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Board of Contract AppealsU.S. Department of Housing and Urban DevelopmentWashington, D.C. 20410-0001In the Matter of:HUDBCA No. 91-5922-D64Docket No. 91-1681-DRJIMMIE DALLAS, SR.,RespondentFor the Respondent:W. A. Kimbrough, Jr., Esq.Turner, Onderdonk, Kimbrough& Howell, P.A.1359 Dauphin StreetMobile, Alabama 36604For the Government:John K. Grisso, Esq.HUD Atlanta Regional Office75 Spring Street, S.W., Room 676Atlanta, Georgia 30303-3388ORDER OF DISMISSALIn accordance with 24 C.F.R. §26.24(d), a bench decision wasissued in this case on January 27, 1992. A copy of thetranscribed bench decision is enclosed. Respondent was notifiedat the hearing that the time to request Secretarial Review wouldbegin to run from receipt of this Order and a transcribed copy ofthe bench decision.This case is dismissed as decided.ORDERED this 27th day of January, 1992.IXvz. 1 Jean S.Administoerve nIdge

67AFTERNOON SESSIONDETERMINATIONStatement of the CaseBy letter dated April 25, 1991, JimmieDallas, Sr., Respondent inthis case, wasnotified that the United states Department of7Housing and Urban Development (HUD) proposed to8debar him and his affiliates from participationin departmental programs for a period of five10years from the date of a Limited Denial of11Participation (LDP) imposed on April 25, 1990.12Dallas and his affiliates were temporarily13suspended pending determination of debarment.14The affiliates named in the notice of proposed15debarment were Medical Community, Inc. (MCC),16Community Convalescent Center (CCC), and DBS17Management Company, Inc.18The grounds cited for the proposed debarment19concerned Dallas' actions as President of MCC and20DBS Management. MCC was the owner of Community21Convalescent Center (CCC) in Mobile, Alabama,22which was a nursing home with a mortgage insured23,by HUD-FHA under Section 232 of the National24Housing Act; DBS Management was the an-site25management agent of CCC.Dallas is charged as a

68principal of both MCC and DBS Management withwrongfully paying for legal services related toproject development and a bankruptcyreorganization of MCC by using project funds ofCCC, in violation of the Regulatory Agreementbetween HUD and MCC; and for refusing to7reimburse the project fund account when directedto do so by HUD.9,Dallas is further charged withrefusing to replace DBS Management as management10,agent for CCC, and for continuing to personally11manage CCC after he was under the strictures of12an LDP, in violation of the terms of the13Regulatory Agreement between HUD and MCC, and the14express terms of the LDP.15Sections 305(b), (c)(2), (d), and (f) as causes16for the proposed debarment, and 24 C.F.R. 40517(a)(2) as cause for the temporary suspension.18HUD cites 24 C.F.R.Respondent Dallas denies that he19committed willful or egregious violations of the20Regulatory Agreement between MCC and HUD, or ofthe Management Agreement applicable to DBS22Management, and thus contends that a five year23debarment is excessive.24intentional contractual violations, contending25that he did not understand the obligations of theHe denies all charges of

69Regulatory Agreement or Management Agreement, andthus was unaware that he was in violation ofthem.He further states that he violated theterms of the LOP by continuing to manage CCCbecause he could not afford to hire a managementagent.Dallas made a timely request for a8hearing on the proposed debarment and suspension.aThis determination is based on the record1established at the hearing, and it is issued, byagreement of the parties, as a bench decisionpursuant to 24 C.f.R., Section 26.24(d).13141516171819202122232425

70FINDINGS OF FACT1.On December 19, 1988, Dallasexecuted a Regulatory Agreement incident toreceipt by MCC of a mortgage insurec by HUD-FHAfor 3,690,400 under Section 232 of the NationalHousing Act.Dallas executed the RegulatoryAgreement as President of MCC, a closely held8Alabama corporation formed in 1970.9also the majority shareholder of MCC.Dallas wasThe10purpose of the HUD-insured mortgage was to11consolidate the debts of MCC, then in bankruptcy12reorganization, so that it could satisfy a13construction loan and operate the CCC, a nursing14home.15(Exh. G-2, Testimony of Mr. Dallas.)2.On June 6, 1988, Dallas also16executed a Management Certification Agreement to17HUD as President of DBS Management Company.18was approved by HUD as management agent for CCC,19and Dallas was the on-site manager of CCC.20Management Certification states that DBS agrees21to "assure that all project expenses are22reasonable in amount and necessary to the23operation of the project."24the Management Certification to comply with the25project's Regulatory Agreement, and anyDBSTheDBS further agreed in

71applicable HUD handbooks, notices, or otherpolicy directives that relate to the managementcf the projects.(Exh. G-28).When Dallas executed the RegulatoryAgreement and the Management CertificationAgreement, he had not read them. Furthermore, hedid not read them throuch at any time todetermine the contractual obligations of eitherMCC or DBS Management.Dallas attended no10training or informational sessions conducted by1HUD to understand the complex obligations of12financial management and reporting that were13central to compliance with the RegulatoryAgreement and Management Agreement. HUD15apparently gave the applicable handbook and16training to17preparing the books and records of CCC, not to18Dallas.19the.requisite explanatory handbook for his own20guidance, although he was the project manager.21He believed that so long as MCC remained current22on its mortgage payments it was in full23compliance with the Regulatory Agreement. He24believed that so long as DBS Management was able25to run the CCC day-to-day, that it was inHarrell, the CPA who would beDallas requested neither training nor

72compliance with its Management Certification.2Dallas believed that all of the income received3from patients of CCC was income of MCC, and wasnot In any way controlled by the terms of theRegulatory Agreement.64.(Testimony of Mr. Dallas.)The closing for the construction7loan used to build CCC was scheduled for February814, 1990. The law firm of Sirote, Permute9represented MCC at various times, and MCC owed10the law firm in excess of thirty thousand dollars11( 30,000) for legal services unrelated to12operation of CCC.13Slepian of the firm demanded from Dallas that MCC14pay the firm its legal fees or it would not15represent MCC at the loan closing.16behalf of MCC, agreed in writing to pay Sirote,17Permute ten thousand dollars ( 10,000) in18September 1989 and an additional seventeen19thousand, five hundred ( 17,500) starting in20March 1990. On September 29, 1989, Dallas wrote21a check for22Sirote, Permute, using CCC operating project23income to cover the check. He did not obtain24HUD's permission to write the check before he d i d25so. (Answer to Complaint; testimony of Mr.In September 1989, a Mr.Dallas, onten thousand dollars ( 10,000) to

liii731 1', Dallas; Exh 5-4.)25.13Dallas was unaware that the tenthousand dollars ( 10,000) he paid to Sirote,Permute was not allowed to be paid using projectoperating income.The monies received frompatients at the nursing home constitute project7 1 operating income. Paragraph 6(b) of the8Regulatory Agreement provides that MCC as ownerof CCC, the project, could not, without the prior10written approval of the Secretary of HUD:11".pay out any fund except fromsurplus cash, except for reasonableoperating expenses and necessaryrepairs."(Exh G-2.)12136.The Regulatory Agreement defines14most of the relevant terms it uses."Project" is15defined to include the mortgaged property and16"all its other assets of whatsoever nature, used17in or owned by the business conducted on said18mortgaged property.""Surplus cash - is defined19to be the cash remaining after the payment of all20mortgage sums currently due, the deposit of21required reserves, all other current financial22obligations of the project, and the segregation23of required special funds and tenant security24deposits.Surplus cash is computed twice a25fiscal year, in June and January.(Exh. G-2;

74Testimony of Ralph Puggs.)7.The ten thousand dollars ( 10,000)paid ty Dallas to sirote, Permute was not fromsurplus cash.The payment was made usingoperating project funds derived from paymentsfrom the patients at CCC.The payment by Dallaswas recorded on the Schedule of Disbursements inthe Monthly Accounting Report filed with HUD onSeptember 30, 1989. The ten thousand dollarsC( 10,000) covered legalfees for representation11of MCC in Bankruptcy Court, and for other work12incident to corporate and operational costs of13MCC.14expenses of1516None of the legal fees were for operating8.CCC. (Exhs. G-4; G-9.)By letter dated January 16, 1990,Chief of HUD's Loan Management Branch,17asked Dallas for clarification of payment18ten thousand dollars ( 10,000) to the law firm.19HUD stated in that letter that,20be an expense of the owner and should not be paid21by the project.22the project has been reimbursed ten thousand23dollars ( 10,000)." (Exh. G-5.)24259.Onof theThis appears toProvide evidence to show thatFebruary 23, 1990, HUD receivedDallas' response to its January 16, 1990, letter.

75In that response, Dallas wrote that the check tothe law firm was for lecal fees for CommunityConvalescent Center and not for personal legalexpenses of Mr, Dallas. - Dallas apparently didnot understand that the ownerreferred to in theJanuary 16 letter from HUD was MCC, anal not7Dallas personally. (Exh. G-6.)10. On February 23, 1990,a10Lunsford, Manager of the HUD Area Office inBirmingham, wroteDallas a memorandum letterentitled "Notice cf Regulatory Agreement12Violations." At Page 2 of that document,13states the requirements of Paragraph 6(b) of the14Regulatory Agreement, and charges that improper15payment of ten thousand dollars ( 10,000) to the16law firm was made in violation of Paragraph 6(b)17in September 1989, because the payment was18for an operating expense of the project, but was19in the nature of a development cost, which is not20payable from project operating income.21on behalf of MCC, was ordered to cease making any22payments in violation of the Regulatory23Agreement.24to provide satisfactory evidence to HUD that all25cited violations of the Regulatory Agreement haditnotDallas,He was also ordered, within 30 days,

76been corrected. (Exh. G-7.) On March 6, 1990,Dallas sent a written response to HUD on other3issues raised in the February 23, 1990 Notice ofRegulatory Violations, but stated tnat the lawfirm itself would respond to HUD to show that theten thousand dollars ( 10,000) was for operatingexpenses of the project.8(Exh. G-8. )!11. On March 7, 1990, the law firm, bythen10renamed E& Permute, P.C., sent aLunsford at HUD,whichit was paiddescribing the legalletter toservice forthe ten thousand dollars12!( 10,000).13from the14apparently misunderstood HUD's concern with the15payment to thefirm of ten thousand16( 10,000) fromproject income.171understood that HUD believed the181.been19Inot the corporation itself.20indication that Jones' response was written based21 1on his familiarity with the Regulatory Agreement,22 !Management Agreement, or relevant HUD handbook.23Nonetheless, 1 find that Jones' response to HUDJoseph P. Jones, Jr., the attorneylaw firm that wrote the Marchperformedfor individual7letter,dollarsJones somehowlegalwork hadofficers of MCC,There is no12425establishes that the ten thousand dollars1( 10,000) paymentwas for legal services related