Commonwealth v. U.S. Dep't of Educ., Case No. 1:17-cv-02679 (TNM)

• Decision Date: 12 October 2018
• Docket Number: Case No. 1:17-cv-02679 (TNM)
• Citation: 340 F.Supp.3d 7
• Parties: COMMONWEALTH of Massachusetts et al., Plaintiffs, v. UNITED STATES DEPARTMENT OF EDUCATION et al., Defendants.
• Court: U.S. District Court — District of Columbia

340 F.Supp.3d 7

COMMONWEALTH of Massachusetts et al., Plaintiffs,

v.UNITED STATES DEPARTMENT OF EDUCATION et al., Defendants.

Case No. 1:17-cv-02679 (TNM)

United States District Court, District of Columbia.

Signed October 12, 2018

Glenn Stuart Kaplan, Commonwealth of Massachusetts-Attorney Generals Office, Jennifer Lynne Snow, Office of the Attorney General, Timothy Scott Hoitink, Office of the Massachusetts Attorney General Insurance and Financial Services, Boston, MA, Joseph Michael Sanders, Gregory Wood Jones, Illinois Attorney General's Office, Chicago, IL, Jane Melissa Azia, Carolyn Fast, Office of the New York Attorney General, New York, NY, for Plaintiffs.

Karen Bloom, U.S. Department of Justice, Washington, DC, Stuart Justin Robinson, U.S. Department of Justice, San Francisco, CA, R. Charlie Merritt, U.S. Department of Justice, Richmond, VA, for Defendants.

MEMORANDUM OPINION

TREVOR N. MCFADDEN, U.S.D.J.

Corinthian Colleges, Inc., once operated over a hundred for-profit college campuses across the country. Multiple state and federal investigations revealed that Corinthian defrauded students by falsifying its post-graduation job placement data. Facing millions of dollars in fines and allegations of deceptive marketing, Corinthian filed for bankruptcy and announced the closure of its schools in 2015.

The Department of Education oversees federal loan programs that provided financial aid to thousands of Corinthian enrollees. Student borrowers may assert as a defense against repaying their loans any conduct by a school that would give rise to a cause of action against the school under applicable state law. See 34 C.F.R. § 685.206(c). In the wake of Corinthian's collapse, more than 100,000 borrowers have raised this defense. Defs.' Mem. in Supp. of Mot. to Dismiss 9, ECF No. 26-1 ("Defs.' Mem."). To apply for relief, the students must attest that they were enrolled in a Corinthian-operated program that misrepresented job placement rates and that they relied on this misrepresentation when deciding to enroll. Id. at 10. Borrowers who have not submitted an attestation remain subject to the Department's debt collection efforts, including wage garnishment orders and tax refund seizures. Am. Compl. 26.

Massachusetts, Illinois, and New York (collectively, the "States") challenge the Department's collection activity. They contend that the debts incurred by former Corinthian students are not legally enforceable and that subjecting these borrowers to wage garnishment and refund seizures is arbitrary and capricious in violation of the Administrative Procedure Act ("APA"). Am. Compl. 30. They seek declaratory and related relief on behalf of the students who attended Corinthian schools in the three states.

The Defendants moved to dismiss the case, arguing that the States lack standing to sue, that they fail to sufficiently allege "agency action" as required by the APA, and that the Department's collection activity is lawful. See Defs.' Mem. at 14-32. Because the Court finds that the States have not established standing to bring this action, it will grant the Defendants' motion.

I.

Title IV of the Higher Education Act allows college students to apply for and receive loans from the federal government to pay for educational expenses. See 20 U.S.C. § 1087a et seq. While these loans must generally be repaid, the Department has the authority to specify certain "acts or omissions of an institution of higher education [that] a borrower may assert as a defense to repayment of a loan made under [the Act]." Id. at § 1087e(h). The Department's regulations allow borrowers to raise as a defense "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).

Federal law requires the Department to "try to collect" any "claim of the United States Government for money or property arising out of the activities of, or referred to, the agency." 31 U.S.C. § 3711(a)(1). Accordingly, the Department refers "legally enforceable nontax debt that is over 120 days delinquent" to the Treasury Department. 31 U.S.C. § 3716(c)(6)(A). Through administrative offsets, the Treasury may withhold tax refunds and other monies payable to a borrower to recover the debt. See 31 U.S.C. § 3701(a)(1). The Department of Education also may garnish wages when attempting to collect claims. 31 U.S.C. § 3720D(a). A borrower may raise the conduct of a school as a defense in response to such wage garnishments, tax refund seizures, and other offsets. 34 C.F.R. § 685.206(c). But until this defense is asserted and the Department adjudicates the borrower's application, collection activities continue. See Defs.' Mem. 2.

At issue in this case are the delinquent student loan debts of borrowers who attended Corinthian's colleges. Between 2010 and 2014, at least 71 Corinthian campuses across the country fraudulently misrepresented job placement rates for many of their programs of study. Pls.' Mem. in Opp'n to Defs.' Mot. to Dismiss 6, ECF No. 27 ("Pls.' Mem."). In response, the Department simplified the process for asserting defenses to loan repayment. Defs.' Mem. at 9. It created "attestation forms" requiring student borrowers to provide the name and dates of the program they attended, the degree they sought, and a certification that they enrolled based on the school's advertising materials or similar representations. Id. at 10. Once borrowers submit this form, their loans are "placed in forbearance or stopped collection until their claim is resolved." Id. at 11.

But this is not enough, according to the States. They seek to prevent the Department from engaging in further debt collection against all potentially defrauded borrowers, not just those who file attestation forms. Pls.' Mem. 9. They argue that the debts incurred by former Corinthian students are not legally enforceable because of the company's fraudulent misrepresentations, and that the Department knows these debts are unenforceable. Pls.' Mem. at 26. Thus, by submitting the debts to the Treasury for collection upon delinquency, the Department is acting arbitrarily and capriciously in violation of the APA. Id.

The States claim standing to bring this claim on three grounds. First, they allege harm to their "sovereign interest in the correct interpretation of their state laws as incorporated into federal law." Id. at 2. The Department's debt collection efforts rest on a "misinterpretation of state law regarding the enforceability of the debts in question," and the States have an interest in the proper interpretation and enforcement of their legal codes. Id. Second, the States suggest they have a quasi-sovereign interest in the economic well-being of their residents that entitles them to sue the Department as parens patriae .¹ Id. Third, they argue that the Department's "unlawful collection activities" have directly harmed their proprietary interests. Id. at 21. But for this debt collection "individuals would have additional assets" and would also be able to "attend the States' community colleges and universities." Id. at 21-23. The Department's conduct therefore caused the States to "pay increased government benefits" and receive "reduced revenues." Id. at 21-22.

The Defendants disagree. They argue that the Department's conduct does not interfere with the States' exercise of their sovereign powers, that a state cannot assert standing as parens patriae against the federal government, and that the alleged direct injury to the States' proprietary interests is not attributable to the Department's actions. See Defs.' Mem. at 14-20. Thus, because the States lack standing, the Defendants contend that the Court does not have subject matter jurisdiction over their claims and seek dismissal pursuant to Federal Rule of Civil Procedure 12(b)(1). Id. at 13. They also seek dismissal under Rule 12(b)(6), as they believe that the Department's debt collection efforts are lawful and not subject to challenge under the APA. Id. at 21-25.

II.

Article III of the U.S. Constitution limits this Court's jurisdiction to "actual cases or controversies."

Clapper v. Amnesty Int'l USA , 568 U.S. 398, 408, 133 S.Ct. 1138, 185 L.Ed.2d 264 (2013). "No principle is more fundamental to the judiciary's proper role in our system of government than the constitutional limitation of federal-court jurisdiction to actual cases or controversies," and the "concept of standing is part of this limitation." Simon v. E. Kentucky Welfare Rights Org. , 426 U.S. 26, 37, 96 S.Ct. 1917, 48 L.Ed.2d 450 (1976) (citation omitted). To establish their standing, the States must allege an injury that is "concrete, particularized, and actual or imminent; fairly traceable to the challenged action; and redressable by a favorable ruling." Clapper , 568 U.S. at 409, 133 S.Ct. 1138.

The parties invoking the Court's jurisdiction bear the burden of establishing standing. Susan B. Anthony List v. Driehaus , 573 U.S. 149, 134 S.Ct. 2334, 2342, 189 L.Ed.2d 246 (2014). When facing a motion to dismiss under Rule 12(b)(1), they "must clearly allege facts demonstrating each element." Spokeo, Inc. v. Robins , ––– U.S. ––––, 136 S.Ct. 1540, 1547, 194 L.Ed.2d 635 (2016) (cleaned up). The Court presumes that it "lack[s] jurisdiction unless the contrary appears affirmatively from the record." Renne v. Geary , 501 U.S. 312, 315, 111 S.Ct. 2331, 115 L.Ed.2d 288 (1991). The Court will "draw all reasonable inferences from [the States'] allegations in [their] favor," but will not "accept inferences that are unsupported by the facts," "assume the truth of legal conclusions," or credit "threadbare recitals of the elements of standing." Arpaio v. Obama , 797 F.3d 11, 19 (D.C. Cir. 2015).

Separately, litigants may move to dismiss a complaint for a "failure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). A valid complaint must contain factual allegations that, if true, "state a claim to...