January 31, 2020 Public Contract Law Journal

The Rise & Fall of Equitable Offset

by Michael Brustein, Bonnie Graham, Emily Fridman & Megan Trachman
Graduation

Graduation

Michael Brustein cofounded the firm Brustein & Manasevit, PLLC in 1980 and was instrumentally involved in many of the cases discussed in this article. Bonnie Graham joined
Brustein & Manasevit, PLLC in 2009, became a partner in 2016, and was also instrumental in arguing several of the cases in this article. Emily Fridman and Megan Trachman were associates with Brustein & Manasevit, PLLC.

I.  Introduction

For nearly three decades, the doctrine of equitable offset injected principles of fairness and practicality into the process for recovery of disallowed expenditures by federal education grantees. Since its genesis in the late 1980s, the doctrine has been an invaluable tool for U.S. Department of Education (ED or Department) grantees when faced with liabilities to the federal government. By invoking equitable offset as a defense, education grantees have been able to use hundreds of thousands of dollars in federal education funds for their intended purpose of serving schools and students, rather than returning those funds to the federal government. The premise of the defense is that when a grantee spends general, non-federal funds to benefit a federal program, those expenditures may be used to offset liabilities to the federal government. Applying the doctrine of equitable offset, a federal grantee may reduce its audit liability by demonstrating that non-federal funds were used to benefit the program in an allowable manner.

Grounded in basic contract principles, equitable offset treats federal grantees similarly to public contractors. When a federal grant is awarded, the grantee and the federal government enter into an agreement regarding the amount of funds to be spent on a particular program. Pursuant to that agreement, the federal government holds the grantee accountable for demonstrating compliance with agreed upon spending obligations. Under the doctrine of equitable offset, the grantee’s ability to demonstrate compliance with spending requirements is tantamount to complete fulfillment of its obligations. Therefore, a grantee may evade liability for misspent funds by demonstrating that it has spent the agreed-upon amount of funds to benefit the program at issue.

At its peak, the Department strongly embraced equitable offset. In fact, in 1995, the Department went so far as to publish proposed equitable offset regulations.1 Although they never made it to the final regulation stage,2 the proposed rules demonstrate the Department’s support for the doctrine and acknowledgment of its value to grantees. Despite the doctrine’s steady rise and undeniable value to federal award grantees, the Department has recently signaled a likely beginning of the end of this defense to repayment of federal funds in denying the availability of offset based on equitable factors surrounding the underlying mis-expenditures. Specifically, the ED denied an equitable offset for one grantee, in which it determined the underlying violations were too egregious to warrant the remedy, and for another grantee, in which the underlying violation was the result of intentional misconduct of three employees.3 Federal courts upheld the Department’s denial in both circumstances,4 providing the ED with almost unfettered discretion in determining whether an offset is warranted and departing from government-wide practice that automatically extends this opportunity to grantees — not as a matter of equity, but as a fulfillment of the government’s agreement.

This article will begin by tracing the origins of the doctrine of equitable offset and explaining the test used to determine whether it applies. Next, this article will analyze key examples of its application in administrative and judicial proceedings, including a case, that began to narrow the scope of its application. This article will proceed to cover a recent case, which eschewed the doctrine altogether, and discuss the likely implications of the Department’s recent rejection of the doctrine for ED grant recipients, and what this could mean for all federal grantees.

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