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Vol 9A March 2004

Number range CHAPTER

**[DENYING OR DISCONTINUING FINANCIAL ASSISTANCE]{.underline}**

**[RELATIONSHIPS ON THE BASIS OF RESPONSIBILITY]{.underline}**

**[CONCERNS: THE REQUIREMENT FOR DUE PROCESS]{.underline}**

**by Eric Moll**

Number range CHAPTER[INTRODUCTION]{.underline}

It is the policy of the Department of Commerce to make awards to
applicants and recipients who are competently managed, responsible,
capable, and committed to achieving the objectives of the awards they
receive. Grants officers are sometimes faced with pre-award
circumstances which raise concerns about an applicant's responsibility,
including a lack of integrity, to carry out the objectives of a
particular grant or cooperative agreement. For example, negative
information may come to light from a Dun and Bradstreet report or during
the name check process. An applicant may be the subject of negative
findings in a draft or final audit, or may be the subject of negative
information from ongoing inspection or investigation activities. In
addition, there may be a record of poor prior performance on other
awards, debt problems, or negative items reported by an applicant on
Form CD-511 concerning debarment, suspension and other responsibility
matters.

The purpose of this article is to ensure that grants officials are aware
of the availability of the procedures for denying or discontinuing
financial assistance relationships on the basis of responsibility
concerns with grant applicants or current recipients (who are seeking
renewals, continuations, or new awards) and to reinforce the need to
follow those procedures.[^1] Such procedures include:

[High-risk determinations]{.underline}\--Where an applicant is declared
high-risk and is denied an award on the basis of concerns relating to
the applicant's present responsibility, the applicant must be given
notice of the Department's determination.

[Suspension/ debarment]{.underline}\--In serious cases, usually
indictment for and/or conviction of criminal offenses, the Department of
Commerce provides formal procedures for excluding an organization from
participating in financial assistance on a government-wide basis. *See*
15 CFR Part 26, Non-procurement Debarment and Suspension.

Failure to follow the required procedures can result in an illegal *de
facto* debarment for which an applicant can seek redress in a Federal
district court.

[BACKGROUND]{.underline}

Financial assistance applicants have certain procedural rights if an
agency proposes to deny an award on the basis of responsibility concerns
on the part of the applicant. Specifically, the courts have found that
applicants have a constitutionally protected "liberty interest" in doing
business with the government that gives rise to a due process right
under the Fifth Amendment of the Constitution to reasonable notice and
an opportunity to be heard appropriate to the circumstances of the case.

It is clear that the definition of "liberty," in the context of the
Fifth and Fourteenth Amendments to the Constitution, includes "the right
of the individual to contract, to engage in any of the common
occupations of life, to acquire useful knowledge, to marry, to establish
a home and bring up children, to worship God according to the dictates
of his own conscience, and generally to enjoy those privileges long
recognized at common law as essential to the orderly pursuit of
happiness by free men."[^2] These rights apply as fervently in the case
of corporations as they do with individuals.[^3][^4]

Although there is no right of an individual or corporation to enter into
discretionary government grants or cooperative agreements, that does not
mean that the government can act arbitrarily, either substantively or
procedurally, against a person or that such person is not entitled to
challenge the processes and the evidence before he is officially
declared ineligible for such grants or cooperative agreements.[^5]
Specifically, an applicant or recipient has a right to be free from
"stigmatizing" governmental defamation having an immediate and tangible
effect on its ability to do business. Thus, the government may not brand
or stigmatize an applicant or recipient as "nonresponsible" without
granting it notice of specific charges so as to afford it an opportunity
to clear its name.[^6] It is clear, therefore, that grant recipients and
applicants have the right to procedural safeguards before being debarred
from future consideration for grants or cooperative agreements.

Debarment actions directly implicate due process liberty interests
because they have the potential to damage a contractor's or grant
recipient's reputation and deprive it of business.[^7] Where a person's
good name, reputation, honor or integrity is at stake because of what
the government is doing to him, notice and an opportunity to be heard
are essential.[^8] Accordingly, considerations of basic fairness require
administrative regulations establishing standards for debarment and
procedures which will include notice of specific charges, opportunity to
present evidence and, in cases where fact-finding is necessary, to
cross-examine adverse witnesses, all culminating in administrative
findings and conclusions based on the record so made.

[HIGH RISK ORGANIZATIONS]{.underline}

Under the Grants Manual, the Grants Officer is charged with determining
whether an applicant is sufficiently responsible to receive Federal
financial assistance in accordance with requirements established in 15
CFR § 14.14 or 15 CFR § 24.12. Department of Commerce Grants and
Cooperative Agreements Interim Manual(Grants Manual), Chapter 9, G.1.
The following are examples of indicators used to determine whether a
high-risk designation is warranted: (1) financial instability;
(2)inadequate internal controls; (3) unsatisfactory performance under
other Federal awards; (4) unsatisfactory audits; and (5)
irresponsibility of officials and key employees. Elements reflecting on
the responsibility of employees include: a) conviction for such ethical
violations as embezzlement, theft, forgery, bribery, falsification or
destruction of records, making false statements, receiving stolen
property; b) conviction in other offenses indicating a lack of business
integrity; or c) adverse information revealed through the name check
procedure which reflects significantly on the applicant's honesty or
financial integrity.

Depending on the nature and severity of the evidence with respect to the
above referenced factors, the Grants Officer may delay the award until
the conditions are corrected, not make the award, or designate the
applicant as high risk and make the award with special conditions.
Grants Manual, Chapter 9, G.2.[^9] In any instance where a Grants
Officer intends to deny a grant or cooperative agreement to an applicant
on the basis of pre-award concerns relating to the applicant's present
responsibility, the applicant must be given notice of the Department's
determination. Grants Manual, Chapter 9, G.3. Such a "high risk"
determination relates solely to the applicant's present responsibility
and the particular award for which the determination is being made, and
does not affect, as a debarment would, the applicant's eligibility for
future awards. The notice to the applicant must provide an opportunity
to the applicant to submit information showing that the Department's
determination is in error or otherwise warrants reconsideration.[^10]
The finding of "high risk" should be included in the award file.[^11]

The potential risk of a *de facto* debarment arises when the agency
withholds the award for an unreasonable period of time or denies an
award as part of a long-term attempt at disqualification, and provides
no notice to the applicant and no opportunity to respond. Accordingly,
whenever a Grants Officer proposes to make a "high risk" determination
which will deny an award based on responsibility concerns, and the
denial is part of a long-term plan to disqualify the applicant, the
Department's formal debarment and suspension regulations (15 CFR Part
26) must be followed. [^12]

[COMMERCE DEBARMENT AND SUSPENSION REGULATIONS]{.underline}

Executive Order 12549 (51 *Fed. Reg.* 6370 (1986)) directed executive
departments and agencies to participate in a system for debarment and
suspension from programs and activities involving Federal financial
assistance and non-financial assistance and benefits. In particular, the
President ordered that "debarment or suspension of a participant in a
program by one agency shall have government-wide effect." The idea
behind the order was to ensure that persons found to be unfit to deal
with one government agency could not simply begin dealing with a
different government agency, and also to avoid the need for duplicative
debarment proceedings in each agency.

The Department of Commerce has adopted regulations similar to those of
other agencies in recognition of Executive Order 12549 and consistent
with the liberty interests at stake. 15 CFR Part 26 provides formal
procedures for suspending or debarring applicants or recipients on the
basis of nonresponsibility or a lack of integrity.[^13] In addition,
pursuant to Executive order 12689 and section 2455 of the Federal
Acquisition Streamlining Act of 1994, the Department of Commerce has
also established regulations for reciprocal government-wide effect of
debarments across procurement and nonprocurement actions.[^14]
Therefore, if an organization is debarred from procurement contracts
under the Federal Acquisition Regulations (FAR), it applies with equal
force to financial assistance, and vice versa. There is one debarment
list published by the General Services Administration.

Suspension is an action that excludes an organization from participating
in financial assistance for a temporary period, pending completion of an
investigation and any judicial or administrative proceedings that may
ensue.[^15] Such action is imposed only when immediate action is
necessary to protect the public interest.

With regard to minimum due process, the organization must be afforded
its opportunity for rebuttal, but this can be after the suspension is
already in effect. It has been consistently held that due process is
satisfied so long as an organization which is formally suspended, has a
meaningful rebuttal opportunity, whether it be an oral hearing or
otherwise, after the suspension.[^16] Indeed, the precise requirement
announced in *Horne Brothers v. Laird*[^17][^18]-that the organization
must receive a rebuttal opportunity within 30 days, so as not to "dangle
in suspension for a period of one year or more"-has been incorporated
into government-wide regulations, including those concerning grants and
cooperative agreements.[^19][^20]The function of the hearing would be to
provide for an independent evaluation of the "adequate evidence" (akin
to probable cause) that misconduct has occurred and [not]{.underline} to
ensure that the organization is guilty.

Debarment is an action taken to exclude an organization from
participating in financial assistance on a government-wide basis for the
period of the debarment, generally a period of time not exceeding three
years.[^21] The overwhelming majority of actions taken by the Department
under the regulations thus far have been based upon criminal
convictions; this is also true government-wide. The most common scenario
is suspension upon indictment and debarment upon conviction. However, in
theory, debarment can be based upon performance, financial management,
or lack thereof, and other factors. The key issue, in any case, is
whether violations can be established which are sufficient enough to
meet either of two tests:

\(1\) was the violation "so serious as to affect the integrity of an
agency program," or (2) was the violation "of so serious or compelling a
nature that it affects the present responsibility of a person."[^22]

Concerning the first test, willful failure to perform in accordance with
the terms of the agreement is one example of conduct offered by the
regulation which may be sufficient to meet the criterion of affecting
the integrity of an agency program. Another example might be an
applicant's repeated failure to correct financial management
deficiencies identified in a series of audits. Regarding the second
test, there is no readily apparent example to serve as guidance to
determine when conduct is "so serious a nature that it affects the
present responsibility of a person." Limited guidance is provided by 15
CFR § 26.845 which provides that the existence of a cause for debarment
does not necessarily require that the person be debarred; the
seriousness of a person's acts or omissions and any mitigating factors
are considered in making any debarment decision. This provision should
be read as a caution against debarment except in cases involving the
most serious violations and as suggesting that debarment should be
reserved for those cases in which a willful or intentional violation can
be established.

Following the formal suspension and debarment procedures will provide an
applicant or current recipient the required due process in denying or
discontinuing financial assistance relationships.

[*DE FACTO* DEBARMENT]{.underline}

The following general principles concerning *de facto* debarment can be
gleaned from the court cases presented as illustrations in the next
section of this article. Determinations to deny an award to an applicant
for lack of responsibility which involve more than one grant may
constitute a *de facto* debarment where the procedural due process
guarantees and an opportunity to be heard have not been afforded to the
affected applicant. When an agency does not provide the appropriate due
process procedures, it may be engaging in an illegal *de facto*
debarment. Consequently, an agency may not exclude a potential recipient
from receiving an award without invoking 15 CFR Part 26 by making
repeated, or even a single, determination to deny an award, if it is
part of a long-term plan to disqualify the applicant from receiving any
future grants. Thus, an agency cannot leave an applicant "dangling" for
an indefinite period of time without affording it the protections of 15
CFR Part 26. *De facto* debarment, therefore, can be shown by the
successive denial of a number of awards that would have otherwise been
made but for the fact that the applicant had been "debarred" without due
process.[^23] Additionally, a finding of *de facto* debarment may be
justified at the time of a single determination to deny an award if
there is evidence that the agency has decided from that point forward
that it would make no further awards to that organization. This single
instance is where the "seeds" of *de facto* debarment are planted.

[Illustrations]{.underline}

The recognition and development of the problem of *de facto* debarment
can most easily be illustrated via an overview of the following cases in
which the government's actions were found to have constituted illegal
*de facto* debarments:

*Myers & Myers v. U.S. Postal Service.*[^24] In this case*,* the
organization had been a mail carrier for the last 26 years. Its awards
were not renewed, and no reason was given by the agency. The
organization was allowed to bid on new awards on which it was the low
bidder, but the bids were rejected by the agency because the bidder was
considered nonresponsible. The reason for this determination was that
the Postal Inspection Service provided information to the contracting
officer that the organization had entered into illegal subcontracts and
had filed fraudulent cost statements. The organization was able to
present evidence that the Postal Service's refusal to renew the awards
was part of a "sanction" taken against it for claimed irregularities in
the firm's operating procedures.

*Old Dominion Dairy v. Secretary of Defense*.[^25][^26]Old Dominion was
a dairy products supplier which was denied two awards it would otherwise
have received but for the fact that the agency had determined in an
audit report that it had "knowingly and substantially over billed the
government" in past dealings. However, a determination of a lack of
integrity was made and communicated through government channels without
Old Dominion having been informed of the audit results or been given any
written notice that the determination had been made. Denials of the
awards could have continued indefinitely with absolutely no recourse for
the organization.

*Art-Metal USA, Inc. v. Solomon.*[^27] In this case the General Services
Administration (GSA) terminated an award with Art-Metal for the
convenience of the government and held other awards in abeyance or
"suspended animation" that Art-Metal would otherwise have received as
the low bidder. GSA was concerned about "public relations" when articles
appeared in two local newspapers, reporting on the government's
broad-scale investigation into GSA operations, alleging that Art-Metal
failed to meet specifications, produced inferior products, and engaged
in possible contract abuse.

*Shermco Industries v. Secretary of the Air Force.*[^28] Shermco
Industries alleged that it was *de facto* debarred from February of 1976
to March of 1978. Shermco was indicted in December of 1977 for filing
fraudulent claims, and formal suspension was commenced that same month
with a final order issued in February of 1978. The agency did not
finally initiate suspension action until six months after Shermco was
the low bidder on an award and three months after a nonresponsibility
determination was made. Suspension was not ordered until seven months
after the bid and almost five months after the nonresponsibility
determination. These periods of delay were found to be excessive. An
agency should not leave an applicant "dangling" for an indefinite period
of time while it decides whether to initiate suspension procedures
without affording it the protections that are associated with formal
suspension and debarment.

*Leslie and Elliot Co., Inc. v. Garrett.*[^29]

In this case, the contractor was denied two Navy contracts on which it
was the low bidder. In addition, the contracting officer considered the
contractor to be an administrative burden because an excessive amount of
government oversight was required on prior contracts, and he felt the
company was submitting fraudulent claims. All of these factors lead the
court to conclude that the Navy did not want the contractor to receive
any more work on the Navy base.

[CONCLUSION]{.underline}

In any instance where a Grants Officer intends to deny a grant or
cooperative agreement to an applicant or recipient on the basis of
pre-award concerns related to present responsibility, the applicant or
recipient must be given notice of the Department's determination. Such a
high-risk determination relates solely to the applicant's or recipient's
present responsibility and the particular award for which the
determination is being made, and does not affect the applicant's or
recipient's eligibility for future awards. On the other hand, where a
Grants Officer intends to deny a grant or cooperative agreement to an
applicant or recipient on the basis of pre-award concerns related to
responsibility, and this denial precludes the applicant or recipient
from participation in future awards with the agency, the applicant or
recipient must be afforded its due process rights under the Department's
suspension and debarment regulations, 15 CFR Part 26. Failure to follow
the required procedures will expose the agency to a valid claim of *de
facto* debarment based on an argument by the applicant that it has been
denied due process of law and its constitutional liberty interests.

Grants or program officials who are contemplating denying an award for
the reasons raised in this article should contact the Federal Assistance
Law Division at 482-8035 for further guidance.

[^1]: ^?^ The termination of existing financial assistance awards is
    beyond the scope of this article and may be addressed in a future
    issue.

[^2]: ^?^ *Meyer v. Nebraska*, 262 U.S. 390, 399 (1923).

[^3]: ?

[^4]: ^?^ A corporation may contract and may engage in the occupations
    of life, and should be afforded no lesser protection under the
    Constitution than an individual to engage in such pursuits. As the
    Supreme Court established long ago, a corporation is a person within
    the meaning of the equal protection and due process clauses. *See
    First National Bank of Boston v. Belloti*, 435 U.S. 765, 780 n.15
    (1978).

[^5]: ^?^ *See Old Dominion Diary v. Secretary of Defense*, 631 F.2d
    953, 962 (D.C. Cir. 1980). It should be noted that, while the cases
    discussed in this article are primarily contract-related cases,
    federal assistance applicants and recipients have been determined to
    possess the same due process rights. *See Mainelli v. United
    States*, 611 F. Supp. 606 (D.C.R.I. 1985). Accordingly, the
    principles enunciated in the contract cases are instructive in the
    financial assistance arena as well.

[^6]: ^?^ *Hellenic American Neighborhood Action Committee v.The City of
    New York*, 933 F. Supp. 286 (S.D.N.Y. 1996).

[^7]: ^?^ *Reeve Aleutian Airways, Inc. v. United States,* 982 F.2d 594
    (D.C. Cir. 1993).

[^8]: ^?^ *Board of Regents v. Roth*, 408 U.S. 564, 573 (1972);
    *Wisconsin v. Constantineau*, 400 U.S. 433, 437 (1971). The Supreme
    Court in *Roth* held that a due process liberty interest was
    implicated in such situations and, to paraphrase the D.C. Circuit in
    *Old Dominion Diary*, to rule otherwise in the case of debarment
    would drain *Roth* of meaning, something the Supreme Court has taken
    pains not to do.

[^9]: ^?^Conditioning a particular award to protect the agency does not
    implicate the applicant's protected "liberty interest."

[^10]: ^?^ For example, such a notice should state that the Department
    is not making an award to the applicant, the reasons why, and that
    the Department's decision becomes final 30 days after receipt of the
    notice unless the applicant provides information to the Grants
    Officer prior to that time to show that the Department's decision
    was in error or otherwise warrants reconsideration.

[^11]: ^?^ Grants Manual, Chapter 9, G.5.

[^12]: ^?^ Grants Manual, Chapter 9, G.3. As a practical matter,
    government-wide debarment and suspension under 15 CFR Part 26 are
    used in only the most egregious cases, usually indictment for and/or
    conviction of criminal offenses.

[^13]: ^?^ 15 CFR Part 26 was substantially revised in the issuance of a
    final common rule on November 26, 2003. *See 68 Fed. Reg. 66534.*

[^14]: ^?^ *See 60 Fed. Reg. 33036.* August 25, 1995 was the effective
    date for reciprocity provisions.

[^15]: ^?^ 15 CFR § 26.1015.

[^16]: ^?^ *Mainelli v. United States*, 611 F. Supp. 606 (D.C.R.I.
    1985).

[^17]: ?

[^18]: ^?^ 463 F.2d 1268 (D.C. Cir*.* 1972).

[^19]: ^?^ *See* 15 CFR § 26.725.

[^20]: ?

[^21]: ^?^ 15 CFR §§ 26.930, 26.115 and 26.865.

[^22]: ^?^ 15 CFR § 26.800.

[^23]: ^?^ It should be noted that repeated determinations of
    nonresponsibility may not necessarily support a case of de facto
    debarment where the determinations involve practically
    contemporaneous awards similar in nature, and are based upon
    essentially the same current information indicating a lack of
    responsibility. See *Becker and Schwindenhammer,* B-225396, March 2,
    1987; and *Standard Tank Cleaning Corp.,* B-245364, January 2, 1992.

[^24]: ^?^ 527 F.2d 1252 (2nd Cir. 1975).

[^25]: ^?^ 631 F.2d 953 (D.C. Cir. 1980).

[^26]: ?

[^27]: ^?^ 473 F. Supp. 1 (D.D.C. 1978).

[^28]: ^?^ 584 F. Supp. 76 (N.D.Tex. 1984).

[^29]: ^?^ 732 F. Supp. 191 (D.D.C. 1990).