Pursuant to Federal Rule of Appellate Procedure 43 c 2 , Secretary of the… v. Riley UNITED STATES COURT OF APPEALS 1 FOR THE SECOND CIRCUIT 2 August Term 2006 3…

* Pursuant to Federal Rule of Appellate Procedure 43(c)(2),
Secretary of the Department of Education Margaret Spellings is
automatically substituted for former Secretary of the Department
of Education Richard W. Riley as defendant-appellant in this
case.
1
06-0976-cv
Medrash v. Riley
UNITED STATES COURT OF APPEALS 1 FOR THE SECOND CIRCUIT 2
August Term 2006 3
Docket No. 06-0976-cv 4
(Argued: May 15, 2007 Decided: October 17, 2007) 5 __________________________________________________________ 6
BETH MEDRASH EEYUN HATALMUD, 7
Plaintiff-Appellee, 8
v. 9
MARGARET SPELLINGS,* in her official 10 capacity as Secretary of the 11 Department of Education, 12
Defendant-Appellant. 13
__________________________________________________________ 14
Before: NEWMAN, MINER, and KATZMANN, Circuit Judges. 15
Appeal from a summary judgment in favor of plaintiff entered 16 in the United States District Court for the Southern District of 17 New York (Owen, J.) directing the payment with interest of the 18 portion of Pell Grant funds that was withheld by defendant 19 pursuant to a Settlement Agreement pending resolution of 20 plaintiff’s ultimately unsuccessful challenge to the termination 21 of its eligibility to participate in the Pell Grant Program. 22
23 Reversed and remanded. 24

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2
NATHAN LEWIN (Alyza D. Lewin, on the 1 brief), Lewin & Lewin, LLP, 2 Washington, D.C., for Plaintiff- 3 Appellee. 4
SHEILA M. GOWAN (Michael J. Garcia, 5 United States Attorney for the 6 Southern District of New York; 7 Kathy S. Marks, Assistant United 8 States Attorney, of counsel), New 9 York, New York, for Defendant- 10 Appellant. 11

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3
MINER, Circuit Judge: 1
Richard W. Riley, originally named as defendant-appellant, 2
in his official capacity as the then-Secretary of the United 3
States Department of Education (“DOE”), appealed from a summary 4
judgment entered in the United States District Court for the 5
Southern District of New York (Owen, J.) in favor of plaintiff- 6
appellee Beth Medrash Eeyun Hatalmud (“BMEH”), an educational 7
institution devoted to Judaic and Rabbinical studies. The 8
judgment directed payment with interest of the portion of Pell 9
Grant funds that was withheld by the DOE, pursuant to a 10
Settlement Agreement, pending resolution of BMEH’s ultimately 11
unsuccessful challenge to the termination of its eligibility to 12
participate in the Pell Grant Program. The District Court 13
determined that the funds withheld should be treated as a bond 14
posted by BMEH under the security provision of a temporary 15
restraining order previously issued but subsequently dissolved. 16
We disagree with that determination for the reasons that follow. 17
BACKGROUND 18
The Pell Grant Program (the “Program”), established under 19
Title IV of the Higher Education Act of 1965, provides grants to 20
assist students in need of financial aid for meeting the costs of 21
their post-secondary education. See 34 C.F.R. § 690.1. Under 22
the Program, the DOE has discretion to provide funds, through 23
several different methods, to institutions participating in the 24
Program. See id. § 668.162(a)(1). The method of funding for 25
BMEH was called the “reimbursement method,” in which the school 26

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4
paid student awards from institutional funds and later sought 1
reimbursement from the DOE. Id. § 668.162(d)(1). 2
In February, 1994, the DOE issued a notice for the 3
termination of BMEH’s eligibility to participate in the Pell 4
Grant Program. The basis for the termination was the DOE’s 5
finding that BMEH did not prepare its students for employment in 6
a recognized occupation, a requirement for Pell Grant 7
eligibility. Hatalmud v. Riley, No. 97-cv-2035 (RO), 1998 WL 8
1570, at *1 (S.D.N.Y. Apr. 3, 1998). On July 10, 1995, BMEH 9
brought an action in the United States District Court for the 10
Southern District of New York challenging the DOE’s decision that 11
it would not pay BMEH’s requests for reimbursement pending an 12
administrative decision on whether BMEH’s eligibility was 13
properly terminated. When BMEH brought its action, it 14
simultaneously sought a temporary restraining order (“TRO”) 15
requiring the DOE to pay two requests for reimbursement that 16
previously had been submitted and remained unpaid. 17
At the hearing on the TRO, the District Court, in granting 18
BMEH’s reimbursement requests, stated: “[I]t seems to me that it 19
is in order to direct that payments be forthwith resumed, made or 20
otherwise.” The DOE thereupon requested a bond, in accordance 21
with Fed. R. Civ. P. 65(c), to secure the DOE for any costs and 22
damages it might suffer if the TRO were found to be wrongfully 23
issued. BMEH’s counsel suggested that the DOE “hold back ten 24
percent of the payments as a bond” because “[t]here are loans to 25
everyone.” Adopting this suggestion, the District Court directed 26

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5
the DOE to withhold ten percent of the ordered reimbursements as 1
a Rule 65(c) bond. On July 14, 1995, the court issued a written 2
Order granting the TRO, requiring the DOE to release “all monies 3
due to [BMEH],” and, “[i]n lieu of a bond,” permitting the DOE to 4
withhold “ten percent (10%) of the monies currently held by it.” 5
The Order also scheduled a hearing on the preliminary injunction 6
sought by BMEH to require future reimbursement payments pending 7
trial. On July 28, 1995, prior to any further proceedings, the 8
parties resolved their dispute in its entirety and entered into a 9
Settlement Agreement. 10
Under the terms of the Settlement Agreement, the DOE 11
admitted neither the factual allegations in BMEH’s complaint nor 12
liability on account of any of the facts or circumstances alleged 13
in the complaint. The parties agreed to seek expedited 14
proceedings in the pending administrative proceedings relating to 15
the DOE’s proposed termination of BMEH’s participation in the 16
Pell Grant Program. The DOE also undertook to pay otherwise 17
eligible claims for reimbursement submitted by BMEH during the 18
pendency of the termination proceedings, except that the DOE 19
“[would] be entitled to retain ten percent (10%) of the amount 20
thereof pending final agency decision.” 21
The parties agreed that the TRO would be dissolved and that 22
“no force and effect” would be given “to the findings made on the 23
record” by the District Court in connection with the TRO 24
application. Finally, the parties stipulated that the action be 25
dismissed with prejudice and without costs and that any dispute 26

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6
relating to compliance with the terms of the Settlement be 1
resolved by the District Court without the need to file a new 2
action. The Stipulation of Settlement was “So Ordered” by the 3
District Court on August 3, 1995. 4
Thereafter, an Administrative Law Judge (“ALJ”) held a 5
hearing on BMEH’s eligibility to participate in the Pell Grant 6
Program. On April 23, 1996, the ALJ issued a ruling that BMEH 7
was not eligible to participate in the Program. Hatalmud v. 8
Riley, No. 97-cv-2035 (RO), 1997 WL 223075, at *2 (S.D.N.Y. May 9
2, 1997). Following a remand by the Secretary of Education for a 10
further elaboration of the ALJ’s decision, the ALJ issued a more 11
detailed decision on September 25, 1996. In the decision on 12
remand, the ALJ reiterated his determination that BMEH was 13
properly terminated from the Pell Grant Program, finding that, 14
although “some students have found employment as teachers in the 15
field of Orthodox Jewish education . . . , these programs were 16
neither intended nor designed to prepare students for gainful 17
employment in a recognized occupation.” In re Hatalmud, No. 97- 18
94-SP, 1998 EOHA Lexis 30, at *3 (Dep’t of Educ. June 16, 1998). 19
The ALJ accordingly concluded that BMEH did not meet the 20
definition of an eligible institution. On January 27, 1997, the 21
ALJ’s decision was affirmed by the Secretary of Education as the 22
final agency decision, and BMEH’s participation in the Pell Grant 23
Program was terminated as of that date. The Secretary’s 24
termination decision was upheld by the District Court in an Order 25
dated April 2, 1998. Hatalmud v. Riley, No. 97-cv-2035 (RO), 26

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7
1998 WL 157059, at *4 (S.D.N.Y. Apr. 2, 1998). BMEH did not 1
appeal from that Order. 2
Meanwhile, on March 12, 1997, the DOE had issued a Final 3
Program Review Determination (“FPRD”), concluding that BMEH was 4
liable to the DOE for $16,403,631, which the DOE had calculated 5
to be the amount of federal funds disbursed to BMEH under the 6
Pell Grant Program since BMEH began its participation. The DOE 7
ruled that, because BMEH’s programs were ineligible for the Pell 8
Grant Program, BMEH was required to refund to the DOE all federal 9
funds it had received under the Program. On April 25, 1997, BMEH 10
advised the DOE that its calculation was incorrect and that the 11
liability should be reduced because the DOE had included the 12
$452,008 that the DOE had retained pursuant to the Settlement 13
Agreement. BMEH did not assert any right to the $452,008. The 14
DOE agreed with BMEH’s calculation, and, on May 7, 1997, issued a 15
revised FPRD assessing a liability of $15,949,148, reducing the 16
prior assessment by $452,008 to account for the retained amount. 17
The DOE further agreed to reduce the liability to $15,764,431 18
based on additional calculations submitted by BMEH. 19
On June 27, 1997, BMEH challenged the DOE’s liability 20
assessment and requested an administrative hearing. In its 21
statement of “Issues and Facts in Dispute,” BMEH renewed its 22
argument that its programs were eligible for federal funds and 23
further argued that it would be unfair to require it to repay the 24
funds because the money was received when it believed its 25
educational program was eligible. BMEH did not in its statement 26

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8
assert any claim for, or otherwise contest, the DOE’s right to 1
keep the $452,008 retained pursuant to the Settlement Agreement. 2
For its part, the DOE continued to take the position that BMEH’s 3
program had been ineligible from its inception, and, therefore, 4
that the federal funds had been improperly spent and must be 5
returned. 6
On June 16, 1998, the Chief Administrative Law Judge, in a 7
written opinion, addressed the issues raised in BMEH’s appeal. 8
The Chief Judge reaffirmed, on the grounds of res judicata, the 9
previous determination that BMEH was ineligible to participate in 10
the Pell Grant Program. Hatalmud, 1998 EOHA Lexis 30, at *7 n.3. 11
However, the Chief Judge “conclude[d] that absent any evidence of 12
fraud or misleading information, and based on the fact that the 13
statutory provision and the regulations in question are subject 14
to varying interpretation, it would be unfair and impermissible, 15
and possibly a violation of substantive due process, to direct 16
repayment of the amount in issue.” Id. at *14. Accordingly, the 17
Chief Administrative Judge ordered “that Beth Medrash Eeyun 18
Hatalmud is relieved of any obligation to repay the United States 19
Department of Education the sum of $15,949,148.” Id. 20
On review, in his decision dated April 1, 1999, the 21
Secretary of Education disagreed with the Chief Judge only to the 22
extent of finding that the “standard [for program eligibility] is 23
long-standing and was not newly interpreted when applied in this 24
case,” and “that evidence of fraud or misleading information is 25
not necessary to establish that a given program is ineligible to 26

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9
receive federal funds.” Accordingly, the Secretary, rejecting 1
BMEH’s attempt to relitigate the finding of ineligibility, 2
reiterated previous determinations by stating: “BMEH’s programs 3
do not meet the standards of an eligible vocational program, 4
under the applicable statute.” However, the Secretary found 5
that, “[n]otwithstanding BMEH’s ineligibility, . . . the specific 6
facts of this case do not warrant the imposition of financial 7
liability.” Accordingly, the Secretary concluded his review by 8
“affirm[ing] [the Chief Administrative Law Judge’s] decision to 9
relieve BMEH of financial liability but impose[d] a fine in the 10
amount of $50,000.” 11
Over five years later, on March 17, 2005, in the action it 12
originally had brought to challenge the denial of reimbursement, 13
BMEH moved in the District Court for an Order requiring the DOE 14
to pay BMEH the $452,008 that the DOE had retained pursuant to 15
the Settlement Agreement. Hatalmud v. Riley, No. 95-cv-5104 16
(RO), 2005 WL 3370500, at *1 (S.D.N.Y. Dec. 9, 2005). BMEH 17
argued in its motion that the amount sought was a “bond” that 18
BMEH had posted as “security” pursuant to Fed. R. Civ. P. 65(c). 19
Id. BMEH argued that, since all matters between the parties were 20
resolved, the DOE must return the “bond.” BMEH also claimed that 21
it was entitled to interest on the theory that the DOE was merely 22
holding the funds as a bond. Hatalmud, 2005 WL 3370500, at *1. 23
In response, the DOE argued that, under the Settlement 24
Agreement the parties resolved all of the claims asserted in 25
BMEH’s complaint, upon which the TRO was based, and that the 26

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10
$452,008 the DOE retained was in consideration of the DOE’s 1
decision to forgo further litigation related to whether the DOE 2
was required to pay BMEH’s reimbursement requests while BMEH’s 3
eligibility to participate in the Pell Grant Program was being 4
determined in the administrative termination proceedings -- 5
proceedings that BMEH ultimately lost. 6
The District Court ruled in BMEH’s favor, concluding that 7
the Settlement Agreement imposed an obligation on the DOE to pay 8
BMEH $452,008. Hatalmud, 2005 WL 3370500, at *1. In addition 9
the court ruled that, since the $452,008 was BMEH’s money held by 10
the DOE, BMEH was entitled to interest. Id. Under the judgment, 11
the interest would be calculated from the dates upon which the 12
DOE retained the ten percent from BMEH’s reimbursement requests. 13
Id. at *1–2. The court also vacated the $50,000 fine, ruling 14
that it had no support in the record and was imposed without a 15
hearing and without reasons given. That ruling is not in issue 16
here. Id. at *2. 17
In interpreting the Settlement Agreement, the District Court 18
rejected the DOE’s argument “that the [$452,008] is not, in fact, 19
a `bond’ or `security’ posted under Rule 65(c) of the Federal 20
Rules of Civil Procedure, but rather, is a benefit of the bargain 21
that the DOE received . . . in exchange for its promise to pay 22
BMEH’s requests for reimbursement pending final agency decision 23
in the administrative proceedings.” Id. at *1. The court 24
concluded that the “only reasonable understanding” of the 25
language in the Settlement Agreement “is as a carry-over of the 26

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security provisions that governed the TRO.” Id. The court noted 1
that, at the TRO hearing, it had directed ten percent of the 2
reimbursement requests to be held as a Rule 65(c) bond, and had 3
issued a written order three days later that “unequivocally” 4
provides that the DOE could withhold that amount “[i]n lieu of a 5
bond.” Id. 6
The District Court further noted that the Settlement 7
Agreement, “signed only fourteen days later incorporated a 8
similar provision, prescribing that ten percent would be withheld 9
‘pending final agency decision.’” Id. Finally, because the 10
District Court found that the $452,008 retained constituted 11
“funds belonging to BMEH,” it concluded that an award of interest 12
would not be “an interest award against the United States” but an 13
award “of interest earned on BMEH’s money that BMEH was entitled 14
to receive years prior, and which has since been in the temporary 15
custody of the government.” Id. This timely appeal by the DOE 16
ensued. 17
ANALYSIS 18
On appeal, BMEH contends that its claim to the retained 19
funds should be governed by the general rule that a district 20
court’s interpretation of ambiguous language should be affirmed 21
unless clearly erroneous. It argues that this rule “applies with 22
even greater force” in this case, because the District Court so 23
ordered the Settlement Agreement only two weeks after granting 24
the TRO and therefore is in the best position to interpret the 25
settlement terms. BMEH notes that the percentage of payments 26

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12
retained pursuant to the settlement was the same as the 1
percentage retained in lieu of bond pursuant to the TRO. 2
In further support of the judgment below, BMEH contends that 3
the “pending final agency decision” provision relative to the ten 4
percent retainage “do[es] not suggest that the DOE may keep the 5
withheld funds but only that they may be escrowed during the 6
administrative proceeding.” Apparently, the DOE maintained a 7
separate escrow account for the withheld funds, and, according to 8
BMEH, this “demonstrates that the DOE viewed the withheld funds 9
as belonging to BMEH, not to the DOE, and as having been paid to 10
BMEH by the transfer to the escrow account.” BMEH asserts that 11
the withheld funds were “only kept separately in case there would 12
be some liability by BMEH at the end of the process.” Finally, 13
BMEH urges on appeal that, because it is the owner of the 14
retained funds, it is entitled to interest earned on the funds 15
despite the rule of sovereign immunity prohibiting the recovery 16
of interest against the United States. 17
We review de novo the District Court’s conclusions of law 18
arising out of its interpretation of Settlement Agreement terms. 19
See Omega Eng’g, Inc. v. Omega, S.A., 432 F.3d 437, 443 (2d Cir. 20
2005). In doing so, we apply the same tests as are applied by 21
the District Court. See Compagnie Financiere de CIC et de 22
L’Union Europeenne v. Merrill Lynch, Pierce, Fenner & Smith, 23
Inc., 232 F.3d 153, 157 (2d Cir. 2000). It is only where the 24
District Court undertakes the interpretation of an ambiguity in 25
an agreement, in the presence of extrinsic evidence of meaning, 26

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that we apply a clearly erroneous standard of review. See U.S. 1
Naval Inst. v. Charter Communications, Inc., 875 F.2d 1044, 1049 2
(2d Cir. 1989); Antilles S.S. Co. v. Members of American Hull 3
Ins. Syndicate, 733 F.2d 195, 204 (2d Cir. 1984) (Newman, J., 4
concurring). But whether or not an ambiguity exists is a 5
question of law that we review de novo. See Tourangeau v. 6
Uniroyal, Inc., 101 F.3d 300, 306 (2d Cir. 1996). 7
In disagreement with BMEH, we see no ambiguity in the 8
Settlement Agreement in regard to the disposition of the withheld 9
funds and so accord no deference on review to the District 10
Court’s interpretation. The fact that the Agreement was “so 11
ordered” by the District Court does not affect our de novo 12
examination here. The District Court’s interpretation clearly 13
was informed by its erroneous conclusion that the provision for 14
10% withholding was “a carry-over of the security provisions that 15
governed the TRO.” Hatalmud, 2005 WL 3370500, at *1. 16
While the District Court characterized its conclusion as the 17
“only reasonable understanding” of the withholding provision of 18
the Settlement Agreement, id., the parties specifically agreed to 19
the dissolution of the TRO and “that they will give no force and 20
effect to the findings made on the record by [the District 21
Court].” Accordingly, the Settlement Agreement, as “so ordered” 22
by the District Court, nullified the 10% “withholding as 23
security” provision that became effective when the TRO was 24
issued, and the District Court’s observations that the Agreement 25
contained a “similar provision” and was “signed only fourteen 26

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14
days later” therefore are without significance. Id. at *1–2. 1
Turning to the Settlement Agreement itself, there is no 2
language anywhere within its four corners evidencing, in the 3
words of the District Court, “a carry-over of the security 4
provisions that governed the TRO.” Id. at *2. Moreover, a 5
security bond would have been pointless after the execution of 6
the Settlement Agreement because the purpose of such a bond is to 7
provide “for the payment of such costs and damages as may be 8
incurred or suffered by any party who is found to have been 9
wrongfully enjoined or restrained” by a TRO or a preliminary 10
injunction during pending litigation. See Fed. R. Civ. P. 65(c); 11
see also Commerce Tankers v. Nat’l Maritime Union of America, 553 12
F.2d 793, 800 (2d Cir. 1977). The following Stipulation included 13
in the Settlement Agreement put an end to the pending litigation: 14
“The action of the plaintiff against the defendant is hereby 15
dismissed with prejudice and without costs.” 16
As in all such agreements, the Settlement Agreement here 17
represented a compromise between conflicting claims. BMEH agreed 18
to forego further District Court litigation and, in return, the 19
DOE agreed to pay ninety percent of BMEH’s reimbursement requests 20
pending administrative determination of its entitlement to 21
participate in the Pell Grant Program. The parties agreed that 22
their dispute would go forward to an administrative 23
determination. (A later challenge by BMEH to the administrative 24
determination was made and rejected in the District Court.) 25
“[The] agreement reached . . . embodie[d] a compromise; in 26

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exchange for the saving of cost[s] and elimination of risk, the 1
parties each gave up something they might have won had they 2
proceeded with the litigation.” United States v. O’Rourke, 943 3
F.2d 180, 186-87 (2d Cir. 1991) (quoting United States v. Armour 4
& Co., 402 U.S. 673, 681–82 (1971)). 5
Referring generally to Pell Grant Program future payments to 6
be made to BMEH, the ten percent withholding provision in the 7
Agreement simply provides “that [the DOE] will be entitled to 8
retain ten percent (10%) of the amount thereof pending final 9
agency decision.” In examining this provision, we recognize that 10
“[t]he cardinal principle for the construction and interpretation 11
of . . . contracts . . . is that the intention of the parties 12
should control.” SR Int’l Bus. Ins. Co. v. World Trade Ctr. 13
Props., LLC, 467 F.3d 107, 125 (2d Cir. 2006)(internal quotation 14
marks omitted). Moreover, “the best evidence of intent is the 15
contract itself; if an agreement is complete, clear and 16
unambiguous on its face, it must be enforced according to the 17
plain meaning of its terms.” Eternity Global Master Fund, Ltd. 18
v. Morgan Guar. Trust Co. of N.Y., 375 F.3d 168, 177 (2d Cir. 19
2004)(internal quotation marks and brackets omitted). The 20
language here is complete, clear and unambiguous and evidences 21
the clear intention of the parties: Disbursement of the withheld 22
funds is to abide the event of the final DOE determination; if 23
the DOE were to prevail in the administrative proceeding, it 24
would retain the funds; if BMEH were to prevail, the funds would 25
be paid over to it. 26

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The final DOE determination, manifested in the decision of 1
the Secretary of Education dated April 1, 1999, and unchallenged 2
here by BMEH, conclusively determined that BMEH was ineligible 3
for participation in the Pell Grant Program ab initio. According 4
to this decision, BMEH received almost sixteen million dollars 5
over the years in Pell Grants, including $4.5 million paid while 6
the termination proceedings were pending. Rather than requiring 7
the repayment of these funds, and apparently strictly as a matter 8
of grace, the Secretary forgave the debt: “Notwithstanding 9
BMEH’s ineligibility, . . . the specific facts of this case do 10
not warrant the imposition of financial liability.” This 11
forgiveness of debt followed the Secretary’s rejection of the 12
reasons given by the Chief Administrative Judge for relieving 13
BMEH’s repayment obligation -- the absence of fraud and 14
misleading information on the part of BMEH and the “varying 15
interpretation[s]” of the applicable statutory provisions and 16
regulations. Hatalmud, 1998 EOHA Lexis 30, at *10. The 17
Secretary’s decision relieved BMEH of an enormous debt, ex aequo 18
et bono, and it does not lie in the mouth of BMEH to call for the 19
payment of money which it never was entitled to in the first 20
place. 21
BMEH’s argument that the DOE maintained the withheld funds 22
in a special escrow account and therefore viewed the funds as 23
belonging to BMEH is unavailing. BMEH never was entitled to any 24
Pell Grant funds, whether withheld or paid over. In this regard, 25
it is noteworthy that the Secretary of Education did not relieve 26

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BMEH from legal liability; he merely determined that “the 1
specific facts of this case do not warrant the imposition of 2
financial liability.” (emphasis supplied). 3
As we have observed, both parties benefitted from the 4
Settlement Agreement, which includes the “winner take all” 5
element of the ten percent withholding provision. See EEOC v. 6
Local 40, Int’l Ass’n Bridge Workers, 76 F.3d 76, 79–81 (2d Cir. 7
1996). BMEH acknowledged the purpose and intent of that 8
provision by objecting to the DOE’s calculation of the entire 9
Pell Grant liability for failure to reduce the amount of total 10
liability by the $452,008 of withheld money in the DOE’s 11
possession. It was not until five years later that BMEH reversed 12
course and concocted the theories that led to the judgment that 13
is the subject of this appeal. 14
In light of the foregoing, it is unnecessary for us to 15
address the issue raised by the District Court’s award of 16
interest against the United States. 17
CONCLUSION 18
The judgment of the District Court is reversed, and the case 19
is remanded for the entry of judgment in favor of defendant- 20
appellant. 21

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