LTV Educ. Systems, Inc. v. Bell

• Decision Date: 12 January 1989
• Docket Number: No. 87-1649,87-1649
• Citation: 862 F.2d 1168
• Parties: 50 Ed. Law Rep. 944 LTV EDUCATION SYSTEMS, INC., Plaintiff-Appellant, v. T.H. BELL, In His Capacity as Commissioner of Education and United States of America, Defendants-Appellees, v. VOUGHT CORP. and LTV Corp., Additional Defendants on Counterclaim-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1168

862 F.2d 1168

50 Ed. Law Rep. 944

LTV EDUCATION SYSTEMS, INC., Plaintiff-Appellant, v. T.H. BELL, In His Capacity as Commissioner of Education and United States of America, Defendants-Appellees, v. VOUGHT CORP. and LTV Corp., Additional Defendants on

Counterclaim-Appellants.

No. 87-1649.

United States Court of Appeals Fifth Circuit.

Jan. 12, 1989.

Rehearing Denied Feb. 15, 1989.

Stuart F. Pierson, Richard L. Cys, Mitchell E.F. Plave, Verner, Liipfert, Bernhard, McPherson & Hand, Chartered, Don Charles Lewis, Washington, D.C., for plaintiff-appellant.

Howard S. Scher, Rita S. Geier, William Kanter, Civ. Div., Dept. of Justice, Washington, D.C., for defendants-appellees.

Appeal from the United States District Court for the Northern District of Texas.

Before WISDOM, REAVLEY and POLITZ, Circuit Judges.

WISDOM, Circuit Judge:

This case involves the efforts of the Department of Education (Education) to recover payments made by it to LTV Education Systems, Inc., (ESI) and various lending institutions on defaulted federally insured student loans (FISL's) based on violations of a federal regulation issued under the Higher Education Act. ¹ The district court, after extensive discovery and hearings on numerous motions, granted Education summary judgment on two of its claims against ESI. The court found that ESI had violated a regulation prohibiting payment of any points, premiums, or interest to lending institutions participating in the Federally Insured Student Loan Program (FISLP). ESI was ordered to pay Education, with interest, the amounts Education as an insurer of student loans, paid to ESI and several lending institutions on certain defaulted student loans. The court reduced ESI's liability by the amount of funds Education recovered through settlements with lenders who agreed to repay the inducements they received from ESI in violation of the regulation. On appeal ESI presents several grounds for reversal of the district court's judgment. We address each of these arguments; none, however, warrants reversal.

LTV Education Systems, Inc., established in 1969 as a subsidiary of LTV, acquired 43 trade and business schools in ten states. Approximately 90 percent of ESI's students financed their tuition with low interest federally insured student loans. ESI describes the loan transaction process as follows:

The student would apply and be accepted to the school; the school would provide the loan or refer the student to a bank; the bank would agree to make the loan and would submit it for insurance to [Education]; [Education] would commit insurance on the loan; and the lender would disburse the proceeds to the school for tuition, books, and supplies.

Appellant's Opening Brief at 11. While the loan is outstanding, lenders are required to pay premiums to maintain insurance coverage. On approved insured student loans, the government pays the interest owed while the student remained enrolled at least half-time at an eligible institution and for nine months there-after. The contract of insurance with an eligible lender requires the government to repay the lender principal and interest on defaulted loans.

During the first few years of its existence ESI participated in the FISLP solely as a school. Through 1971 nearly all FISL's made to ESI students were issued by a single Texas bank, the Texas Bank and Trust Co. of Dallas (TBT). In connection with these loans, TBT required ESI to pay loan origination and service fees and to maintain compensating balances in ESI's deposit accounts at TBT. LTV and its other subsidiaries also maintained compensating balances at TBT. Such requirements undoubtedly made FISL's more attractive to TBT.

On October 31, 1970, Education, apparently concerned that such inducements were undermining equality of access to student loans as a result of discrimination among students and schools by lenders, promulgated the regulation at issue here. The regulation, 45 C.F.R. Sec. 177.6(e)(1) ², which became effective November 30, 1970, provided:

(e) Discounting, payment of premiums: cost to the student

(1) No points, premiums or additional interest of any kind may be paid to any eligible lender in order to secure funds for making loans or to induce such a lender to make loans to the students of a particular institution or any particular catagory of students and, except in circumstances approved by the Commissioner, notes (or any interest in notes) evidencing loans made by educational institutions shall not be sold or otherwise transferred at a discount.

A month after the regulation became effective, Education sent a letter to ESI inviting ESI representatives to attend a meeting to discuss the meaning and impact of this and other recently adopted regulations. The letter stated that compensating balances "are in effect payments of premiums which afford a return to the lender (or holder) in excess of that provided for by the statute". ³ ESI was aware that Education interpreted the regulation as prohibiting compensating balances, and ESI later proposed an amendment that would have permitted the maintenance of such balances with lenders as a condition of the lenders' making student loans. ⁴ During the first year of the rule's existence ESI continued to pay loan origination and service fees to TBT, and interest supplements to several banks including the Bank of Canton. ⁵

When TBT discontinued its FISL activity with ESI in 1972, ESI began acting as a lender as well as a school in the FISLP. Although ESI had obtained Education's approval to enter into a financing arrangement containing a limited flexible interest term that plan, known as the Barnes Proposal, was never implemented. ESI did, however, execute several loan and escrow agreements with several banks, including Citibank, to secure funding for ESI's loans to its students. The L & E agreements which, according to ESI, were modeled on the Barnes proposal, also contained a floating interest rate, but these agreements were not approved by Education. ESI's agreement with Citibank required ESI to maintain compensating balances at the bank. Under the L & E agreements ESI made loans to its students for the remaining 18 months of its existence.

In 1976 Education ceased making payments to ESI on defaulted student loans. Alleging breach of its insurance contract, ESI sued Education in 1976 to recover $3.4 million in insurance claims. The case was removed to federal court and in 1979 the government filed its counterclaims at issue here.

Questions of Material Fact

ESI contends that the district court erroneously concluded that no genuine issue of material fact remains in this case. Although its brief presents several questions of law styled as questions of fact, we focus initially on the only two potential factual disputes. First, ESI maintains that with regard to any compensating balance requirements contained in the loan and escrow agreements there is a question whether any such balances were actually maintained to secure funding in violation of the regulation. ESI relies on two pieces of evidence to demonstrate the dispute over this issue. The first is a Citibank chart dated March 10, 1975, of compensating balances maintained by the LTV group of companies. This document shows a zero next to the percentage maintained by ESI. The chart also discloses however that ESI was required to maintain a 20 percent compensating balance and that other LTV companies actually maintained balances during 1974; in fact, one LTV company maintained more than three times the balance required. Because the regulation prohibited maintenance of compensating balances any time after November 30, 1970, to secure or induce lending, ESI's reliance on one report, which relates only to 1974, is insufficient to raise a genuine factual question. The government's Citibank charts indisputedly show that a compensating balance of over 23 percent was maintained in LTV Aerospace's consolidated account with ESI during 1971 and 1972. ESI argues, but offers no tangible evidence showing, that LTV's and its other subsidiaries' compensating balances were wholly unrelated to Citibank's FISL activities with ESI. ESI admits, however, that on February 23, 1973, Citibank increased its loan commitments to ESI by three million dollars. Both LTV and Citibank officials acknowledged that compensating balances were maintained by the aggregate LTV companies, and a Citibank official testified that the bank looked to the aggregate balances in determining whether to extend additional loans to a company in the LTV group. The evidence also discloses that LTV Aerospace--the parent company of ESI--was a party to the loan and escrow agreements. In a March 6, 1975 letter to Ernst & Ernst, LTV's independent auditors, Citibank stated that "[t]he company [LTV and its subsidiaries] consider the combined cash balances and borrowings of [the companies] in calculating the compensating balance arrangements". Furthermore, in a March 1, 1974 letter to Ernst & Ernst, Citibank stated:

The company was in substantial compliance with the compensating balance arrangements during the year [1973] and subsequently through the date of this letter.

To refute all of this evidence that compensating balances were maintained at Citibank to secure additional FISL lending for ESI, ESI points to an affidavit of its expert, Harry Prieto, in which Mr. Prieto testified that regardless of the bank's expectations, balances were not maintained to facilitate ESI borrowings. We agree with the district court, however, that because Mr. Prieto failed to consider the compensating balances of the LTV companies in the aggregate, as Ernst & Ernst and Citibank agreed was the accepted practice of Citibank, the affidavit is not probative on this issue.

Summary judgment is granted under Rule 56(c) if record evidence shows that there is no genuine issue regarding any material fact and the movant is entitled to judgment as a matter of law. Where, as...