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Civil Resource Manual

83. Grants -- Breach Of Conditions

An increasingly large portion of federal disbursements are made through grants rather than contractual arrangements. The distinctions between grants, contracts, and hybrids generally known as cooperative agreements are not always clear. The Federal Grant and Cooperative Agreement Act of 1977, 41 U.S.C. § 501 et seq., addresses distinctions between funding arrangements.

The United States is entitled to recover for breaches of grant conditions much as it would recover for breaches of contractual provisions. Grant-in-aid arrangements are much like contracts. See Pennhurst State School & Hospital v. Halderman, 451 U.S. 1 (1981). Some statutory schemes explicitly provide for recoveries of grant overpayments, and some further provide for administrative determinations of grant overpayments that are reviewable only on a substantial evidence basis. See Bell v. New Jersey, 461 U.S. 773 (1983). Even in the absence of such statutory schemes, a right to recover damages or restitutionary awards exists as a matter of common law, on the theory that the government possesses a right to recover funds illegally or erroneously paid out. See United States v. Wurts, supra; United States v. Bank of Metropolis, 40 U.S. 377, 401 (1841).

Payments made by mistake--e.g., under a misapprehension that grant conditions are being observed--are recoverable. See United States v. Mead, 426 F.2d 118 (9th Cir. 1970). A failure to observe record-keeping requirements can support a recovery of unsupportable disbursements. See United States v. Independent School District No. 1, supra. In determining contractual or grant obligations, the terms of existing statutes and regulations are read into the agreement. See Thorpe v. Housing Authority, 393 U.S. 268, 279 (1969); Maryland-National Capital Park & Planning Commission v. Lynn, 514 F.2d 829, 833 (D.C. Cir. 1975); Rehart v. Clark, 448 F.2d 170, 173 (9th Cir. 1970). The continuing interest of the United States in grant funds can create an equitable lien on funds or property purchased with them. See Henry v. First National Bank of Clarksdale, 595 F.2d 291, 309 (5th Cir. 1979), cert. denied, 444 U.S. 1074 (1980). See also In re Joliet-Will County Community Action Agency, 847 F.2d 430 (7th Cir. 1988); In re Southwest Citizens' Organization for Poverty Elimination, 91 B.R. 278 (Bankr. D.N.J. 1988) ("HHS' rights in the motor vehicles and equipment purchased with grant funds and within 25 C.F.R. 74.136(a) are paramount to those of the Trustee"); In re Madison County Economic Opportunity Commission, 53 B.R. 541 (Bankr. S.D. Ill. 1985) (government had an equitable lien in property purchased with grant funds.)

Government funds from a federal grant cannot be attached or made subject to garnishment action, until they have paid for the purposes for which they were appropriated. Buchanan v. Alexander, 45 U.S. (4 How.) 20 (1846); Palmiter v. Action, Inc., 733 F.2d 1244 (7th Cir. 1984).

[cited in USAM 4-4.460]