American Training Services, Inc. v. Commerce Union Bank, 75-183-NA-CV.

• Decision Date: 06 April 1976
• Docket Number: No. 75-183-NA-CV.,75-183-NA-CV.
• Parties: AMERICAN TRAINING SERVICES, INC. v. COMMERCE UNION BANK.
• Court: U.S. District Court — Middle District of Tennessee

415 F. Supp. 1101

AMERICAN TRAINING SERVICES, INC. v. COMMERCE UNION BANK.

No. 75-183-NA-CV.

United States District Court, M. D. Tennessee, Nashville Division.

April 6, 1976.

Bernstein, Dougherty & Susano, Knoxville, Tenn., Arum, Friedman & Katz, New York City, for plaintiff.

Russell H. Hippe, Jr., Trabue, Sturdivant & DeWitt, Nashville, Tenn., for defendant.

MEMORANDUM

MORTON, District Judge.

This action is presently before the court on the motion of defendant Commerce Union Bank (C.U.B.) for Partial Summary Judgment as to certain sums which it alleges by way of counterclaim to be due and owing from plaintiff, American Training Services, Inc. (A.T.S.).

The plaintiff is a New Jersey corporation engaged in the business of providing vocational training on a contract basis in several fields. The defendant is a Tennessee corporation engaged in banking and financing operations. Jurisdiction is grounded on diversity of citizenship pursuant to 28 U.S.C. § 1332, the amount in controversy exceeding $10,000.

In April of 1973, the parties entered into a written contract (Exhibit A to plaintiff's Complaint) whereby C.U.B. agreed to finance tuition loans for students undertaking a course of study with A.T.S. Both parties had qualified for participation in the Guaranteed Student Loan Program administered by the Office of Education within the Department of Health, Education and Welfare. 45 C.F.R. Part 177. In accordance with that program, C.U.B. remitted the proceeds of each loan made to a student directly to A.T.S. in payment for a student's tuition fee. The contract provided, in accordance with the provisions of the federal Guaranteed Student Loan Program, supra, and the National Home Study Council Standards, that upon withdrawal from a course of study by a student, A.T.S. would pay C.U.B. the pro rata portion of the unused tuition fee for application on the student's note with C.U.B. A.T.S. was to furnish C.U.B. with periodic reports of student withdrawals, accompanied by the pro-rated refunds.

This procedure had been followed for several months when A.T.S. began to notice deficiencies in the processing of the loan applications remitted by it to C.U.B. Upon investigation of the problem, A.T.S. concluded that its loan application submittals were being handled improperly by C.U.B. and thereafter filed the present suit, alleging negligence and breach of contract. Upon the filing of suit, A.T.S. immediately ceased its remittance of withdrawal refund payments to C.U.B., although it continued to furnish the lists necessary to credit withdrawn students with appropriate refunds on their loan obligations to C.U.B.

C.U.B. then counterclaimed against A.T.S. for recovery of the refund payments withheld by the latter, alleging that approximately $475,000.00 was properly due and payable for credit to the student notes¹ under the express terms of the contract. C.U.B. thereafter filed the present motion for Partial Summary Judgment, seeking enforcement of its refund claim,² an order directing A.T.S. to pay it all refunds which may hereafter become payable under the contract, and the entry of Final Judgment on this matter pursuant to Rule 54(b) of the Federal Rules of Civil Procedure.

A.T.S. resists defendant's motion, arguing that the withdrawals giving rise to the refunds were occasioned by C.U.B.'s negligence in handling the loan applications, that the recovery it seeks against C.U.B. far exceeds the amount of refund payments withheld, and that since there is a dispute over material facts at issue in this case (including the existence of negligence on the part of C.U.B., the causal connection between that alleged negligence and the subsequent student withdrawals, and the exact refund amounts claimed to be due), partial summary judgment is improper.

A.T.S. further maintains that the refund payments are properly the subject of set-off against the amounts claimed to be due it as a result of C.U.B.'s alleged negligence, rejecting the notion that the refunds are in actuality owed to the students rather than the Bank. Indeed, A.T.S. characterizes the students' entitlement to the refunds as a "theory," contending that "in practice" the refunds are paid directly to C.U.B. for application on student notes.

While the last half of plaintiff's characterization of the refund payments is undoubtedly accurate, the allegation that the refunds belong to the students only in theory evinces a serious misapprehension of elementary commercial law. The students, having contracted with A.T.S. for a course of training, and having paid their full tuition by whatever means, are entitled to refund of the unused portion of their tuition fee upon withdrawal. This entitlement is expressly mandated in the Guaranteed Student Loan Program:

"Each participating institution shall establish a fair and equitable refund policy, under which it shall make a refund of unearned tuition fees . . . to a student who receives a loan under this part and who otherwise does not complete the period of study for which the loan was advanced. The institution shall make such policy (including the procedure for obtaining a refund) known in writing to the student prior to his initial acceptance for entrollment sic at the institution. . . ." 45 C.F.R. § 177.63(a) (Emphasis added)

The fact that a student to whom the refund is due may have contractually assigned his rights to a lending institution (as was done in the instant case, see Exhibit 1 to defendant's Motion for Partial Summary Judgment) has no bearing whatever on the character of the obligation imposed upon the training institution (in this case, A.T.S.). Quite clearly, the assignee of such a right has every power to enforce it which his assignor had. See 4 Corbin on Contracts §§ 870, 877. And the fact that the School and the Bank have contracted between themselves to effectuate the rights granted to the latter by a student-borrower, in no way alters the fact that the legal entitlement to the refund rests initially with the student. It is he who has undertaken the obligation to repay the loan, it is he who has been credited with full payment of his tuition fee by the training institution, and it is he through whom the refund is legally paid "in practice" to the Bank.

Thus, plaintiff's argument that the refunds are in reality due to C.U.B. is without merit. For though they are, by contractual agreement, payable to C.U.B., they are, by operation of law, due and owing to the students. This analysis is supported by the very language employed by the parties in their contract. Paragraph 8 of that agreement provides:

"School shall maintain sufficient reserves to refund the pro rata portion of the money due to students who withdraw from courses of study." (Emphasis added)

Inasmuch as any refund payments are legally owed to the students who have withdrawn from their courses with A.T.S., such sums cannot form the basis of a set-off against amounts claimed to be due to A.T.S. by C.U.B. as a result of the latter's alleged negligence or breach of contract. For the refund monies currently being retained by A.T.S. must be considered in essence funds held in trust for the students, while any obligation owed by C.U.B. to A.T.S., aside from being as yet unproven and unliquidated, would be due and owing directly to A.T.S. in its individual capacity.

The law in Tennessee³ is settled that ordinarily, one dealing with the funds of another as trustee cannot set off an obligation owed to himself individually against an obligation owed by him as trustee. Ottarson v. Dobson & Johnson, Inc., 52 Tenn.App. 280, 372 S.W.2d 777 (1963); Wagner v. Citizens Bank & Trust Co., 122 Tenn. 164, 122 S.W. 245 (1909). Moreover, the law is equally clear that a claim of set-off must be predicated upon a debt which is certain, or which can be made certain; set-off cannot be allowed for unliquidated damages. Mack v. Hugger Bros. Const. Co., 153 Tenn. 260, 283 S.W. 448 (1926); Lovejoy v. Ahearn, 223 Tenn. 562, 448 S.W.2d 420 (1969). Since any recovery which A.T.S. may be entitled to from C.U.B. in the instant case is entirely speculative at this point, set-off of the refund payments against such uncertain sums is improper.

It should be noted parenthetically that while A.T.S. does not appear to have defended against C.U.B.'s counterclaim on a recoupment theory, under which liquidated damages are not required, Nashville & Chattanooga R.R. v. Chumley, 53 Tenn. 325 (Heisk 1871),⁴ such a defense would put A.T.S. in no better position. A claim for recoupment must have "sprung immediately from the complainant's claim" and must relate "to cross-demands inseparably connected with and arising out of the transaction on which the suit is grounded." Mack v. Hugger Bros. Const. Co., supra, 283 S.W. at 449-50. As suggested in the discussion above, the negligence and breach of contract claims of A.T.S. simply cannot be considered "inseparably connected" with C.U. B.'s demand for refund payments, since that demand derives from a wholly distinct obligation of A.T.S. to its students. Whether or not the actual cause of the student withdrawals, and resulting obligation on the part of A.T.S. to pay refunds in their behalf, was occasioned by the neglect of C.U.B., as A.T.S. alleges, is immaterial. The refunds became due and payable upon the withdrawal of a student, for whatever reason. Nothing in the regulations promulgated by...