Bartels v. Alabama Commercial College

• Decision Date: 15 December 1995
• Docket Number: Civil Action No. CV294-150.
• Citation: 918 F. Supp. 1565
• Parties: Eddie BARTELS, et al., Plaintiffs, v. ALABAMA COMMERCIAL COLLEGE, Inc., d/b/a Riley Training Institutes of Savannah, Waycross, and Brunswick, Georgia, Richard Riley, Secretary, U.S. Department of Education, the Higher Education Assistance Foundation, and the Georgia Higher Education Assistance Corporation, and Student Loan Marketing Association, Defendants.
• Court: U.S. District Court — Southern District of Georgia

918 F. Supp. 1565

Eddie BARTELS, et al., Plaintiffs, v. ALABAMA COMMERCIAL COLLEGE, Inc., d/b/a Riley Training Institutes of Savannah, Waycross, and Brunswick, Georgia, Richard Riley, Secretary, U.S. Department of Education, the Higher Education Assistance Foundation, and the Georgia Higher Education Assistance Corporation, and Student Loan Marketing Association, Defendants.

Civil Action No. CV294-150.

United States District Court, S.D. Georgia, Brunswick Division.

December 15, 1995.

COPYRIGHT MATERIAL OMITTED

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Murphy Alan Cooper, Georgia Legal Services, Savannah, GA, Lisa Jane Krisher, Georgia Legal Services, Atlanta, GA, Jon P. Smith, Brunswick, GA, for Eddie Bartels, Alethia Pinkney, Shirley Travis, Iris Hull, Sharon Days, Leonie Smart, Mary L. Manley, Doretha Young, Ruby C. Carr, Alfreda C. Bantum, and Octavis Roberson.

Murphy Alan Cooper, Georgia Legal Services, Savannah, GA, Lisa Jane Krisher, Georgia Legal Services, Atlanta, GA, for Iris Miller, Linda Mosley, and Michelle Cross.

Murphy Alan Cooper, Georgia Legal Services, Savannah, GA, Jon P. Smith, Brunswick, GA, for Vera Burson.

Melissa Stebbins Mundell, Savannah, GA, Sean W. Colligan, Commercial Litigation Branch, Civil Division, U.S. Department of Justice, Washington, DC, Delora L. Kennebrew, United States Attorney, Savannah, GA, Jeannine R. Lesperance, U.S. Department of Justice, Washington, DC, for Richard Riley.

Sean W. Colligan, Commercial Litigation Branch, Civil Division, U.S. Department of Justice, Washington, DC, Delora L. Kennebrew, United States Attorney, Savannah, GA, Jeannine R. Lesperance, U.S. Department of Justice, Washington, DC, for Higher Education Assistance Foundation.

James Martin Lachance, Charles S. Johnson, III, Peterson, Dillard, Young, Asselin, Powell & Wilson, Atlanta, GA, for Georgia Higher Education Assistance Corporation.

Lisa Sue Godbey, Gilbert, Harrell, Gilbert, Sumerford & Martin, P.C., et al., Brunswick, GA, for Student Loan Marketing Association.

ORDER

ALAIMO, District Judge.

Defendants, Student Loan Marketing Association, the Higher Education Assistance Foundation, the Georgia Higher Education Assistance Corporation, and the Secretary of the United States Department of Education, Richard Riley (collectively referred to as the "non-school Defendants"), have each filed a Motion to Dismiss Plaintiffs' amended complaint. For the reasons discussed below, the non-school Defendants' motions will be GRANTED.

FACTS

Plaintiffs are a putative class of former students of Alabama Commercial College, Inc., d/b/a the Riley Training Institutes of Savannah, Waycross, and Brunswick, Georgia. From September of 1988 to November of 1990, these schools allegedly recruited the Plaintiffs, induced them to sign up for federally guaranteed student loans, and then failed to provide the promised quality of education or job placement.

Plaintiffs' amended complaint names as Defendants, Alabama Commercial College, Inc. d/b/a Riley Institute ("Riley Institute"), the Secretary of the United States Department of Education, Richard Riley ("Secretary Riley"), the Higher Education Assistance Foundation ("HEAF"), the Georgia Higher Education Assistance Corporation ("GHEAC"), and the Student Loan Marketing Association ("Sallie Mae"). Riley Institute is a now-defunct corporation that provided vocational training in Southeast Georgia. Secretary Riley is responsible for implementing and overseeing the Guaranteed Student Loan Program (now called the Federal Family Education Loan Program, or "FFEL") and other related educational programs. GHEAC and HEAF guaranteed some of the Plaintiffs' student loans and are allegedly assignees of some of these loans. Sallie Mae is in the business of buying student loans in the secondary market and currently holds some of those loans.

In their amended complaint, Plaintiffs seek rescission of their loan contracts, declaratory and injunctive relief, actual and punitive damages, attorneys' fees and costs. In Count One of their complaint, Plaintiffs are suing Riley Institute, GHEAC, HEAF, and Sallie Mae for fraud. In Counts Two and Three, Plaintiffs are suing all the Defendants for breach of contract and for violations of the Uniform Deceptive Trade Practices Act. In Count Four, Plaintiffs are suing Riley Institute, GHEAC, and HEAF for the tort of ex delicto contract breach. Finally, in Count Five, Plaintiffs are suing Secretary Riley for Violations of Due Process.

DISCUSSION

I. The Standard for Evaluating a Motion to Dismiss

Rule 12(b)(6) of the Federal Rules of Civil Procedure permits a defendant to move to dismiss a complaint on the ground that the plaintiff has failed to state a claim upon which relief can be granted. A motion under Rule 12(b)(6) attacks the legal sufficiency of the complaint. In essence, the movant says, "Even if everything you allege is true, the law affords you no relief." Consequently, in determining the merits of a 12(b)(6) motion, a court must assume that all of the factual allegations of the complaint are true, e.g., United States v. Gaubert, 499 U.S. 315, 327, 111 S.Ct. 1267, 1276, 113 L.Ed.2d 335 (1991); Powell v. Lennon, 914 F.2d 1459, 1463 (11th Cir.1990), and construe them in the light most favorable to the plaintiff. E.g., Sofarelli v. Pinellas County, 931 F.2d 718, 721 (11th Cir.1991).

II. Can Count One of Plaintiffs' Complaint Survive Defendants' Motions to Dismiss?

In Count One of their complaint, Plaintiffs assert a cause of action of fraud against Riley Institute, GHEAC, HEAF, and Sallie Mae. Under Rule 9(b) of the Federal Rules of Civil Procedure, a plaintiff must state "the circumstances of fraud ... in his complaint ... with particularity." Fed. R.Civ.Pro. 9(b). A complaint satisfies Rule 9(b) if it alleges the date, time, or place of the alleged fraud or if it alleges alternative means sufficiently detailed to connect the allegations to the defendants. Durham v. Business Management Associates, 847 F.2d 1505, 1511 (11th Cir.1988). Plaintiffs do not cite any direct actions of GHEAC, HEAF, or Sallie Mae, but, rather, only describe the allegedly fraudulent actions of Riley Institute. In an attempt to connect Defendants, GHEAC, HEAF, and Sallie Mae, to the conduct of Riley Institute, Plaintiffs claim that 1) Riley Institute and GHEAC, HEAF, and Sallie Mae stood in an origination relationship under 34 C.F.R. § 682.200, 2) that the promissory notes signed by Plaintiffs implicitly include the notice required by the FTC Holder Rule (the "FTC Holder Rule notice"), 3) that GHEAC, HEAF, and Sallie Mae are assignees of an integrated, mutually dependent contract with Riley Institute and its students, and 4) that GHEAC, HEAF, and Sallie Mae engaged in an agency/joint venture relationship with Riley Institute whereby the non-school Defendants aided and abetted Riley Institute in the procurement of Plaintiffs' student loans.

A. Would the Existence of an Origination Relationship Allow Count One to Survive Defendants' Motion to Dismiss?

Plaintiffs first predicate their fraud count upon an alleged origination relationship under 34 C.F.R. 682.200 between the school and the lenders.¹ Plaintiffs claims that such a relationship would enable them to assert against GHEAC, HEAF, and Sallie Mae the defenses to the student loan contract that could be asserted against Riley Institute.

In support of their assertion, Plaintiffs cite statements of the Secretary of Education from 1988 to 1992 to Congressmen and in briefs submitted to various courts. In these statements, the Secretary stated that when an origination relationship existed and when the loans were wholly or partially unenforceable against the student borrowers, the Department of Education's policy was to forbear enforcement of the loans. See e.g., Letter from Dept. of Educ. Deputy Assistant Secretary for Student Fin. Assistance, Dewey L. Norman, to W.N. Kirby, Comm'r of Educ., Texas Educ. Agency, of 7/17/88 (Pl's Response at Ex. 11); Letter from Dept. of Educ. Acting Assistant Secretary Kenneth Whitehead, to Congressman Stephan J. Solarz, 5/19/88 (Pl's Response at Ex. 10); Armstrong v. Accrediting Council, 832 F.Supp. 419, 433 (D.D.C.1993) (describing Secretary's Brief in Support of its Motion to Dismiss); Williams v. Nat'l Sch. of Health Technology, 836 F.Supp. 273, 284-85 (E.D.Pa.1993) (same).

While this is an issue of first impression in the Eleventh Circuit, courts in other jurisdictions have held that such a theory cannot be used against third parties like GHEAC, HEAF, and Sallie Mae. In reaching its decision, these courts have reasoned that the Secretary's statements were never promulgated as a rule under § 553 of the Administrative Procedure Act ("APA"). See, e.g., Williams, 836 F.Supp. at 284-85 (E.D.Pa.1993). The Court agrees, for federal agencies must comply with the APA's procedural requirements for rulemaking. Chrysler Corp. v. Brown, 441 U.S. 281, 303, 99 S.Ct. 1705, 1718, 60 L.Ed.2d 208 (1979) (citing Morton v. Ruiz, 415 U.S. 199, 232, 94 S.Ct. 1055, 1073, 39 L.Ed.2d 270 (1974)). "Although an agency may choose to bind itself in an informal manner, it cannot regulate third parties other than by utilizing the mechanisms of the APA." Williams, 836 F.Supp. at 285. Thus, the existence of an origination relationship between the school and the lenders would not allow Count One to survive the Defendants' Motion to Dismiss.

B. Is the Notice Required by the FTC Holder Rule Implicitly Included in the Promissory Notes Signed by Plaintiffs?

Plaintiffs next claim that Defendants, GHEAC, HEAF, and Sallie Mae, may be sued for fraud because the notice required by 16 C.F.R. § 433.2, the Federal Trade Commission Holder Rule (the "FTC Holder Rule"), is implicitly included in their promissory notes.² Even assuming that the FTC Holder Rule applies to student loan transactions, a plaintiff has no rights under the rule if the notice is omitted from the contract. See Armstrong v. Accrediting Council, 832...