Agreement, the College is

entitled to seek whatever damages it is entitled to receive. As this Court has stated, “in

03-5180 7
the area of government contracts, as with private agreements, there is a presumption in

the civil context that a damages remedy will be available upon the breach of an

agreement. Indeed, as a plurality of the Supreme Court noted in United States v.

Winstar Corp., 518 U.S. 839 (1996), ‘damages are always the default remedy for breach

of contract.’” Sanders v. United States, 252 F.3d 1329, 1334 (Fed. Cir. 2001) (citing

and quoting Winstar Corp., 518 U.S. at 885 (parallel citations omitted)).

B. The Court of Federal Claims deemed “helpful” the Supreme Court’s decision

in Bennett v. Kentucky Department of Education, 470 U.S. 656, 669 (1985). The trial

court stated that there “the Court taught that, ‘[u]nlike normal contractual undertakings,

federal grant programs originate in and remain governed by statutory provisions

expressing the judgment of Congress concerning desirable public policy.’ Id. at 670.

The normal confines of ‘bilateral contract governing a discrete transaction’ are not

appropriate for a contract incorporating federal grants. Id.” 58 Fed. Cl. at 32.

However, “[i]t is a truism that bears repeating that broad language in an opinion

must be read in light of the issue before the court.” N. States Power Co. v. United

States, 224 F.3d 1361, 1367 (Fed. Cir. 2000) (citing Armour & Co. v. Wantock, 323 U.S.

126, 133 (1944)). As the Court of Federal Claims itself recognized, in Bennett v.

Kentucky “the [Supreme] Court was dealing with a different program and a different

legal question.” 58 Fed. Cl. at 32; see Bennett v. Kentucky, 470 U.S. at 669.

Bennett v. Kentucky involved monetary grants that the Department had made to

the state of Kentucky under Title I of the Elementary and Secondary Education Act of

1965, 20 U.S.C. § 2701 et. seq., “to support compensatory education programs for

disadvantaged children. In order to assure that federal funds would be used to support

03-5180 8
additional services that would not otherwise be available, the Title I program from the

outset prohibited the use of federal grants merely to replace state and local

expenditures.” 470 U.S. at 659. In Bennett v. Kentucky the Department sought to

recover funds it had disbursed to the state, on the grounds that the state had misused

funds meant “to supplement, and not to supplant, state and local expenditures for

education.” 470 U.S. at 658.

The question before the Supreme Court was whether, in “excus[ing] the State

from repayment on the grounds that there was no evidence of bad faith and the State’s

programs complied with a reasonable interpretation of the law[,]” the court of appeals

had applied an erroneous standard of review. Id. at 659. The Supreme Court reversed

“because we disagree with the standard adopted by the Court of Appeals[.]” Id.

There is nothing in Bennett v. Kentucky that indicates, or even suggests, that in

implementing the different federal grant programs there involved, a formal written

contract, comparable to the one executed in this case, had been breached by the

Department or the state recipient. The outcome of Bennett v. Kentucky turned on the

Supreme Court’s interpretation of the applicable statutory provisions and the governing

regulations. There was no issue or ruling regarding a breach of contract.

The Supreme Court’s statements, upon which the Court of Federal Claims relied,

were made in explaining why the Supreme Court did “not believe that ambiguities in the

requirements should invariably be resolved against the Federal Government as the

drafter of the grant agreement.” 470 U.S. at 669. Although the Court referred to the

“grant agreement,” in view of the lack of reference in the opinion to any formal

agreement, we believe the Court used that term (as well as its use of the same term on

03-5180 9
page 670) as a shorthand description of the obligations the parties assumed by

participating in the grant program. See id. at 669-70. Nothing in the opinion indicates

that “agreement” was comparable to the formal written agreement between the College

and the Department.

In the companion case to Bennett v. Kentucky, Bennett v. New Jersey, 470 U.S.

632 (1985), the Supreme Court “acknowledged that Title I, like many other federal grant

programs, was ‘much in the nature of a contract.’” 470 U.S. at 638 (citing and quoting

Pennhurst State Sch. & Hosp. v. Halderman, 451 U.S. 1, 17 (1981)). The Court of

Federal Claims’ ruling in the present case stands that theory on its head. There is no

reason to believe that, because federal grant programs may be “in the nature of a

contract,” special and different rules govern the determination of damages for a breach

of a formal written contract that involves a federal grant of funds to educational

institutions.

C. As noted, the prayer for relief in the complaint sought “damages including

consequential damages for lost profits.” In its briefs the College contends that it is

entitled to recover lost profits and the government argues that lost profits cannot be

recovered here. For several reasons, we find it unnecessary to resolve that question in

this appeal.

The recovery the College seeks is not limited to lost profits, but more broadly

encompasses other types of damages as well. Count I of the complaint alleged that the

Department’s breach of the agreement caused the College “severe and substantial

damages including, but not limited to lost profits . . . .” Count II repeated this language

03-5180 10
as part of the allegation that the Department had violated Title IV. Similarly, the prayer

for relief sought “damages including consequential damages for lost profits . . . .”

Moreover, it would be premature to decide whether the College could recover

lost profits unless and until the Court of Federal Claims decides the Department

breached the agreement. If the court were to hold that there had not been a breach,

there would be no need or occasion to determine what damages, if any, the College

could recover for a breach. Indeed, the issue of lost profits arises in this appeal only

because the Court of Federal Claims put the cart before the horse when it held, as a

matter of law, that the College could not recover any damages and therefore it was

unnecessary to determine whether a breach of contract occurred.

Finally, the record on damages is inadequate to permit an informed judicial

determination on the recoverability of lost profits. The recoverability of lost profits

frequently is a close and difficult issue that turns upon the facts of the particular case.

See, e.g., Litman v. Mass. Mut. Life Ins. Co., 739 F.2d 1549, 1559 (11th Cir. 1984); E.

Airlines, Inc. v McDonnell Douglas Corp., 532 F.2d 957, 998-1000 (5th Cir. 1976); see

also Cal. Fed. Bank, FSB v. United States, 245 F.3d 1342, 1350 (Fed. Cir. 2001) (noting

importance of material facts). There has been no discovery on damages, and there is

no way of knowing what evidence the College could develop and present on the issue.

At this stage of the proceedings, we cannot say that there are no facts that could

support an award of lost profits. The answer to that question must await the

development of a complete record on the subject.

If on remand the Court of Federal Claims determines that the Department

breached the Agreement, and after a full factual record on the damages question has

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been developed, the trial court then will be in a position to decide whether, under the

traditional principles that govern the recovery of lost profits, cf. Cal. Fed. Bank, 245 F.3d

at 1349-50, the College is entitled to recover them. We of course express no views on

that issue.

III

Since this case will return to the Court of Federal Claims to decide initially

whether the Department breached the Agreement, we think it appropriate to mention a

few points that the court should consider in making that determination.

A. As noted, the College’s breach of contract theory is that the Department’s

termination of the College’s participation in the Title IV funding “was in breach of its

contract with [the College] requiring [the Department] to follow the notice and hearing

requirements of 20 U.S.C. § 1094 and 34 C.F.R. § 668, Subpart G.” Complaint, ¶ 39.

The College relies upon Article X.3 of the Agreement, which states:

The Secretary may terminate this Agreement or the
Institution’s participation in one or more of the programs
covered by this Agreement under the Student Assistance
General Provisions regulations, 34 C.F.R. Part 668, Subpart
G, “Fine, Limitation, Suspension, and Termination
Proceedings.”

The cited regulation provides that the Secretary “may limit or terminate any

institution’s participation in a Title IV” program by first “sending an institution . . . a notice

by certified mail, return receipt requested” that, among other things

Informs the institution or servicer that the limitation or
termination will not be effective on the date specified in the
notice if the designated department official receives from the
institution or servicer, as applicable, by that date a request
for a hearing or written material indicating why the limitation
or termination should not take place[.]

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34 C.F.R. §§ 668.86(a) & (b)(1)(iii) (2004).

The regulation further provides that “[i]f the institution . . . does not request a

hearing but submits written material,” the Department will decide the matter and notify

the institution “after considering that material.” 34 C.F.R. § 668.86(b)(2).

The regulation thus in terms requires the Department to hold a hearing before

terminating or suspending an institution’s participation in Title IV programs only if the

institution requests one. Nothing in the record before us shows that the College

requested a hearing and we do not know whether it did. If it did not, it would seem that

the Department had no contractual obligation to hold one.

There may be the further question of whether the Department’s failure to give

notice of its proposed termination in accordance with the regulation waived the hearing-

request requirement. A related question is whether, even though the Department did

not give timely or proper written notice, the regulation required the College to request a

hearing once it was informed of the Department’s suspension of funding.

With respect to the College’s contention that the Department violated the “notice

and hearing requirements of 20 U.S.C. § 1094,” that section states:

(1) An institution that has received written notice of a
final audit or program review determination and that desires
to have such determination reviewed by the Secretary shall
submit to the Secretary a written request for review not later
than 45 days after receipt of notification of the final audit or
program review determination.
(2) The Secretary shall, upon receipt of written notice
under paragraph (1), arrange for a hearing and notify the
institution within 30 days of receipt of such notice the date,
time, and place of such hearing. Such hearing shall take
place not later than 120 days from the date upon which the
Secretary notifies the institution.

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20 U.S.C. § 1094(b) (1999). That provision appears to address a quite different issue

than the suspension of funding here involved, namely, “a final audit or program review

determination” that the institution wishes the Secretary to review after a hearing.

In its reply brief the College argues that the government’s position “would have

this Court disregard the plain language of 20 U.S.C. § 1094(c)(1)(F) and (G) requiring

that [the Department] be permitted to terminate a school’s participation in the Title IV

programs only where it provides such school a hearing.” Subsection (F), however, does

not require the Secretary to hold a hearing but only to provide “reasonable notice and

opportunity for hearing.” § 1094(c)(1)(F). Subsection (G), which deals with “an

emergency action” by the Secretary, does not mention a hearing at all. It only states

that the Secretary “shall provide the institution an opportunity to show cause, if it so

requests, that the emergency action is unwarranted.” § 1094(c)(1)(G). Finally, the

provision of the Agreement (Article X.3) upon which the College relies as incorporating

the hearing requirement refers only to subpart G of the regulations, and not to the

statute.

B. The Court of Federal Claims stated in its Order of April 21, 2003 that “[i]t is

undisputed that the funds earned by the school prior to the cessation of reimbursement

have been repaid.” San Juan City Coll., Inc. v. United States, No. 01-73C (Fed. Cl. Apr.

21, 2003) (order). Accordingly, this case apparently involves not the termination of

participation in Title IV funding (as the College alleges), but a delay in or suspension of

such funding.

Even if the Agreement requires the Department to conduct a hearing before

terminating participation in a Title IV program, does the Agreement also require a

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hearing before payments under the program may be delayed? Is there anything in the

regulations that specifies the time period within which the Department must make

payments to a participating institution?

The hearing requirements of Part G of 34 C.F.R. § 668 cover not only

proceedings to terminate an institution’s participation in the Title IV program, but also

proceedings to suspend it. Quaere, did the Department’s action in this case constitute a

suspension of participation within the meaning of subpart G? The College has not so

argued here. Instead, it contends only that the Secretary improperly terminated its

participation in the program without a hearing. We leave further elucidation of this issue

to the Court of Federal Claims.

C. The issues we have discussed in parts A and B above were suggested by our

consideration of this case. We intimate no views on how those questions should be

resolved. There may be other factual and legal issues that are relevant to the

determination whether the Department breached the agreement.

CONCLUSION

The summary judgment of the Court of Federal Claims dismissing the complaint

is vacated. The case is remanded to that court to determine first, whether the

Department breached the agreement. If the court finds that the Department did so, then

it should determine what damages, if any, the College is entitled to recover. The court

may, if it deems it appropriate, bifurcate the liability and damages issue.

VACATED AND REMANDED

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