Phillips College, Inc. v. Riley, Civ. A. No. 93-1703 (CRR).

• Decision Date: 15 February 1994
• Docket Number: Civ. A. No. 93-1703 (CRR).
• Citation: 844 F. Supp. 808
• Court: U.S. District Court — District of Columbia
• Parties: PHILLIPS COLLEGE, INC., Plaintiff, v. Richard W. RILEY, Secretary of the Department of Education, Defendant.

844 F. Supp. 808

PHILLIPS COLLEGE, INC., Plaintiff, v. Richard W. RILEY, Secretary of the Department of Education, Defendant.

Civ. A. No. 93-1703 (CRR).

United States District Court, District of Columbia.

February 15, 1994.

Jonathan B. Hill, Michael B. Goldstein, Blain B. Butner, and Sean D. Hughto, Dow, Lohnes & Albertson, Washington, DC, for plaintiff.

Michael T. Ambrosino, Asst. U.S. Atty., together with J. Ramsey Johnson, U.S. Atty., and John D. Bates, Asst. U.S. Atty. (Donald C. Phillips, Office of Gen. Counsel, Dept. of Educ., of counsel), for defendant.

CHARLES R. RICHEY, District Judge.

Before the Court are the parties' cross Motions for Summary Judgment in the above-captioned case. In its Complaint for Temporary, Preliminary and Permanent Injunctive and Declaratory Relief, plaintiff Phillips Colleges, Inc. ("PCI") alleges that defendant Richard W. Riley, Secretary of the Department of Education ("the Department"), violated Title IV of the Higher Education Act of 1965, as amended ("HEA"), 20 U.S.C. § 1070 et seq., and § 706(2) of the Administrative Procedure Act ("APA"). More specifically, the plaintiff challenges the Department's decision to collect approximately $2.2 million from the Bankers Trust Company by drawing on a standby Letter of Credit ("LOC") established by PCI in favor of the Department, on the grounds that this draw exceeds the Department's statutory authority and is arbitrary and capricious and otherwise not in accordance with the Department's regulations. The issue before the Court is whether the Department's draw on the LOC was proper.

After careful consideration of the papers filed by the parties, the oral arguments made by counsel at the motions hearing, the underlying law, and the entire record in this action, the Court shall grant the Defendant's Motion for Summary Judgment.

I. FACTS.

There is no dispute as to the material facts in this case. PCI owns and operates over 40 colleges throughout the country in 21 states. Thousands of students attend these colleges, which offer specialized programs in such areas as data processing, paralegal studies, secretarial training, and business administration. These colleges participate in student financial assistance programs ("SFA Programs") authorized under Title IV of the HEA.

During the week of March 18, 1991, the Department program review staff conducted a program review audit of PCI's corporate offices (the "1991 Program Review"). This review evaluated PCI's administration of the Pell Grant, Supplemental Educational Opportunity Grant, Perkins Loan, and Guaranteed Student Loan programs. Issued on September 25, 1991, the Department's Program Review Report stated that the Department found a high occurrence of late Stafford Loan and Pell Grant refunds for the colleges sampled, and concluded that PCI must "review the files of all students for whom a Title IV refund was required to be made who attended any of the Phillips Colleges during the 1987-88, 1988-89, 1989-90, and 1990-91 award years," submit certain specified information concerning these refund transactions, and have an independent CPA review and certify the pertinent information.

In March, 1992, PCI engaged the firm of Weworski & Associates, CPA ("Weworski") to perform the review required by the Department in its September 25, 1991 Program Review Report. The Department, PCI, and Weworski negotiated and agreed upon procedures implemented by Weworski in evaluating the accuracy and completeness of the refund information. Specifically, these procedures consisted of examining a statistical sample of the refund transactions for the period in question.

In April, 1992, following a review of plaintiff's resources, the Department determined that PCI no longer met the financial responsibility requirements for the SFA programs specified in the Department's regulations. More specifically, as indicated in a later agreement, PCI agreed with the Department that "34 C.F.R. § 668.13, a regulatory provision implementing Title IV of the HEA, sets forth standards of financial responsibility that an institution must satisfy in order to begin and to continue to participate in the Title IV programs," and that "PCI and the Colleges did not demonstrate financial responsibility under 34 C.F.R. § 668.13(d) in the manner specified by the Department. ..." Subsequently, PCI began negotiations with the Department to continue its federal funding, culminating in their entering into a Financial Responsibility Agreement ("FRA") on July 24, 1992.

The FRA required that the Department of Education be provided a Letter of Credit ("LOC") in the amount of $5 million, and the original LOC was issued for the Department's benefit on June 18, 1992. Under the FRA, PCI agreed that "the circumstances giving rise to the Department's right to draw on the letter of credit are set forth in the letter of credit and are not conditioned upon or subject to any term of this Agreement. ..." The LOC assures the Department payment where the Department presents the LOC, together with a statement by the Secretary or representative of the Secretary, certifying that:

(a) THE FUNDS AMOUNTING TO U.S. DRAWN UNDER BANKERS TRUST COMPANY LETTER OF CREDIT NO. S-08574 ARE DRAWN DUE TO THE CLOSING OR OTHER FAILURE OF PHILLIPS COLLEGES, INC. (THE "INSTITUTION") TO PROVIDE SERVICES FOR WHICH ITS STUDENTS RECEIVING FINANCIAL ASSISTANCE UNDER TITLE IV OF THE HIGHER EDUCATION ACT OF 1965, AS AMENDED (HEA) HAVE CONTRACTED, OR FAILURE OF THE INSTITUTION TO COMPLY WITH THE REQUIREMENTS OF TITLE IV OF THE HEA; AND

(b) THE FUNDS RECEIVED IN PAYMENT OF THIS DRAWING WILL BE USED TO:

(1) PAY REFUNDS OF INSTITUTIONAL OR NON-INSTITUTIONAL CHARGES OWED TO OR ON BEHALF OF CURRENT OR FORMER STUDENTS OF THE INSTITUTION, WHETHER THE INSTITUTION REMAINS OPEN OR HAS CLOSED.

(2) PROVIDE FOR THE "TEACHOUT" OF STUDENTS ENROLLED AT THE TIME OF THE CLOSURE OF INSTITUTION.

(3) PAY ANY LIABILITIES OWING TO THE SECRETARY OF EDUCATION ARISING FROM ACTS OR OMISSIONS BY THE INSTITUTION, ON OR BEFORE THE EXPIRATION OF BANKERS TRUST COMPANY LETTER OF CREDIT NO. S-08574, IN VIOLATION OF HEA REQUIREMENTS, INCLUDING APPLICABLE REGULATIONS, OR FROM ANY VIOLATION OF ANY AGREEMENT ENTERED INTO BY THE INSTITUTION WITH THE SECRETARY REGARDING THE ADMINISTRATION OF PROGRAMS UNDER TITLE IV OF THE HEA.

The FRA does not limit the Department's right to draw on the LOC, with the exception that the FRA states that the Department must "afford PCI fifteen (15) days to make direct payment of any sums that the Department may otherwise draw upon the letter of credit." Significantly, the FRA also mandates that

PCI shall, within twenty (20) days of any draw by the Department upon said letter of credit, restore the value of the letter of credit to five million dollars ($5,000,000) or such greater amount as PCI has been required to post and maintain.... Failure to post or to maintain said letter of credit shall constitute a material breach of this Agreement.

In addition, the FRA subjects PCI to certain oversight procedures, such as requiring PCI to retain an accounting firm to perform quarterly compliance reviews.

On January 29, 1993, Weworski issued a report ("Weworski Report") identifying $445,201 in total interest and special allowance liability, calculated on the entire refund population for the audited period, and stating that the sample summary encompassed $3,939,061 worth of refunds. Mr. Weworski explicitly stated that this latter figure represented refunds, and not liabilities.

Based on Weworski's report, the Department made a demand on plaintiff and a presentment to Bankers Trust for $4,384,262 on April 30, 1993, informing PCI that $3,939,061 of this draw would be "to cover unpaid, delinquent refunds due by PCI under the Title IV programs." PCI was given 15 days to make payment to the Department before the draw would go forward. At the conclusion of its April 30, 1993 letter informing PCI of its intent to make this draw, the Department stated that "if you have any questions concerning this letter, please contact Carol Bengle in the Office of the General Counsel...." PCI then contacted the Department in an attempt to persuade the Department not to go ahead with the draw. As a result of negotiations between the two parties, they agreed that PCI would provide a supplemental report from Weworski ("Weworski Supplement") containing extrapolated liability figures from the findings Weworski made with regard to the statistical sample in the first report. Furthermore, PCI increased by ten percent (or $500,000) the funds secured by the LOC, pursuant to the Department's right to require such an increase under the FRA. On May 17, 1993, the Department agreed to rescind its threat of April 30, 1993, to draw on the letter of credit.

On June 18, 1993, PCI forwarded a copy of the Weworski Supplement to the Department. Extrapolating from a sample designed to be an estimate of liability and using a confidence level of 95%, the Weworski Supplement projected liabilities of $2,194,554.13.¹ On August 5, 1993, the Department made another demand on PCI. Stating its reliance on the Weworski Report and Supplement, the Department concluded that these studies identified liabilities of $2,194,554.13 and demanded payment from PCI in that amount. In the event PCI failed to make payment, the Department informed PCI that the Department would draw on the LOC. The LOC does not state any requirement that the Department render a final agency determination prior to the draw.

On August 25, 1993, the Department made presentment against the LOC by presenting (1) a draft in the amount of $2,194,554, and (2) the certified statement reading as required by the terms of the letter of credit. The following day, Bankers Trust Company paid the Department's draft by electronically transferring the funds to the Department's control. At the time of this presentment, the Department was confident that it had sufficient information...