Phillips v. Pennsylvania Higher Ed. Assistance Agency, 80-1919

Decision Date03 September 1981
Docket NumberNo. 80-1919,80-1919
Citation657 F.2d 554
PartiesKathleen PHILLIPS, Rebecca McGaffick and Edna Greeley, on behalf of themselves and all others similarly situated Donna Mareno and Raymond Mareno, Intervenor Plaintiffs, v. PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY, a public corporation, Kenneth Reeher, individually and in his capacity as Executive Director of the Pennsylvania Director of PA Higher Education Assistance Agency, and Charles H. Russell, individually and in his capacity as Assistant Deputy Director, Loans Pennsylvania Higher Education Assistance Agency, Appellants.
CourtU.S. Court of Appeals — Third Circuit

Robert W. Barton (argued), Killian & Gephart, Harrisburg, Pa., for appellants.

Edward A. Olds (argued), Neighborhood Legal Services Assn., Pittsburgh, Pa., for appellees.

Before ADAMS, ROSENN and HUNTER, Circuit Judges.

OPINION OF THE COURT

ROSENN, Circuit Judge.

Although loans for educational purposes on attractive terms are easily obtainable and often irresistible, repayment may be difficult and inconvenient. It is the inconvenience that is the genesis of this litigation. Plaintiffs, individual low-income residents of western Pennsylvania who had obtained loans guaranteed by the Pennsylvania Higher Education Assistance Agency ("PHEAA" or "Agency"), sought to enjoin PHEAA from suing them in Dauphin County, Pennsylvania, on the loans in default. They contend that by bringing suit in a forum as much as 200 miles from their homes, PHEAA had denied them the right of access to the courts, a violation of the fourteenth amendment of the United States Constitution. The United States District Court for the Western District of Pennsylvania agreed with plaintiffs' contention and enjoined PHEAA from instituting or further maintaining suits against the plaintiffs in Dauphin County. The district court also decided a pendent state claim and ordered PHEAA not to collect attorneys' fees in actions on the loans, except where the collection of such fees is authorized in the loan agreement. 1 We reverse.

I.

Kathleen Phillips, Rebecca McGaffick, and Edna Greeley initiated this class action on September 1, 1978, on behalf of themselves and all other similarly situated persons, against PHEAA and two of its officers, Kenneth Reeher, executive director, and Charles Russell, deputy director for loans. Donna and Raymond Mareno subsequently were permitted to intervene as plaintiffs. PHEAA, as guarantor of loans made to plaintiffs by commercial lending institutions, 2 had purchased these loans after default by paying the private institutions the full amount due on each loan. Phillips and McGaffick have been sued by PHEAA, which filed complaints in assumpsit against them in Dauphin County. The Agency has also taken legal action in Dauphin County against intervenors Donna and Raymond Mareno, but by entering a confession of judgment against them, rather than by filing a complaint in assumpsit. Greeley, not yet sued by PHEAA, has made no payments in a number of years and therefore anticipates such suit.

Plaintiffs purported to represent two classes of persons. Members of both classes share certain attributes. First, by definition, all are low-income 3 residents of Allegheny, Beaver, Butler or Lawrence Counties in the western part of Pennsylvania. Second, all members are stated to be borrowers of funds who have defaulted on their loans. The loans have been purchased by PHEAA, pursuant to its guaranty agreement with the lending institutions. The only distinction between the classes is based on the response of PHEAA to the defaults. Class I, represented by Phillips, McGaffick and intervenors Mareno, is composed of persons, meeting the general requirements of class membership, who have already been sued by PHEAA in the Court of Common Pleas of Dauphin County. Class II, represented by Greeley, consists of persons, again having shared characteristics, who have not yet been, but allegedly will be sued by PHEAA in Dauphin County. The primary contention of both classes is that suit against them in Dauphin County, approximately 200 miles from their homes, deprives them because of their indigency of access to the courts and denies them due process.

To understand fully the issues in this case, it is necessary to examine briefly the primary operations of PHEAA. The United States encourages the individual states to establish higher education student-assistance programs by providing loan insurance and fiscal support. 20 U.S.C. §§ 1070-1089 (1976 & Supp. III 1979). Responding to this federal impetus, Pennsylvania created PHEAA to offer grants and low-interest loans to Pennsylvania residents, thereby enabling them to finance their higher education. Pa.Stat.Ann. tit. 24, §§ 5101-5189 (Purdon Supp. 1981). The PHEAA loan program is regulated, then, by both federal and state law. Under the legislation, PHEAA follows certain procedures in administering its loan program.

A person desiring a PHEAA-guaranteed low-interest loan first consults a lending institution, usually a bank. When the prospective borrower completes an application, which requires disclosure of both financial condition and the circumstances of the proposed educational venture, the institution forwards the forms to PHEAA offices in Harrisburg (Dauphin County) for administrative review. When PHEAA has determined the amount of the loan it will guarantee, it notifies both the lending institution and the applicant directly by mail. If the applicant decides to accept the offered loan, he or she signs a promissory note evidencing that indebtedness, the promise to repay and the Agency's address in Dauphin County. The lending institution then provides the funds to aid in payment of the student's educational costs. The borrower is not required to make any payments to the lending institution until nine months after his or her schooling has ended.

PHEAA initiates recovery measures only when the relationship between the lending institution, usually a bank, and the borrower has broken down because of the borrower's failure to repay. When a payment is missed, a borrower is declared in potential default and PHEAA is notified. If, after 120 days, the borrower has not caught up in payments, PHEAA is obligated to purchase the note from the bank for its full value and succeeds to all the rights of the bank. After PHEAA has taken over the note, it goes to great lengths amicably to induce payment. Unlike commercial lending institutions, PHEAA is willing and able to accept reduced payments and work out a plan for convenient repayment. Further, when a borrower is unable to make payments, PHEAA accepts the situation with the hope that the borrower's financial condition will improve and payments will resume. By mail and by telephone, PHEAA attempts to maintain an accurate picture of the delinquent's condition and to persuade those able to pay to do so; as to the unemployed and indigent, the Agency may literally wait for years before resorting to legal action. 4

As a general rule, PHEAA takes no legal action for at least five years against indigent debtors who are unable to make payments. Indeed, the Agency maintains, and plaintiffs do not dispute, that it would continue indefinitely its policy of waiting for improvement on the financial condition of an indigent debtor were it not for its fear of the possible effect of the Pennsylvania statute of limitations. 5 PHEAA believes that if it does not bring suit within six years after default or the last payment on the note, whichever is later, it may be barred from attempting to collect on the notes through legal action. 6 Thus, a person admittedly indigent for six years, and therefore both unable and unexpected to make payments, could not thereafter be required to repay PHEAA, even if indigency has been supplanted by prosperity. See PHEAA v. Xed, 102 Dauph. 304 (Pa.C.P.1981).

To avoid such a situation, PHEAA adopted a policy of suing all debtors when five and one-half years had elapsed since default or the last payment, whichever was later. If the defendant in this state suit is indigent, PHEAA does not, while the indigency remains, further pursue collection of the debt. The mere filing of suit against such persons serves PHEAA's purpose of avoiding the running of the statute of limitations.

Under the policy, PHEAA has been filing a substantial number of suits often several hundred per month. As a matter of convenience and administrative efficiency, and because the transaction giving rise to the agency's course of action occurred in Dauphin County, PHEAA has generally filed these suits in the state court of that county. Federal plaintiffs contend that this procedure, when directed against them, is unconstitutional. Their complaint is directed at two specific elements of this procedure: (1) the decision to file suit and (2) the choice of Dauphin County as the forum. They do not dispute that PHEAA could properly sue them in court in plaintiffs' own counties. Although they have not challenged the matter of venue in the state courts, they contend that the simple act of PHEAA's filing suit not the obtaining of a default judgment or the execution on property in a forum 200 miles from their homes, unconstitutionally denies them access to the courts, as guaranteed by the fourteenth amendment. Boddie v. Connecticut, 401 U.S. 371, 91 S.Ct. 780, 28 L.Ed.2d 113 (1971).

II.

Implicit in plaintiffs' complaint is an attack on Pennsylvania's Rules of Civil Procedure, for if state law did not permit PHEAA to sue these western Pennsylvania residents in Dauphin County, these alleged constitutional violations could never occur. Therefore, it is important to be cognizant of Pennsylvania's procedural rules insofar as they are relevant to these suits.

One type of action brought by PHEAA is a suit by summons in assumpsit, commenced by the filing of specified papers with...

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