The opinion of the court was delivered by: Hon. Jeffrey T. Miller United States District Judge
ORDER GRANTING TEMPORARY RESTRAINING ORDER; SCHEDULING ORDER ON PRELIMINARY INJUNCTION
Plaintiff Neighborhood House Association Inc. ("NHA") moves for a temporary restraining order ("TRO") to compel Defendants Children of the Rainbow Headstart, LLC ("COTRHS"), Children of the Rainbow, Inc. ("COTR") and Gail Walker (collectively "Defendants") to return certain property, as more fully identified herein. Having carefully considered the papers of the parties, the court record, appropriate legal authorities, and arguments of counsel, the court grants the TRO and orders that Defendants immediately provide or make available to NHA, all the children's files within its possession or control and all property purchased, procured, or developed by or through federal Head Start, including property located at the Urban Village I, Logan, Sherman Heights, and Joan Kroc Center program sites as identified in the Kemp Declaration.
On August 25, 2011 NHA commenced this action against Defendants alleging three claims for declaratory judgment, injunctive relief, and recovery and accounting. NHA, a non-profit public benefit corporation, is the San Diego County "grantee agency" for purposes of the Head Start Act, 42 U.S.C. §9831 et seq. Health and Human Services ("HHS") designated NHA as San Diego's grantee agency in the 1970s. Grantee agencies may subcontract with other child-serving agencies to provide services to Head Start children. Between January 2007 and June 2011 COTRHS and COTR, both for-profit entities, were subcontractors to NHA.
When NHA turned over management of nine childcare facilities to Defendants, it supplied all equipment and property to operate the Head Start facilities. (Kemp Decl. ¶2). NHA provided COTRHS "with possession of the physical premises upon which classroom facilities were located through subleases, playground equipment, and all necessary classroom contents (chairs, computers, books, supplies, etc.), valued in excess of $600,000. (Kemp Decl. ¶3, 8; Carson Decl. ¶9). COTRHS also possesses confidential files for the children enrolled in the Head Start Programs.*fn1
In broad brush, NHA argues that the agreements between the parties, as well as 45 C.F.R. §74.33, provide that NHA owns title to all property purchased or developed with federal Head Start funds. (Johnson Decl. ¶¶3-8). NHA now seeks the return of all so-called children's files and property purchased with Head Start funds, including the property identified in the Kemp Declaration.
To obtain preliminary or temporary injunctive relief, the party must meet one of two tests: (1) a combination of probable success and the possibility of irreparable harm, or (2) the party raises serious questions and the balance of hardship tips in its favor. Arcamuzi v. Continental Air Lines, Inc., 819 F.2d 935, 937 (9th Cir. 1987). "These two formulations represent two points on a sliding scale in which the required degree of irreparable harm increases as the probability of success decreases." Id. Under both formulations, however, the party must demonstrate a "fair chance of success on the merits" and a "significant threat of irreparable injury." Id; Miller v. California Pac. Med. Ctr., 19 F.3d 449, 456 (9th Cir. 1994 (en banc).
The agreements between NHA and Defendants provide that NHA owns title to all property purchased or developed with federal Head Start funds. (Johnson decl. ¶3-8; Exh. A-F). Among other things, the agreements provide that property acquired by Defendants is held subject to a federal interest in accordance with the term of the federal grant and Head Start Act and that such property "may not be used for any purpose inconsistent with that authorized by the Head Start Act and applicable regulations." (Johnson Decl. Exh. E-F, 2010 Service Agreement §5.10). Not only do the agreements provide that Defendants may not encumber, transfer, or sell property without the consent of HHS, but that upon termination of the Agreement, "COTR shall surrender possession of any property or premises belonging to NHA that is in COTR's possession or control. . . . In addition . . . , COTR agrees to return to NHA within 30 days afer the termination of the Agreement, all equipment and supplies purchased with Federal Head Start funds and all records pertaining to this program, including but not limited to the following documents. . . ." (Johnson Decl. E, 2010 Service Agreement §9.4).
NHA also cites the Code of Federal Regulations for the proposition that "title of federally owned property remains vested in the Federal Government." 45 C.F.R. §74.33. Courts have broadly interpreted this provision. For example, in Henry v. First National Bank of Clarksdale, 595 F.2d 291, 309 (5th Cir. 1979) a debtor attempted to collect its judgment against a Head Start grantee agency. Noting that virtually all of the debtor's assets were derived from grants made through the Department of Health, Education and Welfare under the Head Start Act, the Seventh Circuit noted:
The Head Start Act carefully delineates the purposes for which grant funds may be expended. Although the debtor was a private, nonprofit corporation and not a federal agency, extensive and detailed regulations govern its expenditure of federal funds in order to ensure the use of grant funds for approved purposes. See 45 C.F.R. part 74 (1977). The United States retains a reversionary interest in all grant funds in all property ...