LaMarca v. United States

34 F.Supp.3d 796

Marc LaMARCA, et al, Plaintiffs

v.UNITED STATES of America, et al., Defendants.

Case No. 5:09 CV 2397.

United States District Court, N.D. Ohio, Eastern Division.

Signed July 23, 2014.

Ann S. Vaughn, Independence, OH, Maureen Connors, Parma Heights, OH, Joan E. Pettinelli, William D. Beyer, Wuliger, Fadel & Beyer, Cleveland, OH, for Plaintiffs.

Andrew J. Lievense, Office of the U.S. Attorney, Detroit, MI, for Defendants.

OPINION AND ORDER

DAVID D. DOWD, JR., District Judge.

This case is before the Court on the motion of defendant United States of America to dismiss plaintiffs' third amended complaint (ECF 107), and the motion of defendants Early Flurkey, Jon Greenblatt, Douglas Parrott, Gary Pawlak, and the United States of America to dismiss plaintiffs' third amended complaint, or alternatively, for summary judgment (ECF 109).¹ For the reasons that follow, defendants' motions to dismiss are GRANTED.

PLAINTIFFS' THIRD AMENDED COMPLAINT

A. The Parties

The plaintiffs in this case are Marc LaMarca (LaMarca), Beauty Enterprises, Inc. dba Vogue Beauty Academy (Vogue), Charmayne, Inc. dba Charmayne Beauty Academy (Charmayne), and Anne Kaufman (Kaufman). Plaintiffs Vogue and Charmayne (collectively, the Schools) are privately owned for-profit corporations offering diplomas in basic cosmetology and cosmetology management.

Plaintiff LaMarca is a 50% owner of the Schools and Senior Vice President/Chief Executive Officer of the Schools. Plaintiff Kaufman is a 50% owner of the Schools and Secretary/Vice President of the Schools.

According to the third amended complaint, defendant United States of America is a named party due to alleged actions by the United States Department of Education (DOE) and its investigative arm, the Office of the Inspector General (DOE–OIG). The DOE is responsible for carrying out the requirements of the Higher Education Act of 1965 (HEA), including compliance and enforcement. Pursuant to Title IV of the HEA, the government provides financial assistance to students meeting program requirements. One such financial assistance program is the Pell Grant program.

Defendant Douglas Parrott (Parrott), during all relevant times, was the DOE Area Case Director for Region V. Defendant Earl Flurkey (Flurkey) was the DOE Region V Leader for the Federal Student Aid Program. Defendants Jon Greenblatt (Greenblatt) and Gary Pawlak (Pawlak) were Special Agents with the DOE–OIG.

Plaintiffs' third amended complaint alleges violations of the First, Fourth and Fifth Amendments to the United States Constitution, and breach of contract, in connection with the “forced closing of [the Schools] and the wrongful prosecution of the Schools' Chief Executive Officer.”

B. Plaintiffs' Factual Assertions

Title IV of the Higher Education Act permits post-secondary institutions to participate in federal student financial aid programs, including the Pell Grant program. Institutions participating in the Pell Grant program must enter into a written contract with the DOE called a Program Participation Agreement (PPA). Pell Grant funds for eligible students are sent directly to participating institutions to pay for eligible students' tuition and fees. If a student withdraws or does not complete her coursework, participating institutions may have to refund to the DOE the Pell Grant funds for that student.

The DOE's Office of Student Financial Aid and/or the DOE–OIG monitors the academic progress, recordkeeping, and refunds of eligible students and participating institutions for compliance with Title IV's requirements. This monitoring includes program reviews and inspections of participating schools, including reviews and inspections of school records.

The Schools became participants in the Pell Grant program in 1975. In 1998, the DOE converted Pell Grant processing from a paper to an electronic format. Both the Schools and the DOE experienced difficulties in electronically submitting and processing Pell Grant applications. As a consequence, from 1998–2000, plaintiffs allege that the DOE did not forward “substantial amounts of Pell Grant monies due and owing to the Schools for student tuitions,” which the Schools estimate to be approximately $600,000. ECF 96, par. 18–20.

During this same time, the Schools owed Pell Grant refunds to the DOE for students who dropped out before completing their coursework or who were later determined ineligible for Pell Grant assistance. Plaintiffs assert that pursuant to § 490(d)(7) of the HEA and 10 U.S.C. § 1094(c)(7), the Schools were entitled to offset refunds due to the DOE against Pell Grant funds due to the Schools. According to plaintiffs, the Schools did not pay refunds due the DOE because of cash flow problems created by the DOE's failure to pay the Schools Pell Grant funds for eligible students. The estimated refund owed to the DOE by the Schools was about $430,000, but that number has not been definitively determined by the DOE. According to plaintiffs, the Schools offered to escrow $1,000,000 towards the DOE's claim of unpaid refunds while the exact refund due was determined.

In October 2000, the DOE–OIG conducted an unannounced inspection of the Schools' records. Plaintiffs assert that this inspection was prompted because of the Schools' complaints regarding unpaid Pell Grant funds owed by DOE to the Schools.

In connection with the Pell Grant funds which plaintiffs claim were due but unpaid by the DOE, LaMarca sought the assistance of Congresswoman Stephanie Tubbs–Jones, who contacted the DOE regarding Pell Grant monies due the Schools. Despite her intervention, plaintiffs allege that the DOE did not provide ISAR forms (Individual Student Aid Report) to the Schools which were needed to document the eligibility of students for Pell Grant funds.

In December 2002, LaMarca sought permission from the Schools' accrediting agency, the National Accreditation Commission of Cosmetology Schools (NACCAS), to convert the Schools from a clock hour program to a credit hour program. LaMarca's stated reason for converting from a clock hour program to a credit hour program was to reduce refunds owed to the DOE because students need not demonstrate actual time in class to avoid a refund situation, the student need only pass the class. ECF 96, par. 39–42. NACCAS approved the Schools switch to a credit hour program in June 2003.

Plaintiffs allege that Parrott was “personally opposed” to credit hour programs for vocational schools. According to the third amended complaint, Parrott “privately stated” he would “come down hard” on any cosmetology schools attempting to convert to a credit hour program. Plaintiffs allege that Parrott conspired with Flurkey to close the Schools to prevent them from operating under a credit hour program.

According to plaintiffs, this conspiracy took the form of a program review of the Schools in June 2003 and placement of the Schools on a reimbursement format. A reimbursement format meant that Pell Grant funds would be paid by the DOE after the students completed the coursework, and not at the beginning of the academic term. The reason cited by Parrott for placement of the Schools on a reimbursement format was the Schools failure to make required refunds to the DOE for withdrawn students during the 2001–02 and 2002–03 academic years, and the DOE's statutory right to impose reimbursement format funding and to set off funds due the Schools against refunds the Schools owed the DOE. Parrott required the Schools to return all Title IV refunds due from July 1, 2000 to present before the DOE would pay any Pell Grant funds to the Schools. Plaintiffs claim that Parrott ignored the Schools right to offset payment of refunds against Pell Grant funds due the Schools from the DOE. An irresistible force meets an immovable object.

In response to placement of the Schools on a reimbursement format, LaMarca began a “letter writing campaign” to various government officials, including the President of the United States, accusing Parrot of punishing the Schools for converting to a credit hour program. Plaintiffs allege that these letters prompted “political inquiries” to the DOE, which angered Parrott and caused him to assign Flurkey “to deal with the issue.” ECF 96, par. 54–56.

In July 2003, the Schools submitted a reimbursement request for Pell Grant funds for the 2003–2004 School year that began in June 2003. Plaintiffs estimate that the DOE owed the Schools about $500,000 in Pell Grant funds for the June 2003–December 2003 term.

The reimbursement request contained a CEO Certification Statement signed by LaMarca certifying that “all Title IV refunds had been made as required by federal regulations.” Plaintiffs claim that the certification was prepared by a “third party reimbursement specialist” who was aware that the Schools had unpaid refunds due the DOE, but advised LaMarca that each academic year was considered on a “stand alone” basis, and that LaMarca's certification only applied to refunds for the 2003–2004 academic year and not to refunds owed to the DOE from prior academic years.

However, plaintiffs allege that the DOE ignored the “stand alone” policy and determined that LaMarca's certification was “false.” According to the third amended complaint, Parrott and Flurkey contacted the DOE–OIG to begin a criminal investigation into LaMarca's handling of the Schools' refunds to the DOE and “false” certification statement.

On September 29, 2003, the DOE issued its Preliminary Program Review (PPR) for the inspection of the Schools conducted by the DOE earlier in June 2003. The PPR references the unpaid refunds owed to the DOE by the Schools, but plaintiffs complain that the PPR made no reference to the Schools' right to offset refunds due the DOE against Pell Grant funds due the Schools. However, plaintiffs recognize that there is an administrative process available to resolve these issues, as reflected in paragraph 69 of the third amended complaint:

The issuance of the PPR automatically set into motion the due

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