Just because a college has spent federal grant money doesn't mean that it can't be forced to return it. That's the finding of a federal appeals court last week in a dispute that could end up costing the University of Notre Dame $500,000.

The ruling by a panel of the U.S. Court of Appeals for the Seventh Circuit came in a suit charging that  Congress violated the separation of church and state when it earmarked $500,000 to Notre Dame in 2000 so the university could spread its Alliance for Catholic Education, which helps train teachers for Roman Catholic schools, to other universities.

A federal district judge had dismissed the suit as moot, given that Notre Dame had already spent the money, arguing that the spending and the resulting programming could not be undone. But in a 2-1 ruling, the appeals panel disagreed. While noting that the money has been spent, Judge Richard A. Posner wrote: "What can be rectified, however, is the depletion of the federal treasury by the amount of the grant. It can be rectified simply by the restoration of the money to the U.S. Treasury."

The appeals panel's opinion ordered a full trial on the question of whether the grant inappropriately mixed church and state. Judge Posner noted that the program appeared to have both secular and religious parts, and that the district court needed to conduct a trial to determine all the facts in the case.

The decision also set out scenarios in which the district court could find the earmark to have been unconstitutional, but Notre Dame might not be liable, or where the earmark could be found constitutional and Notre Dame and other institutions could be liable. If Notre Dame was just "an innocent conduit, neither knowing nor having reason to know that it was receiving an unlawful grant, it would not have to make restitution," Posner wrote, adding that such a finding "remains to be determined."

Another possibility, he wrote, is that the district could find that the grant itself was "entirely proper because it contained adequate safeguards against the use of the money for religious activities." But a court might also find that either Notre Dame or the institutions it worked with had violated the terms of the grant, in which case the Education Department could demand repayment from any or all of those institutions. (The Chicago Tribune reported that Notre Dame provided funds through the program to Loyola Marymount and Valparaiso Universities, Providence College, and the University of Portland, in Oregon.)

Michael Carvin, a lawyer for Notre Dame, told the Chicago Sun-Times that -- one way or another -- the university will prevail, and he noted that the ruling came on the "very narrow issue" of whether the case was moot. He said he couldn't see any set of circumstances that would result in Notre Dame having to repay the funds.

In a dissent, Judge Diane S. Sykes wrote that the majority decision overstated the power of the government to demand repayment in a dispute like this, and that the lower court judge was correct to find the case moot. Notre Dame has good reason "to think itself sandbagged," she said.

The ruling comes at a time in which opponents of government aid to religious institutions are paying close attention to programs that they believe cross a line beyond what is legal. Several of these disputes, like the one over the Notre Dame program, involve Congressional earmarks that bypassed the normal peer review system for awarding federal funds.

In October, after a civil liberties group sued the Education Department, it suspended a grant to Alaska Christian College, saying that the funds would have supported religious activities. That grant was also a Congressional earmark.