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Case 3:11-cv-02257-BJM Document 90 Filed 09/20/13 Page 1 of 27

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

Plaintiffs,

v.

INTERNATIONAL JUNIOR COLLEGE
OF BUSINESS AND TECHNOLOGY,
INC., et al.,





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



Defendant.

Civil No. 11-2257 (BJM)

OPINION AND ORDER

International Junior College of Business and Technology, Inc. d/b/a International

Junior College and a related institution1 sued the Secretary of the U.S. Department of

Education (“Department”) in his official capacity seeking judicial review of agency

action under the Administrative Procedure Act (“APA”), 5 U.S.C. §§ 701 et seq.

International presented four causes of action, generally centered on the Secretary’s

handling of its institutional eligibility to provide student grants under Title IV of the

Higher Education Act of 1965, 20 U.S.C. §§ 1070 et seq., and particularly the Secretary’s

order requiring it to repay $1.3 million in Title IV student aid. Docket No. 1 (“Compl.”).

The Secretary filed the administrative record from the Office of Hearings and

Appeals Docket No. 07-52-SA (Docket No. 26, “R.”), along with a record supplement

(Docket No. 38-1, “Supp.”). Each side now moves for summary judgment, and has

opposed the other.2 Docket Nos. 64, 65, 66 (“Def. Mem.”), 73, 76 (“Pl. Mem.”), and 81


1 Although the related institution is a co-plaintiff, its conduct and treatment are not
squarely at issue in this case. For ease of discussion, this opinion refers only to “International,”
even though both entities remain plaintiffs at this time.

2 International also moved for oral argument, which the Secretary did not join. Docket
Nos. 75, 84. Although the case involves a complex timeline of events, the parties’ numerous





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International Junior College of Business and Technology, Inc. v. Duncan, Civil No. 11-2257 (BJM)

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(“Def. Opp.”). The Secretary’s motion for summary judgment is GRANTED, and

International’s motion for summary judgment is DENIED.

STANDARD OF REVIEW

Summary judgment is appropriate when “the movant shows that there is no

genuine dispute as to any material fact and the movant is entitled to judgment as a matter

of law.” Fed. R. Civ. P. 56(a). But the familiar summary judgment framework “has a

special twist in the administrative law context” because “the APA standard affords great

deference to agency decisionmaking,” and presumes that agency action is valid. Assoc’d

Fisheries of Me., Inc. v. Daley, 127 F.3d 104, 109 (1st Cir. 1997). Agency action will be

overturned “if it is arbitrary, capricious, an abuse of discretion, not supported by

substantial evidence, or otherwise not in accordance with the law.” Craker v. DEA, 714

F.3d 17, 26 (1st Cir. 2013) (citing 5 U.S.C. § 706(2)(A), (E)). A court “may not substitute

its judgment for that of the agency, even if it disagrees with the agency’s conclusions.”

River St. Donuts, LLC v. Napolitano, 558 F.3d 111, 114 (1st Cir. 2009).

Generally, agency action will be deemed arbitrary or capricious if “the agency has

relied on factors which Congress has not intended it to consider, entirely failed to

consider an important aspect of the problem, offered an explanation for its decision that

runs counter to the evidence before the agency, or is so implausible that it could not be

ascribed to a difference in view or the product of agency expertise.” Motor Vehicle Mfrs.

Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). As to an

agency’s findings of fact, “[s]ubstantial evidence means ‘more than a mere scintilla. It

means such relevant evidence as a reasonable mind might accept as adequate to support a

conclusion.’” Visiting Nurse Ass’n Gregoria Auffant, Inc. v. Thompson, 447 F.3d 68, 72

(1st Cir. 2006) (quoting Richardson v. Perales, 402 U.S. 389, 401 (1971)).



briefings, statements of facts, and the administrative record provide sufficient detail for the court
to rule on parties’ motions.



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When reviewing a federal agency’s interpretation of a statute it administers, courts

follow a two-step analysis. “First, applying the ordinary tools of statutory construction,

the court must determine ‘whether Congress has directly spoken to the precise question at

issue,’” and if so, “‘give effect to the unambiguously expressed intent of Congress.’”

City of Arlington, Tex. v. FCC, 133 S. Ct. 1863, 1868 (2013) (quoting Chevron U.S.A. Inc.

v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842–43 (1984)). But “if the statute is

silent or ambiguous” on the matter, then the court need only determine “whether the

agency’s answer is based on a permissible construction of the statute.” Chevron, 467

U.S. at 843. Moreover, an agency’s interpretation of its own regulations is of

“‘controlling weight unless it is plainly erroneous or inconsistent with the regulation.’”

Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994) (quoting various cases).

The agency’s interpretation is entitled to deference unless an “‘alternative reading is

compelled by the regulation's plain language or by other indications of the Secretary's

intent at the time of the regulation's promulgation.’” Id. (quoting Gardebring v. Jenkins,

485 U.S. 415, 430 (1988)).

BACKGROUND

This summary of the administrative record is guided by the parties’ Local Rule 56

statements of uncontested fact. See Docket Nos. 65, 72, 78, and 79.3 I note that both

sides attempt to shoehorn questions of statutory interpretation and other argumentation

into the local rule’s fact-indexing format. This summary omits these glosses on the


3 Local Rule 56 requires parties at summary judgment to supply brief, numbered
statements of facts, supported by citations to admissible evidence. It “relieve[s] the district court
of any responsibility to ferret through the record to discern whether any material fact is genuinely
in dispute,” CMI Capital Market Inv. v. González-Toro, 520 F.3d 58, 62 (1st Cir. 2008), and
prevents litigants from “shift[ing] the burden of organizing the evidence presented in a given case
to the district court.” Mariani-Colón v. Dep’t of Homeland Sec., 511 F.3d 216, 219 (1st Cir.
2007). The rule “permits the district court to treat the moving party’s statement of facts as
uncontested” when not properly opposed, and litigants ignore it “at their peril.” Id.



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record; any sufficiently-developed disputes about the legal significance of record facts are

addressed in this opinion’s discussion section.

International’s Academic Offerings and Title IV Participation

According to the sworn statement of Edgar Morales, a member of International’s

board, “[n]early all of International’s students qualified for and received Title IV grant

funds[,] and paid a substantial percentage of their tuition with those grant funds.” R. 689.

International “offered non-degree diploma programs in the fields of allied health,

business, technology[,] and cosmetology[,] and offered associate degree programs in the

fields of allied health and business.” R. 690. According to an unexecuted affidavit from

Rafael A. del Coro, a former professor of accounting at International, the college had

“many” students who took individual Saturday-only courses, labeled “Cursos Sabatinos”

or “Continuous Education.” R. 719. Del Coro states that students who were not in an

associate-degree or diploma program on a half-time or higher basis were tracked using

ledger cards with “a generic program name that was similar to, but not identical to, the

program in which they were taking classes.” R. 720. According to the affidavit of Ruben

Luna, International’s former financial aid director and interim president, “[s]ome”

Saturday-course students would take more than one course in a program. R. 725.

International participated in Title IV federal loan and grant programs until 1999,

after which it only participated in grant programs. R. 690. International had “provisional

certification” for Title IV programs from September 12, 2002 through March 31, 2005.

See R. 235, 1058–69. In a section titled “Reasons and Special Conditions of Provisional

Certification,” the certification recites that International’s “official cohort default rate” for

the Federal Family Education Loan program was over twenty-five percent during one or

more of the preceding three fiscal years. R. 1059. International duly sought

recertification of its provisional participation, and the Department extended the program

participation agreement on a month-to-month basis. See R. 235.



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FY 2005 Financial Statements; Transfer to “Heightened Cash Monitoring 2”

In International’s audited financial statements for the fiscal year ending June 30,

2005 (“FY 2005”), filed with the Department in early May 2006, the auditor included a

note titled “Compliance with 90/10 Rule.” R. 355. In it, the auditor stated that

International “received $2,078,320 of Title IV funds, [and] total eligible cash receipts of

$2,300,716, resulting in a percentage of 90%.” R. 579.

On May 8, 2006, the Department notified International that it was being placed on

the “Heightened Cash Monitoring 2” (“HCM2”) method of payment. R. 741. Citing 20

U.S.C. § 1226a-1 and 34 C.F.R. § 668.162, the Department explained that it was doing so

because International failed to receive more than 10 percent of revenue from non-Title IV

sources. Id. Morales asserts, without any more specificity, that after this time,

International “was not paid all Title IV funds that had been earned by its students.” R.

689. Luna likewise claims that International “was paid very little in Title IV funds”

following the switch to HCM2. R. 724. Morales and his business instead loaned about

$1.5 million to International. R. 689.

That same day, International’s auditor wrote to the Department and explained that

it had erroneously included $17,171.17 of Work Study funds in its formula, and that Title

IV funds added up to only 90.26 percent of International’s revenue for FY 2005. The

accountant added that “in accordance to [sic] rounding rules, a 90.26% ratio rounds out to

90%,” and that he understood International to have met the 90-10 Rule. R. 586.

The auditor reviewed International’s receipts and provided a revised attestation

dated June 14, 2006. R. 589–95. The report stated that Title IV funds used for

institutional charges totaled $2,061,148.34 and that total revenues generated “from

Institutional charges and necessary activities of programs” totaled $2,296,453.58,

yielding a ratio of 89.75 percent. R. 593. The auditor explained that $12,843.36 in cash

receipts had been mistakenly omitted from the first financial statement. R. 592.

By June 30, 2006, there were 413 students enrolled at International. R. 1140.



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In August 2006, one of the Department’s Financial Analysts, Michael Frola,

performed an on-site review of International’s records, examining the files of 55 students

who had made some of the largest total cash payments to International. R. 1407. Of

those students, 34 took Saturday-only courses, for which they typically paid either $420

or $520. R. 1408. These students’ payments were made out-of-pocket, and without Title

IV aid. Frola found that these payments were included in the auditor’s calculations. In

total, receipts from the 34 Saturday-only students added up to $15,789. R. 1409. Frola

calculated that excluding these students’ payments, International’s Title IV ratio was

90.34 percent. Id.

Denial of Recertification Application

On November 8, 2006, the Department issued a letter to International titled

“Denial of Recertification Application to Participate in the Federal Student Financial

Assistance Programs.” R. 235–39. Citing 34 C.F.R. §§ 668.13 and 668.26, the

Department found that International was ineligible to participate in Title IV grants after

June 30, 2005 because (1) International derived more than 90 percent of its revenue from

Title IV funds during FY 2005, and (2) it failed to timely submit required compliance

audit reports and financial statements. The denial letter recited the following grounds for

its findings:

?

International’s compliance audit report and audited financial statements for FY

2004 were due December 31, 2004, but were not filed until November 18, 2005.

R. 236.

?

International’s compliance audit report and audited financial statements for FY

2005 were due December 31, 2005, but were not filed until May 2, 2006. R. 236.

? The FY 2005 financial statements reported $2,078,320 in “[n]et cash received

from Title IV funds,” and $2,300,716 in “[n]et cash received from all eligible

programs,” and stated that this ratio was 90 percent. R. 237.



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? The Department reviewed the auditor’s work papers and calculated a ratio of

90.23 percent. Id.

? On May 25, 2006, International’s auditor notified the Department that he would

audit “100 percent of all cash receipts” for FY 2005 and provide a new 90-10

Rule calculation. Id.

? On June 15, 2006, International’s auditor identified $12,843 in additional cash

payments during FY 2005. The revised report concluded that the FY 2005 90-10

Rule was met with a ratio of $2,061,148 / $2,296,453, or 89.75 percent. Id.

? The Department conducted an on-site review in August 2006 and concluded that

“[m]any” of the cash payments were for non-Title-IV-eligible Saturday short

classes. Estimating “conservatively,” the Department calculated that 25 percent

of International’s cash receipts came from the Saturday courses. Id.

The Department concluded that International “failed to demonstrate its ability to exhibit

proper administrative capability and trustworthiness as a fiduciary, and failed to meet the

standards of financial responsibility.” Id. The Department denied International’s

recertification to participate in Title IV programs, and requested end-of-participation

reports and a closeout audit report. R. 238.

International responded with a letter to the Department dated November 28, 2006.

R. 241–47. In the letter, International “agree[d] that its 2004 and 2005 audits were filed

late and that its fiscal 2005 Title IV revenue exceeded 90.0% of all of its relevant tuition

revenue,” but argued that “extenuating circumstances and corrective actions” justified

recertification. R. 241. Regarding the late audits, International explained that (1) it had

taken measures to ensure timely audit reports in the future, and (2) it believed that the

Department had already accepted other remedial measures as having cured the problem.

R. 242. Regarding the 90-10 Rule, International “agree[d] that it received more than

90.0% of its tuition revenues in fiscal 2005 from Title IV programs,” but attributed the

violation to “an unfortunate clerical error” in its FY 2005 application for a grant program



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operated by the Puerto Rico government. R. 243–44. International offered three

proposals to “remedy” the 90-10 Rule violation: (1) repay $128,320 (plus interest and a

penalty), immediately to the Department and retroactively characterize the corresponding

payments to students as “institutional grants,” remaining eligible for FY 2006; (2) repay

$864,000 (plus interest and a penalty) to the Department over time, discounting that sum

from both the Title IV revenue and total revenue for FY 2005’s 90-10 Rule calculation,

and thereby remaining eligible for FY 2006; or (3) repay all Title IV funds received

during FY 2006—$1,407,351.09—over five years, be deemed ineligible for FY 2006, but

be admitted retroactively to Title IV grants for FY 2007. R. 244–46.

The Department responded in a letter to International in December 2006. R. 252–

54. The Department refused to alter its prior denial of International’s recertification, and

extended the time for International to file end-of-participation reports by 45 days. Id.

Regarding the late audits, the letter reasserted that as a fiduciary, International was

“ultimately responsible for the timely submission of its audits,” and “failed in this

responsibility.” R. 253. However, the Department’s letter did not address International’s

contention that the Department had previously deemed the audit deficiencies to be cured.

As for the 90-10 Rule violations, the Department expressly rejected International’s first

two proposals, finding “no legal basis” for retroactively adjusting a past year’s 90-10

ratio. Id. The Department noted that the third proposal “identif[ied] the correct basis for

measuring the liability,” and advised International that the Department must both

calculate the FY 2006 liability and be repaid before it would consider International’s

application for Title IV participation. Id. The letter additionally advised International

that in the course of a re-application, the Department would review International’s FY

2003 and 2004 audits for 90-10 Rule compliance. R. 253–54.

International closed

in “late December 2006,” following management’s

consideration of the Department’s letter. R. 689, 696. By this time, International still

owed “around $500,000” on the Morales-affiliated loans. R. 689.



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The Advancer Purchase Offer

Meanwhile, in November 2006, Morales reached out to the president of Advancer

Local Development Corporation (“Advancer”) and asked her to consider buying

International. On January 11, 2007, the president of Advancer sent a letter to

International’s Board of Directors titled “Offer to Acquire Assets of International Junior

College.” R. 258–59. Advancer proposed to buy International’s assets and repay

$1,407,351 to the Department on behalf of International, over an extended time period.

The offer was conditioned on all relevant regulatory approval of the sale and the re-

certification of International’s Title IV eligibility. The letter outlined a four-stage process

for the transaction: (1) International’s shareholders would first unanimously adopt a

resolution approving the sale; (2) Advancer would then negotiate a repayment agreement

with the Department conditioned on Title IV re-certification; (3) at the same time the

repayment agreement is executed, International would apply for Title IV re-certification,

and Advancer would then formally purchase International’s assets and apply for a change

of ownership with the Department; and (4) the Department’s approval of the Title IV re-

certification, approval of the change of ownership, consent from educational regulators,

and consent from International’s contractual partners would conclude the purchase. R.

259.

On February 2, 2007, the Department sent a letter to International’s counsel,

responding to two e-mails he sent about Advancer’s offer.4 R. 283–84. The response


4 Although International admitted the Secretary’s Local Rule 56 statement describing the
e-mails, see Docket No. 65, ¶ 57 and Docket No. 72 at 11, the e-mails themselves have been
inexplicably omitted from the administrative record or any formal supplement. Rather, the
Secretary provided the e-mails in an exhibit to a discovery motion. But while the parties agreed
to a limited supplementation of the original record, see Docket Nos. 36 and 38, there is no
indication that these e-mails were part of that agreement. In light of the presumption against
taking new evidence in the district court, I find that the motion exhibit should not be considered
part of the record. See Camp v. Pitts, 411 U.S. 138, 142 (1973); accord Docket No. 54 (denying
International’s efforts to obtain discovery) and Docket No. 71 (denying International’s untimely
request to amend the record). And since even unopposed statements of fact must be supported by





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purportedly “identifie[d] some threshold requirements that Advancer would need to

consider and accept before the Department [would] allocate staff to the significant tasks

that would be required” to review the transaction. R. 283. For instance, the Department

said that a buyer “must assume all liabilities of that school if the school continues to

participate in the federal student aid programs,” but added that it had not yet determined

International’s total liabilities. The letter said more specifically that the Department

would need to review FY 2003 and FY 2004 audit workpapers for 90-10 Rule

compliance. The letter further noted that International’s FY 2006 compliance audit and

financial statements indicated 90-10 Rule compliance, but that “a more detailed review is

required,” which would take between “several weeks” to “more than two months.”

R. 284. Finally, the letter stated that “Advancer would have to accept a transitional

reporting requirement” to demonstrate International’s “compliance with the 90-10 Rule

for one additional year under Advancer’s non-profit ownership,” and that the Department

would examine any contracts for ongoing services between Advancer and International’s

outgoing owners. Id. The Department concluded by saying that if Advancer provided a

written acceptance of these terms it would “prioritize the staff review of the International

audit submissions.” Id.

In response, International’s counsel e-mailed three Department officials—William

Swift, Michael Frola (who had previously conducted the site visit at International’s

offices), and Steve Finley—on May 2, 2007, essentially (1) asking the Department to

quickly finish any review of International’s potential for FY 2003 and 2004 90-10 Rule

violations, and (2) arguing that the Department should not require Advancer, as a non-

profit, to comply with the 90-10 Rule following purchase. R. 286–88.

International’s counsel again e-mailed Finley on June 1, 2007, referring to a

telephone conversation with Frola about the FY 2003 and 2004 audits. R. 289.



admissible evidence, the Secretary’s statement about the e-mails will not be deemed admitted.
See Local Rule 56(e).



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According to the e-mail, Frola was “able to confirm that the auditors did not count any

short-term course revenue . . . in the 90-10 calculations for these fiscal years,” and had

passed the review results on to Finley. Id. International’s counsel requested that the

Department advise Advancer of whether its offer was acceptable to the Department as

soon as possible. Id.

On August 15, 2007, Advancer withdrew its offer, citing the lack of any response

from the Department regarding additional liability. R. 291–92, 706–07.

Final Audit Determination

On August 20, 2007, the Department issued a Final Audit Determination (“FAD”),

finding International ineligible for Title IV participation between July 1, 2005 and June

30, 2006. R. 19–26. Citing 20 U.S.C. § 1002(b)(1)(F) and 34 C.F.R. § 600.5(a)(8), the

Department found that International derived more than 90 percent of its revenue from

Title IV funds during the previous fiscal year. R. 21. The FAD recited the following

events in support of the finding:

?

International’s initial financial statement for FY 2005 reflected a ratio of 90.33

percent.

? The Department’s review of International’s audit papers calculated a ratio of

90.23 percent.

?

International’s revised audit for FY 2005 calculated a ratio of 89.75 percent.

? The Department’s on-site review revealed that the revised ratio included income

from International’s Saturday courses (Cursos Sabatinos).

“[E]stimating

conservatively,” the Department calculated that 25 percent of International’s cash

receipts came from the Saturday courses. The Department considered these

courses ineligible for Title IV participation and thus income from those courses

were excluded from the calculation of total revenues.

?

International’s second revised calculation for FY 2005, excluding receipts from

the Saturday courses, yielded a ratio of 93.9 percent.



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R. 21–22. The Department concluded that International owed a liability of $1,365,078 in

principal and interest, for funds that International received but was not eligible for in FY

2006. See R. 23.

In October 2007, International’s counsel appealed the FAD and requested a

hearing. R. 7–17. International’s exhibits to the appeal included an FY 2006 audited

financial statement and compliance audit. See R. 298–324; 1131–45. A hearing was held

before an Administrative Judge in August 2008, and a transcript was produced. R. 1608–

93. On September 24, 2008, an Administrative Judge for the Department rendered a

decision ordering International to pay $1,365,078. R. 1694–1701. International appealed

to the Secretary. R. 1703–26. On November 25, 2009, the Secretary remanded the case

“for fact-finding on whether [International]’s 34 students [taking only Saturday courses]

were enrolled in one of the institution’s Title IV-eligible programs.” R. 1750. On

remand, the Administrative Judge again ordered International to pay $1,365,078, finding

that International failed to prove the students were enrolled in a Title IV-eligible program.

R. 1833–34. International appealed to the Secretary on August 7, 2010. R. 1836–48.

The Secretary’s final decision, dated November 19, 2010, affirmed the

Administrative Judge’s finding of a 90-10 Rule violation, and ordered repayment.

R. 1886–90. According to the Secretary, International in this second appeal conceded

that it violated the 90-10 Rule, but pressed two other grounds for relief from the liability.

R. 1886–87. The Secretary rejected International’s first argument that it should have

been afforded the same relief given to another institution in Gibson Barber & Beauty

College, No. 05-49-SA (Decision of the Sec’y, Nov. 25, 2009) (Gibson Barber II).

R. 1888–89. The Secretary also rejected International’s request for offset determinations

as outside the scope of the pending proceeding. R. 1889–90.

DISCUSSION

International’s four causes of action challenge the Secretary’s interpretation of the

90-10 Rule, the Secretary’s decision not to relieve International from the Final Audit



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Determination, the Secretary’s decision not to readmit International to Title IV programs,

and the Secretary’s failure to respond to International’s requests for clarification of its

outstanding Title IV liabilities when it was contemplating a sale. I begin with a brief

overview of the statutory and regulatory framework, then consider each motion for

summary judgment as to each cause of action. I accept both sides’ expressed agreement

that this case should be evaluated under the statutes and regulations in force between

2005 and 2008, and the implication that no material changes occurred during that time.

See Def. Mem. at 3 n.2; Pl. Mem. at 3 n.1.

I.

The 90-10 Rule

Under the applicable statute, a Title-IV-eligible “proprietary institution of higher

education” (for-profit institution) was required to have “at least 10 percent of the school’s

revenues 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).

Citing this statute, the Department’s regulations provided that:

(a) A proprietary institution of higher education is an educational
institution that—

. . .

(8) Has no more than 90 percent of its revenues derived from title
IV, HEA program funds, as determined under paragraph (d) of this
section.

. . .

(d)(1) An institution satisfies the requirement contained in paragraph
(a)(8) of this section by examining its revenues under the following
formula for its latest complete fiscal year:

Title IV, HEA program funds the institution used to satisfy its
students' tuition, fees, and other institutional charges to students

[divided by]



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The sum of revenues including title IV, HEA program funds
generated by the institution from: tuition, fees, and other
institutional charges for students enrolled in 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 students who are enrolled in those eligible programs.

(2) An institution must use the cash basis of accounting when
calculating the amount of title IV, HEA program funds in the
numerator and the total amount of revenue generated by the
institution in the denominator of the fraction contained in
paragraph (d)(1) of this section.

34 C.F.R. § 600.5 (2009) (emphasis added).



Congress passed the 90-10 Rule (originally 85-15) to ensure the quality of Title

IV programs. Career Coll. Ass’n v. Riley, 70 F.3d 637, 638 (D.C. Cir. 1995). The rule

lessens for-profit institutions’ reliance on federal funds, and places some pressure on

them to compete for students through the quality of their education, rather than their

ability to provide federal financial aid. Ponce Paramedical Coll., Inc. v. U.S. Dep’t of

Educ., 858 F.Supp. 303, 307, 311 (D.P.R. 1994) (“The intent of the statute, as seen from

Representative Water’s statements on the floor of the House . . . was to reduce proprietary

institutions’ absolute reliance on federal funds”).

II.

Interpretation of 90-10 Rule

International challenges the Secretary’s interpretation and implementation of the

90-10 Rule as being inconsistent with the plain meaning of the statute. International first

argues that the term “revenues from sources that are not derived from funds provided

under [Title IV]” (the denominator in the 90-10 formula), 20 U.S.C. § 1002(b)(1)(F), is

unambiguous, and thus the Secretary’s interpretation, as announced in a final rule, 34

C.F.R. § 600.5(d)(1), should be accorded no deference. Alternatively, International

argues that the 34 students taking Cursos Sabatinos should be deemed enrolled in eligible

programs, such that their cash payments constitute revenues from Title-IV-eligible

programs. I will examine the two arguments in turn.



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A.

Definition of Revenues

The Department’s implementation of the 90-10 Rule defines “revenues” to

include only those funds generated from students enrolled in Title-IV-eligible programs.

§ 600.5(d)(1). Revenues from non-Title-IV eligible programs, or from non-Title-IV-

related activities, are generally excluded from the 90-10 calculation. Id.

In evaluating a federal agency’s interpretation of a statute it administers, courts

follow the two-step Chevron analysis. First, the court “must determine ‘whether

Congress has directly spoken to the precise question at issue,’” and if so, “‘give effect to

the unambiguously expressed intent of Congress.’” City of Arlington, Tex., 133 S. Ct. at

1868 (quoting Chevron, 467 U.S. at 842–43). But if “the statute is silent or ambiguous”

on the matter, then the court need only determine “whether the agency’s answer is based

on a permissible construction of the statute.” Chevron, 467 U.S. at 843. Where

“Congress has explicitly left a gap for the agency to fill,” and the agency’s interpretation

is promulgated through notice-and-comment rulemaking, the court must give substantial

deference to the agency’s interpretation, and its regulation will be overturned only if

“arbitrary, capricious, or manifestly contrary to the statute.” Id. at 843–44; Succar v.

Ashcroft, 394 F.3d 8, 23 (1st Cir. 2005).

Here, Congress did not directly speak to the question at issue. Rather, Congress

explicitly left a gap and delegated authority to the Secretary to interpret and implement

the 90-10 Rule, when it stated that the definition of “revenues from [non-Title-IV

sources]” would be “determined in accordance with regulations proscribed by the

Secretary.” § 1002(b)(1)(F). International’s arguments to the contrary are not persuasive.

The statutory language plainly shows that Congress intended the Secretary to further

define the meaning of “revenues from sources that are not derived from funds provided

under [Title IV].” Id. If Congress did not so intend, the phrase “as determined in

accordance with regulations proscribed by the Secretary” would be superfluous. Corley

v. United States, 556 U.S. 303, 314 (2009) (noting that statutes “should be construed so



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that effect is given to all its provisions, so that no part will be inoperative or superfluous,

void or insignificant”). Moreover, the remarks made by members of Congress that

International cites do not alter this conclusion—first, because the statements cited are all

post-enactment statements not necessarily reflective of original intent, Bruesewitz v.

Wyeth LLC, 131 S. Ct. 1068, 1081, (2011) (“Post-enactment legislative history . . . is not

a legitimate tool of statutory interpretation”), and second, because the very expression of

congressional disapproval and debate tends to show the lack of an unambiguous

definition of non-Title-IV revenues.5

Additionally, International’s interpretation of “revenues” cannot be squared with

the intended purpose of the 90-10 Rule. Under its reading, all non-Title-IV payments

collected by a given institution may be included in the calculation of non-Title-IV

revenue, regardless of the source. Pl. Mem. at 21. Taken to its logical extreme, if an

institution operates a beauty salon on school premises to provide training opportunities to

its students, and that salon also happens to sell a large selection of beauty products,

revenues derived from the sale of those beauty products could count as non-Title-IV

revenues, simply because they are revenues collected by the institution from non-Title-IV

sources. The parties do not dispute that the purpose of § 1002(b)(1)(F) is to ensure the

quality of Title IV-eligible programs, by requiring that at least 10% of the programs is

actually paid for by enrolled students or other non-federal funds. The idea is that

programs that can successfully compete in the marketplace for some paying students or

garner related financial support are likely of sufficient quality and thus deserving of Title-

IV assistance. But if the program is supported solely by Title IV funds and revenues from


5 International’s contention that Congress, in codifying the definition of “revenue” in
2008, indicated its disapproval of the Secretary’s interpretation is also unavailing. Congress’s
codification in 2008, like the other statements cited by International, constitutes post-enactment
legislative action not indicative of original intent. More importantly, and contrary to
International’s conclusory allegation, the 2008 codification does not clearly deviate from the
Secretary’s interpretation such that International’s revenues from Cursos Sabatinos would count
towards the denominator of the 90-10 Rule.



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the sale of beauty products, there is no indication that the program is of such quality that

students who attend the school would be willing in fact to pay for that education out of

their own pockets. Therefore, International’s contention that the meaning of “revenues”

unambiguously includes revenues from Cursos Sabatinos cannot be sustained. See also

Ponce Paramedical Coll., 858 F.Supp. at 311 (finding Congress “explicitly delegated to

the Department of Education the authority” to define what constitutes non-Title-IV

revenues).

Because Congress in the organic statute has not directly spoken to the meaning of

“revenues,” step two of Chevron requires the court to determine whether the agency’s

interpretation is a reasonable one entitled to deference. I find, as other courts have found,

that the Secretary’s definition of non-Title-IV revenues, as promulgated in 34 C.F.R. §

600.5, is a permissible interpretation of the organic statute. See Career Coll. Ass’n, 70

F.3d at 638; Ponce Paramedical Coll., 858 F.Supp. at 312. As discussed above, the

purpose of the 90-10 Rule is to ensure Title IV eligibility extends only to those

institutions who provide quality Title IV programs. It is reasonable for the Secretary to

limit the definition of “revenues” to tuitions, fees, and payments directly related to

students’ enrollment in Title IV programs. Were the definition of revenues to include

tuitions and fees from non-Title-IV programs, or funds derived from non-educational

services, the efficacy of the 90-10 Rule would be diminished or defeated. Thus, I find

that the Secretary’s definition of “revenues” under § 1002(b)(1)(F) is a reasonable

interpretation and must be upheld.

B.

Students Enrolled in Eligible Programs

International also challenges the Secretary’s determination that revenues from the

34 students enrolled in Cursos Sabatinos were revenues from ineligible programs, which

are excluded from the denominator of the 90-10 ratio. International argues that the

decision is contrary to agency precedent and unsupported by the evidence.



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Under the Secretary’s regulations, only payments for “students enrolled in eligible

programs” may be included in the denominator of the 90-10 fraction. 34 C.F.R.

§ 600.5(d)(1). For a program to be deemed Title IV eligible, the program must include at

least 15 weeks of instruction and be at least 600 clock hours, 16 semester or trimester

hours, or 24 quarter hours. § 668.8(d). The Secretary contends that enrollment in a

course that is creditable towards an eligible program, i.e. one that could count towards

satisfaction of program requirements, is insufficient by itself to establish enrollment in an

eligible program such that the student’s payments would be included in the total revenues

figure for the 90-10 Rule. The Secretary’s interpretation of its own regulations is entitled

to “controlling weight” unless “plainly erroneous or inconsistent with the regulation.”

Thomas Jefferson Univ. 512 U.S. at 512.

International contends that the Secretary’s interpretation must be rejected as being

inconsistent with Sinclair Community College, No. 89-21-S, 75 Educ. Law Rep. 1296

(Decision of the Sec’y, Sept. 26, 1991), in which the Secretary affirmed an

Administrative Judge’s finding that a certain number of students were enrolled in Title-

IV-eligible programs. As the Secretary points out, however, the Sinclair case had nothing

to do with the 90-10 Rule and there is no indication that Sinclair involved students taking

weekly Saturday courses. Def. Opp. at 11. The decision, does, however, list some of the

documents an institution can submit to show student enrollment in an eligible program.

See id. (evidence of degree or certificate completion at the institution, or transfer to a

four-year institution; class records showing the students were enrolled for purposes of

obtaining eligible degrees or certificates).

International further argues that the Secretary’s decision is entitled to no deference

because the Administrative Judge and the Secretary ignored key evidence (certain school

officials’ affidavits and the school’s course catalogue in Spanish), and failed to cross

reference the course catalogue with the 34 students’ records to determine that they were

taking courses creditable towards eligible programs. But even assuming the Secretary



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should have found that the 34 students were enrolled in creditable courses, there is no

legal authority for International’s proposition that mere enrollment in a creditable course

is sufficient evidence of enrollment in an eligible program. Moreover, International does

not assert that the 34 students were directly enrolled in eligible programs. Therefore, it

cannot be said that the Secretary’s decision to exclude revenues from the 34 Cursos

Sabatinos students is arbitrary, capricious, or an abuse of discretion. International’s first

claim fails, and the Secretary is entitled to judgment as a matter of law.

III. Affirmance of Final Audit Determination

International next challenges the Secretary’s refusal to forgive its 90-10 Rule

violation and affirmance of the Final Audit Determination, in which the Department

determined International violated the 90-10 Rule for FY 2005 and was liable for

$1,365,078.

The Secretary of Education is charged with conducting “program reviews” of all

participating institutions of higher education. 20 U.S.C. § 1099c-1(a). Reviews result in

the issuance of a Final Audit Determination, in which the Department identifies

violations or liabilities “based on an audit of . . . [a]n institution’s participation in any or

all of the Title IV, HEA programs.” 34 C.F.R. § 668.112(a). An institution may seek

administrative review of a Final Audit Determination and present certain types of

evidence. § 668.113(a)–(c). In the course of such reviews, the Secretary must, among

other safeguards, “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 that error.” 20 U.S.C. § 1099c-1(b)(3). To this end, the

regulations provide that the Secretary “permits the institution to correct or cure” an

“administrative, accounting, or recordkeeping error” if both (1) there was no “pattern of

error,” and (2) “there is no evidence of fraud or misconduct related to the error.” 34

C.F.R. § 668.113(d)(1). Importantly, the Secretary has defined an action that “cures or

corrects that error” to be one that “eliminates the basis for the liability.” § 668.113(d)(2).



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In Gibson Barber II, the Secretary relieved an institution’s liability for violating

the 90-10 Rule. That institution’s FY 2002 90-10 ratio was 92 percent, exceeding the 90

percent threshold by $3,850. Gibson Barber II, slip op. at 1. The institution’s liability

from that violation was $186,958. During FY 2002, the institution’s owner donated6

$3,850 with the intent to bring it into 90-10 Rule compliance. Id. The administrative

judge found that this gift could not be counted as revenue, and affirmed a liability of

$186,958. Id. at 1–2. The Secretary affirmed the finding that the 90-10 Rule had been

violated, but nonetheless decided that the liability should be forgiven. He identified

§ 668.113(d) as an example of his “authority to accept an institution’s corrective

measures in the administration of Title IV funds,” but qualified that reference:

Notably, I do not hold as a general matter that 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 that
eliminates the basis of liability and where the record reveals that there is
no evidence of fraud and no allegation of a pattern of errors by the
institution.

Id. at 2 n.6. The Secretary found “three extraordinary factors” justifying forgiveness of

the liability: (1) the “conspicuously small amount of money” by which the institution

failed the 90-10 test; (2) the absence of allegations of fraud or a recent pattern of similar

violations; and (3) “the absence of any allegation of regulatory violation aside from the

failure to meet the 90/10 rule.” Id. at 2–3 (emphasis in original). Based on those factors,

the Secretary deemed the donation to be a corrective measure “eliminat[ing] the basis for

liability in this proceeding.” Id. at 3. In sum, the statutory and regulatory framework

provides that errors will be forgiven by a “cure or correction” that “eliminates the basis

for the liability.” 34 C.F.R. § 668.113(d)(2); 20 U.S.C. § 1099c-1(b)(3). In Gibson


6 The donation was initially meant to be a loan, but the owner subsequently “converted

the unpaid balance of the loan to a donation.” Gibson Barber II, slip op. at 1 n.2.



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Barber II, the Secretary concluded that the statutory mandate and accompanying

regulation gave him authority to grant relief in light of the case’s “notable

circumstances.” See slip op. at 2.

Here, International contends that “the Secretary had a statutory duty to permit

International to cure its error” and that it demonstrated the same “notable circumstances”

found in Gibson Barber II, triggering the Secretary’s obligation to forgive its 90-10

violation. See Pl. Mem. at 7–16. To succeed on this claim, International must show that

the Secretary’s refusal to grant relief in accordance with the statutory/regulatory scheme

and Gibson Barber II was arbitrary and capricious. Craker, 714 F.3d at 26. Agency

action is invalid if inconsistent with well-established agency precedent and its departure

was unexplained. See Shaw’s Supermarkets, Inc. v. NLRB., 884 F.2d 34, 36 (1st Cir.

1989).

International challenges the Secretary’s refusal to grant relief primarily on three

grounds. First, it argues that the Secretary failed to adequately explain his departure from

Gibson Barber II, because like the institution there, it exceeded the 90-10 Rule by an

exceedingly small amount, especially in contrast to its FAD liability, and there is no

evidence or allegation of fraud or other regulatory violations aside from the 90-10 Rule

violation. Second, International asserts that the Secretary’s interpretation of “a pattern of

error” in § 668.113(d) to require “the lack of any regulatory violation,” R. 1888, is

“unsupported by the plain language of the regulation.” Third and finally, International

contends that the Secretary improperly ignored evidence of International’s corrective

actions, including a $500,000 “forgiven” loan made by one of International’s owners, and

International’s offer in November 2006 to repay the amount of 90-10 overage.

International’s second argument is inapposite, since the Secretary did not base his

decision on a finding that International violated any other regulations. International’s

first and third arguments are related and are addressed together.



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The Secretary in his decision did distinguish International from the institution in

Gibson Barber II, finding that International (1) exceeded the 90-10 ratio by “at least

twice as much” as the institution in Gibson Barber II, (2) was placed on a more stringent

payment process called Heightened Cash Monitoring 2 (“HCM2”), and (3) never

“adopted corrective measures that would eliminate the basis for liability.” R. 1889. With

respect to the first finding, the Secretary noted that the exact amount by which

International exceeded the 90-10 Rule in FY 2005 is unknown, but it ranges between

$8,59