A federal district court this week rejected a lawsuit challenging the Department of Education's selection of a minority-owned firm as designated bonding authority for a financing program to aid black colleges.

The Historically Black College and University Capital Financing Program was approved as part of the 1992 reauthorization of the Higher Education Act of 1965. Section 704 of the act gave the Education Department the authority to create the program, which is designed to help black colleges and universities gain access to the capital markets.

In a suit filed Sept. 19 in the U.S. District Court for the District of Columbia, Grigsby Brandford & Co. of San Francisco and A.H. Williams & Co. of Philadelphia alleged that the selection of Atlanta-based Pryor, McClendon, Counts & Co. was "arbitrary, capricious, lacking a rational basis and an adequate statement of reasons."

A Grigsby-Williams joint venture was one of the finalists in the selection process. Grigsby, a minority-owned firm, had a 55% interest in the venture.

Grigsby and Williams alleged that their proposal was ranked first among the finalists by three of five members of a review panel directed to make a recommendation to Education Secretary Richard Riley.

But in her ruling, Judge Gladys Kessler said Riley was not required to "rubber stamp" any recommendation made by the panel. In addition, the judge said that, based on documents filed in the case, the finalists were closely ranked throughout the selection process and "no one applicant stood out as demonstrably more qualified than the others."

Since it was determined that the finalists were technically qualified to do the work, the secretary could turn to other criteria such as minority ownership to make his selection, the judge wrote.

"Based on Congress' clear intent to maximize minority participation in the HBCU Capital Financing Program, the Secretary was entitled -- perhaps even obligated -- to select the firm using the greatest percentage of minority participation once the evaluation process had identified three well qualified finalists," Kessler wrote in her decision Monday.

"So long as the Secretary's decision had a rational and proper basis, then this court must sustain the decision," Kessler said.

The judge's ruling clears the way for the implementation of the financing program to help black colleges fund capital improvements. On Tuesday, the Department of Education signed its agreement with Pryor McClendon naming it as the designated bonding authority. Officials at the investment bank have begun setting up the financing program.

"By late February we may be ready to kick it off and process loans," an official with Pryor McClendon said.

The capital financing program provides a federal government guarantee of up to $357 million for taxable bonds issued under the program.

However instead of issuing taxable bonds, Pryor McClendon may structure the program so that colleges can borrow money at a lower rate of interest through the Federal Financing Bank, an official said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.