Salazar v. King

• Decision Date: 12 May 2016
• Docket Number: Docket No. 15–832–cv.
• Citation: 822 F.3d 61
• Parties: Ana SALAZAR, Marilyn Mercado, Ana Bernardez, Jeannette Poole, Lisa Bryant, Cherryline Stevens, Edna Villatoro, on behalf of themselves and others similarly situated, Plaintiffs–Appellants, v. John B. KING, Jr., in his official capacity as Secretary of the United States Department of Education, Defendant–Appellee.
• Court: U.S. Court of Appeals — Second Circuit

822 F.3d 61

Ana SALAZAR, Marilyn Mercado, Ana Bernardez, Jeannette Poole, Lisa Bryant, Cherryline Stevens, Edna Villatoro, on behalf of themselves and others similarly situated, Plaintiffs–Appellants

v.John B. KING, Jr., in his official capacity as Secretary of the United States Department of Education^* Defendant–Appellee.

Docket No. 15–832–cv.

United States Court of Appeals, Second Circuit.

Argued: Nov. 4, 2015.

Decided: May 12, 2016.

Eileen Conner (Beth E. Goldman, Jane Greengold Stevens, Danielle Tarantolo, Jason Glick, on the brief), New York Legal Assistance Group, New York, NY, for Plaintiffs–Appellants.

Christina S. Poscablo (Ellen London, Emily E. Daughtry, on the brief), for Preet Bharara, United States Attorney for the Southern District of New York, New York, NY, for Defendant–Appellee.

Toby R. Merrill, Legal Services Center of Harvard Law School, Jamaica Plain, MA, for Amici Curiae East Bay Community Law Center, Legal Services Center of Harvard Law School, National Consumer Law Center, New Economy Project, in Support of Plaintiffs–Appellants.

Before: HALL and LYNCH, Circuit Judges, and RAKOFF, District Judge.^**

GERARD E. LYNCH, Circuit Judge:

Plaintiffs–Appellants Ana Salazar, Marilyn Mercado, Ana Bernardez, Jeannette Poole, Lisa Bryant, Cherryline Stevens, and Edna Villatoro, (“plaintiffs”) brought this class action against Defendant–Appellee Arne Duncan, in his official capacity as the Secretary of the United States Department of Education (“DOE”).¹ Plaintiffs allege that federal student loans were fraudulently procured on their behalf when the Wilfred American Educational Corporation's (“Wilfred”) for-profit beauty schools falsely certified that plaintiffs had an ability-to-benefit (“ATB”) from the education they received from Wilfred. Plaintiffs allege that the DOE's refusal to temporarily suspend collection of the student loan debt of putative class members, and refusal to send them notice of their potential eligibility for a discharge, was arbitrary and capricious in violation of the Administrative Procedure Act (“APA”). The United States District Court for the Southern District of New York (Robert W. Sweet, Judge ) granted the DOE's motion to dismiss, holding that plaintiffs had not adequately alleged a final agency action that may be subject to judicial review. Because the district court dismissed the complaint, it also denied plaintiffs' motion for class certification as moot.

As a preliminary matter, the DOE argues that the case has become moot because all the named plaintiffs' Wilfred loans have now been discharged. We have jurisdiction to review this case because the plaintiffs had standing when they filed their class action complaint and this case fits into the narrow exception to the mootness doctrine for class action claims that are “inherently transitory.” Exercising our jurisdiction to review plaintiffs' APA challenge, we hold that plaintiffs are entitled to judicial review because there is sufficient law to apply to the challenged agency decisions. The text of the relevant statute directs that the DOE “shall” discharge a borrower's loan liability when a school has falsely certified a student's ATB. DOE's regulations and informal agency guidance direct that the DOE “shall” temporarily suspend collection on loans and notify borrowers of their possible eligibility for a discharge when the DOE has reliable information that a borrower “may be eligible” for discharge. We therefore hold that plaintiffs' claims are judicially reviewable under the APA. Accordingly, we VACATE the judgment of the district court and REMAND the case for further proceedings consistent with this decision.

BACKGROUND

I. Statutory and Regulatory Structure of Student Loan Discharge

Title IV of the Higher Education Act of 1965 (“HEA”), 20 U.S.C. §§ 1070 –1099, provides the statutory authorization for federal student loans, including both Federal Family Education Loans (“FFEL”), id. § 1071 et seq.,² and William D. Ford Federal Direct Loans (“Direct Loans”), id. § 1087a et seq. Under the FFEL program, private lenders issue subsidized student loans, which are then insured by guaranty agencies (a state or private non-profit organization), which, in turn, are insured by the DOE. Id. § 1078(b)-(c); 34 C.F.R. § 682.200 (defining guaranty agency). Under the Direct Loans program, the government lends money to students directly.

To qualify for federal educational financial assistance under either loan program, a student must attend an eligible institution and must have a high school diploma or recognized equivalent. If the student lacks a diploma, the institution must demonstrate the student has an ATB from the training that she would receive using the financial aid. 20 U.S.C. §§ 1091(a), (d). The particulars of how a school must demonstrate that the student has an ATB have changed over the years; however, a student generally must pass a standardized test. See 34 C.F.R. § 668.32(e) ; U.S. Dep't of Educ., GEN–95–42, Dear Colleague Letter, at 2 (Sept. 1995) (“DCL 95–42”) (summarizing changes in ATB requirements between 1986 and 1995).

The ATB test, which between 1987 and 1991 was based on criteria developed by private accrediting agencies and could be administered and evaluated by the school itself, proved to be a target of fraud; some schools falsified results or never even gave prospective students the test. See U.S. Dep't of Educ., GEN–89–55, Dear Colleague Letter, at 4 (Dec. 1989). Although after 1991, the ATB tests had to be approved by the DOE and independently administered, and after 1992 the DOE specified a required score, fraudulent ATB testing continued unabated. See U.S. Dep't of Educ., GEN–91–20, Dear Colleague Letter, at 1–2 (June 1991); DCL 95–42 at 2; U.S. Gov't Accountability Office, GAO–09–600, Proprietary Schools: Stronger Department of Education Oversight Needed to Help Ensure Only Eligible Students Receive Federal Student Aid 22 (2009) (“Through separate investigations at proprietary schools, we, along with other federal and state investigative agencies, found test administrators or school officials violating rules to ensure prospective students without high school diplomas passed required tests and obtained access to Title IV aid.”).

Similarly, the Senate Permanent Subcommittee on Investigations Report found that students were the victims of “unscrupulous and dishonest school operators” of private, for-profit trade and other vocational institutions that provide postsecondary education that “leav[e] them with huge debts and little or no education.” Abuses in Federal Student Aid Programs, S.Rep. 102–58, at 10 (1991). The subcommittee also found that “a virtually complete breakdown in effective regulation and oversight had opened the door for fraud, abuse, and other serious problems at every level.” S.Rep. 102–58, at 11.

In response to these findings of pervasive fraud in federal student loans and contentions of lack of adequate supervision by DOE, Congress passed a statute in 1992 directing that the Secretary of the United States DOE (“Secretary”) “shall discharge the borrower's liability on the loan (including interest and collection fees) by repaying the amount owed on the loan” if the borrower received a federal student loan on or after January 1, 1986, and the “student's eligibility to borrow under this part was falsely certified by the eligible institution.” Pub. L. No. 102–325 § 437 (July 23, 1992), codified at 20 U.S.C. § 1087 (emphasis added). Additionally, the statute provides that a “borrower whose loan has been discharged pursuant to this subsection shall not be precluded from receiving additional grants, loans, or work assistance ... for which the borrower would be otherwise eligible” and that the borrower must have her adverse credit history repaired. 20 U.S.C. § 1087(c)(4), (5).

To implement the statute, the Secretary issued two similar regulations, one to govern the FFEL program and one to govern the Direct Loans program. Both state that the Secretary “shall discharge the borrower's liability on [a] loan” made after 1986 when the “student's eligibility to borrow under this part was falsely certified.” Id. § 1087(a)(1), (c)(1) ; see 34 C.F.R. § 682.402(e) (governing discharge of FFEL program loans due to false certification); 34 C.F.R. § 685.215 (governing discharge of federal Direct Loans due to false certification). These regulations include obligations to ensure that the congressional directive is fulfilled by the guaranty agencies that administer the FFEL program and by the DOE, which is the final insurer of the FFEL program and administers the Direct Loans program.

The regulation governing the FFEL program provides that

[i]f the guaranty agency receives information it believes to be reliable indicating that a borrower whose loan is held by the agency may be eligible for a discharge under paragraph (e) [“False certification by a school of a student's eligibility to borrow”] of this section, the agency shall immediately suspend any efforts to collect from the borrower on any loan received for the program of study for which the loan was made (but may continue to receive borrower payments), and inform the borrower of the procedures for requesting a discharge.

34 C.F.R. § 682.402(e)(6)(ii) (emphasis added). Although it speaks of “the guaranty agency,” that regulation also implicates the obligations of the DOE because, as our Court has recognized, “[i]t is the obligation of the Department of Education to see that [the role of guaranty agencies] is properly performed.” McNamee, Lochner, Titus & Williams, P.C. v. Higher Educ. Assistance Found., 50 F.3d 120, 124 (2d Cir.1995). The DOE accepts that the FFEL regulation also applies to the DOE for the purposes of this litigation.³

Another regulation speaks directly to the DOE's obligations under the Direct Loan program, stating:

If the Secretary determines that a borrower's Direct Loan may be eligible for a discharge under this section, the Secretary mails the

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