Jackson v. Culinary School of Washington, Civ. A. No. 91-782 (CRR).

Decision Date26 March 1992
Docket NumberCiv. A. No. 91-782 (CRR).
PartiesMichael JACKSON, et al., Plaintiffs, v. CULINARY SCHOOL OF WASHINGTON, et al., Defendants.
CourtU.S. District Court — District of Columbia

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Paul Fiscella, Northern Virginia Legal Services with whom Clare L. McCulla, Alexandria, Va., was on the brief, for plaintiffs.

Mark E. Shure, McDermott, Will & Emery with whom Amy E. Hancock, Chicago, Ill., was on the brief, for defendant Higher Educ. Assistance Foundation.

Virginia W. Powell, Hunton & Williams with whom Mark B. Bierbower, Richmond, Va., was on the brief, for defendant Crestar Bank.

Laurie J. Pangle, Toledo, Ohio, Fifth Third Bank of Toledo, N.A., for defendant Fifth Third Bank of Toledo, N.A.

Richard D. George, Great Lakes Higher Educ. Ass'n, Madison, Wis., with whom Michael R. Hatcher, Israel & Raley, Chartered, Washington, D.C., and David J. Hanson and Ann Ustad Smith, Michael, Best & Friedrich, Madison, Wis., were on the brief, for defendant Great Lakes Higher Educ. Ass'n.

Saul L. Moskowitz, Clohan & Dean, Washington, D.C., and W. Scott Davis, Bruckner, O'Gara, Keating, Sievers & Hendry, Lincoln, Neb., with whom Paul R. Dean and Douglas K. Spaulding, Reed, Smith, Shaw & McClay and John E. Dean, Clohan & Dean, Washington, D.C., were on the brief, for defendants Nebraska Student Loan Program and Texas Guaranteed Student Loan Program.

Leslie H. Wiesenfelder, Dow, Lohnes & Albertson, Washington, D.C., for defendant Ohio Student Loan Com'n.

Richard L. Brusca, Skadden, Arps, Slate, Meagher & Flom, Washington, D.C., for defendant Student Loan Marketing Ass'n.

Fred E. Haynes, Asst. U.S. Atty., Washington, D.C., with whom were Jay B. Stephens, U.S. Atty., John D. Bates, Asst. U.S. Atty., and Fred Marinucci, of Office of Gen. Counsel, Dept. of Educ., on the brief, for defendant Secretary of Educ.

Richard C. Kast, Asst. Atty. Gen., with whom was Mary Sue Terry, Atty. Gen., Richmond, Va., on the brief, for defendant Virginia State Educ. Assistance Authority.

                                                      TABLE OF CONTENTS
                  I. Introduction and Analysis ........................................................... 1239-1240
                 II. The Secretary's Motion to Dismiss Shall be Granted in Part and Denied
                      in Part
                     A. Given the Secretary's Own Policy Statements, Plaintiffs May Defend
                          Against Collection by the Secretary on the Basis of an
                          Alleged Origination Relationship Between the Lenders and CSW                          1241
                     B. Plaintiffs Have Adequately Alleged an Estoppel Against the Secretary
                         Due to the Alleged Agency Relationship Between the Secretary
                         and CSW ........................................................................  1241-1244
                     C. The Higher Education Act Does Not Wholly Preempt State Law
                         Governing the Enforceability of Student Loan Promissory Notes                     1244-1246
                        1. Plaintiffs Have Stated a Cause of Action Under D.C.Code § 28-3809(a)(3)
                           and the Secretary's Motion to Dismiss This Claim
                           Shall Be Denied .............................................................   1246-1248
                        2. Although the FTC Holder Rule Does Not Provide Plaintiffs
                           Relief as a Matter of Federal Law, Plaintiffs Have Stated a
                           Claim for Failure to Include the Notice of Defenses Clause
                           Pursuant to D.C.Code § 28-3904 and the Motions to Dismiss
                           Shall Be Denied .............................................................   1248-1253
                        3. Plaintiffs Have Failed to State a Claim Upon Which Relief Can
                           be Granted With Respect to D.C.Code § 28-3808 and the
                           Defendants' Motions to Dismiss Shall Be Granted ..............................  1253-1255
                        4. Plaintiffs Have Failed to State a Claim Upon Which Relief Can
                           be Granted Under D.C.Code § 28-3807 and the Defendants'
                           Motions to Dismiss these Claims Shall Be Granted .............................      1255
                
                       5. Plaintiffs Have Failed to State a Cause of Action Pursuant to
                           the D.C. Licensing Regulations for Proprietary Schools and
                           the Defendants' Motions to Dismiss these Claims Shall Be
                           Granted ....................................................................... 1255-1256
                     D. Because Plaintiffs Do Not Have a Private Cause of Action Under
                        the Higher Education Act as a Matter of Law, These Claims
                        Against the Secretary Shall Be Dismissed ........................................  1256-1259
                    E. Plaintiffs Cannot Assert Claims Against the Secretary on the Basis
                        of an Ultimate Lender Theory ....................................................       1259
                III. The Guaranty Agencies' Motions to Dismiss Shall be Granted in Part
                      and Denied in Part
                     A. Plaintiffs Do Not Have a Private Right of Action Against the
                         Guaranty Agencies Under the HEA ................................................       1260
                     B. Because Plaintiffs Cannot Assert Claims Against the Guaranty
                         Agencies on the Basis of an Origination Relationship, the Court
                         Shall Dismiss these Counts of the Complaint with Respect to the
                         Guaranty Agencies ..............................................................  1260-1263
                IV. The Lenders' Motions to Dismiss Shall Be Granted in Part and Denied in
                     Part ...............................................................................  1263-1264
                 V. Pursuant to Fed.R.Civ.P. 12(b)(6), the Court Shall Dismiss the Complaint
                      Against Sallie Mae, Without Prejudice ............................................   1264-1265
                VI. Conclusion .........................................................................   1265-1266
                
OPINION

CHARLES R. RICHEY, District Judge.

I. INTRODUCTION AND ANALYSIS

This is a putative class action1 in which Plaintiffs, former students at the now-defunct Culinary School of Washington (hereinafter, "CSW" or "the school"), seek declaratory and injunctive relief against the Secretary of Education ("Secretary"), Crestar Bank, First National Bank of Toledo, certain State and private Guaranty Agencies2 and the Student Loan Marketing Association ("Sallie Mae").3 Plaintiffs contend that the school not only promised educational training in the culinary arts but employment opportunities thereafter for its students. According to the Plaintiffs, the school fraudulently misrepresented its facilities and the strength of its educational program, and thereby fraudulently induced the students to take out GSLs.4 Complaint at 25, ¶ 59. Plaintiffs are now in default on these student loans. In this action, Plaintiffs seek declaratory and injunctive relief such that their student loans would be null and void and subject to various federal and state law claims and defenses. At bottom, the Plaintiffs contend that the Court should prevent the Secretary, the Guaranty Agencies, the lenders and Sallie Mae from collecting on these loans because the GSLs were extended to the students herein despite the fact that "the Secretary, the guaranty agencies and the banks all knew or had reason to know that CSW was ineligible for the GSL program." Complaint at 43, ¶ 158.

The Court has been inundated with papers by all parties. In view of the importance and complexity of these issues, this is not surprising. The Plaintiffs' 102-page Complaint asserts numerous causes of action and is hardly the model of clarity. The Secretary of Education, the Guaranty Agencies, the lenders and Sallie Mae have predictably filed voluminous Motions to Dismiss the various and sundry claims. Rule 12 of the Federal Rules of Civil Procedure "streamlines litigation by dispensing with needless discovery and factfinding." Neitzke v. Williams, 490 U.S. 319, 109 S.Ct. 1827, 1832, 104 L.Ed.2d 338 (1989). In particular, "Rule 12(b)(6) authorizes a court to dismiss a claim on the basis of a dispositive issue of law." Id. However, in determining whether the Plaintiffs have failed to state a claim as a matter of law, the Court must construe the Complaint liberally, granting the Plaintiffs "the benefit of all inferences that can be derived from the facts alleged." Schuler v. United States, 617 F.2d 605, 608 (D.C.Cir.1979) (quoting Jenkins v. McKeithen, 395 U.S. 411, 421, 89 S.Ct. 1843, 1848, 23 L.Ed.2d 404 (1969)).

Prior to evaluating the Defendants' respective Motions to Dismiss, it is important to outline the basic structure of the GSL program in which the Plaintiffs participated. A student meeting the prescribed needs test may obtain a GSL. See 20 U.S.C. §§ 1087kk-1087uu (1986). However, GSLs are available only if the student attends an "eligible institution" as defined by 20 U.S.C. §§ 1085(a)-(c). CSW was deemed an eligible institution and entered into a program participation agreement with the Secretary. Pursuant to the GSL program, Plaintiffs executed promissory notes with private lenders, such as the Defendants Crestar and First National Bank of Toledo. Non-profit Guaranty Agencies and the Secretary subsidized the program by guaranteeing payment to the private lenders in the event of a student's default on the loan. See 20 U.S.C. §§ 1078, 1087. In the event of default, the private lender may assign the loan to the Guaranty Agency and the Guaranty Agency could begin collection efforts against the student. Pursuant to the Secretary of Education's contractual reinsurance agreements with the Guaranty Agencies, the Secretary could receive an assignment of the loan and could then undertake collection efforts upon reimbursing the Guaranty Agencies for any losses incurred on the defaulted loan. See 20 U.S.C. § 1078; 34 C.F.R. § 682.410(b)(4). In this action, the Plaintiffs seek to halt the collection efforts of the lenders, the Guaranty Agencies and the Secretary under a variety of...

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