The Community Action Agency of Franklin County, Inc. (CAAFC) appealed a decision by the Administration for Children and Families (ACF) disallowing $10,308.50 in federal funds claimed under the Head Start Act. CAAFC claimed the disallowed funds for attorney fees it incurred for its representation in a denial of refunding action for the Head Start budget period beginning on September 1, 1993.

For the reasons set forth below, we conclude that these attorney fees were subject to the daily fee limit set forth in 45 C.F.R. § 1303.3(a) and that ACF properly disallowed the fees which exceeded that limit. Therefore, we uphold this disallowance.

Statutory and Regulatory Background

The Head Start program is designed to deliver early developmental intervention, along with comprehensive educational and supportive services, to low-income preschool children and their families. See 42 U.S.C. § 9831 and 45 C.F.R. § 1304.1-3 (1992). ACF provides funds to grantees to serve as Head Start agencies within designated communities and reviews their performance in meeting program and fiscal requirements. See generally 42 U.S.C. § 9846.

If a grantee fails to meet certain program or fiscal requirements, ACF may deny refunding of its Head Start grant. 45 C.F.R. § 1303.15. Upon notification that ACF intends to deny refunding, a grantee may file an appeal and request a hearing. Id. The Head Start regulations at 45 C.F.R. Part 1303 set forth the procedures governing such an appeal. 1/ Section 1303.3(a)K provides that, in a denial of refunding proceeding, certain attorney fees are chargeable to the Head Start grant. It states:

All parties to proceedings under this part, including informal proceedings, have the right to be represented by an attorney.

(1) Attorney fees may be charged to the program grant in an amount equal to the usual and customary fees charged in the locality. However, such fees may not exceed $250.00 per day, adjusted annually to reflect the percentage change in the Consumer Price Index for All Urban Consumers (issued by the Bureau of Labor Statistics) beginning one year after the effective date of these regulations. The grantee or delegate agency may use current operating funds to pay these costs. The fees of only one attorney may be charged to the program grant with respect to a particular dispute. Such fees may not be charged if the grantee or delegate agency has an attorney on its staff, or if it has a retainer agreement with an attorney which fully covers fees connected with litigation. The grantee or delegate agency shall have the burden of establishing the usual and customary fees and shall furnish documentation to support that determination that is satisfactory to the responsible HHS [Health and Human Services] official.

ACF adopted the $250 daily limit in a 1992 amendment to section 1303.3(a). 57 Fed. Reg. 59,260, 59,265 (1992). Under the prior version of section 1303.3(a), a grantee could not pay an attorney more than "$100 per day without the express written approval of the responsible HHS official." 45 C.F.R. § 1303.3(a) (1990). The validity of the 1992 amendment of section 1303.3(a) was upheld in Meriden Community Action Agency, et al. v. Shalala, 880 F.Supp. 882 (D.D.C. 1995), aff'd, No. 95-5092, 95-5093 (D.C. Cir. April 9, 1996). There the court found that the plaintiffs established that, prior to the 1992 amendment, HHS had consistently waived the $100 attorney fees limit. Because the plaintiffs showed a settled course of agency conduct, the court concluded that HHS must give rational reasons for the 1992 change in its policy. In reviewing the record, the court determined that the change was supported by the reasons HHS set forth in the Notice of Proposed Rulemaking and in the preamble to the Final Rule. Id. at 886. The court relied on the following reasons as justification for HHS' adoption of a non-waivable $250 daily limit:

• HHS represented that its prior policy involving a limit which could be waived generated excessive disputes about what costs should be allowed.
• HHS had concluded that limiting the fee while providing for an inflation adjustment was reasonable and would result in a uniform and equitable application of the provision throughout the country.
• HHS "stated that attorney's fees were being limited because `the funds involved are scarce social service funds appropriated by Congress to provide valuable services to a population in need of them.'" Id. at 887 (quoting Notice of Proposed Rulemaking, 57 Fed. Reg. 3394, 3395 (1992)).
• HHS had concluded that the limit would not prevent Head Start programs from obtaining representation because the local legal community would likely assist Head Start programs by providing free or reduced fee services.

The court also rejected the plaintiffs' argument that the fact that attorney fees are not limited in disallowance cases but are limited in suspension, termination, and denial of refunding cases violated the equal protection rights of Head Start grantees. The court concluded that "the attorneys' fee regulation has a rational relationship to the appropriate governmental purpose of determining how to expend the scarce social service funds available in the Head Start program." Id. at 888.

Facts

CAAFC is a community action agency that receives federal funds to administer a Head Start program in Franklin County, New York. On October 15, 1993, CAAFC was notified by ACF that ACF intended to deny CAAFC's Head Start refunding for the 1993-94 program year. CAAFC retained the law firm of Feldesman, Tucker, Leifer, Fidell & Bank to represent it in the denial of refunding action. On October 28, 1993, CAAFC filed an appeal of ACF's denial of refunding with the Departmental Appeals Board (Board). This appeal was subsequently settled by the parties on June 26, 1994.

By letter dated November 14, 1994, ACF requested an itemized schedule of attorney fees incurred by CAAFC during the Head Start budget period beginning on September 1, 1993 and ending August 31, 1994 which were related to the denial of refunding proceedings and which were to be charged to its Head Start grant. ACF Ex. 1. Counsel for CAAFC prepared a detailed list of its bills. For this period, CAAFC claimed $34,501 in attorney fees, not all of which were related to the denial of refunding proceeding. ACF Ex. 3.

By letter dated September 13, 1995, ACF notified CAAFC that it was disallowing $10,308.50 in attorney fees claimed by CAAFC for the period September 1, 1993 through August 31, 1994. ACF disallowed these fees on the grounds that they were paid for legal services which were related to CAAFC's appeal of ACF's denial of refunding and that they exceeded the limit imposed by 45 C.F.R. § 1303.3(a).

The fees which ACF disallowed were those in excess of the regulatory limit for services rendered between October 18 and October 28, 1993 and between February 28 and April 15, 1994. The October fees involve services for preparing CAAFC's appeal, such as reviewing the legal background for an appeal, conferring with the Executive Director on refunding, reviewing Head Start regulations, discussing strategy for the appeal, and drafting and filing the Notice of Appeal and motions. ACF Ex. 3, at 6-7. The February - April fees concern services for settling the case, such as conferring with CAAFC, negotiating with opposing counsel, and reviewing settlement documents. Id. at 11-12.

The Parties' Arguments

CAAFC argued that the disallowed fees were allowable costs because they were not subject to the limit in 45 C.F.R. § 1303.3(a). CAAFC relied on the portion of section 1303.3(a) which states that "parties to proceedings under this part" are subject to the limit.. CAAFC argued that --

[t]he plain language of the regulation contemplates that only those services which are necessary for the participation in an appeal proceeding, such as the preparation for argument or a hearing before the Board, are subject to limitation.

CAAFC Br. at 4.

Based on this construction of section 1303.3(a), CAAFC argued that fees for services for preparing to file an appeal were outside the scope of section 1303.3(a). CAAFC reasoned that, in preparing to appeal, it was not a party to "proceedings under this part" as required by section 1303.3(a) because the proceeding did not begin until CAAFC actually filed its appeal on October 28, 1993.

CAAFC also argued that the fees incurred for settlement activities were paid for "purposes other than participation in appeal proceedings." Id. at 5. First, CAAFC reasoned that, because the deadlines in the appeal proceeding were extended for settlement discussion, there was no appeal proceeding during that period and therefore these services were not subject to the fee limit. Second, CAAFC reasoned that 45 C.F.R. Part 1303 and 45 C.F.R. Part 16 "outline the nature of the proceedings that are subject to the limit on fees." CAAFC Br. at 5. CAAFC argued that nowhere in these regulations is there a provision for settlement or a requirement that settlement discussions take place. Therefore, CAAFC concluded that settlement discussions are outside the appeal proceeding and are not subject to the fee limit.

CAAFC also asserted that the limit in section 1303.3(a) should be construed narrowly for the following reasons. As a general rule, fees for professional services may be paid with Head Start funds as long as the fees are "reasonable." Office of Management and Budget Circular (OMB Cir.) A-122, Att. B., § 34. The HHS Discretionary Grants Administration Manual specifically provides that the legal costs of pursuing an administrative action, such as a grant appeal, are allowable. HHS Discretionary Grants Administration Manual, Ch. 3, D. at 3-6. In the context of Head Start grants, there is no limit on the allowability of reasonable attorney fees outside of 45 C.F.R. § 1303.3(a).

ACF argued that, under the plain language of section 1303.3(a), all appeal-related attorney fees were limited by that section. ACF contended that --

CAAFC's receipt of ACF's notice of denial of refunding commenced the initiation of appeal-related activity and any legal services performed in connection with CAAFC's appeal up until the termination of these proceedings before the Departmental Appeals Board may be considered "appeal-related."

Based on this construction, ACF concluded that attorney fees for preparing the appeal and for settling the appeal were subject to section 1303.3(a).

Analysis

For the reasons discussed below, we conclude that ACF's construction of its regulation is reasonable and entitled to deference. Therefore, we uphold this disallowance on the grounds that the fee limit set forth in 45 C.F.R. § 1303.3(a) applied to the fees at issue in this case.

Where a regulation is subject to more than one interpretation, a federal agency's interpretation of its own regulation is entitled to deference as long as the interpretation is reasonable and the grantee had adequate notice of that interpretation or did not reasonably rely on its own contrary interpretation. New Jersey Dept. of Human Services, DAB 1549, at 7 (1995); Washington Counties Opportunities, Inc., DAB 1464, at 8 (1994), Illinois Dept. of Families and Children, DAB 1335, at 17 (1992).

We find that ACF's construction of section 1303.3(a) is reasonable for the following reasons:

• ACF's construction is consistent with the plain language of the regulation. The term "proceeding" in the phrase "proceedings under this part" can reasonably be read as beginning with ACF's notice of adverse action and as encompassing all activities which are related to a party's participation in such proceedings. Therefore, in preparing to file an appeal in response to ACF's notice of denial of refunding and in engaging in settlement discussions, CAAFC can reasonably be considered to be a party to "proceedings under this part."
• ACF's construction is consistent with the purpose behind the rule: to restrict the amount of Head Start funds which could be redirected from the provision of services to children to payment for attorney fees in termination, suspension, or denial of refunding proceedings. By construing "proceedings under this part" to include all appeal-related legal services, ACF is simply giving full effect to a policy decision it made concerning the allocation of limited Head Start funds.
• ACF's construction avoids one of the problems occurring under the prior fee limit: disparate applications of the limit. By construing the present limit as applicable to all appeal-related activity, ACF lessens the risk that HHS regions will develop different standards for determining which attorney fees are subject to the limit.
• ACF's construction is consistent with a common understanding of what is entailed in representing a client in an appeal proceeding: a lawyer prepares and files the appeal; a lawyer may try to settle the appeal; if a lawyer does not settle the appeal, he or she completes the case under the procedures of the relevant forum.
• CAAFC relied on OMB Cir. 122, Att. B. § 34 and the HHS Discretionary Grants Administration Manual, Ch. 3, D. for the proposition that reasonable attorney fees are allowable Head Start expenditures. However, OMB Cir. A-122, Att. A. § 3.b. provides that one of the criteria for determining whether a cost is "reasonable" is whether it meets requirements imposed by federal regulation. Thus, in this case, the general provision authorizing expenditures for attorney fees is modified by the specifically applicable program provision of 45 C.F.R. § 1303.3(a). Since the fees disallowed in the case exceed the limit imposed by that regulation, they are necessarily not reasonable and not allowable under OMB Cir. 122, Att. B. § 34. Similarly, the HHS Discretionary Grants Administration Manual, Ch. 3, D. at 3-3 provides that the listed costs are "examples" of allowable costs but that grantees should "consult the appropriate cost principles for specific guidance on allowable and unallowable costs . . . ."

ACF's reasonable construction is entitled to deference because there is no indication in the record that CAAFC incurred the disputed fees in reliance on the construction of the regulation it presents in this case. Rather, CAAFC incurred these fees as a necessary part of its representation in the denial of refunding proceedings and not because it had determined, in 1993 and 1994, that these fees were not subject to section 1303.3(a). See DAB No. 1464 (in which the Board remanded a disallowance of staff bonus payments made by a Head Start grantee pursuant to its understanding of applicable federal cost principles).

Moreover, we find that CAAFC could not have reasonably relied on the construction of the regulations that it offers here because that construction is unreasonable in the context of these particular regulations. Section 1303.15(c)(3) requires the appellant in its initial appeal filing to "fully set forth the grounds for the appeal and be accompanied by all documentation that the grantee believes is relevant and supportive of its position." If CAAFC's construction were accepted, all attorney fees connected with formulation of an appellant's case would be exempt from the fee limit. Furthermore, if attorney fees incurred during settlement negotiations were also exempt, an appellant could possibly manipulate settlement negotiations to further bypass the limit. Thus, CAAFC's construction could potentially exclude a large part of the appellant's preparation for the entire case.

Finally, we note that CAAFC was incorrect when it argued that "nowhere in Part 1303 or . . . 45 C.F.R. Part 16 . . . is there a provision concerning settlement" and therefore that "settlement is outside of the appeals process." CAAFC Br. at 5. Section 1303.15(b)(1) of 45 C.F.R. provides that, to the extent they are not inconsistent with Head Start regulations, the Board's procedures at 45 C.F.R. Part 16 govern denial of refunding appeals. Section 16.4 of 45 C.F.R. informs parties that "the Board makes maximum feasible use of preliminary informal steps to refine issues and to encourage resolution by the parties." Section 16.18 informs parties that they may request a mediator "to aid in resolving the dispute." Finally, the acknowledgement letter that the Board sent to the parties at the very beginning of CAAFC's denial of refunding proceeding informed CAAFC and ACF that --

[a]lthough the appeal is now pending, the parties may negotiate to resolve the dispute informally. The Board will assist in any way appropriate, and can provide mediation services. See 16.18.

Acknowledgement Letter of November 3, 1994 (Board Docket No. A-94-12). Clearly under 45 C.F.R. Part 16, settlement discussions by the parties, with or without the Board's assistance, can be an integral part of the Board's process. The fact that a case is necessarily stayed so that parties can engage in settlement discussions does not remove such discussions from "proceedings under this part."

Therefore, we conclude that CAAFC's claims for attorney fees incurred for preparing its appeal and for settling its appeal are subject to the fee limit in 45 C.F.R. § 1303.3(a).

Conclusion

For the preceding reasons, we uphold this disallowance in full.

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Donald F. Garrett

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Norval D. (John) Settle

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M. Terry Johnson
Presiding Board Member