New Century Development Corporation, DAB No. 1438 (1993)

  Department of Health and Human Services

        DEPARTMENTAL APPEALS BOARD

     Appellate Division

SUBJECT:  New Century                       DATE: September 8, 1993
     Development Corporation Docket No. A-92-162 Decision No.
   1438

   DECISION

New Century Development Corporation (NCDC) appealed a determination by
the Office of Community Services (OCS) of the Administration for
Children and Families disallowing $200,000 expended by NCDC under an
economic development grant made pursuant to the Community Services Block
Grant Act (CSBG) of 1981, 42 U.S.C. . 9910(a)(2).  OCS found that NCDC
had materially failed to comply with the terms of the grant by using the
money for activities which were not approved under the grant and by
failing to achieve the objectives of the grant.

Based on the analysis below, we uphold OCS' disallowance of these funds.

BACKGROUND

The CSBG authorizes competitive grants to certain kinds of nonprofit
community groups to sponsor "enterprises providing employment and
business development opportunities for low-income residents of the
community designed to increase business and employment opportunities in
the community."  42 U.S.C. . 9910(a)(2)(A).  Under that authority, OCS
issued an announcement of the availability of discretionary funds for
urban and rural community development, in order to encourage the
creation of "projects intended to provide employment and business
development opportunities and generally improve the quality of the
economic and social environment of low-income residents . . . ."  52
Fed. Reg. 4091 (February 9, 1987).  The projects were ordinarily to be
for one year, with longer periods of up to two years possible, if
justified by the applicant.  Id. at 4090.

NCDC filed an application in response to this announcement.  In its
grant application, NCDC proposed to create new jobs for low-income
people by assisting a clothing manufacturer to locate a factory in the
Poinciana Industrial Center.  The Poinciana Industrial Center was an
industrial park being developed by NCDC with the support of Dade County.
It was located in Liberty City, Florida, an economically disadvantaged
area.  NCDC Unnumbered Exhibit (Ex.), "Liberty City Industrial Park Gets
$1 Million from State," The Miami News, June 23, 1988.  OCS awarded NCDC
a grant in the amount of $300,000 for this purpose.  The project period
for the grant was September 30, 1987 to December 31, 1988. 1/

In February 1988, five months after the award of the grant, NCDC
notified OCS that the clothing manufacturer had decided not to move to
Poinciana Industrial Center.  OCS Ex. C.  NCDC requested that it be
allowed to substitute two different businesses for assistance pursuant
to the $300,000 grant.  It proposed to use $200,000 to renovate a
building in Poinciana Industrial Center to be occupied by New York
Bakeries.  It proposed to use $100,000 for moving costs to enable Leasa
Industries, an oriental vegetable processing plant, to relocate to a
larger facility in Poinciana Industrial Center.  In its request for the
modification, NCDC explained that Leasa was already operating in Liberty
City but that the larger building in the Poinciana Industrial Center
would allow Leasa to expand its operation and hire more low-income
residents of Liberty City.  NCDC represented that it could complete both
projects within the original timeframe of the grant, i.e., by December
1988.

In a letter dated April 13, 1988, OCS approved the modification to the
grant.  OCS Ex. D.  OCS indicated that its approval of the $200,000 for
the New York Bakeries renovation was predicated on NCDC's representation
that the project would create 150 new jobs for low-income people, and
that its approval of $100,000 for the Leasa relocation was predicated on
NCDC's representation that the project would create 70 new jobs for
low-income people.  Id.  . The following month, May 1988, NCDC informed
OCS that New York Bakeries had decided not to relocate and that NCDC's
Board and management "determined that the most efficient use of its OCS
resources was to apply them to the LEASA project, in total."  NCDC
Unnumbered Ex., Second Quarter Report dated May 13, 1988.  At this time,
NCDC did not request OCS' approval of its proposed change to the terms
of the grant.

Thereafter, NCDC proceeded with its proposal to renovate a building for
Leasa with the OCS money.  In its July 1988 quarterly report to OCS,
NCDC represented that it was completing the design and construction
documents for Leasa and the project should be completed in March 1989.
NCDC Unnumbered Ex., Third Quarter Report dated July 20, 1988.  In its
November 1988 quarterly report, NCDC reported that it had obtained
additional funding from the State of Florida for this project and so it
would not request further funds from OCS; that construction was to start
in November and be completed by May of 1989; and that NCDC would be
requesting the remaining funds under the grant ($90,000) once
construction began.  NCDC Unnumbered Ex., Fourth Quarter Report dated
November 17, 1988.  In its March 1989 quarterly report, NCDC reported
that the project was going well and stated that it hoped OCS would send
a representative to the grand opening.  NCDC Unnumbered Ex., Fifth
Quarter Report dated March 9, 1989.  In May 1989, NCDC requested a
no-cost extension to December 1989 to complete the project.  NCDC
Unnumbered Ex., Letter dated May 9, 1989.  OCS granted this extension.
OCS Ex. E.  By January 1990, the renovated site was ready for occupancy.
NCDC Unnumbered Ex., Letter dated January 5, 1990 to Capital Bank.

While the site was ready by January 1990, the project apparently began
losing momentum in the fall of 1989 when Leasa disclosed it did not have
sufficient capital to finance its move to the new site.  The documents
filed by NCDC in this case demonstrate that, beginning in 1990, a
variety of strategies was employed by NCDC and various public entities
to obtain financing for the move. 2/

In October 1990, ten months after the grant period expired and the
renovation of the building was completed, NCDC made a written request to
OCS that it modify the terms of the grant by approving NCDC's
expenditures for the Leasa project.  NCDC Unnumbered Ex., Letter dated
October 11, 1990.  Upon receipt of this request, OCS informed NCDC that
it would consider such a modification if NCDC submitted information
concerning the project's successful completion:  documentation that the
financing was in place for Leasa's move and a timeline for full
completion including job creation.  NCDC Unnumbered Ex., OCS letter
dated November 19, 1990.  OCS also reminded NCDC that all jobs created
by the project must be low-income jobs which would be created by the
expiration of NCDC's proposed no-cost extension, i.e., June 1991.  OCS
Ex. L.

Subsequent to OCS's request for this information, NCDC repeatedly and
incorrectly informed OCS that the Leasa's move was imminent.  NCDC
Unnumbered Exs., Letter dated March 1, 1991; Letter dated April 23,
1991; Letter dated June 24, 1991; Letter dated October 29, 1991.
Finally, in May 1992 when Leasa had still not moved, OCS informed NCDC
that it would not retroactively modify the terms of the grant and OCS
disallowed the $200,000 portion of the grant which it initially approved
to relocate New York Bakeries.  As to the remaining $100,000 portion of
the grant, OCS requested a final audit report showing that the money was
expended in pursuit of the approved project.  OCS Ex. M.

NCDC appealed the OCS disallowance.  In its appeal letter, NCDC
represented that Leasa had moved into the Poinciana Industrial Center in
June 1992, the month after the disallowance.  NCDC further represented
that NCDC had guaranteed a loan of $300,000 to finance the move; that it
had pledged the renovated facility as security for the loan; and that it
had obtained a promissory note from Leasa to reimburse it for the loan.
Attachments to NCDC Submission of August 9, 1993.

ANALYSIS

OCS argued that NCDC materially failed to comply with the conditions of
the grant for two reasons.  First, OCS argued that, by spending the
$200,000 for the Leasa project rather than New York Bakeries project,
NCDC had spent the money for activities that were not approved under the
grant.  Second, OCS argued that NCDC failed to achieve the purpose of
the Leasa project:  creation of new jobs for low-income people.

In its appeal letter, NCDC argued that it was entitled to retain the
disallowed funds because:  (1) OCS knew that NCDC was spending the
entire grant to assist Leasa; (2) OCS did not indicate that NCDC could
not allocate the money to Leasa; and (3) OCS did not request NCDC to
file a written request to reallocate the money.  Subsequently, NCDC
represented that it "had undergone a state of denial" as to this grant
and that it did not have "one shred of data" to support the use of the
$200,000 for the Leasa project.  NCDC Submission dated August 9, 1993.
Rather, NCDC pointed out that Leasa had moved to the  Poinciana
Industrial Center and requested the Board's "clemency" on the grounds
that having to repay the $200,000 grant "would create a financing burden
that NCDC might not overcome."  Id.

For the following reasons, we conclude that OCS properly imposed this
disallowance.

 o  Under the terms of the grant as approved by OCS in April
 1988, NCDC was authorized to spend this $200,000 for the New
 York Bakeries project.

 o  NCDC unilaterally changed the scope and objectives of this
 grant when it decided to spend the $200,000 on the Leasa
 project.

 o  When a grantee proposes a change to the scope or objectives
 of a CSBG grant, it must obtain prior written approval.  There
 is no dispute that NCDC failed to obtain such prior written
 approval.

 o  Having failed to obtain prior written approval, NCDC
 requested retroactive approval.  Whether to grant retroactive
 approval rests within the discretion of OCS.

 o  Because the viability of the Leasa project was questionable
 at the time NCDC requested OCS' retroactive approval, OCS asked
 for certain documentation concerning its successful completion.
 NCDC failed to provide adequate documentation.  Thereafter,
 while OCS gave NCDC a considerable period of time to demonstrate
 that the Leasa project would be successfully completed, NCDC
 failed to complete it.  Therefore, OCS reasonably refused to
 retroactively approve the expenditure of the $200,000 for the
 Leasa project.

 o  Because NCDC used the $200,000 for the costs of  activities
 which were not approved under the grant, we uphold this
 disallowance.

 o  The Board cannot grant "clemency" to NCDC even though
 repayment of this money will cause financial hardship for NCDC.

Below we discuss OCS' refusal to retroactively approve NCDC's
modification of the grant, why the imposition of the disallowance is
proper, and why we cannot overturn the disallowance based on equitable
considerations.

 1.  Because NCDC materially failed to comply with the terms of
 the grant for the Leasa project, OCS reasonably refused to
 retroactively authorize NCDC to spend $200,000 of the grant for
 that project.

This grant is subject to the provisions of 45 C.F.R. Part 74 concerning
administration of grants.  NCDC Unnumbered Ex., "Special Terms and
Conditions"; 45 C.F.R. . 74.1.  Under paragraph 14.f. of the "Special
Terms and Conditions" of this grant and 45 C.F.R. .. 74.102(a) and
74.103(b), NCDC was required to obtain prior written approval for any
change to the scope or objectives of its approved project.  NCDC's
decision to reallocate two-thirds of the grant funds to the Leasa
project and abandon the New York Bakeries project constitutes a change
to the scope and objectives of the grant. 3/

Having failed to obtain prior approval, NCDC requested retroactive
approval for these expenditures.  Such retroactive approval may be
granted under Part 74.  City of Charleston, South Carolina, DAB No. 866
(1987).  Whether to approve or disapprove a retroactive approval request
is within the discretion of the program office administering the grant.
Id. at 5.

In previous rulings concerning OCS' discretionary decisions, the Board
has held that it would uphold OCS' decision unless we find that the
decision was arbitrary.  See Southbay Community Development Corp., DAB
No. 1432 (1993); Oakwood Child Development Center, Inc., DAB No. 1092
(1989); City of Charleston, DAB No. 866.  Under this standard, the Board
considers whether OCS' decision was a reasonable decision, not whether
it was the best or only possible decision.  Southbay, DAB No. 1432, at
7.  In cases involving the denial of a retroactive approval, the Board
has specifically stated that it would not reverse the denial where there
is a reasonable basis of support for the denial.  City of Charleston,
DAB No. 866, at 5; Economic Opportunity Atlanta, Inc., DAB No. 313, at 3
(1982).

In this case, we conclude that OCS reasonably denied NCDC's request to
modify this grant and extend the term of the grant because NCDC
materially failed to comply with the grant terms for the Leasa project.
Below we review those terms and NCDC's compliance.

NCDC's obligations under the grant for the Leasa project were as
follows:

 o  Leasa was to move to a renovated facility in Poinciana
 Industrial Center, expand its production capacity and create
 additional low-income jobs.  Initially, NCDC represented that
 Leasa's relocation would create 70 additional new jobs.  OCS Ex.
 C.  Subsequently, the figure both NCDC and OCS referred to was
 50 new jobs. 4/ . o  Under the terms of the CSBG Notice of
 Availability of Funds, this work plan was to be completed
 "within the funding period provided in the particular grant."
 52 Fed. Reg. 4090.  The Notice specifically stated that, with
 sufficient justification provided by the applicant, OCS would
 approve a grant period "not to exceed two years."  Id. at 4094.

 o  The original grant deadline for accomplishing the Leasa
 project work plan was December 1988.  In August 1989, OCS
 extended the grant period until December 1989.  OCS Ex. F.
 Subsequently, NCDC requested that the grant deadline be
 retroactively extended to June 1991.  NCDC Unnumbered Ex.,
 Letter dated August 29, 1990.  In its disallowance letter, OCS
 denied this request for a second no-cost extension.  OCS Ex. M.

Leasa did not move until June 1992.  Therefore, NCDC failed to
accomplish the grant objectives of relocating Leasa in a larger facility
and creating new low-income jobs within the grant period (September 1987
through December 1989).  Further, even if OCS had granted NCDC's last
request for an extension of the grant period to June 1991, NCDC would
have failed to complete the grant objectives by that date also.

The fact that Leasa moved the month after OCS issued this disallowance
and refused to approve the modification of the grant does not make OCS'
decision arbitrary or unreasonable.  In May 1992, when OCS issued its
determination, OCS had waited almost three and a half years beyond the
expiration of the original grant term to see if NCDC would finally
achieve the grant objectives.  Over those years, there were periods of
time in which NCDC repeatedly and incorrectly assured OCS that Leasa's
move was imminent and at least one instance in which NCDC failed to
respond to OCS' request for information about the project. 5/  OCS'
forbearance in the face of NCDC's problems shows that OCS did not act
precipitately in concluding that the grant objectives were not being
achieved but instead gave NCDC ample opportunity to succeed under this
grant.

Further, in this proceeding, NCDC has failed to establish that Leasa's
move actually resulted in new low-income jobs.  NCDC filed two exhibits
relating to job creation by Leasa:  a March 1992 report made by Leasa
listing the names and salaries of its employees; and a statement dated
June 1992 from Leasa concerning the number of jobs to be created in the
future.  As discussed below, neither of these documents establishes that
Leasa's move to the renovated facility resulted in new low-income jobs.

The March 1992 report of employees was composed prior to Leasa's move in
June 1992 and therefore lists jobs which existed prior to the move.
This document is irrelevant to this case since the critical measure for
compliance with the terms of NCDC's grant is the number of new jobs
Leasa created after it moved to a new facility and was able to expand
production.

The June 1992 statement from Leasa is a statement of prospective intent
concerning jobs which it expected to create.  There is no evidence that
these jobs existed as of June 1992, one month after the disallowance and
nearly two and one half years after the expiration of the grant.
Further, in the course of the case before the Board, NCDC never updated
this statement to reflect actual job .creation although over a year
elapsed between the time it was written and the closing of the record in
this case. 6/

Thus, while Leasa actually moved into the intended facility after the
disallowance was issued, the record contains no evidence concerning the
number of actual low-income jobs which resulted from its move to the
larger facility.  This void is particularly relevant to NCDC's
compliance with the grant terms because prior to the move Leasa operated
its business elsewhere in Liberty City, the economically disadvantaged
area NCDC was seeking to improve with this grant.  The benefit to this
community was thus never Leasa's relocation itself, but its expanded
capacity which was to be achieved by the relocation.

In view of the foregoing circumstances, we conclude that OCS acted
reasonably when it refused to retroactively approve NCDC's expenditure
of the $200,000 for the Leasa project.

 2.  Under 45 C.F.R. . 74.113(a), OCS properly imposed a
 disallowance for $200,000.

It is fundamental that grant funds may be used only for allowable costs
of the activities for which the grant was awarded.  45 C.F.R. . 74.170.
In this case, the $200,000 at issue was awarded to assist in the
relocation of New York Bakeries, not Leasa.  Therefore, NCDC materially
failed to comply with the terms of the grant by spending this money on
the Leasa project.

The regulation at 45 C.F.R. . 74.113(a) provides that when a grantee
materially fails to comply with the terms of a grant, the granting
agency has a range of options.  It may suspend the grant, terminate the
grant, or "take such other remedies as may be legally available and
appropriate . . . ."  45 C.F.R. . 74.113(a).  Such "other remedies"
include imposing a disallowance on the grantee.  See Southbay, DAB No.
1432; Bedford-Stuyvesant Restoration Corp., DAB No. 1404 (1993);
Ironbound Educational and Cultural Center, Inc., DAB No. 1302 (1992).
Therefore, OCS properly imposed a disallowance for NCDC's material
failure to comply with the terms of the grant.  . 3.  The Board does not
 have the authority to grant "clemency" to a party who has not
 performed under the terms of a grant.

NCDC asked the Board for "clemency" in this matter.  The Board is bound
by all applicable laws and regulations.  45 C.F.R. . 16.14.  A party's
good faith, honest efforts, or financial hardship do not provide a legal
basis for the Board to overturn a disallowance. 7/  See District of
Columbia Dept. of Human Services, DAB No. 1323, at 2 (1992); City of
Charleston, DAB No. 866, at 7.  Thus, the presence of any such factors
in the case of NCDC would not justify a different result here.

CONCLUSION

For the foregoing reasons, we uphold OCS' disallowance in the amount of
$200,000.

 M. Terry Johnson

 Donald F. Garrett

 Norval D. (John) Settle Presiding Board Member

1.     The initial Notice of Grant award identified the project period
as ending September 29, 1988.  OCS Ex. B.  OCS subsequently corrected
this to reflect an expiration date of December 31, 1988, the date NCDC
initially requested.  OCS Ex. D.

2.     Apparently, Dade County and other community development financing
agencies also wanted Leasa to move.  Dade County's interest hinged on
the fact that it had obtained a State of Florida infrastructure grant
for over a million dollars which was contingent on Leasa's moving to the
Poinciana Industrial Center.

3.     NCDC initially appeared to argue that OCS should be estopped from
denying that it approved the expenditure of this money for Leasa.
Subsequently, NCDC seemed to abandon this approach by indicating that it
did not have any evidence to support its use of the money for Leasa.
Thus, while we do not condone OCS' apparent silence as NCDC proceeded to
redirect the grant money, we do not address the question of whether OCS
should be estopped from denying that it approved a modification to this
grant.  However, we do note that estoppel against the federal
government, if available at all, is not available on the same terms as
would apply to private parties.  In addition to proving the traditional
elements of misrepresentation, reasonable reliance and detriment, a
party must also prove affirmative misconduct.  Office of Personnel
Management v. Richmond, 496 U.S. 414 (1990), reh. denied, 111 S.Ct. 5
(1990); Heckler v. Community Health Services of Crawford County, Inc.,
467 U.S. 51 (1984); Schweiker v. Hansen, 450 U.S. 788 (1981).  NCDC did
not present persuasive evidence as to the traditional elements of
estoppel or address the special issues involved with estoppel against
the federal government.

4.      When NCDC initially informed OCS that it was shifting all of the
grant money to the Leasa project, it spoke in terms of 35 to 50 jobs.
NCDC Unnumbered Ex., Second Quarter Report dated May 13, 1988.  In July
1990, when NCDC informed OCS that Leasa was refusing to move unless
supplied with additional funds, it referred to 50 new workers.
Quarterly Report dated July 11, 1990.  In the OCS report of her June
1991 grants trip, the OCS project officer referred to an expectation of
50 new jobs.  OCS Ex. H.

5.     In August 1990, when requesting its second no-cost extension,
NCDC assured OCS that the interested parties were attempting to obtain
financing for Leasa's move which possibly could begin in October 1990.
NCDC Unnumbered Ex., Letter dated August 29, 1990.  In November 1990,
OCS informed NCDC that in order for OCS to consider its request for a
no-cost extension and approve its expenditure of the $200,000 for Leasa,
NCDC must document that financing was in place for the move and submit a
timeline of tasks for full implementation of the project.  OCS Ex. J.
NCDC apparently did not respond, because in February 1991 OCS again
requested this information and informed NCDC that it would issue a
disallowance unless it received the documentation within 10 days.  OCS
Ex. K.  In March 1991, NCDC wrote OCS that it expected to receive the
funds for Leasa's move within the next 60 days.  NCDC Unnumbered Ex.,
Letter dated March 1, 1991.  In April 1991, NCDC wrote OCS that Leasa
would be moving between May and July and hiring by August.  NCDC
Unnumbered Ex., Letter dated April 23, 1991.  In June 1991, NCDC wrote
OCS that its loan for Leasa's relocation had been approved and that
Leasa would move by August.  NCDC Unnumbered Ex., Letter dated June 24,
1991.  In October 1991, NCDC wrote OCS that Leasa expected to move by
the end of 1991.  NCDC Unnumbered Ex., Letter dated October 29, 1991.

6.     NCDC was given numerous extensions of time in which to file its
initial brief and exhibits and its reply to OCS' brief and exhibits.

7.      We express no opinion as to whether OCS, if it received adequate
documentation from NCDC, could conclude that the $100,000 originally
approved for the Leasa project under this grant furthered the federal
purpose of promoting economic self-sufficiency through the creation of
permanent jobs and was therefore allowable under the February 1987
program