Manriquez v. DeVos

• Citation: 345 F.Supp.3d 1077
• Decision Date: 25 May 2018
• Docket Number: Case No. 17-cv-07210-SK
• Court: U.S. District Court — Northern District of California
• Parties: Martin CALVILLO MANRIQUEZ, et al., Plaintiffs, v. Elisabeth DEVOS, et al., Defendants.

345 F.Supp.3d 1077

Martin CALVILLO MANRIQUEZ, et al., Plaintiffs,

v.Elisabeth DEVOS, et al., Defendants.

Case No. 17-cv-07210-SK

United States District Court, N.D. California.

Signed May 25, 2018

Joshua David Rovenger, Toby Rachel Merrill, Eileen Mathews Connor, Pro Hac Vice, Legal Services Center of Harvard Law School, Jamaica Plain, MA, Megumi Alejandra Tsutsui, Noah Zinner, Housing & Economic Rights Advocates, Oakland, CA, for Plaintiffs.

Karen S. Bloom, U.S. Department of Justice, Washington, DC, R. Charlie Merritt, United States Department of Justice, Richmond, VA, for Defendants.

ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR PRELIMINARY INJUNCTION

Regarding Docket No. 35

SALLIE KIM, United States Magistrate Judge

Plaintiffs move the Court for a preliminary injunction returning to the status quo ante by requiring the Department of Education to process certain non-discharged federal student loan debt in accordance with the "Corinthian Job Placement Rate Rule." Defendant Elisabeth Devos, Secretary of the Department of Education (hereinafter "Secretary") opposes the motion. Having considered the parties papers, relevant legal authority, and having heard oral argument, the Court GRANTS IN PART and DENIES IN PART Plaintiffs' motion.

FACTUAL BACKGROUND

A. Regulatory Background.

The Department of Education (the "Department") is responsible for overseeing and implementing Title IV of the Higher Education Act of 1965 ("Higher Education Act") 20 U.S.C. § 1001 et seq. , including the William D. Ford Direct Loan Program ("Direct Loan Program"), 20 U.S.C. § 1087a et seq., which provides loans ("Direct Loans") to borrowers for use at "participating institutions of higher education." (Dkt. 35, at page 4.) The Higher Education Act allows borrowers to seek cancellation of their Direct Loans based on a school's misconduct and directs that "the Secretary shall specify in regulations which acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of a loan made under this part[.]" 20 U.S.C. § 1087e(h).

In 1995, the Secretary promulgated a regulation that permits a borrower to assert as a defense to repayment, "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)(1). The regulation, also known as the "borrower defense rule," relieves the borrower of the obligation to repay all or part of the loan and associated costs and fees. The regulation further provides:

If the borrower's defense against repayment is successful, the Secretary notifies the borrower that the borrower is relieved of the obligation to repay all or part of the loan and associated costs and fees that the borrower would otherwise be obligated to pay. The Secretary affords the borrower such further relief as the Secretary determines is appropriate under the circumstances. Further relief may include, but is not limited to, the following:

(i) Reimbursing the borrower for amounts paid toward the loan voluntarily or through enforced collection;

(ii) Determining that the borrower is not in default on the loan and is eligible to receive assistance under title IV of the Act.

(iii) Updating reports to consumer reporting agencies to which the Secretary previously made adverse credit reports with regard to the borrower's Direct Loan.

34 C.F.R. § 685.206(c)(2).

The loans that are the subject of this litigation were issued pursuant to a Master Promissory Note, which states that the borrower may assert a defense against collection of the loan, if "the school did something wrong or failed to do something that it should have done," provided that "the school's act or omission directly relates to [the] loan or the educational services that the loan was intended to pay for, and if what the school did or did not do what would give rise to a legal cause of action against the school under applicable state law." (Dkt. 35-5, at ¶ 3, Ex. 1, at page 7.)

A memorandum from James Runcie, the Chief Operating Officer of the Federal Student Aid office of the Department, dated June 4, 2015, states: "Prior to 2015, the borrower defense identified above was rarely asserted by any borrowers and no specific methods of collecting information regarding borrower defense claims had been defined or found necessary." (Dkt. 35-7, Ex. 12, at page 1.) According to the Department's Office of Inspector General's report dated December 8, 2017, from July 1, 1995 through June 24, 2015, the Department received only five borrower defense claims. (Dkt. 35-6, Ex. 10, at page 6.)

B. Corinthian Colleges.

Corinthian Colleges, Inc. ("Corinthian") was a for-profit college chain, operating under the brands Everest, Heald, and WyoTech. (Dkt. 35-5, Ex. 2, at page 1.) At its peak in 2009 and 2010, Corinthian operated over 100 campuses in 25 states, enrolled over 110,000 students and collected over $1.7 billion in revenue, over 80% of which was in the form of student loans provided under the Direct Loan Program. (Id. , at page 2.) The Corinthian schools included different campuses for a wide variety of subjects. For example, Corinthian schools included Heald Concord – Accounting, Heald Fresno – IT Network Systems, Everest Los Angeles Wilshire – Dental Assistant (Diploma), and WyoTech Long Beach – Plumbing Technology (Diploma). (Dkt. 35-6, Exs. 6-7.)

In January 2014, the Department sought data supporting Corinthian's advertised job placement rates. (Dkt. 35-7, Ex. 11, at page 4.) Corinthian refused to provide the data, and in June 2014, the Secretary placed Corinthian on a heighted cash monitoring status. (Id. ) In July 2014, the Secretary and Corinthian entered into an operating agreement, pursuant to which Corinthian would cease operations "by teaching out at least a dozen of its campuses and by selling as many of the rest of the schools as possible." (Id. ) The Secretary also appointed a monitor to oversee Corinthian's operations and its wind-down activities, "including federal student aid draws, expenditures (including refunds required under the operating agreement), and [Corinthian's] compliance with its obligations to the Department." (Id. )

In March 2015, after Corinthian failed to file audited financial statements, the Secretary requested a letter of credit from Corinthian. (Id. , at page 5.) In April 2015, the Secretary determined that Corinthian made false statements about its placement rates and issued a fine against Corinthian in the sum of $30 million for "substantial misrepresentation" under 34 C.F.R.§ 668.71 - 75. (Dkt. 35-5, Exs. 3-4; Dkt. 35-7, Ex. 11.) Specifically, the Secretary found that Corinthian published falsely inflated job placement rates for 947 programs at its Heald College locations. (Dkt. 35-5, Ex. 3.)

Corinthian closed its colleges in April 2015, and students who had borrowed federal student loans to attend a Corinthian program asserted their rights to cancellation of their loans under the borrower defense rule and terms of the Master Promissory Notes. (Dkt. 35-5, Ex. 5, at pages 2-3.)

C. The Secretary's Response to the Collapse of Corinthian.

Faced with the collapse of Corinthian and over 100,000 borrowers with potential borrower defenses, Under Secretary Ted Mitchell ("Under Secretary") of the Department appointed a special master ("Special Master") to help the Department develop the processes and systems needed to provide relief to borrowers who had relied upon false and misleading statements from certain career colleges, including Corinthian. (Dkt. 35-7, Ex. 11, at page 1.) The goal of the Special Master was to develop a system for providing debt relief that was "fair, transparent, and efficient, with a minimal burden on borrowers." (Id. )

In June 2015, the Secretary requested that the Office of Management and Budget grant emergency approval of an attestation form, waiving the requirement for public notice in the Federal Register. (Dkt. 35-7, Ex. 12, at page 3.) It appears that the Office of Management and Budget granted approval, as the Secretary disseminated the attestation forms and set up a process to review claims and to provide expedited relief for certain Corinthian borrowers. (Dkt. 35-5, Ex. 5.) The attestation forms advise borrowers of Corinthian's publication of misleading job placement rates and the location of a website containing two lists of covered programs and dates of enrollment covered by the attestation (the "Lists"). (Dkt. 35-6, Exs. 6, 7, 8, 9.) The Lists include names of schools and dates of enrollment from 2010 to 2014. (Dkt. 35-6, Exs. 6, 7.) For example, borrowers listed in the examples above were eligible for relief under the Corinthian Rule only if their first dates of enrollment were as follows: (1) Heald Concord – Accounting after February 13, 2014; (2) Heald Fresno – IT Network Security after July 1, 2010; (3) Everest Los Angeles Wilshire – Dental Assistant (Diploma), between July 1, 2010 and September 30, 2014; and (4) WyoTech Long Beach – Plumbing Technology (Diploma) between July 1, 2010 and September 30, 2014. (Id. ) The attestation forms state that borrowers should submit the forms only if their programs and dates of enrollment are included on the Lists. (Dkt. 35-6, Exs. 8, 9.)

In the case of a borrower who attended a Heald program on the Lists, the attestation form states as follows:

I am submitting this attestation and additional materials in support of my application for a borrower defense to repayment discharge of my Direct Loans under 34 C.F.R. § 685.206(c)

....

I believed that the job placement rates related to my program of study indicated the level of quality a Heald education offered to students. I chose to enroll at Heald based, in substantial part, on the information I received about job placement rates related to my program of study and the quality of education I believed those placement rates represented.

(Dkt. 35-6, Ex. 8.) The combined attestation form for the Everest and WyoTech...