On appeal from the Office of Compliance, Department of Education, EDU Docket Nos. 5979-04, 5980-04, 5981-04, 5982-04, 5983-04, 5984-04.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges S.L. Reisner and Baxter.
Six private schools (appellants) appeal from a November 1, 2006 final decision by the State Board of Education (the Board) to disallow certain legal fees in the schools' calculation of the tuition rates they charged to sending school districts. We affirm.
Appellants are six private schools for disabled students, of whom four are non-profit corporations: Windsor School, Inc. in Pompton Lakes; Windsor Prep, Inc. in Paterson; Windsor Academy, Inc., also located in Paterson; and Shepard High School, Inc., in Morristown. Two are for-profit corporations: Shepard Academy, Inc., in Morristown and Windsor Learning Center in Pompton Lakes.
Prior to July 1, 2001, Dr. Daniel Greco and Philip Scardilli were officers and trustees of those six schools. On January 25, 2003, Greco and Scardilli were indicted by a Morris County grand jury on fifteen counts of criminal activity arising out of their management of the six schools. On March 17, 2003, Greco and Scardilli each pled guilty to one count of second-degree theft by deception, and the State dismissed the remaining counts. On August 18, 2003, Greco and Scardilli were each sentenced to a six-year term of imprisonment. At sentencing, both were required to (1) divest themselves of their interest in, and positions at, all six schools, (2) forfeit their professional licenses and certificates in the education field, and (3) pay restitution in excess of $3.6 million. The six schools are presently under new ownership and management.
Similar criminal indictments were also filed against the six corporate entities. Each corporation pled guilty to a single count of theft by deception on March 17, 2003. As part of the sentence, the corporations consented to entry of an order holding them jointly and severally liable for restitution in the amount of $3.6 million.
Greco, Scardilli, and the corporations incurred legal fees of more than $448,000 for the defense against the criminal charges. All six schools subsequently included those legal fees in the computation of tuition that they charged to the sending districts. Between May 28, 2003, and June 19, 2003, the New Jersey Department of Education, Office of Compliance (the Department) reviewed the tuition rates charged to the sending districts by appellants. The Department determined in its audit report that the legal fees incurred because of Greco and Scardilli's criminal conduct were non-allowable costs. On June 19, 2003, the Department concluded that the legal fees did not conform to the requirements of N.J.A.C. 6A:23-4.2(a)(1), and were unreasonable in accordance with N.J.A.C. 6A:23-4.5(a)(63).
By letters dated July 28, 2003, the Department amended the audit report to disallow the legal fees incurred by the six schools, based on the same reasoning applied to Greco and Scardilli: the legal fees incurred in defense of the corporations' criminal conduct did not conform to the requirements of N.J.A.C. 6A:23-4.2(a)(1) and were unreasonable in accordance with N.J.A.C. 6A:23-4.5(a)(63).
Appellants sought timely review of the Department's audit reports, and on November 18, 2003, Department of Education Chief of Staff Gloria Hancock denied appellants' appeals. After appellants filed separate petitions of appeal with the Commissioner of Education (the Commissioner), the Commissioner transmitted all six appeals to the Office of Administrative Law (OAL) for hearing.
Because all six appeals involved common issues of fact, the parties agreed to consolidate the cases before the OAL and stipulate to all relevant facts. On March 8, 2006, Administrative Law Judge (ALJ) Ken R. Springer issued his initial decision, finding that the Department properly disallowed legal fees from appellants' approved tuition rates for the 2001-2002 and 2002-2003 school years.
The ALJ found that the legal expenses incurred in the "unsuccessful defense of individuals and corporate entities engaged in the misuse of public funds do not qualify as an expense 'incurred by an ordinary prudent person in the administration of public funds.'" Administrative Law Judge Springer further denied appellants' request for an extension of the thirty-day requirement for repayment of the funds to the school districts, reasoning that the Commissioner had not reserved the right to waive application of the deadline. The ALJ reasoned that even if the Commissioner did have such authority, it should be exercised sparingly. Given that the legal expenses here were incurred from criminal conduct, the ALJ determined that the equities did not favor an extension of the 30-day period.
On April 6, 2006, the Commissioner adopted the ALJ's initial decision. The Commissioner's decision stated:
[T]he Commissioner is in accord with the ALJ's grant of summary decision to the Department, as she concurs with his determination that the Department appropriately disallowed legal fees incurred in connection with the defense against criminal charges-leading to the convictions for theft by deception of two former directors and the corporate entities-from petitioners' approved tuition rates for the 2001-02 and 2002-03 fiscal years. The Commissioner further agrees that even assuming, arguendo, she had the authority to extend the 30-day timeline prescribed by regulation for the repayment of these monies, public policy and the equities in this matter militate against such an action.
The Board upheld the Commissioner's decision in an opinion dated November 1, 2006, after which appellants filed a notice of appeal with this court.
Appellants present three issues for our consideration: (1) the Board's decision to disallow the legal expenses was arbitrary, capricious and unreasonable because it has no legal basis and the Board did not explain its decision; (2) the Board's decision constituted "impermissible ad hoc rule-making;" and (3) the Board's decision that required appellants to ...