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INTERBORO INST. v. MAURER

February 15, 1997

INTERBORO INSTITUTE, INC., Plaintiff, against ROBERT J. MAURER, Individually and as President of Higher Education Services Corp.; H. CARL McCALL, Individually and as Comptroller of the State of New York; ROBERT ATTMORE, Individually and as Deputy Comptroller of the State of New York; RICHARD P. MILLS, Individually and as Commissioner of Education of the State of New York; JEANINE GRINAGE, Individually and as Deputy Commissioner for Higher and Professional Education of the New York State Department of Education; and DONALD J. NOLAN, Individually and as Former Commissioner for Higher and Professional Education of the New York State Department of Education, Defendants.


The opinion of the court was delivered by: MCAVOY

 I. BACKGROUND AND FACTS

 Before the Court today are the motion of the plaintiff, Interboro Institute, Inc., for a temporary restraining order and preliminary injunction, and the motion of the defendants, individual officers with responsibilities in the New York State Comptroller's Office, Department of Education, and Higher Education Services Corporation, to dismiss the Complaint pursuant to Fed. R. Civ. P. 12(b)(6).

 This matter arises out of the decision of the New York State Higher Education Services Corporation ("HESC") to withhold TAP and STAP (hereinafter referred to collectively as "TAP") funds from the plaintiff Interboro. The defendants claim that the withholding is necessary to effectuate an offset in the amount of $ 4,796,132. The sum was arrived at after an audit of Interboro for the 1989-90 through 1991-92 grant years. The plaintiff argues that the decision to seek repayment of these funds was arbitrary and capricious and motivated by the personal animus of the defendant Nolan, whom Interboro claims has been trying to shut the school down for years. The defendants, of course, claim that their actions were the result of a fair and legitimate auditing process.

 Interboro is an accredited junior college located in New York City. Interboro is authorized to confer Associate in Occupational Studies degrees in six areas: accounting, business administration, paralegalism, secretarial sciences, security management and opthalmic dispensing. Interboro's enrollment is approximately 1000 students, 95% of whom are minorities, and the majority of whom are women. More importantly, approximately 95% of the students receive TAP funds. Thus, withholding TAP funds can be expected to have a significant impact on the ability of the school to operate.

 An original draft audit report proposed over $ 6 million in disallowances to be repaid by Interboro. The school twice submitted to OSC objections to the report and documentation in support seeking a reduction. By letter dated November 19, 1996, the New York State Higher Education Services Administration ("HESC") notified Interboro that it must refund $ 4,796,132 plus interest. It further informed the school that until the sum was paid or other payment arrangements were made, the State would withhold all future TAP payments, subject to offset, up to the amount of the offset.

 As of December 1996, Interboro had approximately $ 1.172 million in funds on hand, and no other liquid assets. Interboro claims average monthly operating expenses of approximately $ 500,000. Thus, the plaintiff asserts that the expected costs for the spring semester are expected to exceed the school's liquid assets, thereby rendering the school insolvent, if the TAP funds are not provided by the State. The State claims that Interboro can seek a repayment schedule that would obviate the need for immediate repayment of the full amount.

 Interboro further claims that the motivation behind the post-audit disallowances was fueled by the defendant Nolan, the former Deputy Commissioner of Higher and Professional Education in New York. Interboro alleges that Mr. Nolan twice tried to deny re-registration of all of Interboro's degree granting programs: once in 1985, and again in 1995. However, each time, the decision was overruled on administrative appeal to the Commissioner of Education. The plaintiff also points to certain communications between the audit personnel and Nolan during the audit process as further evidence that Nolan influenced the audit process and led to what the plaintiff claims is an arbitrary and capricious decision to demand a refund of certain TAP funds.

 Also, Interboro claims that 80% of the $ 4.3 million sought by the State was determined to have been wrongfully paid based on a review of students' files who ostensibly did not meet the matriculation standards published in the school's catalogue. In essence, the State concluded that certain students were admitted and received TAP funding, even though they didn't meet admissions standards published by Interboro. However, the plaintiff claims that what is published in its catalogue is not binding, because the Education Commissioner's own regulations define matriculated status as not requiring specific matriculation examinations, language examinations or other prerequisites established by the school. Also, Interboro argues that the fact that some of these students actually completed a program successfully, establishes an "ability to complete," and thus, cannot form the basis of an auditors conclusion that TAP funds were inappropriatly certified by the school for those students. Interboro alleges that it was the written policy of the State Education Department ("SED") not to recommend disallowances for students who actually completed the program, even though they did not meet admissions requirements. The defendants claim that no such policy exists, and that the letter from which Interboro derives its position is misrepresented. Nevertheless, the plaintiff claims that the amount disallowed in in error, and that such error was the result of HESC and OSC purposefully failing to follow established policies and regulations, all with the intent to close down the school.

 Interboro also complains that they are the victims of selective enforcement. It claims that it has been audited three times in the past six years. No other school has. The plaintiff claims that the refund sought by the State from Interboro is the most substantial ever demanded as a result of a TAP audit. The only other schools audited more than once during the last six years, according to Interboro, were business schools and proprietary institutions, such as Interboro, which are located downstate and cater to predominantly minority students. The defendants claim that many upstate schools have been audited and required to repay TAP funds. Moreover, the defendants claim that other schools have been disallowed more funds, in terms of the percentage of funds received, than Interboro.

 Interboro, in addition to seeking the TRO and preliminary injunction which seek to enjoin the State from withholding TAP funds, also alleges certain claims against the defendants in a Complaint filed on December 12, 1996. Interboro sets forth two claims for relief: (1) violation of the Due Process Clause and (2) violation of the Equal Protection Clause, both under the Fourteenth Amendment. In addition, Interboro seeks attorneys fees pursuant to 42 U.S.C. § 1988.

 The defendants have moved to dismiss the plaintiff's claims. It is the defendants' position that the Complaint must be dismissed on the basis of the Eleventh Amendment, on the basis that Interboro has not alleged a viable property interest in the receipt of TAP funds, that the plaintiff has not been denied due process, that the plaintiff has failed to state a claim for a violation of the Equal Protection Clause, that the defendants are entitled to qualified immunity, and that the Complaint fails to allege the personal involvement of the defendants in the alleged unlawful conduct.

 II. DISCUSSION

 The Court has before it a motion by the plaintiff for a Temporary Retraining Order and Preliminary Injunction, and a motion by the defendants to dismiss the Complaint. The Court first turns to the plaintiff's motion.

 A. Temporary Restraining Order/Preliminary Injunction

 The standard for granting a preliminary injunction is well-settled and undisputed. *fn1" "Entry of a preliminary injunction is appropriate where the party seeking the injunction establishes: (a) the injunction is necessary to prevent irreparable harm, and (b) either (i) likelihood of success on the merits, or (ii) sufficiently serious questions going to the merits of the claim as to make it fair ground for litigation, and that a balance of the hardships tips decidedly in favor of the movant." See, e.g., Malkentzos on Behalf of MM v. DeBuono, 102 F.3d 50, 54 (2d Cir. 1996); Resolution Trust Corp. v. Elman, 949 F.2d 624, 626 (2d Cir. 1991). However as to the second prong, "the more rigorous likelihood of success standard must be met where, as here, the movant seeks to 'stay governmental action taken in the public interest pursuant to a statutory or regulatory scheme.'" Young Jin Choi v. U.S., 944 F. Supp. 323, 324 (S.D.N.Y. 1996), quoting Plaza Health Laboratories, Inc. v. Perales, 878 F.2d 577, 580 (2d Cir. 1989) (standard of sufficiently serious question going to the merits and balance of hardships tipping in movant's favor does not apply when movant seeks to enjoin government action taken in public interest). In this case, the governmental action is the disallowance of TAP funds pursuant to New York Education Law § 665, and the public interest is the protection of state funds. Finally, the Court is mindful that a preliminary injunction is extraordinary relief not to be granted routinely. See, e.g., Patton v. Dole, 806 F.2d 24, 28 (2d Cir. 1986); Flexible Technologies, Inc. v. World Tubing Corp., 910 F. Supp. 109, 113 (E.D.N.Y. 1996). With these legal standards in mind, the Court now turns to the arguments of counsel.

 1. Irreparable Harm

 "In order to satisfy the irreparable harm requirement, '[a] moving party must show that the injury it will suffer is likely and imminent, not remote or speculative, and that such injury is not capable of being fully remedied by monetary damages.'" Time Warner Cable of New York City v. City of New York, 943 F. Supp. 1357, 1384 (S.D.N.Y. 1996), quoting NAACP v. Town of East Haven, 70 F.3d 219, 224 (2d Cir. 1995).

 The plaintiff argues that if it does not receive the expected TAP funds for the Spring semester, it will become insolvent by the Summer term, and therefore, suffer irreparable harm. In essence, the plaintiff is arguing that the action of withholding TAP funding will effectuate the destruction of an ongoing business concern, Interboro itself, and thereby cause irreparable harm. In support for this position, the plaintiff cites U.S.A. Network v. Jones Intercable, Inc., 704 F. Supp. 488 (S.D.N.Y. 1988), Roso-Lino Beverage Distributors, Inc. v. Coca-Cola Bottling Co., 749 F.2d 124 (2d Cir. 1984), and Semmes Motors, Inc. v. Ford Motor Co., 429 F.2d 1197 (2d Cir. 1970).

 The defendants argue that the withholding of TAP funds, at worst, may lead to a disruption of business at the institution. However, the defendants point out that the plaintiff's license to operate and permission to grant degrees have not been revoked or suspended as a result of the defendants' actions. In addition, the plaintiff still is permitted to participate in the TAP program. Thus, it is the defendants position that all that has occurred is that, after conducting an audit of the plaintiff's records, *fn2" certain students that the plaintiff certified as TAP eligible *fn3" have been determined by OSC actually to have been ineligible. Thus, the funds released on behalf of those students subsequently have been disallowed. The State now seeks a refund from the plaintiff. This is in the view of the defendants a situation for which money is plaintiff's sole remedy. Accordingly, the defendants conclude that the plaintiff will suffer no irreparable harm if TAP payments are withheld.

 Rather than requiring immediate repayment of all sums, the defendants claim that the Higher Education Services Corporation ("HESC") offered the plaintiff the opportunity to make arrangements for a repayment schedule that could alleviate the financial burden of the disallowance. Specifically, the defendants point to the November 19, 1996 letter that informed the plaintiff of the disallowance of TAP funds. In that letter, HESC, through its Executive Vice President, stated "until we receive the refund demanded in this letter, or the school makes other repayment arrangements, all funds payable to the school will be held, subject to offset, up to the amount of the disallowance." It is the defendants' position that this language, coupled with the fact that HESC's action did not affect TAP participation or the accreditation of Interboro, clearly rebuts an assertion of irreparable harm. As explained more fully below, the Court agrees with the defendants.

 Looking to the case support cited by the plaintiff, the Court finds that they are not sufficiently analogous to the instant situation to offer support for the plaintiff's view.

 In U.S.A Network, the plaintiff therein sought a preliminary injunction to enjoin the defendant from terminating an agreement with the plaintiff. See 704 F. Supp. at 490. In essence, the plaintiff, a national cable network, established that if the defendant terminated their agreement, it would lose exposure to a segment of the viewing public, certain fees, and an unquantifiable measure of its reputation in the industry, i.e., goodwill. The Court denied the plaintiff's application for a preliminary injunction on the ground that "the termination of USA from Jones' systems will not devastate or threaten the very existence of plaintiff's business." Id. at 492. As correctly iterated by the plaintiff herein "one exceptional circumstance warranting injunctive relief in a contract action exists where the prospective breach, if unrestrained, threatens the destruction or catastrophic impairment of an ongoing business." Id. at 491 (citations omitted). However, the U.S.A Network Court advised that "mere disruptions in business, [] though perhaps substantial, do not fall within this exception." Id. (citation omitted). In addition, the Court in U.S.A Network noted that preliminary injunctions "should issue not upon a plaintiff's imaginative, worst case scenario of the consequences flowing from the defendant's alleged wrong but upon a concrete showing of imminent irreparable injury." Id., citing State of New York v. Nuclear Reg. Comm'n, 550 F.2d 745 (2d Cir. 1977).

 In Roso-Lino, the Second Circuit reversed a District Court's denial of a preliminary injunction on the ground that the lower court incorrectly determined that it lacked the power to decide the injunction issue. 749 F.2d at 125. The Court then went on to consider the plaintiff's motion for an injunction seeking to prevent the defendant, Coca-Cola from terminating the plaintiff's beverage distributorship. The Roso-Lino Court held that "the loss of Roso-Lino's distributorship, an ongoing business representing many years of effort and the livelihood of its husband and wife owners, constitutes irreparable harm." Id. at 125-26. Of importance to the Court was the fact that if the injunction was not granted, the Rosa-Linos stood "to lose their business forever." Id. at 126.

 In Semmes Motors, the Second Circuit, inter alia, affirmed a lower court's grant of a preliminary injunction preventing the defendant, Ford Motor Company, from terminating the plaintiff's right to own and run a Ford dealership. As stated by Judge Friendly, "Ford's contention that Semmes failed to show irreparable injury from termination is wholly unpersuasive ... [as] the right to continue a business in which [plaintiff] had engaged for twenty years and into which his son had recently entered is not measurable entirely in monetary terms; the [plaintiff and his son] want to sell automobiles, not to live on the income from a damages award." 429 F.2d at 1205.

 In the instant case, unlike Roso-Lino and Semmes Motors, the plaintiff is not facing action that would effectively remove the ability of Interboro to function as a junior college. No accreditation is being removed, and Interboro is not being foreclosed from participation in the TAP program. All that is occurring is the defendants are recovering TAP funds that they have determined were wrongfully paid. Because of the amount of the disallowance, and on the assumption that it is required to immediately repay the entire amount, Interboro claims that the withholding of TAP funds will lead to its insolvency, and result in the closing of the institution. However, the Court finds that the plaintiff is seeking a preliminary injunction in this case based on a "worst case scenario." See U.S.A Network, 704 F. Supp. at 491. As was stated in the November 19, 1996 letter, the act of withholding future TAP funding would be ...


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