SUBJECT: Northstar Youth Services, Inc.

Northstar Youth Services, Inc. (Northstar), appealed a June 27, 2000 determination by the Substance Abuse and Mental Health Services Administration (SAMHSA) Grant Appeals Committee (Committee) finding Northstar liable for a disallowance of $468,575 in federal funding incurred by Human Services Resources Inc. (HSR), Northstar's corporate predecessor. The disallowance involved expenditures incurred from 1985 through 1989 under two National Institute of Mental Health (NIMH) grants awarded pursuant to the Cuban Entrant Health Program. See Refugee Education Assistance Act of 1980, Pub. Law No. 96-422.

Northstar argued that it was not liable for the disallowance because HSR was neither the original grantee nor the original grantee's corporate successor. Northstar asserted that NIMH had been subject to fraud orchestrated by Northstar's founder based on that individual's simultaneous control of HSR and the original grant applicant, a for-profit corporation. The Committee concluded that Northstar was liable for the disallowance because its predecessor, HSR, had been awarded the funds and in fact had received the funds. Northstar Ex. 13 at 3.

The record consists of the parties' briefs, evidentiary submissions and the tape from the Board's June 14, 2001 informal conference conducted by telephone. The parties asked the Board to resolve at this juncture only the question of whether Northstar is liable in principle for the disallowance. In the event that the Board concludes that Northstar is liable, both parties left open the possibility of using the mediation process to determine the appropriate amount of the disallowance.

For the reasons discussed below, we conclude that Northstar, as the successor corporation to HSR, following a change in corporate name, is liable in principle for the disallowance.

FACTUAL BACKGROUND

A. The Corporations

A key issue in this case is the interrelationship of two corporations founded and, for the period in issue, controlled by one individual, Harvey J. Snyder.

Incorporated on June 15, 1982, the Developmental Services Consortium (DSC) was a for-profit corporation owned by Snyder. DSC legally changed its name to H.B.S. Management Group (HBS) on October 31, 1984. Northstar asserted without contradiction that, as of June 12, 2001, HBS remains a corporation in good standing in the Commonwealth of Pennsylvania.

Developmental Services Associates (DSA) was a non-profit corporation incorporated on February 2, 1983 by Snyder. Snyder was DSA's President and Director. DSA changed its name to Human Services Resources (HSR) on November 19, 1984. HSR changed its name to Northstar on April 17, 1993. Currently, Northstar is a corporation in good standing in the Commonwealth of Pennsylvania.

Each corporate line retained its own separate Employer Identification Number (EIN) for the period in issue.

B. The Grants

On February 2, 1983, DSC applied to NIMH for a Cuban Residential and Day Treatment Program grant funded under the Cuban Entrant Health Program. NIMH awarded Grant MH000004 (Grant 4) to DSC in 1983. Grant 4 was extended throughout the project period until it ended on December 31, 1989. The total grant award was $3,987,265. Under this program DSC, at the outset, then, for the period in issue, HSR, housed Cuban entrants in group homes and apartments in the Norristown, Pennsylvania area. The program was designed to teach the participating men skills needed to obtain jobs, function independently and cope with everyday life. On September 10, 1985, NIMH awarded DSC Grant MHU000010 (Grant 10), for a Carlisle Prison Program, also funded under the Cuban Entrant Health Program. Funding totaling $1,524,357 was provided to DSC, and later HSR, for the project. The program participants were housed in the former Cumberland Jail in Carlisle, Pennsylvania. The Cumberland facility was closed in August 1986 due to funding cutbacks. Grant 10 expired in 1987. DSC's application for Grant 10 required no new supporting information or material. Rather, NIMH based the award on the DSC Program Proposal for Grant 4. Northstar Br. at 9-10; Northstar Ex. 10.

On October 31, 1984 DSC filed Articles of Amendment with the Pennsylvania Secretary of State changing its name to HBS. On November 19, 1984 DSA filed Articles of Amendment with the Pennsylvania Secretary of State changing its name to HSR.

On January 2, 1985, Snyder wrote to the NIMH Grants Management Chief indicating that, "as of January 1, 1985 . . . [DSC] has changed its name to . . . [HSR]." In fact, however, there had been no such name change. Although both corporations maintained the same Post Office Box mailing address, Snyder noted the differing EINs for each corporation. SAMHSA Ex. 1. By letter dated October 4, 1985, HSR's Business Manager informed NIMH that although invoices were being billed under the new name HSR, checks were still being issued in the name of DSC. The Business Manager asked NIMH to update its computer records to reflect HSR as grantee.

In 1992, the Pennsylvania Department of Public Welfare, Bureau of Financial Operations, audited HSR for the fiscal year ending June 30, 1991. The audit revealed improprieties in the operation of HSR attributable to Snyder, specifically a significant misappropriation of HSR funds. See Northstar Ex. 4. HSR's Board of Directors removed Snyder from control of HSR in 1992. In 1994, Snyder was indicted on Federal charges of criminal fraud. Snyder pled to lesser charges, was incarcerated for several months and paid $50,000 in restitution. Northstar Br. at 12-14; Northstar Ex. 5.

THE DISALLOWANCE BEFORE SAMHSA

On June 28, 1995, SAMHSA issued a disallowance to Northstar. SAMHSA originally disallowed $518,575 in expenditures incurred by HSR under the above grants during the period July 1, 1985 through December 31, 1989.⁽¹⁾ This figure was ultimately reduced to $468,575 to reflect Snyder's restitution of $50,000. Northstar Ex. 12 at 2. The disallowed costs were as follows:

Salary $141,984
Fringe Benefits $39,615
HBS Management Fees $122,836
(From 7/1/85-9/30/86)
Other Direct Costs $44,089
Excess Indirect Costs $170,087

Northstar Ex. 8 at 1-5.

By letter dated July 14, 1995, Northstar appealed to the SAMHSA Grant Appeals Committee asserting that it was not liable for the disallowed costs. See Notice of Disallowance at 2.

On January 5, 1999, the Committee issued a decision finding Northstar liable for the disallowance.

The Committee noted that subsequent to Northstar's appeal to the Committee, regulations retracting SAMHSA's "interim appeals process" had taken effect. 63 Fed. Reg. 66062 (December 1, 1998). Since Northstar's appeal preceded those regulations, the Committee gave Northstar the option to "await a decision by SAMHSA [on the disallowed costs], or proceed directly to the Departmental Appeals Board." Northstar Ex. 10 at 5. Northstar remained in the SAMHSA appeal process.

In spite of the January 5, 1999 Committee Decision on liability, Northstar continued to contest liability in the subsequent proceedings before the Committee. Northstar Ex. 11. Thus, the greater part of the June 27, 2000 Committee Decision revisited that issue and reaffirmed that Northstar was liable.⁽²⁾ See Northstar Ex. 12.

The Committee noted that during the period in question (1985-1989) the grants were awarded to DSC then HSR.⁽³⁾ The Committee stated that the "grants were accepted by the organization, not by an individual." Further, HHS auditors had traced the draw downs of federal grant funds to HSR's bank account. Northstar Ex. 12 at 3.

This appeal followed.

Northstar's Arguments Before the Board

Northstar asserted that HBS, not HSR, should be liable for the disallowance. Northstar argued that SAMHSA had not demonstrated that the disallowance was proper. Northstar argued that the Committee erroneously believed that Northstar was the corporate successor to DSC. Northstar noted that DSC had submitted the Program Proposal for the grants and that its successor, HBS, continues as a Pennsylvania corporation. Northstar pointed out that the evidence clearly demonstrated that Snyder had lied to and materially misled NIMH for the benefit of his fraudulent management scheme when he represented that DSC had changed its name to HSR. Moreover, Snyder had plead guilty to theft from a federal program. Northstar Br. at 6-7.

Northstar asserted that had NIMH followed applicable PHS grants policy regarding corporate name changes from the outset, the entire fraud perpetrated by Snyder could have been prevented. Northstar Submission (April 26, 2001) at 3. Northstar pointed to Narragansett Indian Tribe, DAB No. 1103 (1989), as requiring a finding in its favor. Northstar asserted that in Narragansett, the Board found that only the corporation that originally applied for the grant could be held liable for any disallowance arising under the grant. Northstar Br. at 22-26.

Additionally, Northstar argued that, under Pennsylvania law, it could not be a "successor" to DSC. Northstar noted that the term "successor business" is defined broadly to include a corporation which by way of any kind of acquisition transaction acquires all or part of the assets of another corporation. Northstar observed that no such acquisition occurred between itself and DSC. Further, Northstar contended that, as a general rule, Pennsylvania law provides that a successor corporation does not acquire the debts and/or liabilities of its predecessor. Finally, Northstar noted that its current operation is limited to the administration of grants from the Commonwealth. Thus, it has no income or funding available to repay any federal disallowance assessed against it. Northstar Br. at 26-30.

At the outset, we note that Northstar's assertion that SAMHSA bore the burden to prove the validity of the disallowance is incorrect. A grantee bears the burden of justifying its expenditure of federal funds. See, e.g., Texas Migrant Council, Inc., DAB No. 1743 at 4 (2000); Ute Indian Tribe, DAB No. 1739 at 4 (2000); Child Opportunity Program, Inc., DAB No. 1700 at 1 (1999). Further, Northstar's reliance on the law of Pennsylvania regarding the effect of successorship on debts or liabilities incurred by a predecessor corporation is irrelevant. This case involves federal grant funds. Thus, federal law applies. See Pennhurst State School & Hosp. V. Halderman, 451 U.S. 1 (1981); see also Cappalli Fed Grants & Coop Agreements (1982). Moreover, the fact that Northstar now administers only Commonwealth-funded grant programs and lacks income or funding to repay any federal disallowance is irrelevant to our decision here.

The only issue raised by this appeal is whether Northstar is liable for a disallowance arising out of the receipt of grant funding by a predecessor corporation, Human Services Resources, Inc. (HSR). We conclude that Northstar is liable in principle for the disallowance for the following reasons:

• Northstar cited no authority, and we know of none, that allows a federal grantee to be relieved of responsibility for grant funding simply because the grantee has changed its name. Thus, we conclude that Northstar as the successor corporation to HSR following a name change is accountable for federal grant funding received by HSR.
  
  
• Under the uniform administrative requirements for nonprofit organizations, Northstar's predecessor corporation, HSR, was clearly the "recipient" of the funding in question and as such was fully accountable for the proper expenditure of that funding. A "recipient" is the organization "receiving financial assistance directly from an HHS awarding agency to carry out a project or program." 45 C.F.R. � 74.2. Northstar did not dispute that HSR in fact received the grant funding in question from SAMHSA. Moreover, in all instances relevant to this disallowance, HSR was listed as the grantee on the notices of continuation award. As the recipient of the funding, and as the specified grantee on the notices, HSR was fully accountable for the proper expenditure of the grant funding in question.
  
  
• Although Northstar argued that it was not liable for the disallowance because HSR was neither the original grant applicant (DSC) nor the original applicant's corporate successor (HBS), the critical point is that HSR (not the original grant applicant) was the recipient of the funding and was named the grantee on the notices of continuation award.
  
  
• Moreover, there was no "arms length" relationship between HSR and HBS during the period at issue so that the corporations should be treated as separate and distinct entities insofar as the liability for the disallowance is concerned. It is undisputed that the same individual effectively controlled both corporations during this time period. This Board has looked behind the corporate veil in a variety of contexts where conflicts of interest have been found to exist between two corporations and one corporation can consequently be viewed as effectively controlling the other corporation. See, e.g., Child Opportunity Program, Inc., DAB No. 1700 at 12-13 (1999); Enterprise for Progress in the Community, DAB No. 1558 at 7 (1996). Here, we see no reason to treat HSR as a separate corporation from HBS when the same individual, Snyder, had full control over both corporations during the time in question and used both corporations jointly to perpetrate his scheme to defraud both the state and the federal government.
  
  
• The decision on which Northstar relied for the proposition that only the corporation that originally applied for the grants should be held liable for any disallowance arising under these grants is distinguishable from the current situation and fully supports the result here. The major distinguishing feature in Narragansett is that the corporation that had originally applied for the funding was also the "recipient" of the funding. As we concluded above, Northstar is here accountable for the grant funding because although it may not have originally applied for the funding, it was the "recipient" of the funding and was the named grantee on the notice of continuation award.
  
  
• We understand Northstar's frustrations in being held accountable for the misuse of funding by a prior corporate official during an earlier period in time when the nature of the grant programs being administered was materially different. However, Northstar did not deny that it may once have had legal recourse against the corporate official for malfeasance arising from his misuse of the funds in question. To the extent that Northstar once had recourse against this individual but failed to exercise its rights to the fullest, it cannot now be heard to complain that it should no longer be held accountable for the acts of this official.
  
  
• Finally, while NIMH may have failed to follow certain oversight procedures upon being notified that the original grant applicant corporation DSC had changed its name to HSR, such a failing does not rise to the level of affirmative misconduct on the part of NIMH that might justify what is in effect a claim of estoppel by Northstar.⁽⁴⁾ NIMH at no time affirmatively misled HSR about its rights and obligations under the grants in question. The affirmative misconduct that occurred in this case was in fact perpetrated by Northstar's predecessor, HSR. An official of HSR (Snyder) intentionally misled NIMH into believing that the original grant applicant DSC had changed its name to HSR. Moreover, at no time during the years in question did any official from either HSR or the successor to the original applicant corporation HBS attempt to contact NIMH again to correct this misinformation. A grantee is responsible for the acts of its officers or employees. See e.g. Utica Head Start Children and Families, Inc., DAB No. 1749 (2000). Given HSR's longstanding and overt efforts to mislead NIMH about its then existing corporate status so that one of its officials (Snyder) would be in a better position to misappropriate federal grant funding, we find disingenuous Northstar's argument that SAMHSA is somehow accountable for the misappropriated funding because it should have exercised better oversight.⁽⁵⁾
  

CONCLUSION

For the reasons discussed above, we conclude that Northstar, as the successor corporation to HSR, following a change in corporate name, is liable in principle for the disallowance.

Marc R. Hillson

Cecilia Sparks Ford

Donald F. Garrett
Presiding Board Member

1. SAMHSA assumed responsibility from NIMH for grants under the Cuban Entrant Health Program on October 1, 1992. Northstar Ex. 8. SAMHSA never specified the percentage of disallowed costs attributable to a particular grant.

2. This Decision also addressed, at least in part, disallowed salary and management fees.

3. HSR first appears as the Grantee on a Notice of Grant Award issued "7/8/85." SAMHSA Ex. 1.

4. There can be no estoppel absent the traditional requirements of a misrepresentation of fact, reasonable reliance, and detriment to the opposing party. Heckler v. Community Health Services of Crawford County, Inc., 467 U.S. 51, 59 (1984). Moreover, estoppel against the federal government, if available at all, is presumably not available absent affirmative misconduct by the federal government. Schweiker v. Hansen, 450 U.S. 785 (1981).

5. We would nevertheless hope that SAMHSA has learned from this experience and will fully follow its oversight policies in any instance where a grantee notifies it that there has been a change in the corporate name.