Canterbury Career School, Inc. v. Riley

• Decision Date: 14 October 1993
• Docket Number: Civ. A. No. 93-3843 (MLP).
• Parties: CANTERBURY CAREER SCHOOL, INC., Plaintiff, v. Richard W. RILEY, Secretary of the United States Department of Education, in his official capacity, Defendant.
• Court: U.S. District Court — District of New Jersey

833 F. Supp. 1097

CANTERBURY CAREER SCHOOL, INC., Plaintiff, v. Richard W. RILEY, Secretary of the United States Department of Education, in his official capacity, Defendant.

Civ. A. No. 93-3843 (MLP).

United States District Court, D. New Jersey.

October 14, 1993.

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David O. Drake, Salt Lake City, UT, James H. Landgraf, Guest, Domzalski, Kurts & Landgraf, Burlington, NJ, for plaintiff.

Lawrence G. Brett, Office of the Gen. Counsel, U.S. Dept. of Educ., Washington, DC, Irene Dowdy, Asst. U.S. Atty., Trenton, NJ, for defendant.

OPINION

PARELL, District Judge.

This matter comes before the court on application by plaintiff, Canterbury Career Schools, Inc., for a preliminary injunction seeking (a) to prevent defendant, Richard W. Riley, in his official capacity as Secretary of the United States Department of Education, from publishing or continuing to publish certain cohort default rates which plaintiff alleges have been erroneously calculated by defendant; (b) to mandate defendant to suspend these rates and publish appropriate notice of such suspension; and (c) for any other relief which the court deems just and proper. Also before the court is defendant's motion to dismiss for lack of subject matter jurisdiction. The following opinion constitutes the findings of the court on this application for preliminary relief and motion to dismiss. For the reasons stated, the preliminary injunction is granted and the motion to dismiss is denied.

BACKGROUND

Plaintiff, Canterbury Career Schools, Inc., is a New Jersey corporation which operates a post-secondary school with its main campus located in Nevada and branch campuses located in California, Pennsylvania and New Jersey. Plaintiff provides career training for a variety of occupations, including tractor trailer driving, secretarial positions, medical support positions, bartending, word processing and a few technical careers. Since 1987 plaintiff has been accredited without interruption by the Accrediting Counsel for Continuing Education & Training. A substantial percentage of the students who attend plaintiff's schools are economically disadvantaged and, at the time of enrollment, many of these students are on welfare.

Approximately 72% of the students who enroll at plaintiff's school succeed in completing their courses of study and go on to graduate. Of those graduates, plaintiff is successful in placing approximately 88% in education-related jobs.¹ Plaintiff asserts that its school is reputed as providing students with quality education and for preparing those students to perform well in their chosen occupations

Defendant, Richard W. Riley, has been sued by plaintiff in his official capacity as the Secretary of the United States Department of Education. Defendant is responsible for administering and implementing the Federal Family Educational Loan programs ("FFEL") authorized by Title IV of the Higher Education Act of 1965, as amended, 20 U.S.C. § 1070 et seq. Plaintiff has a Participation Agreement with the Secretary, in accordance with 20 U.S.C. § 1094, whereby plaintiff is fully eligible to participate in the FFEL programs.

The purpose of the FFEL programs² is to enable students to obtain federally guaranteed loans. Under the FFEL programs, a student receives a loan from a participating lender, usually a bank, to pay tuition, fees and living expenses related to attendance at an eligible post-secondary institution. Repayment of the student loan is insured by a guaranty agency. 20 U.S.C. § 1078(b)-(c); 34 C.F.R. 682.100 and 682.401. In the event of default, the guaranty agency pays the lender the unpaid amount of the outstanding loan. The Department of Education ("DOE") "re-insures" the guaranty agencies for payments made to the lenders. 20 U.S.C. § 1078(c); 34 C.F.R. 682.100 and 682.404.

However, in order for the lender to collect reimbursement from the guaranty agency on a defaulted loan, the lender must demonstrate that "due diligence" in the collection of the loan was properly performed³. Lenders must perform "due diligence" for a period of at least 180 days. 34 C.F.R. 682.411. This 180 day period begins either (1) 30 days after the lender discovers that the student borrower has entered the repayment period⁴ or (2) the day after the student borrower misses a payment, whichever is later. 34 C.F.R. 682.411(b). After the 180 day period has expired, the loan goes into default and the lender submits a claim to the guaranty agency for reimbursement. Before a reimbursement claim is paid, the guaranty agency is responsible for reviewing the lender's records to ensure that the lender has, in fact, properly performed "due diligence". 34 C.F.R. § 682.406(a)(1) and (3). If the lender has not properly performed "due diligence", then the guaranty agency is not authorized to reimburse the lender. Once the guaranty agency pays a claim, it is required to employ collection or servicing efforts of its own before seeking reimbursement from DOE. 34 C.F.R. § 682.410(b)(4). If those efforts fail, then the guaranty agency may seek reimbursement from DOE.

Because of the increasing monetary drain on DOE in paying defaulted loans, Congress amended HEA in 1990 by passing the Student Loan Default Prevention Initiative Act (20 U.S.C. § 1085). The purpose of 20 U.S.C. § 1085 was to reduce the number of defaulted loans by revoking the eligibility of schools whose students had high rates of default. Section 1085 provides that any school whose "cohort default rate" ("CDR") exceeds a certain threshold percentage⁵ for three consecutive years loses its eligibility for participation in the FFEL program for the fiscal year in which the determination is made and for the two succeeding years. 20 U.S.C. 1085(a)(2)(A).

A school's CDR is calculated by the Secretary of DOE by taking the number of current or former students who enter the repayment period in a given fiscal year and dividing that number by the number of those students who default by the end of the following fiscal year. 20 U.S.C. § 1085(m)(1)(A). As specifically set forth in the statute, the Secretary of DOE, in calculating a school's CDR, is to "exclude any loans which, due to improper servicing or collection, would result in an inaccurate or incomplete calculation of the cohort default rate." 20 U.S.C. § 1085(m)(1)(B). The Secretary relies upon information provided by the guaranty agencies to calculate CDRs. This information is in the form of a "tape dump," which is a computer tape listing information about each loan insured by the guaranty agency. The information contained on the "tape dump" indicates the status of each loan, specifically indicating whether the loan is in default or repayment.

If a school's calculated CDR exceeds the statutory threshold percentage, the school may appeal to the Secretary of DOE on the ground that (1) the calculation of the CDR is inaccurate and that recalculation would reduce the CDR to below the threshold percentage, and/or that (2) due to exceptional mitigating circumstances, loss of eligibility based on the calculated CDR would be inequitable. 20 U.S.C. § 1085(a)(2)(A)(i)-(ii).

The Department of Education published a letter commonly referred to as the May, 1993 "Dear Colleague Letter" ("May, 1993 DCL") which set forth procedures to be followed in challenging the calculation of a school's CDR on appeal. (Def.'s Ex. 1 attached to declaration of M. Geneva Coombs). If a school wishes to appeal on the first ground, by the terms of the May, 1993 DCL, it must submit specific relevant data to the guaranty agencies within ten days of receiving notification from DOE of the calculated CDR. May, 1993 DCL at 3. The guaranty agencies are to respond by either agreeing with the school's conclusions regarding disputed loans or by providing complete copies of servicing records for disputed loans. May, 1993 DCL at 4. After the guaranty agencies respond, the school then has five days in which to provide DOE with all the necessary information upon which the appeal is based. May, 1993 DCL at 4.

The cohort default rates calculated by defendant for plaintiff's school are (1) 39% for 1989 (2) 54.8% for 1990, and (3) 49.7% for 1991. Each of these calculated rates exceeds the "threshold percentage" as that term is defined by 20 U.S.C. § 1085(a)(2)(B).

Plaintiff received notification from DOE of its calculated CDR for fiscal year 1991 on or about August 13, 1993, whereupon plaintiff immediately applied in the federal district court in Nevada for a temporary restraining order and a preliminary injunction against defendant. By order dated August 13, 1993, the Nevada court dismissed plaintiff's action without prejudice for lack of venue. Plaintiff then filed a Verified Complaint with this Court seeking a temporary restraining order and a preliminary injunction against defendant, specifically seeking to prevent defendant from publishing or continuing to publish the CDRs calculated by defendant for plaintiff's school for the fiscal years 1989, 1990 and 1991 and to mandate defendant to suspend these CDRs and to publish appropriate notice of such suspension. On August 26, 1993, Judge Jerome B. Simandle held an emergency hearing on plaintiff's request for a temporary restraining order, and by order dated that same day the request was denied.⁶ At that time, the Court scheduled September 23, 1993 as the date for the hearing on plaintiff's request for a preliminary injunction and on defendant's anticipated motion to dismiss. The evidentiary hearing on these motions commenced on September 23, 1993 and was continued on September 29 and September 30, 1993.⁷

DISCUSSION

I. JURISDICTION

Jurisdiction over this action is found under 20 U.S.C. § 1082(a)(2), which provides federal district courts with original jurisdiction over civil actions against the Secretary of the Department of Education.

Defendant alleges that the "anti-injunction" provision contained in this section pr...