U.S. v. Griffin

• Citation: 707 F.2d 1477
• Decision Date: 13 May 1983
• Docket Number: No. 82-1138,82-1138
• Parties: , 11 Ed. Law Rep. 780 UNITED STATES of America v. Gary L. GRIFFIN, Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

Page 1477

707 F.2d 1477

228 U.S.App.D.C. 72, 11 Ed. Law Rep. 780

UNITED STATES of America v. Gary L. GRIFFIN, Appellant.

No. 82-1138.

United States Court of Appeals, District of Columbia Circuit.

Argued Oct. 21, 1982.

Decided May 13, 1983.

Appeal from the United States District Court for the District of Columbia (D.C. Civil No. 80-02253).

I. Michael Greenberger, Washington, D.C., for appellant. Russell B. Kinner, Washington, D.C., was on brief for appellant. Lynn E. Cunningham, Washington, D.C., also entered an appearance for appellant.

A. Patricia Frohman, Asst. U.S. Atty., Washington, D.C., with whom Stanley S. Harris, U.S. Atty., Royce C. Lamberth and R. Craig Lawrence, Asst. U.S. Attys., Washington, D.C., were on brief, for appellee. Kenneth M. Raisler, Asst. U.S. Atty., Washington, D.C., also entered an appearance for appellee.

Kenneth L. Mickens was on brief for Nat. Consumer Law Center, Inc., amicus curiae.

Before WILKEY and WALD, Circuit Judges, and McGOWAN, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge McGOWAN.

Opinion concurring in the judgment filed by Circuit Judge WILKEY.

McGOWAN, Senior Circuit Judge:

Gary Griffin defaulted on the federally-insured student loan a proprietary vocational school in Washington, D.C., gave him to pay for classes it offered in radio and television repair. As he told the school's collection agency, Griffin believes he has valid defenses that excuse him from any obligation to his school lender. According to Griffin, this school's salesmen used high-pressure tactics to sell empty dreams to Washington's poor and hopeless. He says the school was shamefully inadequate and that defaults like his were common because students often emerged with no marketable skills. The United States sued Griffin to recover the money it reimbursed the school after Griffin defaulted. The question presented on appeal is whether Griffin may raise against the government defenses he might have raised against the school in a suit to collect on the loan. The District Court granted summary judgment for the government, holding that Griffin could not raise any defenses because he failed to bring them to the Office of Education's (OE's) ¹ attention before it paid the school's default claim. Because we find that OE is bound by its own regulations to recognize any valid defenses Griffin might have, we reverse.

I

On October 4, 1975, Griffin applied for a federally-insured student loan to attend the Washington Drafting School, later known as Lacaze Academy, Technical Division, to take a course in radio and television repair. See generally Higher Education Act of 1965, tit. IV, pt. B, 20 U.S.C. Secs. 1071 to 1087-4 (1976 & Supp. V 1981) (as amended) (guaranteed student loan program). After the school's financial aid officer signed the application, and OE approved the insurance, Griffin executed two promissory notes to secure the loan from the school: one, dated November 3, 1975, was for $862.50; the second, undated, was for $137.50. Griffin attended classes from October 1975 to October 1976. We will not dwell on Griffin's allegations about the inadequacies of his course of study or the misrepresentations of the school's salesman; suffice it to say that they strongly evoke Charles Dickens' immortal image of Dotheboys Hall as administered by Wackford Squeers.

By June 1978, when Griffin's payments became due and he defaulted, OE had run into some problems of its own with the Washington Drafting School. In both 1975 and 1977 it considered suspending or terminating the school's eligibility as an insured lender because a high proportion of loans the school made between 1974 and 1976 were either delinquent or in default. Record Excerpts (R.E.) 71. Indeed, in 1977 OE substantially reduced the school's lending limit and renewed its contract of insurance even to that extent only "reluctantly." R.E. 147.

OE had also learned of problems others were having with the school. At some point it received a copy of a 1975 Veterans' Administration audit of the Washington Drafting School. The audit found that the school was falsely certifying that chronically absent students were in fact in attendance. It also found violations of various Veterans' Administration regulations. R.E. 102-07. Moreover, between August 1977 and August 1978, Griffin's attorney and at least one law clerk from the Neighborhood Legal Services Program of Washington, D.C., had conversations or meetings with OE officials concerning various clients' problems with Lacaze-Gardner School, an entity comprising both Lacaze Academy, Technical Division, and a school teaching business skills, Lacaze-Gardner School, Inc. R.E. 185-89. In the spring of 1978, a law clerk specifically inquired "whether the Office of Education would permit students to raise defenses to repayment of federally-insured loans relating to the circumstances of enrollment and the educational program." R.E. 187 (affidavit of Griffin's attorney). In response, OE sent a copy of a bulletin announcing that a school run for profit is a "seller" for purposes of a Federal Trade Commission rule requiring consumer credit contracts to specify that subsequent holders are subject to the same claims and defenses as the original seller. R.E. 187-88; see 16 C.F.R. pt. 433 (1982) (FTC rule); R.E. 190-92 (OE Bulletin L16, June 28, 1976).

On August 11, 1978, the school wrote to inform OE that Griffin's account was past due. One week later OE sent Griffin a letter encouraging him to make repayment arrangements by writing the school's collection agency or by phoning the school's student loan director. R.E. 182. The letter said that if Griffin and the school could not agree on the amount owed, or "if there are other problems which you would like to discuss," Griffin could write to a regional office of OE. The letter's main message, however, was repeated at the end: "Please contact LACAZE ACADEMY as soon as possible." Id. On October 6, 1978, Griffin's attorney wrote to the school's collection agency as OE had requested. He stated that "Mr. Griffin wishes to present defenses to the entire amount due and owing" and that he would "be glad to set out Mr. Griffin's defenses in detail if you will kindly inform me as to whom this information should be directed." R.E. 183.

By this time Lacaze-Gardner, Inc., the business school affiliate of the technical school, was amid a brewing scandal. Beginning in late August, the Washington Post ran a series of articles describing the business school as a rat-infested firetrap and reporting an OE investigation into allegations that the school collected loan money for many students who never completed their course work. By November the articles reported a wide range of alleged deceptions and asserted that the Federal Bureau of Investigation was starting its own investigation. Finally, on the day two of the most condemnatory articles appeared, the school was closed for fire code violations after two "suspicious" fires broke out. R.E. 173. The next day, November 10, OE instituted emergency action to terminate both Lacaze schools' eligibility under the federal loan program because their local licenses to operate as proprietary schools had lapsed on October 31, 1978. R.E. 161-62.

On November 16, 1978, the technical school submitted a claim to OE, the insurer of the loan, for reimbursement of its loss due to Griffin's default. At the same time, it assigned all its rights in the promissory notes to the government. Even though it was required by regulation to submit with its claim copies of all documents relating to its collection efforts, see 45 C.F.R. Sec. 177.48(c) (1978); see also 34 C.F.R. Sec. 682.516(e)(1)(ii)(D) (1982) (amended current version), it did not supply OE a copy of Griffin's letter to the collection agency in which he announced his intent to raise defenses on the loan. OE paid the default claim on December 7, 1978.

The government then sent some collection notices of its own. In June 1979 Griffin's attorney wrote to object to the government's collection tactics and to announce that Griffin and another student had "many good and sufficient defenses based on misrepresentations and inadequate services by Lacaze-Gardner." R.E. 61. Although an agency official wrote in response that some of the violations Griffin's attorney had listed would not be valid defenses, he did not assert at that time that the government was immune to any defenses not previously raised. Instead, he said the agency was

quite sensitive to bona fide defenses honestly raised by debtors who are willing to discuss facts with us. If the debtors you represent can prove a defense on the debt, we will pursue the matter with the lender, which has warranted to us that the note qualifies for payment on the federal loan insurance.

R.E. 59.

II

On September 4, 1980, the government filed suit in the District Court to recover the balance due on the defaulted loan. Griffin asserted defenses based on the school's alleged inadequacies: breach of contract, illegal contract, and fraud or violation of District of Columbia consumer protection rules. The government, however, retreating from the position it espoused earlier, argued that Griffin could not raise any defenses to payment of the loan. Central to the government's contention was its characterization of the rights it was asserting against Griffin.

All agreed that one source of the government's rights against Griffin was its position as holder of the promissory notes. Upon payment to the school, the government became "subrogated for all of the rights of the holder of the obligation upon the insured loan and ... entitled to an assignment of the note." 20 U.S.C. Sec. 1080(b) (Supp. V 1981). Were its rights so limited, however, the government would have been in no better position than the school itself. As OE made clear, "[i]f the school fails to provide such education, the student has defenses on the [school-generated] loan. ...