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Friday, November 4, 2005

Is the Whole the Sum of Its Parts?

Ask Quentin Tanko, who signed four one-year contracts agreeing to participate in the National Health Service Corps Scholarship Program. The contracts provided that the government would pay Tanko’s medical school tuition and other reasonable expenses. In exchange, Tanko agreed to provide health services in an underserved area when he graduated; he promised one year of service for every year the government funded his tuition. The first contract covered the first school year.  Each additional contract covered each additional year of school, and adopted the terms of the first contract.

The contracts set forth the government’s remedy if Tanko breached, and provided for two possible scenarios. The first scenario:

If a student cannot provide health services in [a shortage area] because he must leave school for academic or disciplinary reasons, voluntarily terminates his schooling, or "fails to accept payment . . . in whole or in part, of a scholarship under this contract," the student is only responsible to "repay to the United States all funds paid to the applicant . . . within 3 years of the date the applicant becomes liable to make payment."

The second scenario:

If . . . the participant fails to provide his period of service obligation "for any reason other than those [specified above,]" the contracts provide "the United States shall be entitled to recover the amount equal to three times the scholarship funds awarded, plus interest."

Tanko accepted the scholarship from the government for his first two years of medical school. After his second year, however, he advised the government that he would not be accepting the scholarship money for the next two years. When he graduated, Tanko did not provide his two years of service in an underserved area (which he had promised in exchange for the first two years of scholarship money). The government demanded that Tanko repay his debt for the first two years of school, including treble damages, plus interest. Tanko received a total of $88,731 in scholarship funds; applying treble damages and interest his total bill came to $380,964.45.

Tanko sought a declaration that he only owed the government the actual amounts disbursed to him, and not treble damages. He argued that the documents he signed were a single four-year contract, not four separate one-year contracts. Based on this argument, he claimed that he fell within scenario one because he "fail[ed] to accept . . . payment in whole or in part, of a scholarship under this contract." Under this clause, his refusal to accept that last two years of scholarship money triggered the terms requiring him to pay solely the funds the government had disbursed to him (and not treble damages).

The government counterclaimed, arguing that each school year was covered in a separate contract, and Tanko accepted full payment of the scholarship under the first two contracts. Under the government’s interpretation, Tanko’s breach fell within the second scenario and triggered the treble damages clause.

The 8th Circuit affirmed the district court and held in the government’s favor. The court recognized that treble damages were "severe and onerous," but they did not constitute a penalty. Following a 9th Circuit decision, the 8th Circuit held that:

the exception for failing to accept payment "in part" applies only when the participant fails to accept partial payment for any given year, and does not exempt the participant from treble damages for any year in which he receives full funding.

Tanko v. United States, No. 05-1717 (8th Cir. Nov. 3, 2005).

[Meredith R. Miller]

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