Paul's Beauty College v. US

• Decision Date: 14 April 1995
• Docket Number: Civ. A. No. 94-1432-FGT.
• Parties: PAUL'S BEAUTY COLLEGE, Plaintiff, v. UNITED STATES of America, and Richard W. Riley, Secretary, Department of Education, Defendant.
• Court: U.S. District Court — District of Kansas

885 F. Supp. 1468

PAUL'S BEAUTY COLLEGE, Plaintiff, v. UNITED STATES of America, and Richard W. Riley, Secretary, Department of Education, Defendant.

Civ. A. No. 94-1432-FGT.

United States District Court, D. Kansas.

April 14, 1995.

COPYRIGHT MATERIAL OMITTED

Gary L. Ayers, Foulston & Siefkin, Wichita, KS, for United Schools of America, Inc.

Emily B. Metzger, Office of U.S. Atty., Wichita, KS, for Dept. of Educ. and U.S.

MEMORANDUM AND ORDER

THEIS, District Judge.

This matter is before the court on the plaintiff's motion for preliminary injunction (Doc. 4). Plaintiff brings this action for declaratory and injunctive relief, seeking to reverse two administrative decisions of the Department of Education. These two decisions terminated the plaintiff's participation in federal student financial assistance programs under Title IV of the Higher Education Act of 1965, 20 U.S.C. § 1070 et seq., and ordered the plaintiff to repay the Department of Education some $476,000 for unauthorized disbursements of student financial assistance.

The defendants have filed a motion to dismiss, arguing that Paul's Beauty College is not a separate entity and thus lacks the capacity to sue or be sued. The plaintiff thereafter filed a motion for leave to amend the complaint to change the name of the plaintiff to "United Schools of America, Inc. d/b/a Paul's Beauty College." The Magistrate Judge granted the plaintiff's motion. Subsequent to that ruling, the defendants filed a timely response, arguing that the proposed amendment is insufficient to cure the deficiencies in the original complaint. The defendants' response notes that the proposed amended complaint simply adds "United Schools of America d/b/a Paul's Beauty College" to the case caption. In the text of the proposed amended complaint, United Schools of America is not identified as the party plaintiff in this action. United Schools of America is not mentioned in the text of the proposed amended complaint. No amended complaint has been filed. Until this matter is resolved by proper amendment to the complaint, Paul's Beauty College remains the named plaintiff. Defendants' motion to dismiss for lack of capacity remains pending and shall be granted unless the plaintiff files an appropriate amended complaint within ten (10) days of the date of this order.

The court has considered the evidence presented at the preliminary injunction hearing and the post-hearing briefs. For the reasons set forth herein, the plaintiff's motion for preliminary injunction shall be denied.

Paul's Beauty College (Paul's) is a proprietary vocational school located in Oklahoma City, Oklahoma. In 1986, the school was purchased by United Schools of America, Inc., which is owned by Frederick J. Laurino and located in Wichita, Kansas.

On January 9, 1992, the Department of Education issued a notice of intent to terminate Paul's eligibility to participate in student financial assistance programs under Title IV of the Higher Education Act of 1965, as amended. The department sought to terminate Paul's eligibility for the following reasons: (1) Paul's federal student loan fiscal year default rate for fiscal year 1989 exceeded 60%; (2) Paul's disbursed Title IV funds at an ineligible branch campus; and (3) Paul's failed to implement a pro rata refund policy. On March 1, 1993, the Department of Education amended the notice of intent to terminate to include, as an additional reason, that Paul's fiscal year 1990 default rate exceeded 65% and had not been reduced from 1989. Following administrative proceedings, an administrative law judge (ALJ) issued a decision finding that Paul's should be terminated from participation in federal student financial assistance programs for the above reasons. The Secretary of the Department of Education affirmed.

The second administrative decision arose from a final program review determination issued by the Department of Education. The most important finding in that determination was that Paul's had disbursed over $475,000 in student financial assistance at an ineligible campus. Paul's appealed the final program review determination. The ALJ found in favor of the Department of Education and, with the exception of certain loans for which the Department was seeking a double recovery, affirmed the final program review determination. The Secretary of the Department of Education affirmed the ALJ's decision.

Paul's seeks an order enjoining the enforcement of the two final decisions of the Secretary and requiring the Secretary to return Paul's to the status it held prior to the issuance of the final decisions. Paul's thus seeks reversal of the termination decision and reinstatement to the Title IV financial aid programs. Paul's further seeks reversal of the monetary assessment against it. Granting the injunction requested by Paul's would require the Department of Education to resume prospective federal funding to Paul's, obligate the Department to pay approximately $10,000 in reimbursement of funds advanced by Paul's to students, and prohibit the collection of the assessed program review liability.

To obtain preliminary injunctive relief, the moving party must establish:

(1) substantial likelihood that the movant will eventually prevail on the merits; (2) a showing that the movant will suffer irreparable injury unless the injunction issues; (3) proof that the threatened injury to the movant outweighs whatever damage the proposed injunction may cause the opposing party; and (4) a showing that the injunction, if issued, would not be adverse to the public interest.

Otero Savings & Loan Ass'n v. Federal Reserve Bank, 665 F.2d 275, 278 (10th Cir. 1981). Since a preliminary injunction is an extraordinary remedy, the right to relief must be clear and unequivocal. SCFC ILC, Inc. v. Visa USA, Inc., 936 F.2d 1096, 1098 (10th Cir.1991). A preliminary injunction will be disfavored if it: (1) disturbs the status quo; (2) is mandatory as opposed to prohibitory; or (3) affords the movant substantially all the relief he may recover following trial on the merits. Id. at 1098-99. To prevail on a motion for preliminary injunction when the requested relief falls within one or more of these three categories, "the movant must show that on balance, the four factors weigh heavily and compellingly in his favor." Id. at 1099.

The relief sought by Paul's falls within all three of the disfavored categories. Paul's has been terminated from participating in federal student financial aid. An injunction would therefore alter the status quo. Further, the injunction would require the Department of Education to take affirmative action, specifically, to pay money to Paul's. Finally, the injunction would award Paul's substantially all the relief to which Paul's would be entitled if it succeeded on the merits. Therefore, Paul's must show that the four factors weigh heavily and compellingly in its favor before the court will issue the requested injunction.

The court first examines the alleged irreparable harm to Paul's if the injunction does not issue. Testimony was presented at the hearing to the effect that Paul's will go out of business if it cannot offer financial aid to its students. Paul's offered only generalities and speculation on this matter. No evidence was presented about the effect the termination of Paul's will have on United Schools of America, Inc., which owns several schools in addition to Paul's. As the Tenth Circuit recently noted, "it is not the purpose of a preliminary injunction to provide a business guarantee to any litigant." Id. at 1100 n. 9. Paul's has failed to make a clear showing of irreparable injury.

The court next addresses the potential harm to the Department of Education and to the public interest. Paul's allegedly had the second highest student loan default rates in the state of Oklahoma — 62.9% for fiscal 1989; 68.1% for fiscal 1990. Exhibits submitted by Paul's indicate that Paul's student loan default rates have remained above 50% — 55.8% for fiscal 1991; 57.9% for fiscal 1992. See attachments to Plaintiff's Supplemental Memorandum in Support of Motion for Preliminary Injunction (Doc. 19). These default rates continue to exceed the rates for which termination is authorized. 34 C.F.R. § 668.15(b)(1).

The potential harm to the defendants and the public if the injunction is issued is clear and sizeable. Enjoining the termination decision would mandate the resumption of federal funding to Paul's. Enjoining the program review determination would prevent the defendants from collecting the $475,000 debt. Denying the injunction would result in no clear harm to the public. The defendants and the public would be harmed by resuming the flow of federal tax dollars to an institution that has demonstrated an inability to comply with the governing regulations and that has already subjected the public to a large potential liability for defaulted student loans. Paul's has failed to meet its burden of clearly establishing that its threatened injury outweighs the damage the proposed injunction may cause the defendant and that the injunction, if issued, would not be adverse to the public interest.

Finally, the court turns to whether Paul's can establish a substantial likelihood of success on the merits. Paul's argues that, if it has established the other three requirements for the issuance of an injunction (i.e., irreparable harm, balancing of harms, public interest), a "modified version" of the success on the merits test is to be applied. Under this test, "it will ordinarily be enough that the plaintiff has raised questions going to the merits so serious, substantial, difficult and doubtful as to make them a fair ground for litigation and thus for more deliberate investigation." Koerpel v. Heckler, 797 F.2d 858, 866 (10th Cir.1986) (quoting Lundgrin v. Claytor, 619 F.2d 61, 63 (10th Cir.1980)). Since Paul's has failed to establish the other three requirements for the issuance of an injunction,...