CUMBERLAND — House of Compassion is suing Rhode Island Housing for breach of contract after it allegedly withdrew funding last month to the nonprofit agency, which houses low-income, HIV positive and AIDS patients.

The 14-year-old home, at 2510 Mendon Rd., argues that Rhode Island Housing based its decision upon concerns raised in an independent audit without taking into consideration that the organization has since addressed the issues, according to a complaint filed in Superior Court in Providence.

Rhode Island Housing responded that there could be no breach of contract because the federal grants in question expired on their own terms and were simply not renewed.

Rhode Island Housing administers three grants for House of Compassion from the federal Office of Housing and Urban Development. The three grants total nearly 80 percent of the organization’s annual revenue.

According to court filings, a three-year, $303,676 grant expired April 25, 2008; a $17,576 grant expired on Nov. 13, 2007; and a $24,785 grant expired on June 30, 2007. The case is set to be heard on Aug. 1 before Superior Court Judge Bennett R. Gallo.

Meanwhile, the House of Compassion remains open, running with a mix of paid staff and volunteers. “Nothing has changed at the house per se,” says executive director Colleen Scanlan.

The House of Compassion’s board of directors and its supporters are forming a plan to cover its annual costs through fundraising and grant sources. Scanlan says the City of Woonsocket and the Town of Cumberland have pledged their support.

“The house provides a good service that the town has supported in the past, and any way that we can be helpful to a member of this community we’ll try,” Cumberland Mayor Daniel J. McKee said. “But the town is not in the financial position to carry the dollars that she has lost.”

Rhode Island Housing has offered House of Compassion residents continued service under another, qualified sponsor, but, so far, none of the nine residents have chosen to leave, said Scanlan. She says the organization is trying to avoid raising its $350-a-month rents to cover costs.

“We run a whole house on what the Rhode Island Housing executive director [Richard Godfrey] earns as a salary,” Scanlan says. “All we are asking for is a little bit of money.”

House of Compassion has a long operated on the edge of closure, since much of its revenue is tied to discretionary federal grants. Scanlan and supporters have made it an almost annual rite to lobby for the House’s continued funding.

But last year, revelations of potential conflicts of interest within the House of Compassion prompted the full review of the organization’s management and led to its loss of funding. According to Rhode Island Housing’s court filings, it learned that Scanlan had hired her son as the House’s full-time “social services designee,” a job placing the 19-year-old in charge of managing federal filings, including food stamps for residents and information for HUD’s Homeless Management Information Systems.

Rhode Island Housing also learned that Scanlan’s sister was a member of the board of directors. HUD ordered a financial audit and a determination of whether there was any conflict of interest with the relationships.

An audit conducted by accounting firm Braver PC and released in draft form on Feb. 25 revealed accounting and bookkeeping deficiencies.

Chief among the concerns was that the House of Compassion had failed to properly separate grant funds in its financial ledgers, which made it difficult to determine how funds were expended. It also failed to accurately account for all reimbursements and expenses and failed to properly maintain and store all financial records.

Rhode Island Housing ordered the House to find a qualified sponsor that would help administer the federal grants.

While Scanlan maintains that Tri-Hab (a Woonsocket substance-abuse program) and even the Town of Cumberland offered to partner with House of Compassion, Rhode Island Housing said it received no written confirmation from Tri-Hab. McKee said that Rhode Island Housing declined the town’s offer.

On May 29, 2008, Braver PC sent a letter to Scanlan acknowledging that since the audit, the House had corrected its accounting deficiencies. House of Compassion had hired a full-time bookkeeper and added the recommended policies, security measures and financial records, the letter stated.

It was perhaps too little too late. HUD notified the House of its loss of funding that same day.

“I am so disillusioned,” said Scanlan. “I had so much faith in these people that they would do the right thing.”

pmarcelo@projo.com