Pro Schools, Inc. v. Riley, 93-C-113.

• Decision Date: 25 June 1993
• Docket Number: No. 93-C-113.,93-C-113.
• Citation: 824 F. Supp. 1314
• Parties: PRO SCHOOLS, INC., Plaintiff, v. Richard W. RILEY, Secretary of Education in his official capacity, and The United States Department of Education, an agency of the United States of America, Defendants.
• Court: U.S. District Court — Eastern District of Wisconsin

824 F. Supp. 1314

PRO SCHOOLS, INC., Plaintiff, v. Richard W. RILEY, Secretary of Education in his official capacity, and The United States Department of Education, an agency of the United States of America, Defendants.

No. 93-C-113.

United States District Court, E.D. Wisconsin.

June 25, 1993.

Blumenthal, Jacquart, Blumenthal, Leib & Phelps by Robert B. Shelledy and Robb A. Marcus, Milwaukee, WI, for plaintiff.

Lynne M. Solein, Asst. U.S. Atty., Milwaukee, WI, Ronald B. Sann, Office of Gen. Counsel, U.S. Dept. of Educ., Washington, DC, for defendants.

DECISION AND ORDER

RANDA, District Judge.

The plaintiff, Pro Schools, Inc. ("Pro Schools"), commenced this lawsuit seeking preliminary and permanent injunctive relief enjoining the defendants, the Secretary of Education and the Department of Education (collectively, "the Secretary"), from terminating its eligibility to participate in the Federal Family Education Loan program. (Complaint at 7-8.) After a hearing held on February 17, 1993, the Court denied and dismissed the claims for injunctive relief on the grounds that the Court had no authority to issue an injunction against the Secretary. With the Court's permission, Pro Schools immediately filed an Amended Complaint seeking declaratory relief ordering the reinstatement of its eligibility for federal education loans and also seeking interim compensatory damages incurred as a result of its current ineligibility. (Amended Complaint at 8-9.)

The Amended Complaint raised four separate grounds for relief: (1) Pro Schools' liberty and property interests were deprived without due process of law because the Secretary's decision was arbitrarily reached without a full record hearing before an administrative law judge; (2) the Secretary violated the HEA by failing to provide Pro Schools with a record hearing, by miscalculating the applicable cohort default rates, and by failing to find that exceptional mitigating circumstances rendered termination inequitable; (3) the Secretary violated applicable regulations and statutes by failing to issue a decision on Pro Schools' appeal within 45 days and by applying the 35% cohort default rate retroactively; and (4) the Secretary's actions were arbitrary and capricious and therefore violated the Administrative Procedures Act ("APA"). (Amended Complaint at 4-7.)

The matter comes before the Court on the parties' cross-motions for summary judgment. For the following reasons, the Court grants the Secretary's motion and dismisses the case.

STATUTORY AND REGULATORY BACKGROUND

It makes sense to begin with the statutory and regulatory framework under which the current dispute arises. Title IV of the Higher Education Act of 1965 ("HEA") created the Guaranteed Student Loan program ("GSL"). The Higher Education Amendments of 1992 changed GSL's name to the Federal Family Education Loan program ("FFEL"). FFEL is an umbrella term referring to four different loan programs: (1) the Federal Stafford Loan program; (2) the Federal Supplemental Loans for Students program; (3) the Federal PLUS program; and (4) the Federal Consolidation Loan program. The Secretary of Education ("the Secretary") is responsible for administering these programs and is authorized to issue regulations to carry out the corresponding statutes. 20 U.S.C. § 1082(a)(1).

Under the FFEL programs a student receives a loan from a participating lender to cover tuition, fees and living expenses relating to attendance at an eligible post-secondary institution. 20 U.S.C. § 1071, 34 C.F.R. § 682.100. Repayment of the loan is insured by a state or private non-profit guaranty agency. 20 U.S.C. § 1078(b) and (c). The Department of Education ("the Department") provides reinsurance for the guaranty agency, 20 U.S.C. § 1078(c), 34 C.F.R. § 682.404, meaning that it will pay off a defaulted loan with federal funds after specified collection efforts have failed. Association of Accredited Cosmetology v. Alexander, 979 F.2d 859, 860 (D.C.Cir.1992).

To participate in the FFEL programs, a school must apply to the Department for eligibility and certification. Id. Certification turns upon the satisfaction of several statutory and regulatory requirements. Id. Once approved to participate, the school must sign a contract with the Department called a "Program Participation Agreement". Id. By signing the Agreement, the school agrees, inter alia, "to comply with all the relevant program statutes and regulations governing the operation of each Title IV, HEA program in which it participates" and further agrees that the Agreement "automatically terminates ... on the date the institution no longer qualifies as an eligible institution." Id. (See also, Defendant's Brief at 5.)

The Department has various tools and powers by which to police the administration of the FFEL programs. The Department may limit, suspend or terminate the participation of a school in these programs, may fine a school for violations of program rules and may demand repayment of improperly utilized funds. 20 U.S.C. § 1094(b) and (c); 34 C.F.R. Part 668, Subparts G and H. Prior to 1992, the Department had to provide a hearing "on the record" before it could terminate or otherwise limit a school's participation in Title IV programs. 20 U.S.C.A. § 1094(b) and (c) (1990). The Higher Education Amendments of 1992 eliminated the requirement for "record" hearings. 20 U.S.C.A. § 1094(b) and (c) (Supp.1993).

During the 1980's, the Department experienced "an ever-increasing number of defaulted loans." Association, 979 F.2d at 860. Between 1983 and 1989, the number of loan defaults increased by 338%, and the cost of these loan defaults as a percentage of total program expenses jumped from about 10% in 1980 to more than 50% in 1990. Id.; See also, "Abuses in Federal Student Aid Programs", Report by the Permanent Subcommittee on Government Affairs, S.Rpt. 102-58 (May 17, 1991) ("the Senate Report"). More importantly, a disproportionate amount of loan defaults were attributable to "proprietary" (for profit) trade schools — like those operated by the plaintiff — whose combined 50.6% default rate was almost twice the national average. Id., at 861; (Id.) Indeed, a GAO report found that about half of the approximately 2200 proprietary schools had default rates over 20% and concluded that high default rates were warning signs of potential abuse. Senate Report at 10. Other evidence even showed that some proprietary schools defrauded the Department by, among other things, "realizing enormous profits by increasing tuition without cost-justification." Id.

Congress took steps to address the foregoing problems. As part of the Omnibus Budget Reconciliation Act of 1990, Congress enacted the Student Loan Default Prevention Initiative Act ("SLDPIA"), which amended the definition of an "eligible institution" so as to tie a school's continued eligibility for FFEL loans to the maintenance of a satisfactory default rate:

(2) Ineligibility based on high default rates

(A) An institution whose cohort default rate is equal to or greater than the threshold percentage specified in subparagraph (B) for each of the three most recent fiscal years for which data are available shall not be eligible to participate in a program under this part for the fiscal year for which the determination is made and for the two succeeding fiscal years, unless, within 30 days of receiving notification from the Secretary of the loss of eligibility under this paragraph, the institution appeals the loss of its eligibility to the Secretary. The Secretary shall issue a decision on any such appeal within 45 days after its submission....

* * * * * *

(B) For purposes of determinations under subparagraph (A), the threshold percentage is —

(i) 35 percent for fiscal year 1991 and 1992;

(ii) 30 percent for fiscal year 1993; and

(iii) 25 percent for any succeeding fiscal year.

20 U.S.C.A. § 1085(a)(2)(A) and (B) (Supp. 1993). The SLDPIA defined and determined the "cohort default rate", critical to the determination of an institution's continued eligibility, as follows:

(m) Cohort default rate

(1) In general

(A) Except as provided in paragraph (2), the term "cohort default rate" means, for any fiscal year in which 30 or more current and former students at the institution enter repayment on loans under section 1078 or 1078-1 of this title received for attendance at the institution, the percentage of those current and former students who enter repayment on such loans received for attendance at that institution in that fiscal year who default before the end of the following fiscal year.

20 U.S.C.A. § 1085(m)(1)(A) (Supp.1993).¹ A school's loss of eligibility under the foregoing sections can be appealed on only two grounds; (1) miscalculation of the cohort default rate and (2) exceptional mitigating circumstances. 20 U.S.C.A. § 1085(a)(2)(A)(i) and (ii) (Supp.1993).

FACTUAL BACKGROUND

Pro Schools is a Wisconsin corporation operating seven cosmetology schools, six of which are located in Wisconsin and the seventh in Rockford, Illinois. (Smith Aff. at ¶¶ 1-2.) Pro Schools purchased the seven schools from IBA Accredited, Inc. ("IBA") in October of 1991. (Id. at ¶ 2.) IBA was apparently part of a large, interrelated corporate chain that owned a series of cosmetology schools across the nation. (Plaintiff's Brief at 6, n. 2.) Richard Smith, Pro Schools' president and sole shareholder, worked for IBA from February of 1990 until August of 1991, when he resigned to incorporate Pro Schools and purchase the seven schools at issue. (Id. at ¶¶ 3-5.) There is no evidence that Smith or Pro Schools had any prior ownership interest in IBA or any of its related corporations. (Smith at ¶ 7.)²

As discussed above, the seven schools now owned by Pro Schools were part of the IBA corporate chain during fiscal years 1988-1990. (Defendant's Proposed Findings of Fact ("Def. FOF") at ¶ 3.) Technically, it appears that each school in the IBA chain was a "free-standing" inst...