Human Development Corp. of Metropolitan St. Louis v. United States Department of Health & Human Services ( 2002 )


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  •                    United States Court of Appeals
    FOR THE EIGHTH CIRCUIT
    ___________
    No. 02-1986
    ___________
    The Human Development Corporation *
    of Metropolitan St. Louis,             *
    *
    Appellant,                *
    * Appeal from the United States
    v.                              * District Court for the
    * Eastern District of Missouri.
    United States Department of Health and *
    Human Services, The Administration *
    for Children and Families,             *
    *
    Appellee.                 *
    ___________
    Submitted: September 10, 2002
    Filed: December 5, 2002
    ___________
    Before WOLLMAN, HEANEY, and BYE, Circuit Judges.
    ___________
    WOLLMAN, Circuit Judge.
    The Human Development Corporation of Metropolitan St. Louis (HDC) was
    the designated Head Start agency for St. Louis, Missouri. The Administration for
    Children and Families (ACF), an agency within the United States Department of
    Health and Human Services (HHS), administers the Head Start program. On June 9,
    2000, ACF notified HDC that it was disallowing $83,960 for costs related to the
    purchase of computers and $33,430 for HDC’s failure to meet the required twenty
    percent non-federal match in fiscal years 1996 and 1997. HDC appealed this decision
    to the Departmental Appeals Board (Board), which sustained $46,178 of the
    disallowance related to the computers and upheld the non-federal match disallowance
    in its entirety. HDC then filed a petition for judicial review of the Board’s decision.
    Both HDC and HHS moved for summary judgment. The district court granted HHS’s
    motion, concluding that the Board’s decision “was not arbitrary, capricious, an abuse
    of discretion, or otherwise not in accordance with the law.” We reverse in part and
    affirm in part.
    I. Standard of Review
    We review a district court’s grant of summary judgment de novo, applying the
    same standards used by the district court. Gipson v. INS, 
    284 F.3d 913
    , 916 (8th Cir.
    2002). The parties agree that judicial review of the Board’s decision is governed by
    the Administrative Procedure Act (APA). Under § 706(2) of the APA, we will set
    aside an agency action if it is “unsupported by substantial evidence,” or is “arbitrary,
    capricious, an abuse of discretion, or otherwise not in accordance with law.” 
    5 U.S.C. § 706
    (2)(E), (A).
    II. Disallowance for Computer Costs
    The record indicates that between 1995 and 1997, HDC purchased 119
    computers from Bentech, Inc. (Bentech) for its Head Start program. Four purchase
    orders are included in the record: P.O. HS-622-95-712, dated November 30, 1995,
    for 17 computers with 486 processors at $2,049 each; P.O. HS-622-95-663,1 dated
    November 30, 1995, for 40 computers with 486 processors at $2,099 each; P.O. HS-
    1
    There appears to be some confusion regarding this purchase order. It is
    occasionally referred to as P.O. HS-622-95-633.
    -2-
    622-97-386, dated October 3, 1997, for 22 computers at $2,099 each; and P.O. HS-
    622-97-414,2 dated October 23, 1997, for 40 computers at $2,099 each.3
    On November 12, 1998, ACF notified HDC by letter that HDC’s designation
    as a Head Start grantee would be terminated, effective November 30, 1998. In this
    letter, ACF asserted that HDC’s “property management system lacked procedures and
    adequate controls to ensure that property purchased with Federal grant funds was
    safeguarded.” According to ACF, “[s]everal purchases had not been properly
    accounted for in the property records.” HDC appealed ACF’s termination decision
    to the Board, and on September 30, 1999, the Board reversed.
    Thereafter, the Office of Inspector General contracted with Leon Snead &
    Company, P.C. (Snead) to review HDC’s Head Start program for the period from
    December 1, 1995, through November 30, 1998. Snead reported that HDC’s property
    management controls were “very weak.” More specifically, Snead found equipment
    that was not listed on HDC’s inventory and could not find certain equipment that was
    included on the inventory. Because of these shortcomings, Snead concluded that “a
    physical inventory could not be accomplished.”
    After Snead’s report was issued, ACF notified HDC of alleged deficiencies4
    and new noncompliant areas in HDC’s Head Start program. ACF again advised HDC
    2
    This purchase order is also mistakenly referred to as P.O. HS-622-95-714.
    3
    P.O. HS-622-97-386 and P.O. HS-622-97-414 do not specify the type of
    computer ordered.
    4
    The definition of “deficiency” includes “[a] violation of Federal or State
    requirements . . . which the grantee has shown an unwillingness or inability to correct
    within the period specified by the responsible HHS official, of which the responsible
    HHS official has given the grantee written notice . . . .” 
    45 C.F.R. § 1304.3
    (a)(6)(iii)
    (2002).
    -3-
    that its property management system did not sufficiently safeguard property
    purchased with federal grant funds. HDC was afforded an opportunity to correct the
    deficiencies and noncompliant items, and ACF later conducted an on-site audit. On
    June 9, 2000, ACF advised HDC by letter that, after reviewing HDC’s responses to
    the audit report, it was disallowing “costs totaling $84,169.00 for unallowable costs
    related to duplicate payment for computers and travel advance not refunded . . . .”
    HDC appealed that portion of the disallowance relating to the computers, which
    totaled $83,960.
    HDC relinquished the Head Start program in the spring of 2000 and moved the
    Head Start computers to a warehouse shortly thereafter. After receiving the June 9,
    2000, disallowance letter, HDC took steps to ensure that it could account for all of the
    computers purchased with Head Start funds. In July of 2000, HDC employee Dan
    Todd examined and documented thirty-nine Bentech computers with 486 processors
    and fifty-nine Bentech computers with AMD 166 processors in HDC’s warehouse.
    Aff. of David S. McDowell ¶ 5.5 HDC’s accounting firm, Baird, Kurtz & Dobson
    (Baird), also inventoried the Head Start computers. Baird found thirty-nine 486s,
    fifty-eight machines with AMD 166 chips, and one Pentium machine.6 
    Id. ¶ 7
    .
    While its appeal was pending before the Board, HDC learned that it had
    overlooked P.O. HS-622-95-712. Thus, HDC executive David S. McDowell returned
    to the HDC warehouse, where he found seventeen additional 486s that were
    segregated from the other ninety-eight computers. HDC then submitted this
    information, in affidavit form, to the Board. HDC also submitted documentation
    5
    HHS has not challenged McDowell’s affidavits. We therefore accept the
    affidavits as factually accurate, notwithstanding minor discrepancies in the
    documentation supporting HDC’s calculations.
    6
    In his affidavit, HDC executive David S. McDowell describes the machines
    with AMD 166 chips as “a Pentium equivalent.”
    -4-
    relating to the theft of three computers and the seizure of one computer by the Office
    of Inspector General.
    As noted above, ACF initially indicated that the $83,960 disallowance was
    based on a duplicate payment for computer equipment. ACF subsequently
    determined that no duplicate payment had been made and clarified that the issue
    before the Board was whether HDC had received the computers associated with P.O.
    HS-622-95-663. According to ACF, there was no way to account for these computers
    accurately because HDC had failed to record the required information as to each
    computer upon receipt. See 
    45 C.F.R. § 74.34
    (f)(1) (2002) (requiring recipients to
    maintain accurate and detailed records for equipment purchased with federal funds).
    HDC did not dispute that there were deficiencies in its property management system,
    but argued that any such deficiencies were immaterial. HDC contended that the
    inventories it submitted demonstrated that it had accounted for all but one of the
    computers on P.O. HS-622-95-663. HDC also suggested that the missing computer
    was one of those that had been either stolen or confiscated.
    On January 4, 2001, the Board determined that although HDC had failed to
    comply fully with the property management standards governing grant recipients,
    “[t]his does not definitely show that the computer costs should be disallowed . . . .”
    “Instead,” the Board explained, “it places a burden on HDC to account for the
    computers in a way that satisfactorily overcomes the questions raised by its failure to
    comply. The Board then concluded that HDC could account for only eighteen of the
    forty computers and therefore sustained the disallowance as to the cost of the
    remaining twenty-two computers. It is from the district court’s ruling upholding this
    decision that HDC has now appealed.
    On appeal, HDC challenges the Board’s method of determining whether it had
    satisfactorily accounted for the forty computers. HDC also contends that the evidence
    it submitted to the Board demonstrated that it had accounted for all 119 computers it
    -5-
    acquired from Bentech pursuant to the four purchase orders discussed above,
    including the 40 computers associated with P.O. HS-622-95-663. After reviewing the
    record, we agree with HDC’s position.
    Initially, we turn to an argument raised by HHS. According to HHS, the
    evidence indicates that HDC purchased more than 150 computers from Bentech for
    use in the Head Start program. The evidence to which HHS refers is HDC’s close-
    out inventory of equipment purchased with Head Start funds. As HDC states in its
    reply brief, however, “[it] has always admitted that its inventory records were
    inaccurate.” Furthermore, although the close-out inventory was included in the
    materials submitted to the Board, the Board made no specific findings regarding the
    number of computers HDC had purchased from Bentech. Instead, the Board simply
    noted that there were four purchase orders in the record. These orders, as discussed
    above, indicate that HDC acquired a total of 119 Bentech computers between 1995
    and 1997. For these reasons, we are not persuaded by HHS’s argument regarding the
    number of computers HDC purchased for the Head Start program.
    Next, we turn to HDC’s attempt to account for the forty computers associated
    with P.O. HS-622-95-663. The Baird inventory report included ninety-eight Bentech
    computers, thirty-nine of which were 486s,7 fifty-eight of which had AMD 166 chips,
    and one of which was a Pentium machine. Aff. of David S. McDowell ¶ 7. Dan
    Todd’s inventory report listed essentially the same computers. 
    Id. ¶ 5
    . David
    McDowell’s affidavit indicates that he personally viewed seventeen additional 486s
    that were segregated from the other Bentech computers. Supplemental Aff. of David
    S. McDowell ¶ 2. HDC attributes the fifty-six 486s to P.O. HS-622-95-712 and P.O.
    7
    The Board noted that “the [Baird] inventory lists 38 486 computers, not 39 as
    represented by HDC, since one serial number appears twice.” Our review of
    inventory report indicates that the Board is correct. Nevertheless, the “HDC Tag
    #[’s]” of these computers are different, leading us to believe that the duplicate serial
    number was merely a typographical error.
    -6-
    HS-622-95-663, and the remaining fifty-nine computers to P.O. HS-622-97-386 and
    P.O. HS-622-97-414. Thus, of the 119 computers associated with these purchase
    orders, the Baird, Todd, and McDowell inventories account for 115.8 HDC’s
    documentation regarding three stolen computers and a confiscated computer appears
    to account for the remaining four.
    Finally, we turn to the Board’s method of determining whether HDC had
    “adequately accounted for” the forty computers associated with P.O. HS-622-95-663.
    As noted above, the Board acknowledged that HDC’s failure to comply fully with
    applicable property management standards “[did] not definitively show that the
    computer costs should be disallowed . . . .” Despite this initial acknowledgment, the
    Board then essentially relied on HDC’s admittedly deficient inventory records to
    demonstrate that HDC could not account for twenty-two of the forty computers. The
    Board simply did not address HDC’s calculations. As discussed above, these
    calculations indicate that HDC has accounted for the 119 computers purchased from
    Bentech, including the 40 computers associated with P.O. HS-622-95-663. Thus, we
    conclude that the Board’s decision is not supported by substantial evidence on the
    record as a whole. See Gavin v. Heckler, 
    811 F.2d 1195
    , 1199 (8th Cir. 1987) (“In
    the review of an administrative decision, ‘[t]he substantiality of evidence must take
    into account whatever in the record fairly detracts from its weight.’” (quoting
    Universal Camera Corp. v. NLRB, 
    340 U.S. 474
    , 488 (1951)). Accordingly, we
    8
    HHS notes that P.O. HS-622-97-414 does not identify the type of computer
    ordered. HHS then explains that because the amount paid for computers acquired
    pursuant to this purchase order and P.O. HS-622-95-663 was identical, its auditors
    concluded that identical types of computers were purchased. This conclusion,
    however, is contradicted by other evidence in the record, including the inventory
    reports submitted by HDC.
    -7-
    reverse the district court’s judgment with respect to the computer disallowance. HDC
    was and is entitled to summary judgment on that issue.9
    III. Disallowance for Failure to Meet Non-Federal Match
    The Head Start Act (Act) provides that federal financial assistance to Head
    Start programs “shall not exceed 80 percent of the approved costs of the assisted
    program or activities,” unless the Secretary determines that certain circumstances
    justify additional funding. 
    42 U.S.C. § 9835
    (b). The Act also prohibits the Secretary
    of Health and Human Services (Secretary) from “requir[ing] non-Federal
    contributions in excess of 20 percent of the approved costs of [Head Start] programs
    or activities . . . .” 
    Id.
     A department-wide regulation outlines the applicable cost
    sharing or “matching” requirements. See 
    45 C.F.R. § 74.23
     (2002); 
    45 C.F.R. § 1301.10
    (a) (2002). This regulation provides in relevant part:
    (a) To be accepted, all cost sharing or matching contributions, including
    cash and third party in-kind, shall meet all of the following criteria:
    (1) Are verifiable from the recipient’s records;
    (2) Are not included as contributions for any other federally-
    assisted project or program;
    (3) Are necessary and reasonable for proper and efficient
    accomplishment of project or program objectives;
    (4) Are allowable under the applicable cost principles;
    (5) Are not paid by the Federal Government under another
    award, except where authorized by Federal statute to be used
    for cost sharing or matching;
    (6) Are provided for in the approved budget; and
    (7) Conform to other provisions of this part, as applicable.
    
    45 C.F.R. § 74.23
    (a).
    9
    Because we have determined that HDC is entitled to summary judgment, we
    need not address its additional arguments related to the computer disallowance.
    -8-
    As discussed above, Snead reviewed HDC’s Head Start program for the period
    from December 1, 1995, to November 30, 1998. Snead reported that HDC had “failed
    to provide the required 20 percent non-federal match in the amount of $33,430” for
    fiscal years 1996 and 1997. HDC did not dispute this finding, but explained that the
    shortfall resulted from an error on the part of its accountants. According to HDC, its
    accountants were unaware of a 1992 revision to the applicable regulations. After
    learning about the revision, however, the accountants apparently reviewed their
    records for the relevant time period and determined that HDC had reported only a
    non-federal match amount that was sufficient to meet the perceived regulatory
    requirement, with the balance going unreported. This unreported balance consisted
    of contributions to three other programs. HDC argues that these contributions
    exceeded the shortfall identified by Snead.
    The Board rejected this argument and sustained the disallowance. In doing so,
    it found that the contributions made to the three other programs were not part of the
    “approved costs of [the Head Start] program or activities.” 
    42 U.S.C. § 9835
    (b). The
    Board also noted that HDC had failed to include these contributions in its “approved
    budget,” as required by 
    45 C.F.R. § 74.23
    (a)(6).
    HDC challenges the Board’s determination on the non-federal match issue as
    arbitrary and capricious. According to HDC, the Board’s analysis conflicts with the
    “plain language” of § 74.23(a). As an initial matter, we agree with HHS that this
    argument is based on HDC’s mischaracterization of the Board’s holding and is
    therefore without merit. Furthermore, “[w]e accord substantial deference to an
    agency’s interpretation of its own regulation.”10 Univ. of Iowa Hosps. & Clinics v.
    10
    In doing so, we reject HDC’s claim that “[t]he District Court improperly gave
    the [Board’s] decision Chevron deference.” See Chevron, U.S.A., Inc. v. Natural Res.
    Def. Council, Inc., 
    467 U.S. 837
     (1984); United States v. Mead Corp, 
    533 U.S. 218
    (2001). We agree with the district court that “[t]he Department of Health and Human
    Services is specifically empowered to promulgate regulations concerning the Head
    -9-
    Shalala, 
    180 F.3d 943
    , 950-51 (8th Cir. 1999) (citations omitted); see also Thomas
    Jefferson Univ. v. Shalala, 
    512 U.S. 504
    , 512 (1994) (“We must give substantial
    deference to an agency’s interpretation of its own regulations.” (citations omitted)).
    Our review of the record satisfies us that the Board’s interpretation was neither
    “plainly erroneous” nor “inconsistent with the regulation.” Univ. of Iowa Hosps., 
    180 F.3d at 951
     (citations omitted). Likewise, we see no basis for concluding that the
    Board’s determination on the non-federal match issue was “arbitrary, capricious, an
    abuse of discretion, or otherwise not in accordance with the law.” 
    5 U.S.C. § 706
    (2)(A). We therefore affirm the district court on this issue.
    IV. Conclusion
    We reverse the district court’s judgment for HHS with respect to the computer
    disallowance. Summary judgment should be entered in favor of HDC on that issue.
    In all other respects, the judgment is affirmed.
    A true copy.
    Attest:
    CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
    Start program.” See, e.g., City of New York v. Shalala, 
    34 F.3d 1161
    , 1166-67(2d
    Cir. 1994); 42 U.S.C. § 9836a(a).
    -10-