Education Assistance Corp. v. Cavazos

• Decision Date: 10 April 1990
• Docket Number: No. 89-5393,89-5393
• Citation: 902 F.2d 617
• Parties: 60 Ed. Law Rep. 413 EDUCATION ASSISTANCE CORPORATION, A South Dakota Corporation, Appellant, v. Lauro F. CAVAZOS, Secretary of Education of the United States, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 617

902 F.2d 617

60 Ed. Law Rep. 413

EDUCATION ASSISTANCE CORPORATION, A South Dakota

Corporation, Appellant, v. Lauro F. CAVAZOS, Secretary of Education of the United

States, Appellee.

No. 89-5393.

United States Court of Appeals,

Eighth Circuit.

Submitted Dec. 15, 1989.

Decided April 10, 1990.

Thomas L. Shriner, Jr., Milwaukee, Wis., for appellant.

Neil H. Koslowe, Washington, D.C., for appellee.

Before McMILLIAN, JOHN R. GIBSON and BOWMAN, Circuit Judges.

McMILLIAN, Circuit Judge.

The Education Assistance Corporation (EAC) appeals from a final order entered in the United States District Court ¹ for the District of South Dakota granting summary judgment in favor of the Secretary of the United States Department of Education (Secretary). For reversal, EAC argues (1) the 1987 amendments to the Higher Education Act of 1965 violate its property rights under the fifth amendment by requiring EAC to transfer $6.6 million of "excess cash reserves" to the Secretary and by conditioning EAC's right to reimbursement on compliance with that requirement and (2) the Secretary's denial of EAC's request for a waiver from the transfer requirement was arbitrary and capricious. We affirm.

I.

In 1965 Congress enacted the Higher Education Act, Pub.L. No. 89-329, 79 Stat. 1232 (1965) (codified as amended at 20 U.S.C. Secs. 1071 et seq.) (the Act), which established a guaranteed student loan (GSL) program to assist students in financing their post-secondary education. The Act encourages state agencies or, in their stead, private non-profit corporations known as guaranty agencies to establish student loan guaranty programs by providing federally-subsidized interest payments and by authorizing the Secretary to reinsure guaranteed loans. 20 U.S.C. Sec. 1071(a)(1) (1988).

EAC, formerly known as South Dakota Education Assistance Corporation, was organized as a non-profit corporation in 1978 and designated by the Governor of South Dakota as South Dakota's guaranty agency. On November 14, 1978, EAC entered into four contracts with the Secretary's predecessor, the Commissioner of Education (hereinafter the Secretary). The "basic contract" recognizes EAC as South Dakota's guaranty agency and provides that lenders who receive EAC's guaranty will also receive a federal interest subsidy. See 34 C.F.R. Sec. 682.401 (1988). The "advances contract" entitles EAC to receive cash advances from the Secretary pursuant to 20 U.S.C. Sec. 1072(a)(1) (1988) and 34 C.F.R. Sec. 682.403 (1988). ² The two remaining contracts are the heart of the GSL program. They obligate the Secretary to reimburse EAC for payments it makes in discharge of its guaranty obligations when a student defaults on a loan. EAC's original "reinsurance contract" provided for reimbursement of 80% of the amount expended by EAC in discharge of its insurance obligations. See 34 C.F.R. Sec. 682.404 (1988). The "supplemental reinsurance contract" binds the Secretary to reimburse EAC for 100% of the amount paid to lenders as long as EAC's default rate does not exceed 5% of the loans insured by EAC. See 34 C.F.R. Sec. 682.405 (1988). If the default rate rises to between 5% and 9%, EAC receives 90% reimbursement. Id. If the default rate exceeds 9%, EAC only receives 80% reimbursement. Id.

The contracts obligate EAC to comply with the statutory and regulatory requirements of the GSL program and "all changes in the Act or regulations in accordance with their respective effective dates." ³ They also give the Secretary permission to withhold reimbursements owing to EAC if "the [Secretary] finds that ... there has been a failure by [EAC] to comply with any of the provisions of this Agreement or applicable Federal law or regulations." ⁴

EAC's assets are held in a "reserve fund." See 34 C.F.R. Sec. 682.410(a)(1) (1988). The assets include federal advances, reimbursements, and administrative cost allowances. Administrative cost allowances are paid by the Secretary to EAC pursuant to 20 U.S.C. Sec. 1078(f) (1988) to help offset EAC's operating costs. In 1986, Congress made these allowances mandatory and gave the guaranty agencies a "contractual right" to receive them. Higher Education Amendments of 1986, Pub.L. No. 99-498, 100 Stat. 1268, 1381 (codified as amended at 20 U.S.C. Sec. 1078(f)(1)(A) and (f)(1)(B) (1988)) (hereinafter 1986 Amendments). At the same time Congress confirmed that guaranty agencies have a "contractual right" to reimbursements from the Secretary. 1986 Amendments, 100 Stat. at 1376 (codified as amended at 20 U.S.C. Sec. 1078(c)(1)(A) (1988)). EAC's reserve fund also consists of a single insurance premium not exceeding 3% of the loan, which is paid by the lender and passed on to the student borrower, and a portion (currently not greater than 30%) of the amount collected by an agency from a borrower after default on a loan for which the agency's claim was reimbursed by the Secretary. See 20 U.S.C. Sec. 1078(b)(1)(H), (c)(2)(D), (c)(6)(A)(ii) (1988). EAC recently stopped charging lenders the 3% insurance fee in an effort to entice lenders to the program. EAC also is entitled to investment earnings on the reserve fund. See 20 U.S.C. Sec. 1072(c)(3) (1988). Neither the State of South Dakota nor private investors have contributed to EAC's reserve fund.

In 1987 Congress amended the Act by adding 20 U.S.C. Sec. 1072(e) (1988), the constitutionality of which is at issue in this case. The 1987 amendments, enacted as part of the Omnibus Budget Reconciliation Act of 1987, Pub.L. No. 100-203, Sec. 3001, 101 Stat. 1330, 1330-36 (1987), limit the amount of cash reserves a state or guaranty agency may maintain in its reserve fund. They were adopted after the Comptroller General reported to Congress that guaranty agencies had built up unnecessarily large cash reserves and some were using the funds for non-GSL purposes. See H.R.Conf.Rep. No. 495, 100th Cong., 1st Sess. 518, reprinted in 1987 U.S.Code Cong. & Admin.News 2313-1, 2313-1264 (hereinafter 1987 USCAAN). The amendments require the Secretary to determine a maximum cash reserve for each agency using fiscal year 1986 financial data and to recover the amount of reserves in excess of that maximum amount. ⁵ 20 U.S.C. Sec. 1072(e)(1), (e)(2) (1988). An agency may transfer its excess reserves to the Secretary by any one of four methods: (1) repaying advances not otherwise required to be repaid, (2) withholding and cancelling claims for reinsurance otherwise payable, (3) reducing claims for administrative cost allowances, and (4) any other acceptable method such as a lump sum payment or the payment of additional reinsurance fees. 20 U.S.C. Sec. 1072(e)(2). The total cash reserves recovered by the Secretary may not exceed $250 million, 20 U.S.C. Sec. 1072(e)(4) (1988), and have been deposited in the student loan insurance fund established under the Act. The student loan insurance fund is used to reimburse guaranty agencies for defaulted loans. See 20 U.S.C. Sec. 1081(a) (1988). The 1987 amendments expired automatically on September 30, 1989. Omnibus Budget Reconciliation Act of 1987, Pub.L. No. 100-203, Sec. 3002, 101 Stat. 1330, 1330-38.

A guaranty agency may request a waiver from the transfer requirement pursuant to 20 U.S.C. Sec. 1072(e)(3) (1988). The Secretary is authorized to grant a waiver if (1) the agency's financial position has deteriorated significantly, (2) significant changes in economic circumstances or in the loan program render the agency's maximum cash reserve inadequate, or (3) the transfer would compel an agency to violate contractual obligations that require the agency to maintain a specified level of reserve funds. 20 U.S.C. Sec. 1072(e)(3).

On December 22, 1987, EAC notified the Secretary that it considered the 1987 amendments to be an abrogation of the Secretary's contractual obligations and that it would not consent to incorporation of the transfer requirement into its existing contracts with the Secretary. To avoid any implication that it consented to the transfer requirement, EAC announced it would not guarantee any student loans after December 21, 1987. To ensure continued access to loans for the students in South Dakota, EAC arranged for the Pennsylvania Higher Education Assistance Agency to guarantee those loans which EAC would otherwise have guaranteed. On January 25, 1988, the Secretary suggested that EAC apply for a waiver rather than suspend its guaranty function. The Secretary also warned EAC that suspension of its guaranty obligations constituted a termination of the existing agreements and that the Secretary would accordingly not reinsure any loans guaranteed by EAC on or after December 21, 1987.

Meanwhile, the Secretary determined that EAC's reserve fund balance in fiscal year 1986 contained $6.6 million in excess of its maximum cash reserve calculated pursuant to 20 U.S.C. Sec. 1072(e)(1)(A). In a letter dated February 16, 1988, the Secretary directed EAC to choose a method of transferring the $6.6 million excess cash reserves to the Secretary or request a waiver pursuant to 20 U.S.C. Sec. 1072(e)(3).

On March 15, 1988, EAC requested a waiver from the transfer requirement. In support of its request, EAC submitted a study conducted by the accounting firm of Touche Ross & Co. which concluded that, without the $6.6 million, EAC's reserve fund would not be adequate to meet EAC's future insurance obligations. EAC also claimed that the transfer requirement would compel it to violate the minimum reserve balance it promised to the South Dakota Student Loan Corporation (SDSLC). SDSLC is a non-profit corporation, established in 1978, which operates a secondary market for student loans by purchasing the loans from private lenders. On September 26, 1988, the Secretary denied EAC's request for a waiver. EAC refused to transfer the $6.6 million to the Secretary, and the Secretary began withholding reimbursements on claims submitted by EAC for payments it made in discharge of its insurance...