Cal. Ass'n of Private Postsecondary Sch. v. DeVos, Civil Action No. 17-999 (RDM)

• Citation: 436 F.Supp.3d 333
• Decision Date: 31 January 2020
• Docket Number: Civil Action No. 17-999 (RDM)
• Parties: CALIFORNIA ASSOCIATION OF PRIVATE POSTSECONDARY SCHOOLS, Plaintiff, v. Elisabeth DEVOS, Secretary of Education, et al. Defendants.
• Court: United States District Courts. United States District Court (Columbia)

436 F.Supp.3d 333

CALIFORNIA ASSOCIATION OF PRIVATE POSTSECONDARY SCHOOLS, Plaintiff,

v.Elisabeth DEVOS, Secretary of Education, et al. Defendants.

Civil Action No. 17-999 (RDM)

United States District Court, District of Columbia.

Signed January 31, 2020

Robert Lawrence Shapiro, Duane Morris LLP, Washington, DC, Boris Bershteyn, Pro Hac Vice, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, Clifford M. Sloan, Sylvia Olga Tsakos, Todd D. Kelly, Skadden, Arps, Slate, Meagher & Flom LLP, Washington, DC, for Plaintiff.

Karen Bloom, U.S. Department of Justice, Washington, DC, R. Charlie Merritt, U.S. Department of Justice, Richmond, VA, for Defendants.

MEMORANDUM OPINION

RANDOLPH D. MOSS, United States District Judge

The California Association of Private Postsecondary Schools ("CAPPS") challenges regulations promulgated by the Department of Education ("the Department") in November 2016 to address perceived deficiencies in the William D. Ford Federal Direct Loan ("Direct Loan") program. See Dkt. 82; Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, William D. Ford Federal Direct Loan Program, and Teacher Education Assistance for College and Higher Education Grant Program, 81 Fed. Reg. 75,296 (Nov. 1, 2016) (codified in scattered sections of 34 C.F.R.) ("the 2016 Rule" or "the Rule"). Although CAPPS originally sought to invalidate the 2016 Rule in its entirety, the Court previously held that CAPPS lacked standing to pursue most of its claims. See Cal. Ass'n of Private Postsecondary Schs. v. DeVos , 344 F. Supp. 3d 158, 183 (D.D.C. 2018) (" CAPPS I "). Following that decision, CAPPS amended its complaint, Dkt. 82, and it now challenges only two (related) provisions of the 2016 Rule. See Dkt. 82-1 at 20–24.

Both of the challenged provisions are found in the portion of the Rule that defines the terms of the "program participation agreement"—or "PPA"—that all institutions of higher education must enter into with the Secretary of Education ("the Secretary") before participating in the Direct Loan program. The first of these terms requires participating schools to agree not to "seek to rely in any way on a predispute ... agreement with a student who has obtained or benefited from a Direct Loan" that would preclude the student from joining a class action "that is related to" a "borrower defense claim." 34 C.F.R. § 685.300(e). The second term requires participating schools "not to enter into a predispute agreement to arbitrate a borrower defense claim, or rely in any way on a predispute arbitration agreement with respect to any aspect of a borrower defense claim." Id. § 685.300(f). A "borrower defense claim," in turn, is a claim that a student borrower has or could assert as a defense to repayment of a loan to the Secretary (or as a basis to seek recovery of an amount already paid to the Secretary) and includes claims that the participating institution of higher education breached a contractual obligation to the student or made a "substantial misrepresentation" to the student. Id. § 685.300(i)(1) ; id. § 685.222.

CAPPS moves for summary judgment seeking to invalidate these provisions on three grounds. It argues that (1) they conflict with the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1, et seq. ; (2) they were promulgated in excess of the Department's statutory authority; and (3) they are arbitrary and capricious, in violation of the Administrative Procedure Act ("APA"), 5 U.S.C. § 706(2)(A). See Dkt. 83-1 at 7–8. The Department of Education opposes CAPPS's motion and cross-moves for summary judgment. Dkt. 94. For the reasons explained below, the Court concludes that the Department has the better of the arguments and will, according, grant summary judgment in its favor.

I. BACKGROUND

A. Factual and Regulatory Background

In 1993, Congress amended Title IV of the Higher Education Act ("HEA"), 20 U.S.C. § 1001 et seq. , to allow eligible students who attend "participating institutions of higher education" to obtain loans directly from the federal government in order to finance their postsecondary educations. See Student Loan Reform Act of 1993, Pub. L. No. 103-66, 107 Stat. 341 (codified at 20 U.S.C. §§ 1087a – 1087h ); 20 U.S.C. § 1087a(a). To qualify as a "participating institution" under this program—known as the William D. Ford Federal Direct Loan program—an "institution of higher education" must enter into an agreement with the Secretary of Education that, among other things, "provide[s] for the establishment and maintenance of a direct student loan program at the institution;" "provide[s] that the institution accepts responsibility and financial liability stemming from its failure to perform its functions pursuant to the agreement;" and "include[s] such other provisions as the Secretary determines are necessary to protect the interests of the United States and to promote the purposes of" the Direct Loan program. Id. § 1087d; 34 C.F.R. § 685.100(a) (noting that the Direct Loan program is known as the William D. Ford Direct Loan Program). "No institution of higher education," however, has "a right to participate in the [Direct Loan] programs authorized under [part D of Title IV of the HEA]." 20 U.S.C. § 1087b(b). The statute further directs the Secretary to "specify in regulations which acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of a" Direct Loan. Id. § 1087e(h).

Pursuant to these authorities, the Secretary issued "standards, criteria, and procedures governing the Federal Direct Student Loan ... program" in January 1994. Federal Direct Student Loan Program, 59 Fed. Reg. 472, 472 (Jan. 4, 1994). Those standards included the first iteration of the "borrower defense rule," which permitted Direct Loan borrowers to "assert as a defense against repayment of the loan" to the Department "a claim based on the act or omission of the school" the borrower attended, if (1) the act or omission gave rise to a cause of action against the school under state law, (2) the borrower presented "the claim to the school and received no satisfaction," and (3) the borrower filed a timely claim with the Department. Id. at 481. The Secretary did not specify any other defenses to repayment, nor did he set forth any procedure by which the Department would adjudicate assertions of defenses to repayment. See id.

In December 1994, the Secretary issued revised regulations. See William D. Ford Federal Direct Loan Program, 59 Fed. Reg. 61,664 (Dec. 1, 1994) (codified at 34 C.F.R. Part 685 (1995 version)). Under the new regulations, borrowers were permitted to "assert as a defense against repayment" of a Direct Loan "any act or omission of the school attended by the student that would give rise to a cause of action against the school under applicable State law." 34 C.F.R. § 685.206(c)(1) (1995 version). "If the borrower's defense against repayment [was] successful, the Secretary [was required to] notif[y] the borrower that [she was] relieved of the obligation to repay all or part of the loan and associated costs and fees that the borrower [was] otherwise obligated to pay." Id. § 685.206(c)(2) (1995 version). The Secretary could also reimburse "the borrower for amounts paid toward the loan voluntarily or through enforced collection." Id. To recover these losses, the regulations authorized the Secretary to "initiate an appropriate proceeding to require the school whose act or omission resulted in the borrower's successful defense against repayment of a Direct Loan to pay the Secretary the amount of the loan to which the defense applie[d]." Id. § 685.206(c)(3) (1995 version). These regulations remained in effect, without alteration, for more than twenty years.

The adequacy of this regulatory regime was put to the test in May 2015 by "the collapse of Corinthian Colleges," a "publicly traded company operating numerous postsecondary schools that enrolled over 70,000 students at more than 100 campuses nationwide." Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, William D. Ford Federal Direct Loan Program, and Teacher Education Assistance for College and Higher Education Grant Program, 81 Fed. Reg. 39,330, 39,335 (June 16, 2016) (to be codified in scattered sections of 34 CFR). According to the Department, "[g]overnment investigations established that Corinthian [Colleges] had for years engaged in widespread misrepresentations and other abusive conduct." Id. at 39,382. As the Department further explained:

In April 2015, the Department levied a $30 million fine against Heald, a chain owned by Corinthian, for misrepresenting its placement rates, but several days later, Heald and the remaining Corinthian-owned schools closed, and Corinthian filed for bankruptcy relief. The State of California sued Corinthian in September 2013, and obtained a $1.1 billion judgment against the company only in March 2016, after the company had filed for bankruptcy relief. The [Consumer Financial Protection Board ("CFPB") ] sued Corinthian in September 2014, and obtained a $531 million judgment against the company only in October 2015—well after Corinthian had become insolvent and filed in bankruptcy. None of these government actions actually achieved affirmative recovery for Corinthian Direct Loan borrowers.

Id. at 39,382 –83. Although two groups of Corinthian students had sought to bring class action lawsuits prior to the company's collapse and although other students had attempted to bring individual suits, courts held that those actions were barred by arbitration clauses included in the Corinthian enrollment agreements. Id. at 39,383.

Following Corinthian's collapse, thousands of former Corinthian students applied for loan relief pursuant to the Department's borrower defense regulations. 81 Fed. Reg. at 39,335. In the Department's view, the barrier to class actions found in the Corinthian enrollment agreements...