SUBJECT: Northstar Youth Services, Inc.

DECISION

Northstar Youth Services, Inc. (Northstar), appealed an amended disallowance determination by the Substance Abuse and Mental Health Services Administration (SAMHSA) Grant Appeals Committee (Committee).

The amended disallowance involved $200,550 in expenditures incurred from 1985 through 1989 by Northstar's corporate predecessor, Human Services Resources (HSR), under two National Institute of Mental Health (NIMH) ⁽¹⁾ grants awarded pursuant to the Cuban Entrant Health Program. See Refugee Education Assistance Act of 1980, Pub. Law No. 96-422. SAMHSA originally disallowed $1,182,029 in funding for these grants on June 28, 1995. Northstar then appealed the June 28, 1995 disallowance to the SAMHSA Grant Appeals Committee. ⁽²⁾ The Committee issued a decision on June 27, 2000, which Northstar appealed to this Board. See DAB Docket No. A-2000-105.

The parties asked the Board to resolve a single issue at that juncture, whether Northstar would be liable in principle for any disallowance that arose during the administration of the SAMHSA grants by Northstar's corporate predecessor, HSR. We concluded in our decision that Northstar would be liable in principle for any such disallowance. Northstar Youth Services, Inc., DAB No. 1788 (2001) (Northstar I). After the Board issued its decision on Northstar's liability in principle, SAMHSA reinstated a disallowance of $468,575 which Northstar appealed to the Board. The Board twice stayed proceedings while the parties engaged in lengthy settlement discussions. Although the parties ultimately made some limited progress, they were unable to settle the appeal in its entirety. The parties then asked the Board to lift the stay and issue a decision on the amended disallowance, which we now do.

The record in this case consists of the parties' briefs and evidentiary submissions in this appeal as well as the record for Northstar I (DAB Docket No. A-2000-105). As explained more fully below, we reverse SAMHSA's disallowance in part and sustain it in part.

Background

This dispute arose from the relationship of two Pennsylvania corporations, Northstar's non-profit predecessor, HSR, and a for-profit corporation, HBS Management Group. Both HSR and HBS were founded and, during the period involved here, controlled by the same individual. We incorporate by reference the more detailed background of this dispute set out in Northstar I at 2-5.

A. The Parties' Settlement Negotiations

For approximately one year during the appeal leading to Northstar I, the parties attempted to settle their dispute informally. Northstar Br. at 1-2; Northstar Ex. 1. As noted above, after the Board issued its decision finding Northstar liable in principle for the disallowance, SAMHSA reissued a notice of disallowance identifying $468,575 as the amount of disallowed federal funding. Northstar appealed to this Board. The parties jointly requested a stay so that they could continue settlement discussions. The settlement discussions were not successful but did lead to a modification of the disallowance amount.

B. Revisions to the October 25, 2001 Disallowance By letter dated January 23, 2002, SAMHSA informed Northstar that the disallowance had been reduced to $204,755. Further, SAMHSA stated:

As we previously advised you . . ., we do not have the authority to negotiate a reduction in the interest and penalty charges which began accruing on the date of our final determination letter of June 28, 1995 or negotiate the length of repayment.

Northstar Ex. 6, at 3 (footnote omitted).

In the January 23, 2002 revision, SAMHSA identified the "Original Amount" of the disallowance as $518,575. ⁽³⁾ Based on Northstar's documentation and a 1994 repayment of $50,000 by the individual who founded HSR (and HBS), SAMHSA reduced the disallowance to $204,755. SAMHSA identified the three remaining cost categories of the disallowance as HBS Management Costs, Other Direct Costs and Indirect Costs. On April 23, 2002, Northstar submitted additional documentation, accepted by SAMHSA, which reduced the disallowance of "Other Direct Costs" by $4,205. Thus, the overall disallowance was reduced to $200,550. ⁽⁴⁾ SAMHSA Ex. 19.

In regard to the amended disallowance, Northstar alleged generally that (1) SAMHSA had "breached its agreement to fully and finally settle this matter for $200,000;" (2) SAMHSA, by its breach and its conduct during settlement discussions, was estopped from requiring Northstar to pay the revised disallowance; and (3) entire categories of costs, or particular items within categories, of the revised disallowance were incorrect. Northstar Br. at 4.

Below we set out, individually, Northstar's particular arguments and our analysis for each of the questioned cost categories including arguments pertaining to specific items within categories. We then address Northstar's argument regarding SAMHSA's alleged breach of the settlement agreement and its possible estoppel.

1. HBS MANAGEMENT COSTS

SAMHSA disallowed $122,836 in direct costs incurred by Northstar's predecessor, HSR, in connection with HSR's management consulting contract with HBS. SAMHSA stated that Northstar failed to provide documentation justifying these costs. SAMHSA January 23, 2002 Letter at 2.

A. $69,117 in "HBS expenses' and $36,514 in "costs incurred by HBS"

Northstar argued that SAMHSA's disallowance of these costs was erroneous and inconsistent with federal law. Northstar Br. at 7. The central theme throughout this aspect of Northstar's argument was that HBS was a separate for-profit management company (whereas HSR/Northstar (the grantee) was a distinct, non-profit corporation). Thus, according to Northstar, liability for these costs should not have been assessed to HSR/Northstar. Northstar Letter to SAMHSA (November 20, 2001). Northstar also argued that the HBS expenses were Professional Service Costs (for consultants) allowable under Paragraph 34, Attachment B, of Office of Management and Budget (OMB) Circular A-122 (1980). ⁽⁵⁾ Northstar interpreted the allowability criteria in Paragraph 34 as designed to answer two questions: (1) was it appropriate to obtain services from a third party rather than a grantee's employees? and (2) were the fees paid reasonable in light of services received? Thus, Northstar argued that since SAMHSA did not question the appropriateness of its use of HBS as a consultant, SAMHSA's inquiry on allowability was limited to whether the fees paid to the consultant were reasonable in light of the services received by HSR. Northstar alleged that these costs were not reviewed on an individual basis to determine their allowability, but were simply disallowed without looking at the "total package" of services HSR received on the ground that the expenditures would not have been allowable if HSR had made them. Northstar Br. at 6; Northstar Reply Br. at 6-7; see also Northstar Ex. 8.

There is no merit to Northstar's general argument regarding the potential liability of its predecessor, the non-profit HSR, which had contracted with a for-profit corporation, HBS, for the performance of these unspecified grant functions. In Northstar I, we specifically held that Northstar, as HSR's eventual successor, was liable in principle for this disallowance. Id. at 1.

We also reject Northstar's argument that SAMHSA erred in disallowing the costs described in sections A and B above because SAMHSA had not reviewed and evaluated the "total package" of HBS's consultant services. Once a cost is questioned as lacking documentation, the grantee bears the burden to document, with records supported by source documentation, that the costs were actually incurred and represent allowable costs, allocable to the grant. Ricon San Luiseno Band of Mission Indians, DAB No. 1826 at 3 (2002); The Centers for Family Life, DAB No. 1685 at 11 (1999); Lac Courte Oreilles Tribe, DAB No. 1132, at 5, n.4 (1990); see also 45 C.F.R. �� 74.50-74.53. Northstar did not even allege that it had such documentation, much less provide it.

Moreover, Northstar remained responsible for documenting that all of the funding was properly expended for grant objectives and was otherwise allowable even though HSR hired a consultant (HSB) to perform grant functions. A grantee must demonstrate that a consultant complied with all applicable requirements in performing the grant activities the consultant has contracted to perform. Traylor Products and Services, Inc., DAB No. 1331, at 10-12 (1992). In this case, Northstar has failed to adequately document the allowability of the specific functions in issue. Even if the special requirements pertaining to consultant services in OMB Circular A-122, Att. B � 39 were applied as Northstar argued, Northstar clearly has never documented that these requirements were, in fact, met. Here, the issues of accountability are particularly significant because of the very substantial charges of fraud raised against the for-profit corporate consultant during the period in question.

B. $1,721 in costs and $459 salary for HSR Operations Manager paid by HBS

Here, Northstar contended, SAMHSA disallowed "roughly 3%" of the Executive Director's salary, as well as $459 in salary for HSR Operations Manager, paid by HBS because it had determined that some of these expenditures were for activities not related to the grant program. Again, Northstar asserted that SAMHSA erred because it never determined if the totality of the individuals' services to the grant program justified funding their entire salary through the grant. Rather, SAMHSA simply assumed that grant funding had been applied to non-grant activities. Northstar Br. at 7-8.

Northstar's argument here ignores the general allocability requirements of OMB Circular A-122, Att. A � A4. Northstar did not dispute that these officials carried out activities other than those related solely to this grant. Although Northstar has argued that SAMHSA erred in disallowing these costs, Northstar clearly failed to demonstrate that this percentage of questioned staff activities was, in fact, grant-related.

C. $15,025 in Carlisle Program costs paid to HBS

The auditors noted, as Northstar has argued here, that the HSR Notice of Grant Award was revised to extend the grant project and budget period to December 31, 1987, and to rebudget $15,025 of the original award into the indirect cost category for administration of the orderly termination of the Carlisle grant. SAMHSA Exhibit 2 in DAB Docket No. A-2000-105 (DHHS Office of the Inspector General Audit Report at 5 (March 29, 1993)) (Audit Report). The auditors subsequently noted that this payment was undocumented and that it had been apparently made for HBS consultants who had already left the HSR payroll. Id. at 16.

SAMHSA argued that these costs were disallowed because there was insufficient information to explain what the administrative costs represented. Further, SAMHSA asserted that the costs were apparently intended to pay for salaries of individuals who had left the HSR payroll at the time the services were provided. SAMHSA Br. at 5.

Northstar asserted that these costs were allowable because they were incurred in late 1986 and early 1987 to close down the Carlisle therapeutic program and were approved retroactively by the NIMH Chief of Grants Management (NIMH Grant Chief) after he was fully informed of the circumstances surrounding the expenditures. Northstar provided a revised notice of award, which was signed by the NIMH Grant Chief, and dated 9/28/87. The budget in the award specifically identified the subject questioned cost of $15,025 as "Indirect Costs Rate 57% of S[alary] & W[ages]." Northstar Br. at 7; Northstar Ex. 9; Northstar Reply Br. at 6.

We agree with Northstar that the Carlisle Program costs described above are allowable. In addition to the revised Notice of Grant Award which included these funds, Northstar provided an affidavit from R. Wayne Jordan, the individual who was HSR's business manager at the time the expenditures were made. Northstar Exhibit 9. The affidavit states that these expenditures were made to close out a therapeutic program that HSR operated in Carlisle, Pennsylvania as part of its Cuban Entrant Treatment Program. More importantly, the affidavit states that the questioned expenditure had already been made long before the Revised Notice of Grant Award was issued and that the NIMH Grant Chief knew about these specific expenditures at the time he approved the revised notice. Northstar also provided copies of contemporaneous correspondence between HSR's business manager and the NIMH Grant Chief which identifies this questioned item as "Administration Costs" and explains the specific circumstances under which these costs were incurred. Id.

The retroactive approval of this cost by the NIMH Grant Chief, along with the affidavit by Mr. Jordan, which was undisputed by SAMHSA, and the contemporaneous correspondence between the two individuals, establishes the allowability of this cost. The NIMH Grant Chief presumably would not have approved a revised award for a budget expenditure that had already been made at the time of the approval if he had not determined that the expenditure was allowable and furthered the objectives of the grant. The affidavit and correspondence provide further substantiation of the basis of this cost and NIMH's (SAMHSA's) understanding of the expenditure at the time of its approval. Accordingly, we reverse the disallowance of $15,025 in Carlisle Program costs.

2. OTHER DIRECT COSTS

SAMHSA disallowed $44,089 in expenditures categorized as "other direct costs" incurred by HSR between 1985 and 1988.

Northstar contested only $10,754.82 of these expenditures (thereby conceding the remaining $33,334.18). Based on additional documentation submitted by Northstar (documentation for $666 in food costs and evidence that a check for $3,539 was not charged to the grant) SAMHSA further reduced these contested costs by $4,025. Northstar Brief at 8; SAMHSA Br. (May 14, 2002) at 4. SAMHSA's acceptance of this documentation reduced the amount of disputed costs to $6,549.07.

Northstar explained the remaining $6,549.07 in disputed "other direct costs" as follows:

Checks to Norristown Yellow Cab $2,881.40 According to Northstar, in 1985 HSR wrote four checks, totaling the disputed amount, to Norristown Yellow Cab covering costs incurred transporting Cuban Entrants to jobs secured through the vocational element of HSR's Cuban Entrant Treatment Program. Northstar indicated that these individuals lived in a HSR-operated residential facility and finished work at various times during the course of a typical night. HSR could not provide transportation from the scattered job sites back to the residential facility without leaving the facility unattended. Northstar attested that the PHS "approved these costs as part of the therapeutic element of the Cuban Entrant Treatment Program." Northstar Ex. 11.

Checks to the HSR Operations Manager $628.56 During the period in question and pursuant to PHS's request, HSR established a grant-related therapeutic treatment center in Carlisle, Pennsylvania. According to Northstar, HSR wrote two checks ($430.74 and $197.82) to its Operations Manager to reimburse his overnight travel to the site to recruit staff and make purchases for the treatment center. Northstar Ex. 11.

Checks to the HSR Clinical Director $2,006.11 Northstar asserted that PHS requested that HSR interview and transport Cuban Entrants in remote locations to be housed in either the HSR Norristown or Carlisle sites. According to Northstar, HSR wrote two checks ($1281.74 and $724.37) to its Clinical Director to reimburse his travel and lodging costs in Atlanta, Georgia where he interviewed Cuban Entrants at the federal prison. Northstar alleged that PHS approved these costs and, in fact, PHS officials were involved in this interview process as well. Northstar Ex. 11.

Checks to Great Holiday Travel Tours $1,023 According to Northstar, this part of the disallowance involved payments from HSR to a travel agency for grant-related travel to Washington, D.C. Northstar asserted that HSR employees were required to travel to the PHS secure treatment facility at St. Elizabeth's Hospital to interview and transport men, approved for release by PHS, to the HSR facilities in Norristown or Carlisle. Northstar indicated that HSR wrote five checks ($238, $134, $67, $219 and $365) to the travel agency between 1985 and 1986. Northstar alleged that the validity of these payments could be verified by internal PHS documents and by Immigration and Naturalization Services records demonstrating that agency's approval for the release of the particular Cuban Entrants. Northstar Ex. 11.

Check to HSR Employee $10 Northstar asserted that, on June 13, 1986, HSR issued a check for $10 to a HSR employee, engaged in grant-related travel, who had been $10 short for a bus ticket between the Norristown and Carlisle facilities. Northstar Ex. 11.

Generally, SAMHSA questioned the documentation of these costs as inadequate to establish that the expenditures furthered grant objectives. See SAMHSA Letter (January 23, 2002) at 2. However, in its brief, other than noting that it had reduced this aspect of the disallowance by $4,025, SAMHSA provided no response or analysis regarding Northstar's argument and evidence relevant to the $6,549.07 remaining in issue. See SAMHSA Br. at 5.

Northstar sought to demonstrate the rationale for the allowability of these "other direct costs" in an affidavit from its Executive Director (HSR's Business Manager during the period in issue). See Northstar Ex. 11. The affiant detailed the specific origins and purposes of these costs. Northstar did not attempt to make a general all encompassing argument for allowability of the entire amount of "other direct costs" disallowed by SAMHSA (approximately $40,000). Rather, Northstar provided an explanation of the five cost categories discussed above (totaling slightly more than $6,500) drawn from a three-page list of unsupported costs identified by the auditors. See Northstar Ex. 10.

The affiant was the business manager of HSR at the time the expenditures were made and had personal knowledge of the specific purpose for each of these particular expenditures covered by his affidavit. It also bears on the credibility of this affiant, in our view, that he did not attempt to provide explanations for each and every questioned item under this category, but rather focused on the relatively small number of questioned items about which he apparently had detailed personal knowledge and recollection. We find that Northstar's explanations regarding allowability of these costs are reasonable and sufficient to support these costs in the absence of any countervailing argument from SAMHSA.

Accordingly, we reverse SAMHSA's disallowance of the $6,549.07 in disputed "other direct costs" identified above.

3. INDIRECT COSTS $87,830

SAMHSA disallowed $87,830 in indirect costs claimed by HSR in connection with the Cuban Entrant grant programs. Northstar presented no argument or evidence regarding these costs. Accordingly, we sustain this aspect of the disallowance in its entirety.

4. NORTHSTAR'S ESTOPPEL ARGUMENT

Northstar asserted that, on November 29, 2001, the parties had agreed to the essential terms of a settlement (i.e., Northstar's repayment of $200,000 in five installments over four years) and thus had a binding contract. Northstar argued that SAMHSA's withdrawal from that agreement constituted a breach of that contract. Northstar noted that "the fundamental elements of estoppel . . . misrepresentation of fact, reasonable reliance, and detriment to the opposing party" were all present in this situation. Consequently, Northstar asserted that SAMHSA should be estopped from requiring Northstar to repay the revised disallowance as well as any associated interest or penalties. Northstar Br. at 4.

Northstar's arguments fail for the following reasons. While the parties to an appeal before the Board may, at any time, engage in settlement discussions in an attempt to resolve the issues arising from a disallowance, those discussions occur while the appeal is stayed and are entirely off the record. Thus, any oral offer or concession that a party may have made as part of the informal settlement negotiations can have no bearing on our decision. Likewise, such issues as the authority of the party representative to bind a party to an oral agreement that may have been reached during the negotiations or other issues pertaining to legality of any resulting oral settlement agreement are outside the scope of the Board's review. While a party may have recourse elsewhere if it believes there was a binding settlement agreement, the content of the settlement negotiations can have no bearing on our decision. Cf. Idaho Division of Financial Management, DAB No. 1822 at 16, n.6. (2002).

Moreover, estoppel would not lie here in any event. In order for estoppel to lie against a party, the following elements must be met: (1) the party against whom estoppel is sought must have misrepresented the facts; (2) the party asserting estoppel must have reasonably relied on those facts; and (3) the reliance must have resulted in some harm or detriment to the party asserting estoppel. Heckler v. Community Health Services of Crawford County, Inc., 467 U.S. 51, 59 (1984); see also Alabama Dept. Of Human Resources, DAB No. 1621 at 10 (1997); North Central West Virginia Community Action Assoc., DAB No. 1604 at 8 (1996). The elements of estoppel could not be met here, where what is at stake is the amount due to the federal agency arising out of past unallowable costs.

The prevailing view in the federal courts is that equitable estoppel does not lie against the federal government, if indeed it is available at all, absent at least a showing of affirmative misconduct. See, e.g., New Hampshire Dept. of Health and Human Services, DAB No. 1862 at 20 (2003); Minnesota Dept. of Human Services, DAB No. 1791 (2001) and cases cited therein. See also Office of Personnel Management v. Richmond, 496 U.S. 414 (1990) and Heckler v. Community Health Services of Crawford County, Inc., 467 U.S. 51 (1984). There is no evidence of affirmative misconduct by SAMHSA relative to the failed settlement.

Conclusion

Based on the preceding analysis, we reverse the disallowance of $21,574.07 generally identified as Carlisle close-out costs and "other direct costs." We sustain the remainder of this disallowance, in the revised amount $178,975.93. SAMHSA should take this revision into account in calculating any assessment of interest.

Marc R. Hillson

Cecilia Sparks Ford

Donald F. Garrett
Presiding Board Member

1. NIMH was SAMHSA's institutional predecessor.

2. The regulations then in effect required Northstar to appeal its disallowance through the preliminary appeal process at 42 C.F.R. Part 50, Subpart D, prior to appealing to this Board.

3. As noted earlier, the October 25, 2001 disallowance identified $468,575 as the amount of disallowance. See Northstar I. Northstar did not challenge the higher ($518,575) amount, nor did the parties explain its basis. We surmise that the $518,575 amount resulted from the parties' closer examination of claimed costs. See Northstar Br. at 1.

4. By letter dated August 16, 2002, SAMHSA notified Northstar, and the Board, that it had identified 1,483 days of administrative inaction on its part between June 28, 1995 and June 27, 2000. In view of its admitted inaction, SAMHSA waived 1,483 days of interest on the disallowance which had accrued over this four-year period. Consequently, SAMHSA determined that, as of July 31, 2002, Northstar's disallowance totaled $281,902.50 ($200,550 in disallowed costs and $81,352.50 in interest).

5. Circular A-122 is made applicable by 45 C.F.R. � 74.27. Although the language remains largely unchanged from the earlier version cited by Northstar, Circular A-122 now addresses Professional Service Costs at Paragraph 39 of Attachment B.