International Junior College of Business & Technology, Inc. v. Duncan

United States Court of Appeals
For the First Circuit
No. 13-2547
INTERNATIONAL JUNIOR COLLEGE OF BUSINESS AND TECHNOLOGY, INC.,
d/b/a 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.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Bruce J. McGiverin, Magistrate Judge]
Before
Thompson, Kayatta, and Barron,
Circuit Judges.
Ronald L. Holt, with whom Matthew L. Hoppock and Dunn &
Davison LLC, were on brief, for appellants.
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.
September 16, 2015
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 financial assistance programs because the
school failed to comply with a requirement that for-private
colleges derive at least 10 percent of their revenue from some
source other than federal student aid. International brought suit
under the Administrative Procedure Act ("APA"), 5 U.S.C. § 701 et
seq., in Puerto Rico district court to challenge the decision, but
this effort was unsuccessful, as the court dismissed
International's claims on summary judgment. Now, International
asks us to take another look at the agency's decision, arguing
that the DOE Secretary erred in several respects.
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, 20 U.S.C.
1
The parties consented to conducting all the proceedings
before a magistrate judge. Therefore, we review the magistrate
judge's decision as a final judgment of the court. Fed. R. Civ.
P. 73(c).
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§ 1070, et seq. ("Title IV"), authorized the federal post-secondary
student aid loan and grant programs.2 Under Title IV, students
who were enrolled in qualifying educational programs at eligible
post-secondary institutions and who met certain eligibility
requirements could receive federal loans and grants to help pay
for their tuitions. The schools, however, were given direct access
to the students' funds and were in charge of disbursing the funds
to students.
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]." 20 U.S.C.
§ 1002(b)(1)(F)(2003). This requirement was known as the "90/10
rule", and according to the DOE, was enacted "to require
proprietary institutions to attract students based upon the
quality of their programs, not solely because the institutions
2 The statute and some of the relevant implementing
regulations have been amended multiple times, but the parties do
not dispute that the regulations as they existed from 2005 to 2008
govern this case. The Higher Education Act was also reauthorized
in 1998, and some portions were re-codified. We use the citations
to the code as they existed during the relevant time period.
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offer Federal student financial assistance."3 Institutional
Eligibility Under the Higher Education Act of 1965, as Amended, 59
Fed. Reg. 6446-01, 6448 (Feb. 10, 1994). "Thus, under the statute,
these institutions must attract students who will pay for their
programs with funds other than Title IV . . . program funds." Id.
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 20 U.S.C. §§
1002(b)(1)(F), 1094(c)(1999). So, the DOE Secretary promulgated
numerous regulations to ensure proprietary institutions' adherence
to the 90/10 rule and to ensure the institutions were appropriate
fiduciaries for disbursing the students' funds. See 34 C.F.R. §§
668.23(d), 668.82. For instance, participating institutions were
required to submit annual financial audits to the DOE, which had
to be completed by independent accountants. The auditors were
specifically required to certify that the school derived at least
10 percent of its revenue from sources other than Title IV
programs. The regulations also provided a formula the schools had
3The statute was originally enacted as the 85/15 rule, but
was amended to the 90/10 rule in 1998. See Pub. L. No. 105-244,
§ 102(b)(1)(F), 112 Stat. 1581, 1588 (codified at 20 U.S.C. §
1002).
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to use to calculate their revenues. Specifically, an institution
only satisfied the 90/10 requirement if the Title IV funds the
school received equaled 90 percent or less of "[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 . . . ." 34
C.F.R. § 600.5(d)(1)(1999).
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 34 C.F.R. § 600.40(a)(2)(1998). A non-complying school
also could not become eligible to participate in Title IV again
until it "demonstrate[d] compliance with all eligibility
requirements for at least the fiscal year following the [non-
compliant] fiscal year . . . ."4 34 C.F.R. § 600.5(g)(1999). The
rule's enforcement was also retroactive, meaning that when the DOE
made a final assessment of a school's noncompliance with the rule,
with limited exceptions, the school would have to pay back any
Title IV funds it received during any year it was ineligible. See
4
This rule has since been amended, and now requires the
institution to fail compliance with the 90/10 rule for two years
before it loses Title IV eligibility. See 34 C.F.R. §
668.28(c)(1)(2010).
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id.; 34 C.F.R. § 668.26(d). 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
non-compliance 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,
5
We could not discern from the (voluminous) record exactly
when International opened, but it appears the school existed since
at least 1991.
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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 International, most of its students received Title IV
grant funding to pay their tuitions.
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
6 It's also hard to tell from the record when all of
International's programs became Title IV-certified, but we know
that a number of them qualified since at least 1991.
- 8 -
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 for 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
7Since September 2002, the school was already on probationary
Title IV eligibility status for a different violation (an issue
with its past loan default rates).
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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
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"closeout" audit of all the funds International had received up to
July 1, 2006.
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 34 C.F.R. § 600.5(d), the hearing officer
determined that the school could not include as "revenue" in its
90/10 calculation the cash payments made by students "who take
8 According to International, the buyer pulled out because
the DOE took too long to assess the total amount of the liabilities
International owed.
9 Since International did not submit its fiscal 2005 audit
until May 2006, and thus was not placed on Heightened Cash
Monitoring until May 2006, the school had received upfront Title
IV funds from July 1, 2005 to May 2006.
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only one course at a time on a Saturday," as those students were
not enrolled in a half- or full-time academic program.
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 appeal, 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
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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
This Lawsuit
Still dissatisfied, International 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
10International also made additional arguments that are not
relevant to this appeal.
11 The Secretary assumed without deciding that this issue,
which wasn't raised on the first appeal to him, was properly
preserved.
12 The APA provides that "[a] person suffering legal wrong
because of agency action, or adversely affected or aggrieved by
agency action within the meaning of a relevant statute, is entitled
to judicial review thereof." 5 U.S.C. § 702.
- 13 -
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 leading
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
13An additional plaintiff, L'Image Educational Corp., was not
involved in this matter, but because the DOE could impose
International's liabilities on L'Image based on the companies'
ownership structure, see 34 C.F.R. §§ 668.15(c)(2006),
668.174(b)(2002), it was named as a plaintiff in the suit.
14International also brought a fourth claim -- that the DOE
acted arbitrarily and capriciously by taking too long to assess
the school's total liabilities, thus prompting the anticipated
buyer of the school to terminate the deal. But International does
not pursue this claim before us.
- 14 -
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." Atieh v. Riordan, No.
14-1947, 2015 WL 4855786, at *2 (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
- 15 -
to law." Id.; 5 U.S.C. § 706(2)(A). In other words, we "focus on
whether the agency examined the relevant data and articulated a
satisfactory explanation for its action including a rational
connection between the facts found and the choice made." Sistema
Universitario Ana G. Mendez v. Riley, 234 F.3d 772, 777 (1st Cir.
2000) (citation and alterations omitted).
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, 20 U.S.C. §
- 16 -
1002(b)(1)(F)(2003). We will delve into the particulars of
International's claim in a little bit, but generally,
International argues that the DOE regulations improperly excluded
certain types of tuition revenue in the 90/10 calculus and that if
the regulatory definition of "revenues" was not so narrow,
International would have fallen below the 90 percent threshold.
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." 20 U.S.C. §
1002(b)(1)(F)(2003). And the regulations "prescribed by the
Secretary" provided that:
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
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students who are enrolled in those eligible
programs.
34 C.F.R. § 600.5(d)(1)(1999). In other words, according to the
regulations, only the funds the school generated from students
enrolled in Title IV programs (and not from the whole student body)
could be used to calculate a school's total "revenues."
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 (footnote omitted). "If, however,
- 18 -
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 (footnote
omitted). "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," 20 U.S.C. §
1002(b)(1)(F)(2003) (emphasis added), we construe the statute as
specifically delegating to the agency the responsibility of
defining "revenues". But International simply ignores the latter
part of the statute, failing to argue why we should not read the
statute this way. Left to our own devices, we see no reason why
we should not (particularly because we do not see what purpose the
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"as determined in accordance with regulations prescribed by the
Secretary" language would otherwise have). See Corley v. United
States, 556 U.S. 303, 314 (2009) (noting that statutes should be
"construed so that effect is given to all provisions, so that no
part will be inoperative or superfluous, void or insignificant").
Thus, the relevant question here is whether the regulation's
definition was "arbitrary, capricious, or manifestly contrary to
the statute." Chevron, 467 U.S. at 844.
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 to 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
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otherwise contrary to Congressional intent.15 Chevron, 467 U.S.
at 845 ("If [an administrative interpretation] represents a
reasonable accommodation of conflicting policies that were
committed to the agency's care by the statute, we should not
disturb it unless it appears from the statute or its legislative
history that the accommodation is not one that Congress would have
sanctioned.").
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, we 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
15
International does direct us to some statements made by
several Congressmen purportedly questioning whether the
Secretary's definition of "revenues" was overly restrictive. But,
as International concedes, these statements were made after the
statute was enacted. As the Supreme Court has said, "[p]ost-
enactment legislative history (a contradiction in terms) is not a
legitimate tool of statutory interpretation . . . [because it] by
definition could have had no effect on the congressional vote."
Bruesewitz v. Wyeth LLC, 562 U.S. 223, 242 (2011) (citation
omitted).
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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." 34 C.F.R. §
600.5(d)(1)(1999). And 34 C.F.R. § 668.8 defined "eligible
- 22 -
programs" as those programs that required a certain minimum number
of weeks and hours of instruction and prepared students for
"gainful employment in a recognized occupation." 34 C.F.R. §
668.8(d)(1)(iii)(1987).16 Recognizing that an individual course
did not meet the regulation's definition of an "eligible program,"
International nonetheless argues that because the courses were
creditable toward a degree program, the income derived from them
16 34 C.F.R. § 668.8(d)(1987) provided:
An eligible program provided by a proprietary
institution of higher education or
postsecondary vocational institution—
(1)(i) Must require a minimum of 15 weeks of
instruction, beginning on the first day of
classes and ending on the last day of classes
or examinations; (ii) Must be at least 600
clock hours, 16 semester or trimester hours,
or 24 quarter hours; (iii) Must provide
undergraduate training that prepares a student
for gainful employment in a recognized
occupation; and (iv) May admit as regular
students persons who have not completed the
equivalent of an associate degree;
(2) Must . . . (i) Require a minimum of 10
weeks of instruction, beginning on the first
day of classes and ending on the last day of
classes or examinations; (ii) Be at least 300
clock hours, 8 semester or trimester hours, or
12 quarter hours; (iii) Provide training that
prepares a student for gainful employment in
a recognized occupation; and (iv)(A) Be a
graduate or professional program; or (B) Admit
as regular students only persons who have
completed the equivalent of an associate
degree.
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should have been included as "revenue." International argues that
DOE precedent demands this conclusion.
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 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 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
17An issue we need not address given our holding that Sinclair
is inapposite, the DOE argues that Sinclair cannot be applied here
at all because it actually predated the existence of the 90/10
rule, and so its holding could not have been intended to extend to
application of the 90/10 regulations.
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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
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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 90/10-compliant. Id. The
hearing officer determined, however, that donations did not
constitute an acceptable source of revenue, as defined by the
regulations, and therefore, the school still had not complied with
the 90/10 rule during the 2002 fiscal year. Id. at *1-2. Thus,
the hearing officer concluded, Gibson was liable for the $186,000
it received in fiscal 2003. Id.
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 rule." Id. at *2. The
Secretary relied on 34 C.F.R. § 668.113(d),18 which he interpreted
18 34 C.F.R. § 668.113(d) (1998) provided:
(1) If an institution's violation that
resulted in the final audit determination . .
. results from an administrative, accounting,
or recordkeeping error, and that error was not
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as granting him the "authority to accept an institution's
corrective measures in the administration of Title IV funds when
in my judgment such measures 'eliminate the basis for the
liability' sought by [the DOE] . . . ." Id. Specifically, the
Secretary noted that Gibson exceeded the 90 percent threshold by
only a "conspicuously small amount of money;" there was no evidence
that Gibson had engaged in fraud or a pattern of similar
violations; Gibson had no other regulatory infractions; and
Gibson's attempted corrective measure (the $3,850 donation) would
have brought the school in compliance had the donation been an
acceptable source of revenue. Id. at *2-3.
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 too distinguishable from Gibson's, such
that "[t]he scope of the equitable remedy authorized in [Gibson]
part of a pattern of error, and there is no
evidence of fraud or misconduct related to the
error, the Secretary permits the institution
to correct or cure the error.
(2) If the institution is charged with a
liability as a result of an error described in
paragraph (d)(1) of this section, the
institution cures or corrects that error with
regard to that liability if the cure or
correction eliminates the basis for the
liability.
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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, 20 U.S.C. § 1099c-1(b)(3), on its face
required the Secretary to allow the school to "cure its error
absent a pattern of error and absent fraud or misconduct related
to the error." And second, International argues that it did cure
its 90/10 error by infusing cash into the school with the $1.5
million loan from the owner, similar to the tack Gibson took, such
that its 90/10 violation also should have been forgiven.
First, we easily dispose of the claim that 20 U.S.C. §
1099c-1 required the Secretary to allow International to cure its
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default. To be sure, § 1099c-1(b)(3) provided that "the Secretary
shall . . . permit the institution to correct or cure an
administrative, accounting, or recordkeeping error if the error is
not part of a pattern of error and there is no evidence of fraud
or misconduct related to the error." (Emphasis added). The
implementing regulation provided, however, that "[i]f an
institution's violation that resulted in the final audit
determination . . . results from an administrative, accounting, or
recordkeeping error, and that error was not part of a pattern of
error, and there is no evidence of fraud or misconduct related to
the error, the Secretary permits the institution to correct or
cure the error." 34 C.F.R. § 668.113(d)(1) (1999) (emphasis
added).19 But International argues only that the "Secretary had a
statutory duty to permit International to cure its error absent a
pattern of error and absent fraud or misconduct related to the
error." While International does not clearly argue such, we
interpret this claim as one that the statute's use of mandatory
language -- "shall" -- required the Secretary to let the school
correct or cure its mistake, while the implementing regulation's
use of discretionary language -- "permits" -- did not, thus
19 Given the language in both the statute and the implementing
regulation referencing administrative accounting or bookkeeping
errors, we do not even see how these provisions would ever apply
to a substantive 90/10 violation. We will assume without deciding,
however, that the statute could apply to an actual 90/10 violation
because the DOE does not make this argument.
- 29 -
rendering the regulation's interpretation of the statute
erroneous. However, International provides no developed argument
as to why the statute and regulation are inconsistent just because
their language is not identical, such that the Secretary per se
erred by relying on the regulation. See Gutierrez de Martinez v.
Lamagno, 515 U.S. 417, 432 n.9 (1995) ("Though 'shall' generally
means 'must,' legal writers sometimes use, or misuse, 'shall' to
mean 'should,' 'will,' or even 'may.'"). This argument is
therefore waived for lack of development. See Zannino, 895 F.2d
at 17.
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 34 C.F.R. § 668.113(d) in a manner inconsistent with the
standard set forth in his decision in Gibson. International claims
that the distinctions the Secretary drew between Gibson and
International were "strained" and "minor" because (1) like Gibson,
International did not have any prior regulatory violations when
the 90/10 assessment was imposed; (2) the amount by which both
schools exceeded the 90 percent threshold was "de minimis"; and
(3) International took the same corrective action Gibson took by
making a donation to the school.
While not explicitly so, International's claim is framed
as one that the Secretary arbitrarily departed from prior precedent
- 30 -
(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 "explain[] why change is reasonable" when it
departs from prior agency precedent, Shaw's Supermarkets, Inc. v.
NLRB, 884 F.2d 34, 41 (1st Cir. 1989), International has not
argued, let alone established, that the holding set forth in Gibson
reflected any "prior norm," "usual rule[] of decision," or
"consistent precedent" of the DOE, see id. at 36-37 (internal
quotation marks omitted), such that the Secretary was bound by the
Gibson decision in first place. See also River St. Donuts, 558
F.3d at 116 (noting the agency was departing from a "policy").
And we see Gibson, at best, as simply a case-specific application
of 34 C.F.R. § 668.113(d) (and likely an incorrect one at that,
from what we can tell). Indeed, the Secretary specifically said
in Gibson:
I do not hold as a general matter that
20
The magistrate judge also interpreted the nature of
International's claim this way, and neither party took issue with
this characterization in the briefing.
- 31 -
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 corrective
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
21 As we noted above, the law would require the Secretary to
"focus[] upon the issue and explain[] why change is reasonable,"
Shaw's Supermarkets, Inc. v. NLRB, 884 F.2d 34, 41 (1st Cir. 1989),
but International doesn't argue that the Secretary did not focus
on the issue.
- 32 -
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 loan
could not have corrected International's basis for liability.
Based on these facts alone, the Secretary adequately explained why
departure from the relief provided in Gibson was reasonable.
22 International argues that it was on Heightened Cash
Monitoring only due to their 90/10 violation, and thus, being on
Heightened Cash Monitoring is neither a regulatory violation in
and of itself, nor indicative of other problems. We note, however,
that the DOE has discretion regarding when to place institutions
on Heightened Cash Monitoring, 34 C.F.R. § 668.162(a)(1), and the
school does not dispute that the reason International was placed
on Heightened Cash Monitoring was because the DOE had concerns
about its fiduciary capacity.
- 33 -
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 faith 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.
- 34 -
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.
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