Citizens Sav. Bank v. Bell
| Decision Date | 25 March 1985 |
| Docket Number | No. C.A. 83-0567 S.,C.A. 83-0567 S. |
| Citation | 605 F. Supp. 1033 |
| Parties | CITIZENS SAVINGS BANK, Plaintiff/Counterdefendant, v. Terrel H. BELL, United States Secretary of Education, Defendant/Counterclaimant. |
| Court | U.S. District Court — District of Rhode Island |
Letts, Quinn & Licht, Daniel Murray, Alan Flink, Robert D. Fine, Providence, R.I., for plaintiff, counterdefendant.
Richard K. Willard, Acting Asst. Atty. Gen., Saul Moskowitz, Office of the Gen. Counsel, Dept. of Educ., Michael F. Hertz, Stephen D. Altman, Russell B. Kinner, Attys., Civ.Div., Dept. of Justice, Washington, D.C., Everett C. Sammartino, Asst. U.S. Atty., Providence, R.I., for defendant, counterclaimant.
This case is an offshoot of the diverse, complex, and extensive litigation which marked the meteoric rise and precipitous fall of Lafayette Academy, Inc. (Lafayette). The ensuing flood of controversy has not only inundated Lafayette and its principals and successors in interest, but has also engulfed a myriad of financial institutions (the lenders) which provided loans to students or supposed students of Lafayette. This suit is but a small droplet in the raging torrent. It has been brought by one such lender against the Secretary of Education (the Secretary). Parenthetically, it seems appropriate to note that the United States Department of Education (Education) has long been part of the flotsam and jetsam left in Lafayette's roiling wake.
Lafayette, a now defunct correspondence school, eagerly embraced the federal Guaranteed Student Loan Program (GSLP), 20 U.S.C. §§ 1071-1087-4 (1978). That embrace, in turn, gave rise to the series of events which precipitated the instant action. In order to place this matter into proper perspective, an understanding and appreciation of the contours of the GSLP is helpful.
The GSLP was enacted by Congress in order to encourage eligible lenders to make low interest student loans to qualified borrowers enrolled in eligible post-secondary schools. 20 U.S.C. § 1071; 34 C.F.R. § 682 (1984).1 Under the program, deserving pupils may enroll in courses of study at eligible educational institutions. They borrow the funds necessary to meet tuition and related payments from participating lenders. The students' repayment obligations are substantially deferred. Under the program, Education pays the interest on each loan until the borrower is required to begin repayment. In addition, Education pays a premium to the lender in the form of a special allowance, i.e., an interest supplement indexed to Treasury Bill rates, on the outstanding principal for the entire life of the loan.
The GSLP has two parts: the guarantee agency programs (GAP) and the Federal Insured Student Loan Program (FISL). 20 U.S.C. § 1071(a); 34 C.F.R. § 682.100(a). Under the GAP scheme, various state and private non-profit surety agencies guarantee lenders against default by any eligible borrower, and Education reinsures the agencies for 80 to 100 percent of the agencies' guaranteed payments to the lenders. 20 U.S.C. §§ 1077-78; 34 C.F.R. § 682.101. Under the FISL program, Education extends a conditional guaranty to the lender against default by the borrower. 20 U.S.C. §§ 1079-1082; 34 C.F.R. § 682.102. A lender may participate simultaneously in the FISL and in one or more of the GAP programs.
The interest and special allowance payments which Education makes on qualified loans are calculated from the principal balances as indicated on the lender's billings. 34 C.F.R. § 682.302(b). But, a lender participating in more than one of these programs only submits a single quarterly billing for the interest and special allowances due on the outstanding aggregate principal of all of its loans under the several programs. The billing format prescribed by Education, ED Form 799, does not segregate the lender's total portfolio either among the various GSLP sub-programs or on a school-by-school basis.
Upon receipt of a complete, timely, and accurate billing, Education approves payment based on the outstanding principal balance which appears on the billing form. 34 C.F.R. § 682.302(b). The invoice approval system does not provide for payment of less than the total amount requested by the lender; nor does it provide for payment based on less than the overall outstanding principal balance reflected on the form. If Education takes more than 30 days to authorize payment, it becomes liable for penalty interest at a rate which equals the nominal interest rate on the loans involved, plus the special allowance rate in effect for the billing period for each day beyond the 30 day period. 20 U.S.C. § 1087-1(b)(4); 34 C.F.R. § 682.304.
Lafayette, as an educational institution eligible for participation in the GSLP, made considerable federally-backed hay while the sun shone. But, the bubble eventually burst. On December 23, 1980, Lafayette pleaded no contest to a federal criminal information which included one count of filing false, fictitious, or fraudulent statements in violation of 18 U.S.C. § 1101, and one count of presenting false, fictitious, or fraudulent claims in violation of 18 U.S.C. § 287. Both counts related to criminal misconduct in Lafayette's processing of FISL applications for its students. Hot on the heels of the exposure of Lafayette's chicanery, the government began an all-out effort to recoup from the lenders the funds expended by Education in securing the FISL loans issued pursuant to Lafayette's complicity. The lenders, in turn, sought to compel Education to pay their claims for defaulted loans previously made on the basis of Lafayette's representations.
Citizens Savings Bank (Citizens or the Bank) filed its original suit for guaranteed payments on the defaulted Lafayette loans in October, 1981. Citizens Savings Bank v. Bell, C.A.No. 81-0670S (D.R.I.1981) (Citizens I). Education, which had twice previously requested Citizens to repay all of the interest, special allowance, and guaranteed payments it had received on all of its Lafayette student loans, denied liability and counterclaimed for the amounts it had earlier demanded. Citizens I was settled after protracted proceedings.2 On September 13, 1983, Citizens filed this action. The suit covers a narrow sequence of events which occurred shortly before and after the filing of Citizens I. In brief, Citizens sought $41,372.51 in penalty interest for the alleged late payment of its September, 1981 billing and $9,960.89 in penalty interest for the alleged late payment of its December, 1981 billing. 34 C.F.R. § 682.304(a). Education conceded that Citizens was and is entitled to ten days of penalty interest, $2,119.07, on its revised December billings, but denied liability for the balance of the Bank's claims. The Secretary counterclaimed for the penalty interest, $21,248.28, which it asserts was mistakenly paid on Citizens' June, 1981 billing. The Bank disclaimed any obligation to refund that sum or any portion of it.
The underlying facts necessary for decision of the issues presently before the court are not in dispute. The court will endeavor succinctly to summarize those material facts. For ease in reference, the events pertaining to the June, 1981 billing should be viewed as somewhat removed, temporally and otherwise, from the later sequence of events anent the September, 1981 and December, 1981 billings.
Citizens participated in both the FISL program and in a GAP conduit, the Rhode Island Higher Education Loan Program.3 All of the Bank's FISL loans were made to students who claimed to be enrolled at Lafayette. But, once Lafayette pled to the criminal counts, the status of the FISL loans made to its students was thrown to serious question. There then ensued a series of bureaucratic snafus of the ilk which form the stuff of satire.
On March 26, 1981, Education's Acting Deputy Assistant Secretary for Student Financial Assistance, James W. Moore, authorized Richard A. Hastings, the then-Director of the Division of Certification and Program Review (DCPR) in the Office of Student Financial Assistance (OSFA), to approve or deny guaranteed payments on Citizens' Lafayette student loans. Five days later, Hastings notified the Bank that Education had made a final decision denying Citizens' claims on those loans. On April 20, 1981, Hastings sent a detailed letter explaining the reasons for the decision and asking the Bank to repay all of the interest, special allowances, and guaranteed payments it had received on all of its Lafayette loans.4
On May 29, 1981, Hastings instructed Nat Coluzzi, Chief of the Guaranteed Student Loan Branch in the Division of Program Operations (DPO), to forward the Lafayette lenders' interest and special allowance billings to Gary Musselman, a program specialist in the DCPR, for review. Four days later, the student loan processing center (which is a private contractor headquartered in Norfolk, Virginia) was instructed not to process the Lafayette lenders' billings through the computerized billing process; these were likewise to be forwarded to Musselman. On or about June 30, 1981, DCPR orally informed Citizens that its Lafayette loans were not guaranteed, and thus ineligible for interest and special allowance payments.
Citizens submitted its June billing, that is, the single interest and special allowance invoice for the quarter ending June 30, 1981, on July 23, 1981. The figure listed on Form 799 for the outstanding principal included the amount of the Bank's defaulted Lafayette loans. Attached to the form, however, was a brief, unsigned cover letter, comprising two paragraphs. Its full text follows:
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