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Int'l Junior College of Bus. & Tech., Inc. v. Duncan

United States Court of Appeals, First Circuit

September 16, 2015

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,
ARNE DUNCAN, in his official capacity as Secretary of the United States Department of Education, Defendant, Appellee


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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.

Before Thompson, Kayatta, and Barron, Circuit Judges.


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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

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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]


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. § 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 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

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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 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 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, 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

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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 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 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 ...

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