 United States Court of Appeals
                 For the Seventh Circuit
                 Chicago, Illinois 60604
                       July 26, 2006
                          Before
          Hon. Joel M. Flaum, Chief Judge
          Hon. Richard A. Posner, Circuit Judge
          Hon. Frank H. Easterbrook, Circuit Judge
          Hon. Kenneth F. Ripple, Circuit Judge
          Hon. Daniel A. Manion, Circuit Judge
          Hon. Michael S. Kanne, Circuit Judge
          Hon. Ilana Diamond Rovner, Circuit Judge
          Hon. Diane P. Wood, Circuit Judge
          Hon. Terence T. Evans, Circuit Judge
          Hon. Ann Claire Williams, Circuit Judge
          Hon. Diane S. Sykes, Circuit Judge

No. 05-2749
JOAN LASKOWSKI and DANIEL M. COOK,
                                        Plaintiffs-Appellants,
                             v.

MARGARET SPELLINGS, in her official
capacity as Secretary of the United States
Department of Education,
                                         Defendant-Appellee,
                             and

UNIVERSITY OF NOTRE DAME,
                              Defendant-Intervenor-Appellee.
2                                                        No. 05-2749

                          ____________
         Appeal from the United States District Court for the
         Southern District of Indiana, Indianapolis Division.
           No. 03 C 1810—Larry J. McKinney, Chief Judge.
                          ____________


                             ORDER
  On May 26, 2006 and May 30, 2006, appellees, University
of Notre Dame, and Margaret Spellings, Secretary of the
United States Department of Education, filed petitions for
rehearing with suggestion for rehearing en banc. The panel
voted to deny rehearing, Judge Sykes dissenting, but to
issue the attached supplemental opinion, from which Judge
Sykes also dissents.
  A vote of the active members of the court on whether to
grant rehearing en banc was requested, and a majority of
the judges have voted to deny the petitions.Œ The petitions
are therefore DENIED.




Œ
   Judges Manion, Kanne, and Sykes voted to grant the peti-
tions for rehearing en banc. Judges Ripple and Williams took no
part in the consideration or decisions of the petition.
                              In the
 United States Court of Appeals
                For the Seventh Circuit
                           ____________

No. 05-2749
JOAN LASKOWSKI and DANIEL M. COOK,
                                                Plaintiffs-Appellants,
                                  v.


MARGARET SPELLINGS, Secretary of Education,
                                                 Defendant-Appellee,
                                 and


UNIVERSITY OF NOTRE DAME,
                                 Intervenor-Defendant/Appellee.
                           ____________
             Appeal from the United States District Court
      for the Southern District of Indiana, Indianapolis Division.
       No. 1:03-cv-1810-WTL—Larry J. McKinney, Chief Judge.
                           ____________
                   On Petition for Rehearing
                        ____________
                           JULY 26, 2006
                           ____________


  Before POSNER, EVANS, and SYKES, Circuit Judges.
  POSNER, Circuit Judge. In our original opinion, 443 F.3d
930 (7th Cir. 2006), issued on April 13 of this year, we held,
2                                                 No. 05-2749

among other things, that if a grant by the Secretary of
Education to the University of Notre Dame had violated the
First Amendment’s establishment clause, the plaintiffs in
this taxpayers’ suit might be able to obtain from the district
court an order of restitution directing the university to
return the money in question to the U.S. Treasury, even if
the university had redistributed the money to other colleges
rather than spending it itself. The qualification in “might”
was in recognition that “there are defenses to restitution.
The recipient of the money sought to be recovered may not
have known or have had reason to know that it was receiv-
ing money by mistake, and may have relied to its detriment
on its honest and reasonable belief that it was legally
entitled to the money. Notre Dame did rely to its detri-
ment—it gave the money away. Whether it relied reason-
ably is a separate question. If it was merely an innocent
conduit, neither knowing nor having reason to know that it
was receiving an unlawful grant, it would not have to make
restitution,” id. at 936—the “separate question” we left open
for determination on remand.
  In response to the petitions for rehearing we wish to
clarify two points, both relating to section 309 of the Consol-
idated Appropriations Act, 2000, Pub. L. 106-113, 113 Stat.
1501A-261 to 262 (Nov. 29, 1999)—the provision that
earmarked the funds for Notre Dame that are at issue in this
suit. The provision states (so far as bears on this case) that
“of the funds provided in title III of this Act, under the
heading ‘Higher Education,’ for title VII, part B of the
Higher Education Act of 1965. . . $500,000 [is earmarked] for
the University of Notre Dame for a teacher quality initia-
tive.”
  1. This language, read in isolation, entitled Notre Dame to
retain the entire grant rather than requiring it to redistribute
the money to other colleges; the decision to do that was its
No. 05-2749                                                    3

own. But in the grant application that Notre Dame had been
required to submit in order to obtain the grant from the
Department of Education, Notre Dame had proposed that
the grant be used for a “replication” program that would
result in the redistribution of most—but not all—of the
funds to other colleges for their “teacher quality initiatives.”
“Most” is not “all,” so it is clear that Notre Dame was not
required to act merely as a fiscal intermediary between the
Treasury and the colleges that were the ultimate recipients
of the money.
   Although even a fiscal intermediary that receives money
that it knows or should know was wrongfully obtained
by the transferor, or wrongfully transferred to itself, can
be made to pay restitution even if it has passed the
money along to another entity, pursuant to its duty as an
intermediary, e.g., Elliott v. Swartwout, 35 U.S. (10 Pet.) 137,
155 (1836); French Bank of California v. First National Bank, 585
S.W.2d 431, 432 (Ky. App. 1979); Dan B. Dobbs, 1 Dobbs Law
of Remedies § 4.6 (2d ed. 1993), we emphasize the qualifica-
tion “that it knows or should know was wrongfully ob-
tained,” lest we be thought to be trying to enlarge the
liabilities of a fiscal intermediary. An agent may be made to
pay restitution “not only where he indulged in wrongdoing
for his own purposes, but also where he acted simply on his
principal’s behalf. If, however, he has been merely a
conduitpipe for the payment of the money to the principal,
he can plead the defence [of change of position] even
though the money has been obtained as a result of wrong-
doing, provided that the agent neither participated in the
wrongdoing nor knew about it.” Lord Goff & Gareth Jones,
The Law of Restitution § 40-018 (6th ed. 2002).
   A fiscal intermediary has no personal claim to the funds
it handles but holds them only for distribution without
4                                                  No. 05-2749

compensation. Notre Dame was not a fiscal intermediary. It
was entitled to retain some of the grant for itself and
anyway it is not a bank or other institution engaged primar-
ily or routinely in financial intermediation. But like such
an intermediary, Notre Dame can defend against a claim for
restitution, as the quotation from our original opinion
should make clear, on the ground of reasonable reliance.
That defense remains open to it in the proceedings on
remand that we have ordered.
  2. The language of section 309 might seem to undermine
the plaintiffs’ constitutional claim—for how could a
“teacher quality initiative” be unconstitutional? But the
claim is not that Congress may not give money to religious
institutions. It just may not give it without imposing
conditions that prevent the use of the money for religious
rather than secular purposes. 443 F.3d at 937. “[S]tates may
not make unrestricted cash payments directly to religious
institutions.” Freedom from Religion Foundation, Inc. v. Bugher,
249 F.3d 606, 612 (7th Cir. 2001), and cases cited there.
Whether appropriate conditions were imposed by the
Secretary of Education and were properly observed
or implemented by Notre Dame are the issues on the
merits that the district court will be resolving in the first
instance on remand.
    The petitions for rehearing are denied.
No. 05-2749                                             5

A true Copy:
       Teste:

                      _____________________________
                       Clerk of the United States Court of
                         Appeals for the Seventh Circuit




                USCA-02-C-0072—7-26-06
