Seto v. United States

Decision Date09 May 2022
Docket Number21-1497T
PartiesJEFFREY K. SETO, Plaintiff, v. UNITED STATES, Defendant.
CourtU.S. Claims Court

Tax Refund: Treasury Offset Program; CARES Act; Illegal Exaction

Jeffrey K. Seto, pro se Plaintiff.

Brendan D. Jordan, Trial Attorney, Commercial Litigation Branch, Civil Division, U.S. Depm1ment of Justice, Washington D.C., for Defendant. With him on the briefs were Brian M Boynton, Acting Assistant Attorney General, Patricia M McCarthy, Director, Steven J. Gillingham, Assistant Director Commercial Litigation Branch, Civil Division, U.S. Department of Justice, Washington, D.C.



Plaintiff pro se Jeffrey K. Seto initiated this action to challenge, among other things, the decision of the Internal Revenue Service (IRS), a bureau of the United States Department of the Treasury, to apply his 2019 federal income tax refund to offset (in part) over $170, 000 in defaulted student loans (inclusive of interest and fees & costs) dating back nearly 30 years. In support of his claim, Mr. Seto first contends that the United States Department of Education failed to notify him that his student loans were in default. Next, Mr. Seto avers that the IRS unlawfully offset his refund in light of fact that, had he filed his 2019 federal income tax return later in the tax season, his refund would not have been withheld due to certain financial relief provisions included in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Pub. L. No. 116-136, 134 Stat. 281 (2020). Finally, Mr. Seto contends that the Department of Education erred in applying his monthly payments toward interest rather than to pay down the principal, resulting in the continuous assessment of compound interest.

In addition to monetary damages (i.e., the release of his 2019 federal income tax refund in the net amount of $7, 213)[1] Mr. Seto seeks an order of this Court directing the Department of Education to retroactively recalculate Mr. Seto's outstanding student loan debt by applying all payments made since 2013 toward the principal of his student loans rather than the interest, and to re-enroll Mr. Seto in the Department of Education's Loan Rehabilitation Program.

Before the Court are the parties' cross-motions for summary judgment pursuant to Rule 56 of the Rules of the United States Court of Federal Claims (RCFC) addressing the propriety of the IRS's decision to apply Mr. Seto's 2019 federal income tax refund to offset his outstanding student loan debt. The United States also seeks dismissal of Mr. Seto's claims for injunctive relief for lack of subject matter jurisdiction under RCFC 12(b)(1). For the reasons that follow, defendant's dispositive motion is GRANTED and plaintiffs dispositive cross-motion is DENIED.

A. Student Loan History and Loan Rehabilitation Program

Between 1981 and 2002, Mr. Seto took out a series of federal student loans to finance his education. He currently has eight outstanding student loans under the William D. Ford Federal Direct Loan Program (f/k/a Direct Stafford Loan Program) and the Federal Family Education Loan (FFEL) Program. All are in default. Relevant here, as of December 5, 2018, Mr. Seto's "Total Balance" was $170, 264.67, broken down into principal balance ($95, 616.99), interest ($48, 772.99), and fees & costs ($25, 874.68). ECF 16-1 at A9.

In 2005, after initially defaulting on the student loans in issue, Mr. Seto's account was referred to the Department of Education's Default Resolution Group. Thereafter, in March 2014, Mr. Seto enrolled in the Department of Education's Loan Rehabilitation Program and executed a Repayment Agreement. Under the terms of the Repayment Agreement, Mr. Seto was required to make at least nine monthly payments of approximately $180 to rehabilitate his student loans. The Repayment Agreement explained that following the specified rehabilitation period, the loans would be sold to a new lender, who "will establish a new due date and will calculate a new monthly payment amount based upon the balance owed at the time of sale. The amount of the required monthly installment payment may substantially increase." Id. at Al (emphasis added).

Mr. Seto successfully completed the Loan Rehabilitation Program and, consequently, his outstanding student loans were transferred to Fedloan Servicing on December 3, 2014. The next day, Fedloan Servicing sent Mr. Seto two letters advising him of the details of his outstanding student loans (e.g., loan program, owner, disbursement date, principal balance, interest rate, loan status) as well as his repayment options. The Fedloan Servicing letters further explained to Mr. Seto that his monthly payment would remain the same as it was during the Rehabilitation Program for an additional three months, and that during this introductory period, Mr. Seto could elect a new repayment plan from among those offered. The Fedloan Servicing letters specifically noted:

If you do not choose a new repayment plan, your rehabilitated loans with either be:

1. Placed on a standard repayment plan. This means your payment will be the same each month. Please note your standard payment amount may be significantly higher than your payment amount during the rehabilitation process.
2. Placed on the same repayment plan as your other Direct Loans, if you have any that we are currently servicing.

Id. at A3, A5 (emphasis added). Between December 2014 and February 2015, Mr. Seto's monthly payment to Fedloan Servicing was $176, 39. Id. at A120-25.

Following the three-month introductory period, on February 17, 2015 - after Mr. Seto failed to select a new repayment plan - Fedloan Servicing informed Mr. Seto that he had been placed on a standard repayment plan and that his new monthly payment was $1, 281.47. Id. at A126-29. Although Mr. Seto continued making monthly payments to Fedloan Servicing, his payments were well below the standard repayment plan amount. See id. at A130-77. Indeed, by December 2015 -ten months into the new repayment plan - Mr. Seto's "Amount Past Due" totaled $10, 956.36. Id. at A176.

B. Notices of Delinquency and Default

Between March and December 2015, Fedloan Servicing sent Mr. Seto detailed monthly bills and separate delinquency notices informing him that he was in arrears and headed toward default. Id. at A130-77. In the interim, on May 14, 2015, Fedloan Servicing notified Mr. Seto that his continuing failure to make required minimum monthly payments would cause his loans to default on December 10, 2015. Id. at A137. On December 14, 2015, Fedloan Servicing notified Mr. Seto that his failure to comply with the terms and conditions of his loan repayment schedule, coupled with his decision to ignore the company's repeated efforts to resolve his delinquency, required that he remit payment in the full amount of $137, 866.70 by January 11, 2016. Id. at A174-75. The December 14, 2015 notice further informed Mr. Seto that his failure to repay this debt in full within 30 days or contact Fedloan Servicing to make alternative arrangements, "will cause these loans to default." Id., at A174. Mr. Seto did neither.

On January 15, 2016, the Department of Education formally issued Mr. Seto a formal Notice of Default. Id. at A7-8. The Notice of Default explained to Mr. Seto:

Consequences of default include ineligibility for federal student financial aid and most other federal benefits programs. In addition, your account may soon be sent to the U.S. Department of Education's Debt Collections Service for additional collection activities, which may include:
• Wage garnishment.
Offset your federal student loan debt against your federal tax return.
• Possible legal action by the United States Department of Justice.
• Assessment of collection costs and fees.
• Credit bureaus will be notified, and your credit rating may suffer.

Id. at A7 (emphasis added). Between May 2016 and December 2018, the Department of Education sent Mr. Seto a series of follow-up requests for payment and reminders of the potential consequences of his continued nonpayment outlined in the Notice of Default. Id. at A9-11, A75-80. Instead, Mr. Seto continued making monthly payments consistent with his initial payments under the Loan Rehabilitation Program.

C. Federal Income Tax Refund Offset

On December 5, 2018, the Department of Education informed Mr. Seto:

The Department intends to refer your [student loan] debt to the U.S. Department of the Treasury for collection through Treasury offset against all payment streams that are currently authorized by law or that become authorized in the future. These payment streams may include, but are not limited to, Federal and State tax refunds, Social Security benefits, and Federal travel reimbursements.

Id. at A9 (emphasis added). On February 15, 2019, Mr. Seto's outstanding student loan debt was certified to Department of the Treasury. Id. at A178.

Thereafter on July 19, 2019, Mr. Seto purchased a rooftop solar energy system for his home at a total cost of $26, 939, financed over ten years with Loanpal. ECF 20 at Exs. 1 -2. Mr. Seto's decision to invest in renewable energy was inspired, in part, by the Federal Investment Tax Credit (commonly known as the Solar Tax Credit) which, in 2019, granted taxpayers a residential energy efficient property credit equal to thirty percent (30%) of the cost of rooftop solar energy systems. See Indeed, in accordance with the terms of the Loanpal Loan Closing Certificate, Mr. Seto's initial monthly payment of $187.22 would increase to $277.05 on March 4, 2021, if he failed to pay down the loan principal by $10, 094.71 and meet the "target...

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