The Court also notes that New York Education Law § 665(4)(b) & (c) expressly states, in connection with institutional refunds, that the "president [of HESC] shall be empowered to: (i) require such payment immediately, (ii) accept a repayment schedule or installment payments over a reasonable period of time, (iii) reduce any future award received by such student by the amount of the refund due, or (iv) reduce any future payments receivable by the institution on behalf of currently eligible students by the amount of refund due ..." (emphasis added). In addition, "the HESC board of trustees shall promulgate regulations governing procedures for the assertion, appeal and recovery of a refund claimed by the corporation against a student or an institution." Education Law § 665(4)(c). Thus, pursuant to statute, the plaintiff has options other than immediate repayment of the total disallowance. Moreover, Interboro has an avenue for review of the audit decision and a means for recovery of any wrongfully refunded sums. There is no indication in the record that the plaintiff has availed itself of either the repayment schedule or installment option, or of the administrative appeal and recovery option afforded it under New York law.
For the reasons set forth above, the Court cannot say that the plaintiff will be harmed irreparably if the motion for a preliminary injunction is not granted. Accordingly, the plaintiff's motion is denied.
2. Likelihood of Success on the Merits
Given the Court's finding that the plaintiff has failed to show irreparable harm if the preliminary injunction is not granted, the Court need not address the issue of likelihood of success on the merits.
The Court now turns to the defendants' motion to dismiss the plaintiff's Complaint.
B. Standard For A Motion To Dismiss
On a dismissal motion for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6), the general rule is that the allegations in a plaintiff's complaint are deemed to be true and must be liberally construed in the light most favorable to the plaintiff. Dahlberg v. Becker, 748 F.2d 85, 88 (2d Cir. 1984), cert. denied, 470 U.S. 1084, 85 L. Ed. 2d 144, 105 S. Ct. 1845 (1985). A complaint should not be dismissed unless it appears beyond a reasonable doubt that the plaintiff cannot in any way establish a set of facts to sustain her claim which would permit relief. Hughes v. Rowe, 449 U.S. 5, 10, 66 L. Ed. 2d 163, 101 S. Ct. 173 (1980); Bass v. Jackson, 790 F.2d 260, 262 (2d Cir. 1986).
"[A] Rule 12(b)(6) motion is addressed to the face of the pleading. The pleading is deemed to include any document attached to it as an exhibit, Fed. R. Civ. P. 10(c), or any document incorporated in it by reference." Goldman v. Belden, 754 F.2d 1059, 1065 (2d Cir. 1985). In other words, only those documents that are specifically attached, or in some way integral to the Complaint are to be considered by the Court on a motion to dismiss. See San Leandro Emergency Medical Group Profit Sharing Plan v. Philip Morris Companies, Inc., 75 F.3d 801, 808 (2d Cir. 1996).
It is with these legal standards in mind that the Court turns to the issues presented.
C. Eleventh Amendment Immunity
The first issue raised by the defendants is that of the immunity of the State of New York, its agencies, and its officers who are sued in their official capacities from being subject to suit in a federal Court. It is the defendants' position that the plaintiff's Complaint only seeks monetary relief against the defendants in their official capacities.
It is well-settled that the Eleventh Amendment bars suits in federal Court "by private parties seeking to impose a liability which must be paid from public funds in the state treasury." Edelman v. Jordan, 415 U.S. 651, 663, 39 L. Ed. 2d 662, 94 S. Ct. 1347 (1974); Pennhurst State School & Hosp. v. Halderman, 465 U.S. 89, 98-99, 79 L. Ed. 2d 67, 104 S. Ct. 900 (1984) (stating the general rule that Eleventh Amendment immunity applies unless the State consents to suit, Congress expressly overrides it, or the party waives immunity). Even suits resolved in the plaintiff's favor that would have only a collateral, retroactive, or ancillary effect on the state treasury have been barred under the Eleventh Amendment. See Id. at 668; Yorktown Medical Laboratory, Inc. v. Perales, 948 F.2d 84, 87 (2d Cir. 1991). Thus, to the extent that the plaintiff seeks monetary relief against the defendants in their official capacities, such claims are barred by the Eleventh Amendment.
The plaintiff argues that the defendants mischaracterize its Complaint. Rather than seek a monetary award, the plaintiff claims that it seeks only prospective declaratory and injunctive relief against the defendants in their official and individual capacities. In addition, the plaintiff states that its claims for legal fees under 42 U.S.C. § 1988 are asserted against the defendants in their individual capacities only. For those reasons, the plaintiff argues that the Eleventh Amendment is not a bar to any claim alleged in the Complaint.
It has long been the rule that suits against state officials in their official capacity for prospective injunctive or declaratory relief are not barred by the Eleventh Amendment. See Ex Parte Young, 209 U.S. 123, 160, 52 L. Ed. 714, 28 S. Ct. 441 (1908). Moreover, suits against state officials in their personal capacity are not barred by the Eleventh Amendment, even for actions required by their official duties. See Hafer v. Melo, 502 U.S. 21, 27-28, 116 L. Ed. 2d 301, 112 S. Ct. 358 (1991). In the instant case, the plaintiff claims that it seeks a declaration that the defendants acted wrongly and an Order enjoining the defendants from so acting in the future. The fact that such forward looking relief may have some effect on the treasury, it is argued, should not impose an Eleventh Amendment bar.
The Court agrees. The Eleventh Amendment bars those claims against state officials sued in their official capacity to the extent that the relief sought will have a direct or retroactive effect on the state treasury. See Edelman, 415 U.S. at 668. However, prospective declaratory and injunctive relief are not barred by the Eleventh Amendment, even if compliance with the Court order would affect the state treasury. Id. Accordingly, the defendants' motion to dismiss the plaintiff's Complaint, as against the defendants sued in their official capacities, is denied insofar as the Complaint seeks prospective declaratory and injunctive relief.
D. Substantive Due Process Claim
The Court now turns to the defendants' motion to dismiss the plaintiff's first claim, that the withholding of TAP funds violates the Fourteenth Amendment. The plaintiff alleges that the defendants Nolan and Grinage have violated the plaintiff's due process rights by refusing to follow SED policies during the audit process. In addition, the plaintiff alleges that the defendant Nolan also has violated the plaintiff's due process rights by attempting to close Interboro on bases that were subsequently overturned, and by intentionally creating erroneous audit standards that were applied against Interboro. Also as part of the first claim, the plaintiff alleges that the defendant Attmore, personally and through his subordinates, acted in bad faith and with ill-will in that he refused to follow SED Commissioner Regulations, policies and procedures, and sought to punish Interboro. Finally, the plaintiff's first claim alleges that the defendant McCall should be liable for the alleged due process violations against Interboro for failing to intervene when he became aware of the violations.
To properly state a substantive due process claim, a plaintiff must identify a property interest and explain how it has been interfered with by the government. See Greene v. Town of Blooming Grove, 935 F.2d 507, 510 (2d Cir.), cert. denied 502 U.S. 1005, 116 L. Ed. 2d 657, 112 S. Ct. 639 (1991); Paul v. Davis, 424 U.S. 693, 709, 47 L. Ed. 2d 405, 96 S. Ct. 1155 (1976). A plaintiff must also allege that this deprivation was arbitrary or not reasonably related to a legitimate government interest. See Brady v. Town of Colchester, 863 F.2d 205, 215 (2d Cir. 1988); Reno v. Flores, 507 U.S. 292, 302, 123 L. Ed. 2d 1, 113 S. Ct. 1439 (1993). It is important to note that "substantive due process protects against government action that is arbitrary, conscience-shocking, or oppressive in a constitutional sense, but not against government action that is 'incorrect or ill-advised.'" Kaluczky v. City of White Plains, 57 F.3d 202, 211 (2d Cir. 1995). The defendants argue that the plaintiff has failed to allege a valid property interest that has been interfered with by any defendant, and thus, this Court must grant the motion to dismiss the plaintiff's first claim.
1. Property Interest In TAP Funds
As stated in Board of Regents of State Colleges v. Roth, property interests are not created by the Constitution. 408 U.S. 564, 577, 92 S. Ct. 2701, 33 L. Ed. 2d 548 (1972). "Rather they are created and their dimensions defined by existing rules or understandings that stem from an independent source such as state law--rules or understandings that secure certain benefits and that support claims of entitlements to those benefits." Id. As the Roth Court explained, a property interest in a benefit must be based on more than a mere unilateral expectation of that benefit. The person claiming the benefit must have a legitimate claim of entitlement to it. Id. As stated by this Circuit
Looking to state law, 'we focus initially on the relevant statute, regulation, or contract establishing eligibility for the government benefit at issue.' Plaza Health Laboratories, Inc. v. Perales, 878 F.2d 577, 581 (2d Cir. 1989). If the statute, regulation, or contract in issue vests in the state significant discretion over the continued conferral of that benefit, it will be the rare case that the recipient will be able to establish an entitlement to that benefit. Id.; RR Village Ass'n [v. Denver Sewer Corp.], 826 F.2d [1197,]1201-02 [(2d Cir. 1987)].
Kelly Kare, Ltd. v. O'Rourke, 930 F.2d 170, 174 (2d Cir.), cert. denied 502 U.S. 908 (1991).
The defendants argue that the plaintiff has failed to show that it has a valid property interest in the receipt of TAP funds prior to audit. This is a critical distinction from the early cases involving institutions, TAP funding, and the existence of a property interest. Earlier cases arose in the context of a denial of the institutions right to receive funding, i.e., participation in the TAP program. See, e.g., Midtown School of Business v. Foley, 1990 U.S. Dist. LEXIS 2384, 1990 WL 21287 *6 (N.D.N.Y.). In the instant case, Interboro has not been denied participation in the TAP program. Rather, the funds that it claims entitlement to are being withheld as an offset against disallowances determined by an audit. It is on the basis of this distinction - the denial of participation versus participation and the withholding of funds to be applied as an offset - that the defendants claim that the plaintiff cannot show that the defendants' actions have affected a property interest of the plaintiff.
The plaintiff, of course, disagrees. It is the plaintiff's contention that because the defendants had no discretion to withhold TAP funds without cause, but rather, could only do so after making a finding of wrongdoing by the plaintiff, the plaintiff has a property interest in the continued receipt of TAP award funds. See Walz v. Town of Smithtown, 46 F.3d 162, 168 (2d Cir.), cert. denied 132 L. Ed. 2d 810, 115 S. Ct. 2557 (1995); Kelly Kare Ltd., 930 F.2d at 176.
The Court first notes that the issue of whether the Complaint alleges a valid property interest is not easily resolved. Even the parties themselves have tended to vacillate between two distinct alleged property interests when discussing this issue: participation in the TAP program and, assuming participation in the TAP program, entitlement to receipt of the award funds by the participating institution. As to the former, this Court itself has recognized that participation in the program is a property interest, such that its interruption raises due process concerns. See Midtown School of Business, supra. The Court will now consider the latter, which is an issue of first impression for the Court.
The Court first turns to the New York statutory scheme. Under the New York's Education Law, institutions are charged with the duty of certifying to HESC that each student in attendance who has applied for a TAP award is, in fact, eligible. See N.Y. Educ. Law § 665(3)(a) & (c)(i). OSC must then audit the participating institutions to ensure compliance. See N.Y. Educ. Law § 665 (3)(b). If HESC finds that an institution erroneously certified a student, HESC's president
shall be empowered to: (i) require such payment immediately, (ii) accept a repayment schedule or installment payments over a reasonable period of time, (iii) reduce any future award received by such student by the amount of the refund due, or (iv) reduce any future payments receivable by the institution on behalf of currently eligible students by the amount of refund due with a direction to the institution to consider each eligible student's account to have been credited with the amount of his award eligibility for that term of attendance.