State of Del. v. Cavazos

• Decision Date: 01 September 1989
• Docket Number: Civ. A. No. 88-155-JRR.
• Citation: 723 F. Supp. 234
• Parties: STATE OF DELAWARE, Plaintiff, v. Lauro F. CAVAZOS, Secretary of Education, and United States Department of Education, Defendants.
• Court: U.S. District Court — District of Delaware

723 F. Supp. 234

STATE OF DELAWARE, Plaintiff, v. Lauro F. CAVAZOS, Secretary of Education, and United States Department of Education, Defendants.

Civ. A. No. 88-155-JRR.

United States District Court, D. Delaware.

September 1, 1989.

COPYRIGHT MATERIAL OMITTED

John J. Polk and Anne Marie Johnson, State of Del., Dept. of Justice, Wilmington, Del., for plaintiff.

William C. Carpenter, Jr., U.S. Atty., and Kent A. Jordan, Asst. U.S. Atty., U.S. Dept. of Justice, Wilmington, Del., for defendants; John R. Bolton, Asst. Atty. Gen., Neil H. Koslow, Sp. Litigation Counsel and Shawn B. Jensen, U.S. Dept. of Justice, and Brian Siegal, Dept. of Educ., Washington, D.C., of counsel.

OPINION

ROTH, District Judge.

In this action, the plaintiff, the State of Delaware, seeks declaratory and injunctive relief to prevent enforcement of the Omnibus Budget Reconciliation Act of 1987, Pub.L. No. 100-203, 101 Stat. 1330, 1330-38 (the "1987 Amendments") by the defendants, the Secretary¹ and Department of Education, against Delaware's guaranty agency. Delaware claims that the 1987 Amendments, compelling the elimination of excess cash reserves in its Guaranteed Student Loan Program (the "GSL Program" or the "Program"), violate several constitutional provisions: the takings and equal protection component of the fifth amendment; the reserve powers clause of the tenth amendment; the guarantee clause of article 4, section 4; and the public debt clause of section 4 of the fourteenth amendment.

In an Opinion and Order dated October 25, 1988, we denied the defendants' Motion to Dismiss and Motion to Transfer. Delaware v. Bennett, 697 F.Supp. 1366 (D.Del. 1988). Since that time the parties have submitted cross motions for summary judgment. These motions have been fully briefed including several supplemental briefs submitted by both parties. The Court heard oral argument on the motions on June 20, 1989.

I. FACTS

A. The GSL Program.

The GSL Program was created by the Higher Education Act of 1965. The Program provides financial assistance to students seeking a post-secondary education. Under the Program, private lenders make low-interest loans, subsidized by the federal government, to students. The lenders are insured by various state guaranty agencies that 100% of the unpaid principal of qualifying loans will be paid in case of default. In turn, these guaranty agencies are reinsured by the Department of Education.

The Delaware Higher Education Loan Program ("DHELP") is Delaware's guaranty agency; it was created in 1966 to permit Delaware to participate in the GSL Program.² DHELP is one of over 50 agencies which guaranty and service student loans under the GSL Program. These guaranty agencies have satisfied statutory criteria, enabling them to receive advances and reimbursements from the Department for losses on defaulted loans that they have insured, as well as payments for administrative costs.

Under the applicable regulations, guaranty agencies must establish and maintain a "reserve fund." 34 C.F.R. § 682.410(a)(1). The reserve fund is used to honor DHELP's commitment to indemnify lenders for defaulted loans. When a borrower defaults on an insured student loan, DHELP, as the guaranty agency, reimburses the lender with moneys from its reserve fund. The federal government becomes involved through the reinsurance agreement it has entered into with DHELP. In accordance with this agreement, DHELP pays a premium to the federal government and, in exchange, the government reimburses DHELP, in whole or in part,³ for the amount it has paid to the private lenders on defaulted loans.

The GSL Program is administered by the Department of Education throughout the country and is subject to extensive regulation. For example, guaranty agencies' sources of income are limited to: (1) a single insurance premium not exceeding three percent of the loan, which is paid by the lender but passed onto the borrower; (2) federal cash advances; (3) federal reimbursements for claims payments; (4) federal administrative cost allowances; (5) a portion (currently 30%) of any amounts collected by the agency from a defaulting borrower after the lender has been paid by the agency and the agency has been reimbursed by the government; (6) state appropriations; (7) gifts, grants, and other sources; and (8) investment earnings. All these moneys must be placed in the agency's reserve fund. See 20 U.S.C. §§ 1072, 1078; 34 C.F.R. § 682.410(a)(1). Moreover, the moneys in the reserve funds can be used only for limited purposes. The permitted uses are (1) to guarantee loans; (2) to pay default claims; (3) to pay death, disability, and bankruptcy claims; (4) to refund overpayments; (5) to repay borrower payments; and (6) to repay federal advances. 34 C.F.R. § 682.410(a)(2). And although a portion of these funds may be placed in low-risk securities, any income earned from these funds must be placed in the reserve fund. 34 C.F.R. §§ 682.410(a)(1)(ix), 682.410(a)(5). Finally, the relationship between the Department and the guaranty agencies is formalized by five written agreements, 34 C.F.R. § 682.400: the insurance program agreement, 20 U.S.C. § 1078(b); the federal advances for claim payments agreement; the reinsurance and the supplemental reinsurance agreements, now combined into a single guaranty agreement, 20 U.S.C. § 1078(c); and the secondary administrative cost allowance agreement. Notably, the applicable regulations provide that "all of the agreements are subject to subsequent changes in the Act or the regulations that apply to the GSLP and PLUS Program," 34 C.F.R. § 682.400(d), and the agreements themselves provide that "the Agency shall be bound by all changes in the Act or Regulations in accordance with their effective dates."

B. The 1987 Amendments.

The 1987 Amendments were enacted as part of the Budget Act passed by Congress on December 22, 1987, to finance governmental operations in 1988. The 1987 Amendments in the Budget Act are based on a July, 1986, report from the Comptroller General and an August, 1986, General Accounting Office report. These studies concluded that guaranty agencies were accumulating unnecessarily large reserve funds. Congress decided to adopt the recommendations of the General Accounting Office and reclaim $250 million from the guaranty agencies to help finance federal expenditures under the GSL Program. Reclaiming the $250 million, and funding the GSL Program in this manner, helped Congress to meet the guidelines for the federal budget contained in the Gramm-Rudman-Hollings Act.⁴

Until the 1987 Amendments were enacted, there was no ceiling on the amount of cash that guaranty agencies could accumulate in their reserve funds. The 1987 Amendments, by way of a formula, establish ceilings for the reserve funds for each guaranty agency. The 1987 Amendments require the Secretary to direct any guaranty agency with cash reserves exceeding this ceiling to eliminate this excess cash by one of four prescribed statutory methods.⁵ In addition, the 1987 Amendments contain a waiver procedure whereby the Secretary may waive, in whole or in part, the remedies for the elimination of excess cash reserves. A waiver may be granted if it is determined that: (1) a guaranty agency's financial condition has deteriorated significantly; (2) significant changes in economic circumstances have rendered the agency's cash reserve ceiling inadequate; or (3) an agency would be compelled to violate contractual obligations existing on December 22, 1987, that require a specified level of cash reserves. 20 U.S.C. § 1072(e)(3)(A)(i)-(iii).

C. DHELP's Excess Cash.

On February 9, 1988, the Secretary wrote to the Commission, informed it that DHELP had $3,414,277 in excess cash as calculated by the formula in the 1987 Amendments, and directed the Commission that it must, by February 29, 1988, eliminate the excess, employing one of the four prescribed statutory methods. Following an informal hearing⁶ before Department officials, the Department on October 20, 1988, granted a partial waiver in the amount of $732,693.

In granting the partial waiver, the Department stated that it was "based on significant changes in your agency's economic circumstances such that the return of all of the excess cash reserves would render the amount of your reserve fund inadequate for your agency's continued functioning (waiver criterion 2)." Letter from Dewey L. Newman, Deputy Assistant Secretary for Student Financial Assistance, U.S. Department of Education, to John Corrozi, Executive Director, DHELP, at 1 (Oct. 20, 1988) hereinafter Waiver Letter, Appendix to Plaintiff's Opening Brief in Support of Summary Judgment at A-209 (D.I. 23A). In addition, the Department found that DHELP had not justified a waiver based on a significant deterioration in its financial position (waiver criterion 1). Waiver Letter at 2. Finally, the Department addressed waiver criterion 3 and concluded that the "agency's contracts with lenders will not be violated by the Department's recovery of the remaining $2,681,584 in excess reserves...." Id. at 3.

In reaching this final conclusion, the Department reasoned that all of the agency's lenders were covered by a contract that provided that DHELP must maintain a reserve of "not less than two percent (2%) of the aggregate amount of unpaid principal and interest of all Notes exclusive of the portion not covered by Federal Reinsurance." Id. Therefore, because DHELP was entitled to 100% reinsurance, due to its low default rate,⁷ the Department concluded that DHELP was not required to maintain a reserve under the terms of these contracts.⁸Id.

Finally, in one short paragraph, the Department addressed older contracts between DHELP and its lenders:

We note that your agency also submitted a lender contract dating from 1980 which includes the two percent requirement without the exclusion of the federally reinsured amount. However, counsel for your agency informed the Department that

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