BENNETT v. KENTUCKY DEPT. OF EDUCATION
Legal provision: Elementary and Secondary Education
ORAL ARGUMENT OF KENNETH S. GELLER, ESQ., ON BEHALF OF THE PETITIONER
Chief Justice Warren E. Burger: Mr. Geller, you may proceed whenever you are ready.
Kenneth S. Geller: Thank you, Mr. Chief Justice, and may it please the Court:
Two years ago in Bell v. New Jersey, this court unanimously held that the federal government may recoup misspent grant funds under Title I of the Elementary and Secondary Education Act of 1965.
The two cases that the Court will hear this afternoon involve Court of Appeals decisions announcing erroneous rules of construction that substantially frustrate the exercise of this recoupment remedy.
In this case, the Kentucky case, the Sixth Circuit has held that misspent grant funds may be recovered only when the violation is so plain that the grantee could not reasonably have believed that its expenditures were lawful.
In our view there is no legal basis for this ruling.
Now, as the Court is aware, Congress passed the Title I statute in 1965 for the purpose of expanding and improving programs designed to meet the special educational needs of educationally deprived children in low income areas.
Now, from the outset, the Title I program has been designed to provide supplemental federal educational aid to these educationally deprived children over and above whatever assistance they would be entitled to receive from state and local funds, and in order to ensure that federal monies are used solely for this purpose, the Title I program has always included since 1965 the so-called supplanting prohibition.
Now, this provision expressly states that Title I funds may be used only to supplement the level of funds that would in the absence of Title I be made available from state and local sources for the education of children participating in the Title I program.
In other words, Title I is designed to provide an additional layer of federal benefits for certain educationally deprived children rather than to take the place of any money that the state or local government would otherwise provide for educating these children.
The antisupplanting requirement has always been at the heart of the Title I program, and it has always been an express condition on the receipt of federal funds.
Now, this case involves the way in which Kentucky operated its so-called readiness programs in 1974 under Title I.
These readiness classes were for children who were not prepared to enter the regular first or second grade because of educational difficulties.
And in states other than Kentucky, Title I programs provided children such as these with federally funded supplemental instruction in addition to whatever state-funded instruction they were entitled to receive.
But what Kentucky did was the following: it set up special self-contained full day classes for these educationally deprived children wholly apart from the regular instructional program, and it funded these classes almost exclusively out of federal Title I funds.
In other words, these students received virtually their entire academic instruction for the first and second grade through the Title I program rather than through the regular state-funded school program.
As a result, it is quite obvious that Kentucky was using federal funds to supplant state and local funds that otherwise would have been available for the children in these readiness classes.
And the readiness classes unquestionably took the place of the regular first and second grade classes that these students would have attended in the absence of the Title I program.
And in fact, nearly half of the students in these readiness classes were actually promoted to the second or third grade after they had completed their year of readiness training.
So it is quite clear that at least as to those students, federal funds were being used for regular rather than supplemental instruction.
Now, when federal auditors examined the Kentucky Title I program for 1974, they concluded not surprisingly that a supplanting violation had occurred.
Kentucky challenged this finding before the Education Appeal Board.
Now, Kentucky conceded that virtually no state and local funds had been spent for the basic instructional costs of the Title I children in the readiness classes, but it argued that a supplanting violation nonetheless had not occurred because there had been no decrease in state and local funds for the schools involved.
Now, this argument was rejected by the auditors, by the Education Appeal Board, and by the Secretary of Education, all of whom concluded that the antisupplanting provisions of the statute and regulations were crystal clear in their emphasis on maintaining state and local funds for the particular Title I children rather than simply for particular schools.
But as I mentioned a moment ago, the Sixth Circuit reversed the recoupment order.
The Court of Appeals agreed actually with the Secretary's reading of the antisupplanting provisions.
The Sixth Circuit specifically held that the prohibition against supplanting state and local funds with federal funds could be read to refer to expenditures at the level of the educationally deprived child rather than at the school level, and it therefore held that the Secretary's reasonable interpretation of the supplanting provisions would govern all future Title I grants.
But the Court then went on to say that Kentucky's interpretation of the supplanting prohibition also was reasonable, and in these circumstances the Court held that the Secretary could not recoup the concededly misspent funds because the statutory and regulatory provisions at issue were not sufficiently clear to apprise the state of its responsibilities.
Unidentified Justice: Mr. Geller, the Congress enacted amendments to Title I in 1978, and some of the legislative reports in connection with that observed that the supplanting regulations lacked sufficient clarity.
Did Congress itself think that they were confusing, I gather?
Kenneth S. Geller: --Well, Congress did not amend in any way the supplanting provisions.
We don't contend, I should add quickly, that every conceivable application of the supplanting provisions would be crystal clear to every observer.
What we do contend that is that in this case there really was no two, there weren't one or two reasonable constructions of the statute, and that is what we are concerned with here.
But Congress didn't amend the supplanting provisions, and in fact, they--
Unidentified Justice: Well, if there were two equally plausible constructions, is it appropriate in your view that we might treat this much like a contractual arrangement and say that we are going to apply the most reasonable interpretation?
Kenneth S. Geller: --Well, in our view, even if there were two reasonable interpretations, the question would still be was the Secretary's interpretation correct?
In other words, what is the correct interpretation of the statute if in fact under that interpretation of the statute the funds were misspend?
Unidentified Justice: In other words, what is the more reasonable or most reasonable?
Kenneth S. Geller: Yes.
Well, the question, the issue in this case really only arises, Justice O'Connor, when there has been a determination as there was in this case that the funds were in fact misspend.
Unidentified Justice: Right.
Kenneth S. Geller: In that situation, our submission is that the Secretary's recoupment authority is not in any way limited by the fact that the state may have been acting reasonably.
I hope to discuss a little bit later on, after lunch, why... what the state should do when it is faced with an ambiguity, and it should not, as it did in this case, simply adopt whatever interpretation was most favorable to it, and then spend the money--
Unidentified Justice: Mr. Geller, why was the amount reduced in the determination of how much had been misspend?
Kenneth S. Geller: --The amount--
Unidentified Justice: From some $700,000 to $300,000.
Kenneth S. Geller: --It was seven hundred... yes, it was reduced by the Secretary of Education--
Unidentified Justice: Why?
Kenneth S. Geller: --from $700,000 to $300,000 because these readiness classes had a smaller student-teacher ratio than in the regular classes.
I think the ratio in the readiness classes was 13 students to one teacher--
Unidentified Justice: Are you saying in effect the Secretary simply conceded he had made a mistake and he--
Kenneth S. Geller: --No, no, not at all.
What the Secretary concluded is that some supplementing was going on in these readiness classes.
It wasn't a question of total supplanting.
There was some additional benefit being given to the Title I students in the fact that they had smaller classes, and the Secretary took account of those smaller classes by reducing the recoupment to the amount that constituted the supplanting.
Unidentified Justice: --Well there was a mistake in the first place, then, in asking for so much.
Kenneth S. Geller: Well, there wasn't a mistake, there was a different--
Unidentified Justice: Well, you did--
Kenneth S. Geller: --different calculation of the--
Unidentified Justice: --Well, you did ask for that much, $700,000.
Kenneth S. Geller: --Well, the--
Chief Justice Warren E. Burger: We will go on at 1:00 o'clock.
Thank you, Mr. Geller.
Mr. Geller, you may resume the argument.
Unidentified Justice: Mr. Geller, excuse me.
Before you start, would you mind telling me something about how this grant process works?
For example, did Kentucky make any undertaking as to how it would use the--
ORAL ARGUMENT OF KENNETH S. GELLER, ESQ., ON BEHALF OF THE PETITIONER -- Resumed
Kenneth S. Geller: Yes.
In order to get the Title I grant--
Unidentified Justice: Yes.
Kenneth S. Geller: --the local school district had to make certain representations to the state itself as to how it would use the grant.
The state... one of those representations was that it would abide by the supplanting prohibitions of the statute, and the state made similar representations to the federal government in order to get the federal Title I grants.
Unidentified Justice: And what is required appears on the application form or something?
Kenneth S. Geller: Yes.
In fact, it is even more... it is even more explicit than that, Justice Brennan.
The specific form that the state, the local education agency filled out in this case is on page 27a of the Appendix to the Petition--
Unidentified Justice: Yes.
Kenneth S. Geller: --the standard grant application completed in the middle of the page by each of the 50 LEAs, or the local school districts, for the year in dispute, contain the following question, and that was will you use this program to assure that children participating in the component activity will receive this Title I service in addition to services that they are ordinarily entitled to receive from state and local funds, and the district obviously answered that question that it would, and as the Education Appeal Board stated right after that, if they had abided by this assurance, there wouldn't have been any supplanting violation here.
Unidentified Justice: While I have you interrupted, may I ask one other question?
Kenneth S. Geller: Yes.
Unidentified Justice: You argued I think in your brief that the Kentucky authorities could have requested clarification.
Kenneth S. Geller: Yes.
Unidentified Justice: How would they go about that?
Kenneth S. Geller: There is constant contact, as the Court will imagine, between the local Title I administrators and the federal Title I administrators.
In fact, during the year in question in this case, in 1974, there were program review teams right on the premises in Kentucky, and they could have been asked for an opinion.
But beyond that, over the period that the Title I statute has been in existence, there has been a formal mechanism for constant communication between federal and state authorities whereby state authorities that have some question as to how an ambiguous provision should be interpreted can get a determination from the federal authorities.
And I would like to call the Court's attention--
Unidentified Justice: Well, Mr. Geller, was that provision you just read ambiguous?
Do you think it is ambiguous?
Kenneth S. Geller: --We don't think it is at all ambiguous, but the state thought it was ambiguous, or at least they now allege that they thought it was ambiguous, but rather than asking for a definitive interpretation of the ambiguous provision, they adopted their own interpretation and spent the money in accordance with it.
Chief Justice Warren E. Burger: And you say they do that at their own peril.
Kenneth S. Geller: That is our... that is our position.
I would like to call the Court's attention in this regard to the report of the National Institute of Education, a copy of which has been lodged with the clerk of this Court.
This was a report prepared after a comprehensive study of the Title I program undertaken in the mid-1970s by the National Institute of Education.
Unidentified Justice: Is that in the record, is that... or is that something--
Kenneth S. Geller: This is not in the record but it is--
Unidentified Justice: --judicial notice of?
Kenneth S. Geller: --Yes, it is a report of the National Institute of Education, which is part of the Department of Health, Education and Welfare.
Unidentified Justice: Did you furnish one or nine?
Kenneth S. Geller: Well, this was furnished by the amici, and the clerk would have the copies.
I am sure how many... we would be glad to furnish extra copies to the Court, but one of the... this was, as I say--
Unidentified Justice: Does that purport to be an official position of the Department or not?
Kenneth S. Geller: --No, this is a study that was undertaken at Congress' behest of the Title I statute, Title I... administration of the Title I program in the mid-1970s by--
Unidentified Justice: Well, is it--
Kenneth S. Geller: --It is not by the Department of Education.
Unidentified Justice: --Well, who... was it a study by a high school person or by a... or by a real expert?
Kenneth S. Geller: It was a study by I think real experts.
This is the National Institute of Education, Justice White, and one of the points that they made... this is at page 18 of the report which is in the clerk's possession, is that the Office of Education, as it was then called, had a formal mechanism by which is gave advice to grantees when they were confronted with ambiguous provisions in the statute and regulations as Kentucky claims it was confronted with here, and if I could just read one sentence from this NIE report, the report said in an effort to improve the clarify of the legal framework, the Office of Education has adopted the practice of providing individual interpretive responses to state and local inquiries.
On the basis of a review of the responses issued since 1968, NIE, which was the National Institute of Education, concluded that the Office of Education has addressed many of the most difficult and controversial issues in the legal framework, and then the report goes on to discuss one particular area in which a number of interpretations had been given to state grantees, and that is the supplanting area, the very area that we are involved with in this case.
Unidentified Justice: Is there a citation to the specific provision for the formal mechanism for obtaining clarification?
Kenneth S. Geller: The citation in the NIE report?
Unidentified Justice: Well, do you have it or do you know where we would look to find it, Mr. Geller?
Kenneth S. Geller: No, no, but... I don't know that there is a formal citation.
This is something--
Unidentified Justice: I thought I understood you to say there was a formal mechanism, but it isn't--
Kenneth S. Geller: --The mechanism was--
Unidentified Justice: --It isn't established by regulation or anything of that complexion.
Kenneth S. Geller: --It's not established by... as far a I know, by regulation, but every grantee obviously was aware because there was this constant contact with federal administrators of the opportunity to ask for a clarification of an ambiguous provision rather than simply to adopt one's own interpretation and to act accordingly at one's peril.
Unidentified Justice: Well, Mr. Geller, is it true that the federal auditors long before this dispute arose had reviewed Kentucky's program and approved it?
Is that true?
Kenneth S. Geller: That's not... they had never approved.
Unidentified Justice: That is not--
Kenneth S. Geller: That is not true.
There had been program teams on the premises, but they had never approved the actual funding of these programs because just simply by looking at the program there would be no way to know how it was funded, and the supplanting violation occurred not in the way the program was organized but in the way it was funded.
Kentucky never asked for an interpretation of whether the way it was funding its program violated the supplanting provisions until after the year in question here, and as soon as it asked for that interpretation, it was immediately told by the federal officials that this was a supplanting violation because all of the monies of this instructional program were federal monies, and as a result, state and federal authorities immediately got together and worked out a program by which the readiness classes could be continued under a funding arrangement that would not violate the supplanting provision.
So if Kentucky had simply asked before 1974, none of this would have occurred.
Unidentified Justice: --Incidentally, does the government take the position that there are no limits on recoupment other than such as might be prescribed by the Congress or by the Secretary's regulations?
Kenneth S. Geller: That is our legal position.
Obviously the Secretary as a matter of administrative discretion does not seek recoupment in every circumstance in which it could.
Unidentified Justice: But basically, whatever might be the terms, the Secretary sets, and that's it.
Kenneth S. Geller: Basically... that's right.
Well, Congress sets.
Unidentified Justice: Or the Congress, yes.
Kenneth S. Geller: Congress sets, and Congress has set out recoupment provisions.
Unidentified Justice: What if the federal agency were aware of the state's particular utilization and funding and made no objection?
Does that make any difference in your view?
Kenneth S. Geller: --I think if the state got an interpretation from the Education Department that its program was in compliance with the law, it would make a big difference.
As far as we know, there has never been an instance... the NIE report talks about 20 years worth of interpretations given to the states.
We don't know of a single instance in which a state asks for an opinion as to whether what it was proposing to do would violate the statute, was told by the Department of Education that it wouldn't, and thereafter there was an attempt at recoupment.
Unidentified Justice: I suppose, though, that we have not found that estoppel runs against the federal government generally, even in that situation.
Kenneth S. Geller: Well, I am not sure it would be an estoppel situation, Justice O'Connor, because if it was an authoritative interpretation... I mean, agencies do have to follow their own regulations.
The estoppel cases that this Court has confronted, such as Community Health Service and Schweiker v. Hansen and cases like that were all cases in which the person giving the advice was not authorized to give the advice to bind the agency.
But we are talking here about authoritative interpretations from the Department of Education.
And there has never been a litigation over estoppel because the Department of Education has never tried to repudiate one of these positions.
Unidentified Justice: Mr. Geller, do you think it is appropriate to analogize to contract law to a degree in looking at these cases of Title I grants?
Kenneth S. Geller: Well--
Unidentified Justice: Don't they impose contractual type relationships on the--
Kenneth S. Geller: --Well, it is contractual type in the sense that there is an agreement, but it is not a contract, and I think it is important to understand that the requirements that are imposed here are requirements imposed by Congress pursuant to statutes and regulations.
They are not contractual provisions whereby A and B sit down and work out the best arrangement between themselves in anticipation of what is likely to occur.
Here we are talking--
Unidentified Justice: --Is it sufficiently like a contract to apply against the government that old principle of contract construction that ambiguities are resolved against the drafter of the agreement?
Kenneth S. Geller: --No, we have answered that, I think, in our reply brief, Justice Brennan.
It is not.
we are construing here not contract terms but portions of a statute and regulations.
I don't know of any authority for the proposition that a statute should be construed against the drafter, that is, the United States.
Unidentified Justice: Well, but don't those statutes and regulations in effect become part of the contractual type agreement that is entered into with the state?
Kenneth S. Geller: In the sense that the grantees are bound by them, but that is not the question.
Unidentified Justice: I am not sure it would alter the result, but I am trying to explore the framework within which it would make sense to analyze it.
Kenneth S. Geller: There is an agreement here, and I think the framework to analyze whether the agreement has been violated is to recognize that this is an appeal of an administrative order finding recoupment, and there is a body of law as to when a court can set aside an administrative order.
And that is how I think this Court has to analyze the correctness of the Sixth Circuit's decision in this case.
Unidentified Justice: Mr. Geller, can I just ask one question about the clarity of the violation of the supplanting regulation?
The Court of Appeals indicates that the local education agency in Kentucky had to certify that there would be the same number of teachers that would be paid for with state and local funds as without the Title I?
And also I understand at least as much money went into each local education agency of old funds.
Isn't that kind of a good prima facie indication, unless you have much larger student bodies, that there was no supplanting?
Kenneth S. Geller: I think not, Justice Stevens.
There were a number of obligations imposed on LEAs, or local education agencies.
One was the comparability requirement which required that schools get as much money from the LEA each year as they got before the Title I money came into effect.
Now, we are talking here about a totally different requirement which is the supplanting requirement, which on its face, if the Court will look at the statute and regulations, talks about the amount of local money being spent on the children involved.
I think there was some confusion on--
Unidentified Justice: Well, but you spend money on children indirectly by hiring teachers and providing classrooms, and I guess they did pay for the classrooms and they paid for the same number of teachers, as I understand, with local funds--
--The amount, the confusion, if there was any confusion here, was that the amount of local money given to the schools each year remained the same, but the problem was that the Title I children were not getting the benefit of any of that money.
All of their instruction was being paid for by the federal money, and that is where the supplanting violation occurred as the Sixth Circuit ultimately agreed, there was in fact a supplanting violation.
And therefore the same amount of money was being in effect used to give a better education to those who were not--
Kenneth S. Geller: --To the non-title--
Unidentified Justice: --being the beneficiaries of Title I.
Kenneth S. Geller: --Exactly, non-Title I children.
So they were getting the benefit of all of the state money rather than simply their proportionate share.
Unidentified Justice: And in deed, the regular first and second grade students were getting the benefit of a lower pupil-teacher class ratio as well--
Kenneth S. Geller: These are non-Title I statutes.
Unidentified Justice: --because the Title I children were pulled out of their classrooms.
Kenneth S. Geller: Exactly, exactly.
Unidentified Justice: And weren't holding them back.
Kenneth S. Geller: That's exactly right.
That's in large part the supplanting violation here.
The money, the state and local money was being used for the benefit of... only of the non-title... non-Title I children.
So we don't think... we think the Court of Appeals decision is plainly wrong for two independent reasons.
One is I don't think that anyone looking at the statute and regulations, the clarity with which they are written, could really conclude that there was an ambiguity here.
Unidentified Justice: But then you are arguing... I hate to, don't mean to interrupt you... you are arguing they are wrong for two reasons: one, the standard, but even under their own standard they are wrong is what you are saying.
Kenneth S. Geller: Even under their own standard, that's correct.
Unidentified Justice: Because their standard is really not all that... doesn't seem all that unreasonable to me, to be quite frank with you.
Kenneth S. Geller: Well, I think the stand is wrong, but even under their own standard, it is hard for anyone I think to look at the statute and regulations here and conclude that there was an ambiguity or conclude that Kentucky actually had a reasonable interpretation of that statute and regulation.
So even by their own lights, I think the Sixth Circuit was wrong.
But I think that there is a problem with the Sixth Circuit's test as well because even if we were to assume for the moment that the supplanting statute and regulations were in fact ambiguous, and even if we were to assume that Kentucky adopted a reasonable interpretation of those provisions, both assumptions I think are quite dubious, but even if we were to make them, we still think that the Court of Appeals was wrong in reversing the administrative order requiring recoupment of the misspent funds and that is because I think it goes without saying that there has to be some violation of law before a Court of Appeals can set aside an administrative order.
Now, as I noted a moment ago, the Court of Appeals here found that in this case the Secretary's interpretation of the supplanting provisions was reasonable.
In fact, far from finding that the Secretary's interpretation was arbitrary or capricious or in violation of law, the Sixth Circuit held that it was reasonable and would govern all future grants, and there has never been any question here that there was substantial evidence.
Unidentified Justice: Yes, but Mr. Geller, if you take your standard... and I realize we are not necessarily talking about the facts here... you are in effect saying that the local agency must take the funds at its peril unless it is willing to go get an advisory ruling before it actually adopts a plan.
If it is a doubtful case and it takes the money, it may end up having to spend that amount of money itself.
That's what you are saying.
Kenneth S. Geller: If... we don't say that they take it at their peril, Justice Stevens, because there is an important point, and that is they can ask for an interpretation.
Unidentified Justice: Yes, I understand, unless they go and get advice.
Kenneth S. Geller: Unless... and I don't think that is unreasonable.
Unidentified Justice: And you don't have any regulatory scheme regulating the way to go get advice.
Understand it was available and they could do it, but you didn't spell it out in your regulation.
Kenneth S. Geller: Well, I think that the Court has to understand under the Title I program, as in many of these grant programs, there is constant contact between the state and the federal administrators.
There is no suggestion here on the part of Kentucky that they didn't know they could ask for advice.
In fact, they asked for advice in the next year, and when they got the advice, they stopped the way the readiness program was funded.
Unidentified Justice: Well, I suppose under your test, even if they got advice and the advice was wrong... say they asked the wrong official and he misread the regulations, too, the government wouldn't be bound by that advice.
Kenneth S. Geller: Well, I think that relates to the response I gave to Justice--
Unidentified Justice: But that's part of the problem of the--
Kenneth S. Geller: --Justice O'Connor.
I don't think there would be an estoppel problem if they got advice from the official who is authorized to speak for the Department on that matter.
I think what I am saying here is nothing more than what the Court said last term in the Heckler v. Community Health Services case, which was a very similar case, and the Court there said explicitly that people who get federal funds have to act cautiously.
If there is an ambiguity, they have to ask for advice, and they have to ask for advice from an official that they--
Unidentified Justice: --Yes, but it also said you can't rely on oral advice.
Kenneth S. Geller: --No, but... well, first of all, there is no suggestion that the advice from the Department of Education here would be oral.
The National Institute of Education is talking about written.
Unidentified Justice: But the bedrock here--
Kenneth S. Geller: Excuse me?
Unidentified Justice: --The bedrock in this case is that it was not ambiguous.
Kenneth S. Geller: It was not ambiguous and Kentucky never asked for advice if they thought it was ambiguous.
Now, as I was saying, here the Sixth Circuit found that the Secretary's interpretation is reasonable.
There has never been any suggestion that there wasn't substantial evidence to support the Secretary's determination.
So what legal basis is there to set aside the administrative order?
Now, the Sixth Circuit clearly couldn't have been relying on the Title I statute itself because I think it is important for the Court to look at the recoupment provisions of the Title I statute.
20 U.S.C. 1234(a), which is the recoupment provision, says whenever the Secretary determines that an expenditure not allowable under a program has been made by a state, the Secretary shall give such state written notice of a final audit determination and shall recoup the money.
And the audit statute, which is 20 U.S.C. 2835, says the same thing.
It says the Secretary shall require the repayment of the amount of funds under this subchapter which have been finally determined through the audit resolution process to have been misspent or misapplied.
There is no suggestion in the statutes that Congress passed that the Secretary's recoupment authority was limited to situations where the grantee has acted in bad faith or is limited to situations where the grantee has acted reasonably, or that in determining whether a recoupment order is valid, the Court of Appeals is supposed to defer to the grantee's reasonable interpretation of the statute rather than the Secretary's.
The statute itself say precisely the opposite.
And I should add in this regard that in the last few years the states have sought an amendment of the Title I statute from Congress which would have done precisely what they are asking this Court to do in this case, which is to essentially have a qualified immunity defense in these sorts of proceedings.
And Congress has on several occasions refused to do that.
If there are no questions, I would like to reserve the balance of my time.
Unidentified Justice: Well, I think I would just explore with you again the fact that getting a clear answer from the federal agency in these cases isn't always as easy as I think you may have painted it.
Wouldn't you agree with me.
Kenneth S. Geller: Well, I can't--
Unidentified Justice: I mean, it sounds nice here at this level, but on the practical level, it is sometimes very difficult for states or local school districts to get a response to a question.
Kenneth S. Geller: --All I can say in response, Justice O'Connor, is that the report of the NIE found otherwise, that there is this regular process of giving advice.
I would say in this case that that is a particularly hollow claim for Kentucky to make in this case when they never even sought advice, and also, that the year afterwards, when they did seek advice, they had no trouble whatsoever in getting the correct answer.
Unidentified Justice: Well, it may not provide the answer in this case, but I think it is something we have to be mindful of in establishing the proper mechanism for reviewing these cases.
Kenneth S. Geller: Well, I don't disagree with that.
I just think that when the Court announces what the rules will be in this case, it has to think of the rule rather than the exception, and I am not prepared to say that grantees as a rule have any trouble in getting answers to their ambiguous questions.
I think that the experience of the last 20 years and the experience in this very case suggests otherwise.
Chief Justice Warren E. Burger: Mr. Chenoweth?
ORAL ARGUMENT OF ROBERT L. CHENOWETH, ESQ. ON BEHALF OF RESPONDENT
Robert L. Chenoweth: Mr. Chief Justice, may it please the Court:
In this federal-state grant program case involving Title I funds, the Secretary of Education wants retroactive application of his interpretation of the law on supplanting.
To agree with the Secretary's position would be to allow him to use his interpretation of the law retroactively to achieve a recoupment of Title I funds that have already been expended in the Commonwealth of Kentucky.
Such a penalty should not be imposed where Kentucky acted in good faith, on a reasonable interpretation of the provisions of the Title I law, and when there had not been adequate notice of the obligations under the Title I provision to the Commonwealth.
Unidentified Justice: Do you say that these provisions were ambiguous, Mr. Chenoweth?
Robert L. Chenoweth: Your Honor, yes we are saying that they are and that they were ambiguous.
Unidentified Justice: Why not get a clarification then?
Robert L. Chenoweth: I think that is a very, very fair question, but the important point concerning that is that you truly have to believe that there is something wrong with your program, something wrong with the way that you are using the law and getting the funds.
Unidentified Justice: Well, maybe it would be a splendid program, a beautiful program, but not authorized by the statute.
The merits of the program in the abstract are not the issue here.
The issue is whether the money was spent within the framework of the particular purpose for which it was given.
Robert L. Chenoweth: --Yes, Your Honor, we very much agree with that, but the point, while not being in the abstract, is also that we are simply not only looking at what we believe to be facial ambiguity of this law, but really perhaps more importantly than the facial ambiguity, what is meant by supplant, what is meant by supplementing as seen in that law.
We are not looking at just the facial ambiguity, but we are also looking at the ambiguity as applied, as those words were applied, and as seen by the Secretary of Education.
We believe that it is a both level of ambiguity that was evident in this case.
Unidentified Justice: Tell me, Mr. Chenoweth, were the details of the readiness program given in the initial application for the grant by the state?
Robert L. Chenoweth: The details of the program as such were not set out in that application.
It is very important to understand, Justice Brennan, that when Congress enacted this law in 1965, specifically in the law there is the intention of Congress of having the programs that were going to benefit these educationally deprived children developed by the states.
They were intended to be innovative.
The design was going to be left for the states to come up with on the belief that the way Kentucky dealt with this problem would be different than the way it would be dealt with in another state.
So there was no a requirement or an expectation that in the receiving of those Title I funds that you were going to establish at that very point exactly the nature of the program.
Now, the Sixth Circuit Court of Appeals in looking at this case very much relied upon the Bell v. New Jersey decision and the 1981 decision in Pennhurst of this Court.
The Pennhurst decision is applicable in this case because Title I is a grant in aid program, and it is based upon the concept of cooperative federalism.
Unidentified Justice: Well, Mr. Chenoweth, I think there is a significant difference between this case and Pennhurst in that the argument, as I recall, was... that Pennhurst was all about was had the Congress made a particular thing, a condition of the grant of these funds, and the Court ended up saying no, Congress has to speak unambiguously if it is going to make something a condition.
Here there is no question but what compliance with these regulations was a condition of the grant.
Robert L. Chenoweth: Your Honor, I understand what you are saying, but while the words "supplant" are in the law, and Kentucky knew that that was in the law, it is not just simply that that condition was in the law, it is how that condition was applied, and therein is the similarity between this case and Pennhurst because we had not in the Commonwealth been given adequate notification as to what that--
Unidentified Justice: Well, but I think there is a significant difference between saying Congress has to speak unambiguously when it makes a particular requirement a condition of a grant.
That's what Pennhurst said.
And to go further and say Congress must speak unambiguously when it is laying down requirements for something that is concededly a condition, I think there you have got a weaker case.
Robert L. Chenoweth: --Well, Your Honor, we do believe, and it is clear in the Sixth Circuit Court of Appeals that the Court was believing that Kentucky had not had adequate notice of its obligations in the same sense as this Court addressed that in Pennhurst.
Unidentified Justice: That's why I don't think I agree with the Sixth Circuit on that point.
Robert L. Chenoweth: --Your Honor, we do--
Unidentified Justice: Mr. Chenoweth--
Robert L. Chenoweth: --Yes, ma'am.
Unidentified Justice: --on the same point, it is a little difficult for me to understand why you contend that the statute and regulations are ambiguous or confusing in any way.
When the regulation says federal funds made available will be used to supplement the level of state and local funds that would be used in the absence of the federal funds for the education of the pupils participating in the project.
Now, how is that ambiguous?
Robert L. Chenoweth: Justice O'Connor, we believe that in that provision of the law that you are reading, not only does it talk about children, which is a collective reference, first of all--
Unidentified Justice: Well, it talks in the regulation about the pupils participating in the project.
What could be clearer than that?
Robert L. Chenoweth: --The provision of the law while, and the regulation while talking about pupils, it also is talking about project area.
We go back and we look at what was meant by supplanting, what has been looked at as supplanting from the very beginning, and we understand from virtually the beginning of the Title I law that the expenditure of the federal dollars for programs that had previously been paid for by state money, the type of situation with the enrichment types of programs that we had as a part of our readiness program that was paid for with state money, previously early practice, pre-1970 practice would have been that those kinds of services would have been paid for by federal funds.
Kentucky understood that those kinds of services could not be paid for with the federal funds.
Unidentified Justice: Well, can you point to anything in the language of that regulation which I read from that is ambiguous?
Robert L. Chenoweth: Your Honor, simply pointing to that, I cannot point to the provision.
The point though is, one, it is not just facial ambiguity that I think that we have to consider.
We need to look at the context in which this program was being operated.
We need to look at the manner of application.
Part of the divergent interpretations involved in this case came from the perspective of whether you accept that the supplanting issues are to be monitored at the level of the child or whether you are going to monitor the expenditure of money at the school district or at the classroom level.
Unidentified Justice: Well, the regulation refers to the child.
Robert L. Chenoweth: Your Honor, we believe that it also is talking about the project area, and that you look at those together.
I think, though, importantly, that we... what we need to zero in on is not really the interpretations that are involved in this case, because it is not a matter of choosing between those interpretations.
The question here is what Kentucky understood the commitments under that Title I contract to be.
Unidentified Justice: Is that an estoppel argument of some kind?
Robert L. Chenoweth: Your Honor, we do not believe that it is an estoppel matter any more than the Solicitor General's office has indicated it to be.
We think that there are significant differences between this case and the Crawford Community Services case, the Heckler case.
One, that was not a spending power case, it was a private party that was receiving these funds, and there was certainly a very questionable interpretation upon the law that was involved in that case.
So we don't see that what we are having to focus in on in this Title I case as being an estoppel case or a Heckler case at all.
Again, we believe that the pertinent question that has to be addressed is what were the understandings of the commitments under that Title I contract, the contract that is in place because Title I is a spending power clause provision of the federal constitution, and it is very much in the nature of a contract.
There has to be a meeting of the minds of we are going to have a good contract.
And we believe that it is clear that there was not a meeting of the minds here as to what Kentucky's obligations were going to be under that Title I provision.
Unidentified Justice: How soon did Kentucky find that out?
Robert L. Chenoweth: I'm sorry, Your Honor, I--
Unidentified Justice: How soon did Kentucky find out that there was not a meeting of the minds?
Robert L. Chenoweth: --Your Honor, we found that out really as the audit was being completed in 1974.
The audit period was 1967 to 1974.
Unidentified Justice: The basis of that, but to ask when did you try to get an understanding about it?
Robert L. Chenoweth: Your Honor--
Unidentified Justice: When it became ambiguous to you was in '74?
Robert L. Chenoweth: --It was not a matter that at that time--
Unidentified Justice: Was that when it was ambiguous?
Robert L. Chenoweth: --It was not ambiguous.
Unidentified Justice: Was it beginning to be ambiguous?
Robert L. Chenoweth: Your Honor, the ambiguity--
Unidentified Justice: My question is, when did you first let anybody know that you considered it to be ambiguous?
Robert L. Chenoweth: --Your Honor, the answer to that, and the only answer that I can give to you is that it was not at a particular point in time.
We did not believe--
Unidentified Justice: About when?
Robert L. Chenoweth: --There's... there's no way really to answer that, Your Honor.
Unidentified Justice: Well, it was a little before today wasn't it?
Robert L. Chenoweth: Certainly that's true.
The point that we have to consider is that we had these programs developed before the 1970 supplanting provision.
We continued on with those programs for six years.
We had encouraged other school districts to develop those programs.
We thought that they were a showcase program, that they were a good example of a design by a state to serve the intent and purposes of Congress.
You don't ask what is wrong with the law unless you believe that there is something wrong with what you are doing under the law.
Unidentified Justice: Well, then, I misunderstood your original answer, was that in '74 you realized that they were ambiguous.
Robert L. Chenoweth: Your Honor, we found out that was so in the sense we were told after the audit that what our program had been doing and the manner in which that program had been developed, that there was a problem with the law as seen by the auditors.
So at that point in time certainly we did become aware that our education staff had not looked at this law at the same level of monitoring as had the state or the federal education officials.
So yes, it was brought to our mind then.
But we did not have, and our education people did not have a question from the very beginning that this was a problem.
Again, there would have been no incentive... if we thought that there was a problem and we were unsure of that, there was no incentive to continue on with this program.
Unidentified Justice: Well, I thought you said there was a problem in '74.
Robert L. Chenoweth: But this is... that was after the fact, Your Honor.
That was after the audit exception--
Unidentified Justice: '74 is not after the fact of what you are arguing now.
Robert L. Chenoweth: --Your Honor, the important point that we are trying to make here is that we believe we had a program that was consistent with the law, and that we do believe that there is considerable moment in the fact that there were operational review teams that did come in on a yearly basis to Kentucky.
Those operational people from the Federal Office of Education went out to the school districts.
They saw these programs in effect.
And the record is clear that the directors of the Title I wanted to show off this program.
Now, the comment and the response on this as to, well, we didn't look at the funding.
We suggest to the Court that that really cannot be the answer.
That was exactly what the operational team had to look at was whether or not these programs were complying with the law on the expenditure of that money.
That was their only purpose for looking at the program.
Unidentified Justice: Aren't you now arguing estoppel?
Robert L. Chenoweth: Your Honor, we are not arguing estoppel.
We are not arguing that at all, but we do believe that the Sixth Circuit did look at a coalition of factors in looking at this request to apply the Secretary's interpretation of what was prohibited by supplanting, and one of those factors is Kentucky's good faith, and that is very much shown in the record, that Kentucky did attempt to follow this law in good faith.
Unidentified Justice: Well, Mr. Chenoweth, I suppose that the program itself, operationally, in the sense of providing smaller classroom settings for children within an appropriate project area, children who qualified for the aid, is something that the federal government would want to examine in any event, and did, and the question of whether the state had reduced its level of support for those children is a different question, is it not?
Robert L. Chenoweth: --Yes, we believe that is a different question, but also is a part of the consideration of the design of that program.
Kentucky as well as other states were attempting to create innovative ways to meet the needs of these educationally deprived children.
Unidentified Justice: Well, certainly the federal government could have picked up its alleged problem earlier than it did, but do you think that that alone means that no recovery can be had?
Robert L. Chenoweth: Not alone, Your Honor, but we do believe importantly in looking at the way the Sixth Circuit in reviewing this issue which we believe is the pertinent issue, and that is what the understanding of the commitments were by Kentucky in the receipt of those Title I funds, that that was a factor, that Kentucky had had the operational people in looking at the design, and they had not been told that there was anything wrong with those programs, and we believe that was a part of the good faith of the Commonwealth concerning these self-contained readiness programs.
Unidentified Justice: Well, good faith is not normally a defense either to the application of an appropriate federal statute or regulation of this type or, if you treated it as a contract, to a defense under a contract theory, is it?
Robert L. Chenoweth: As a pure contract theory, no, we would agree with that, Justice O'Connor.
But again, we are looking at a contract here in the nature of a grant in aid program, in the nature of the cooperative federalism where the state is giving up something, giving up rights that it has in order to enter into that cooperation with the federal government.
We believe that in order to do that... and we did think consistent with Pennhurst, and that Pennhurst is very much applicable in this case, as the Sixth Circuit Court of Appeals believed, that if there is going to be that giving up, then there is going to have to be a clear understanding of what it is that the state is giving up.
To that extent, we do believe that the Court's consideration that there had not been any finding of bad faith is very much a part of the standard of review that the Courts of Appeals are to exercise pursuant to this Court's decision in Bell v. New Jersey when you are looking at a recoupment of Title I funds.
Again, you don' go into a program, and if you have reservations of that program, start encouraging other school districts within the state to develop those programs.
We had in 1974, when again that audit signalled to us that there were problems, by that time we had 69 school districts that had readiness programs.
That's a third of the Kentucky school districts.
Importantly also, we believe, is the fact that there were not any incentives any the state or the local districts to keep doing this.
We were not saving any money.
There were the same amount of money, as indicated by Justice Stevens, we had the same amount of money going to those school districts, we had the same number of teachers.
So that the only incentive that possibly could have been available to the state, to the local districts, had to be a belief that those programs were serving the intent and purpose of having Title I programs and the receipt of that federal money.
Unidentified Justice: You are not now arguing that the mere fact that the state continued to supply the same amount of money would demonstrate that there was no supplanting, are you?
Robert L. Chenoweth: Your Honor, we are not saying that any of these matters as a sole factor show the point.
Unidentified Justice: For example, if they shifted all the money they... all their first and second grade teachers into the higher grades and reduced the ratios in the higher grades and then financed first and second grade entirely with federal money, you would say that would be a clear violation?
Robert L. Chenoweth: Your Honor, I think that that is obviously a different situation, and yes, that would be supplanting--
But here we were not doing that.
The benefit that was derived from having these self-contained readiness programs was a matter that was agreed and conceded in the administrative proceedings.
It was a matter that was made reference to by the Sixth Circuit Court of Appeals, to the fact that when the auditors made the exception, they made the exception only for the children that were going to be promoted and not for those children that were going to be held back.
We believe that that tends to indicate that there were differing levels of understanding even by the auditors and the education appeals board as to what was meant by supplanting, and that it was not just our perhaps reading of the law, but it was also the reading of the law by others.
That ambiguity that we do believe existed both facially and application, can be seen in the fact that, one, it is in the NIE report that there was a lack of clarity in the issue of supplanting.
This ambiguity, the unclearness of the understanding as to what was supplanting, existed even after 1977, or 1974.
It went on even through 1977, and that again is in the NIE report that that had been very much an issue in the Office of Education between various members of that office.
So we have a continuation even past the period of our audit when there was still some problems as to what was meant by supplanting.
The supplanting statute certainly stated a goal, but we argue that it did not explain how that goal was going to be achieved and was going to be gained, and we do believe that when you look at the language and look at the manner in which that is applied, look at the different kind of indicators that are going to have an important play upon what is meant by supplanting, again, whether you look at that as the Secretary would like, at the pupil, whether you look at that in the pupil and also the classroom, the school district, those indicators, are you going to look at it simply money, or are you going to look at it benefit?
The Secretary must have looked at it not only in terms of money; he had to have looked at it in the sense of benefit, a benefit supplement because he reduced it merely on the fact that we had the lower student-teacher ratio.
That didn't change the dollars approach to it at all, but still gave us a modification of the amount of money on the basis of the benefit.
So two levels are existent, even through the proceedings of this case over six or seven years.
The third factor that the Sixth Circuit Court of Appeals looked at in applying the proper legal standards, again as it was supposed to do, and looking at this case in the sense of Pennhurst, and looking at it in the sense of the significant issue that was identified in Justice White's concurring opinion in Bell v. New Jersey, and that is whether the state should be held liable in a recoupment action, in a post-audit recoupment action if there was merely a technical violation or if there was a different construction of the statute after the state had had their plan submitted and approved--
Unidentified Justice: You mean a changed construction.
Robert L. Chenoweth: --I'm sorry, Your Honor.
Unidentified Justice: A change in the construction.
Robert L. Chenoweth: A change in the construction.
Unidentified Justice: Was there any change here?
Robert L. Chenoweth: We believe that there was a change in the construction--
Unidentified Justice: Well, not by the secretary.
Robert L. Chenoweth: --Well, there was not an explanation of what the construction of the supplanting law was--
Unidentified Justice: Well, this may... this... at most here, this was the first time that the construction was ever spelled out.
I mean, the state says that you finally learned what the Secretary really thought it meant.
Robert L. Chenoweth: --Yes, Your Honor, and we believe that--
Unidentified Justice: That's not a change.
Robert L. Chenoweth: --Well, it certainly is a change from what Kentucky--
Unidentified Justice: It's from a change, it is a change with respect to what you thought it meant.
Robert L. Chenoweth: --Yes, and we think that that's very important.
Again, not the least by which we had these people in looking at the way that we were doing things and then later told that the way we were doing things was not in compliance with the law.
We think that change in construction or the notification of the construction of the law on supplanting is a factor and is a part of what the Sixth Circuit was obliged to do in the reviewing of this recoupment consideration in Title I.
Certainly the retroactive, post-audit recoupment of Title I funds as desired by the Secretary would be inconsistent with the consensual nature of a grant program, like Title I is, where a state ought to... it really has to be able to weigh what the benefits and the burdens are.
The Secretary's desire to have his interpretations applied retroactively is not in keeping, we believe, not only with the Pennhurst decision, but is not in keeping with the Rosato v. Wyman approach.
Unidentified Justice: Well, now, without looking at a retroactive change at all, just looking at the statute and the regulations as they existed, can't they be enforced in the way in which they were written at the time the grant was made?
Robert L. Chenoweth: We do not believe that the interpretation that has been placed upon them by the Secretary in this decision--
Unidentified Justice: Well, as an abstract matter, would you agree they can be applied as they were written when the grant was made, in the abstract?
Is that a valid approach?
Robert L. Chenoweth: --In the abstract, Justice O'Connor, the pertinent question still has to be what did Kentucky understand its commitments to be under this contract?
While we are fully willing to allow the case to follow this case, the New Jersey case, be argued by the able counsel for those parties, I can't help but inject that in that case, the Secretary, where the Secretary does not want a retroactivity of the education law, the contention is that the point of reference must be whether the state complied with its Title I commitments as they were understood at the time.
That is a contemporaneous understanding perspective, and that is what we are contending is and should be applicable in this case.
We believe that to apply the Secretary's interpretation retroactively would create a manifest injustice.
We believe that if you look at the matters looked at by the Sixth Circuit Court of Appeals, that there should not be a retroactive, post-audit recoupment of Title I funds.
The standard of review the Sixth Circuit set out is simply one that protects a state in a grant program from retroactive liability where the state has applied in good faith--
Unidentified Justice: You know, I just really am troubled by your insistence on the repetition of the word "retroactive".
The question, of course, is whether it is, and I don't think that has been conceded at all.
Robert L. Chenoweth: --Your Honor, we believe that the Secretary is applying a construction of the statute and his interpretation of the statute and the level by which that was going to be considered, he is applying that retroactively, and only by doing that could there be a recoupment of the expended Title I funds.
So we are arguing, we believe that the facts show that it is a retroactive application of that.
Unidentified Justice: Well, the agreement itself, of course, if you wanted to treat it as a contract, provides that if the regulatory requirements aren't met, that the federal government may require reimbursement.
Robert L. Chenoweth: Yes, Your Honor, but a part of that is going to be that Kentucky had a notice of what those obligations were going to be, and it is our contention that Kentucky did not have adequate notice of those obligations in keeping with Pennhurst, and that therefore it would not be reasonable to have this recoupment of already-expended Title I dollars that would have to be paid for out of Kentucky general tax dollars.
We believe that is the... that in order to apply the proper legal standards which we think the Sixth Circuit did, and the considerations in the application of Pennhurst, that the... there cannot be that recoupment of monies.
We submit to Your Honors, that the Sixth Circuit Court of Appeals decision should be affirmed.
Chief Justice Warren E. Burger: Do you have anything further, Mr. Geller?
Kenneth S. Geller: Unless the Court has any questions, I don't have anything.
ORAL ARGUMENT BY KENNETH S. GELLER, ESQ. ON BEHALF OF PETITIONER -- Rebuttal
Unidentified Justice: Let me just ask you one... it is in the brief, I know, but would you state again for me the standard for which you contend?
Kenneth S. Geller: Is the legal standard that the Court--
Unidentified Justice: Yes.
Kenneth S. Geller: --This is a review of an administrative order.
Unidentified Justice: So it is an arbitrary and capricious?
Kenneth S. Geller: It is more contrary... well, it is the Administrative Procedure Act.
There has to be a finding of lack of substantial evidence, which there hasn't been here, or there has to be a finding that the Secretary committed some legal error in seeking recoupment.
But it has been conceded, I think, that there was a misspending here.
So unless something in the Title I statute prevents the Secretary from recouping money that has been misspent, we don't think that there can be any overturning of that recoupment decision.
And as I read earlier, the Title I recoupment provisions contain nothing suggesting that there is a requirement of showing bad faith or showing that the grantee did not act reasonably or any of the other things that Kentucky is arguing for today.
Unidentified Justice: So you would say the normal rule should be followed that if the Secretary's interpretation of the statute is a reasonable one, we should accept it.
Kenneth S. Geller: That is correct.
Unidentified Justice: Even in a grant program.
Kenneth S. Geller: Even in a grant program.
This Court, let me just add by saying--
Unidentified Justice: Well, and even if you didn't, you still would reach the result for which you are--
Kenneth S. Geller: --Well, because I think, as you correctly stated, there is really no ambiguity here.
Chief Justice Warren E. Burger: Thank you, gentlemen.
The case is submitted.
We hear arguments next in Bell v. New Jersey.