American Bank of San Antonio v. United States

• Citation: 633 F.2d 543
• Decision Date: 16 July 1980
• Docket Number: No. 569-77.,569-77.
• Parties: American Bank of San Antonio v. The UNITED STATES.
• Court: Court of Federal Claims

633 F.2d 543

American Bank of San Antonio v. The UNITED STATES.

No. 569-77.

United States Court of Claims.

July 16, 1980.

Walter C. Wolff, Jr., San Antonio, Tex., Atty. of Record, for plaintiff; Wolff & Wolff, San Antonio, Tex., of counsel.

Frank M. Rapoport, Washington, D.C., with whom was Asst. Atty. Gen. Alice Daniel, Washington, D.C., for defendant.

Before FRIEDMAN, Chief Judge, and KUNZIG and BENNETT, Judges.

ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT

FRIEDMAN, Chief Judge:

This case is before the court on the parties' cross-motions for summary judgment. The plaintiff participates as a lender in the Federal Insured Student Loan Program and seeks recovery of the unpaid balances of certain student loans it issued under that program. The government denies liability, asserting that the plaintiff has not met the requirements for indemnification with respect to these loans. In addition, the government counterclaims for the interest benefits and special allowances already paid the plaintiff on the loans. We hold that the plaintiff's failure to satisfy the requirements for coverage under the program absolved the government from liability on all the loans in issue. We therefore deny the plaintiff's motion for summary judgment and grant the government's motion entirely on the plaintiff's claims and partially on its counterclaims.

I.

A. The Federal Insured Student Loan Program is one of the means by which the government assists students in meeting the costs of attending postsecondary schools. Under this program, private financial institutions make education loans to students, and the government then insures the loans against default by the students. The government also pays a portion of the interest on these loans. 20 U.S.C. § 1071(a) (1976). From its inception until the time of this suit, the program was administered by the Office of Education of the Department of Health, Education, and Welfare.

A lending institution that wishes to participate in the program enters into a contract of insurance with the Commissioner of Education. A student seeking a federally insured loan initiates the process of obtaining it by completing a portion of an application form, the remainder of which is then filled out by the student's school and the lender. The lender sends the completed application form to the Office of Education for its approval and an insurance commitment, upon receipt of which the lender is authorized to make the insured loan. At the same time, the student and the lender execute a promissory note, which provides for assignment to the government in the event of default. If the student defaults, the lender submits a claim for payment to the government, accompanied by the promissory note, assigned to the government, and all other essential supporting documents.

B. This case arises out of loans the plaintiff made to approximately 90 students,¹ all of whom have defaulted in whole or in part in repaying the loans. When the plaintiff made these loans (mostly in 1973 and 1974), it filed applications under the federal insurance program with the Office of Education, which approved all the loans. After the defaults, however, the government denied each of the plaintiff's claims for recovery, assigning one or more of six types of procedural error or omission by the plaintiff as the reason for each denial.² The plaintiff then filed this suit for recovery of the amounts the students are in default.³

II.

In evaluating the validity of each of the six reasons on which the government relies to justify denial of the plaintiff's claims for payment, we start from the premise that the government is entitled to set reasonable terms and conditions for participation in the loan guaranty program and may refuse to insure loans with respect to which the requirements have not been satisfied. Congress has delegated to the Commissioner of Education the authority (20 U.S.C. § 1082(a) (1976)) to

(1) prescribe such regulations as may be necessary to carry out the purposes of this part;

. . . . .

(3) include in any contract for Federal loan insurance such terms, conditions, and covenants relating to repayment of principal and payment of interest, relating to his obligations and rights and to those of eligible lenders, and borrowers in case of default, and relating to such other matters as the Commissioner determines to be necessary to assure that the purposes of this part will be achieved ....

Pursuant to this authority, the Commissioner promulgated regulations specifying the procedures to be followed by participants in the program and their rights and responsibilities. 45 C.F.R. pt. 177 (1978) (in particular, sections 177.41-.78).⁴ In addition, the Office of Education supplies each participating lender with a Manual for Lenders (issued May 31, 1972),⁵ which provides detailed supplementation of the regulations and gives instructions and examples regarding the steps involved in making loans, obtaining insurance, and seeking reimbursement. (The Manual also includes complete copies of the applicable statutes and regulations.)

The plaintiff does not challenge the regulatory provisions at issue. Indeed, in most instances, the plaintiff does not dispute the government's contention that the plaintiff's procedures violated these regulations. Instead, the plaintiff generally argues, as developed infra, that its violations of the regulations were at most minor, technical ones that we should excuse and not allow as a barrier to its otherwise rightful insurance recovery.

Although the regulations and other rules on which the government bases denial are often intricate, such rules are an essential aspect of the proper operation of a complex and widespread insurance program. They are especially important where, as here, the government, as insurer, has a large financial stake in the sound operation of the participating lenders. We cannot conclude that, in fulfillment of his responsibility to provide careful federal supervision over the loan insurance program, the Commissioner was not entitled to establish these rules or to make compliance with them a condition of loan insurance. The reasonableness of requiring such compliance is confirmed by the fact that the plaintiff is a bank and therefore accustomed to dealing on a daily basis with state and federal banking and other regulations at least as involved as those governing the federal student loan insurance program.

It is in the light of these considerations that we discuss the six grounds upon which the government refused to reimburse the plaintiff.

III.

A. Altered promissory notes. With respect to 39 claims still pending, the promissory notes and application forms originally were prepared with the National Bank of Fort Sam Houston rather than the plaintiff as lender. Subsequently, the name of the Fort Sam Houston Bank was "whited out" where it appeared on these documents, and the plaintiff's name was typed in its place. The plaintiff submitted the application forms for governmental approval in this condition, and then, after these students defaulted, attached the altered promissory notes to its claim for payment from the government. The government ruled, however, that these altered notes did not satisfy its requirement that promissory notes assigned to the government by the lender accompany all claims for payment (20 U.S.C. § 1080(b) (1976); 45 C.F.R. § 177.48(a)(4), (d) (1978); Manual for Lenders para. IV.B.1.c (1972)), and on this basis denied the claims.⁶

Although no regulation or Manual provision directly forbids the use of an altered promissory note to satisfy this requirement, the prohibition is justified by the government's statutory entitlement to be "subrogated for all the rights of the holder of the obligation upon the insured loan." 20 U.S.C. § 1080(b) (1976). The government's right of subrogation contemplates that the bank's assigned claim against the student will be valid to the extent that it is enforceable on it face. That requirement is implicit in the condition that payment of the bank's claim is "contingent upon receipt of an assignment to the United States of America of all right, title and interest of the lender of the note on which the claim is filed." 45 C.F.R. § 177.48(d) (1978).⁷ Unless the bank's claim against the student is enforceable at the time of assignment, the subrogation rights the government receives in exchange for the insurance payments would be worthless.⁸

One of the basic responsibilities placed on lenders is to use reasonable care in conducting their part of the program. See 45 C.F.R. § 177.48(b) (1978); Manual for Lenders para. II.C.2 (1972). A major reason for this requirement is to protect the financial integrity of the program by minimizing the potential governmental liability under it. Lender practices that diminish the enforceability of the promissory notes increase the government's losses as insurer by limiting its ability to collect from the defaulting students.

The plaintiff concedes that its use of altered promissory notes and application forms is an "undoubtedly sloppy" practice. It therefore does not satisfy the general reasonable care standard. Furthermore, by providing the government with such promissory notes, on which the government may wish to seek recovery from the students, the plaintiff has not assigned the government a claim that is indisputably enforceable. A material alteration in a commercial instrument such as a promissory note by one of the parties to the instrument after its execution and without the consent of one of the other parties renders the instrument unenforceable against the nonconsenting party. See 3A C.J.S. Alteration of Instruments § 6 (1973).

If the alterations in these notes do not fall within this general rule, it was the plaintiff's obligation so to demonstrate when it submitted its claim to the Office of Education.⁹ The burden is on the plaintiff to show...