Student Loan Fund of Idaho v. U.S. Dept. of Education

• Decision Date: 04 December 2001
• Docket Number: 99-36078,00-35524,00-35310,PLAINTIFF-COUNTER-CLAIM-DEFENDANT-APPELLEE-CROSS-APPELLANT,Nos. 99-36035,DEFENDANT-APPELLANT-CROSS-APPELLEE,DEFENDANT-COUNTER-CLAIMANT-PLAINTIFF-APPELLANT-CROSS-APPELLEE,s. 99-36035
• Citation: 272 F.3d 1155
• Parties: (9th Cir. 2001) STUDENT LOAN FUND OF IDAHO, INC.,v. U.S. DEPARTMENT OF EDUCATION,, AND DR. RODERICK R. PAIGE, <A HREF="#fr1-*" name="fn1-*">* IN HIS OFFICIAL CAPACITY AS SECRETARY OF THE UNITED STATES DEPARTMENT OF EDUCATION,
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1155

272 F.3d 1155 (9th Cir. 2001)

STUDENT LOAN FUND OF IDAHO, INC., PLAINTIFF-COUNTER-CLAIM-DEFENDANT-APPELLEE-CROSS-APPELLANT v. U.S. DEPARTMENT OF EDUCATION, DEFENDANT-APPELLANT-CROSS-APPELLEE, AND DR. RODERICK R. PAIGE,^* IN HIS OFFICIAL CAPACITY AS SECRETARY OF THE UNITED STATES DEPARTMENT OF EDUCATION, DEFENDANT-COUNTER-CLAIMANT-PLAINTIFF-APPELLANT-CROSS-APPELLEE

Nos. 99-36035, 99-36078, 00-35310, 00-35524

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted June 4, 2001

Filed December 4, 2001

NOTE: SEE AMENDED OPINION OF APRIL 15, 2002.

Rory R. Jones, Boise, Idaho, for the plaintiff-counter-claim-defendant-appellee-cross-appellant.

Howard S. Scher, Department of Justice, Washington, D.C., for the defendant-counter-plaintiff-appellant-appellee and defendant-appellant-cross-appellee.

Appeal From the United States District Court for the District of Idaho; Larry M. Boyle, Magistrate Judge, Presiding. D.C. No. CV-94-00413-LMB

Before: Browning, Wallace, and T.G. Nelson, Circuit Judges.

Wallace, Circuit Judge:

In this appeal, we are asked to interpret a difficult contract and attempt to devine what the Congress meant in portions of the Higher Education Act (Act). The importance of the issues cannot be gainsaid, as they deal with loans to post-secondary students.

We suppose the complexity of the case is demonstrated by the fact that both parties appeal from the judgment of the district court. The Department of Education and Secretary of Education (together, Secretary) argue that the district court erred both in holding that the Secretary was in breach of his obligations to the Student Loan Fund of Idaho, Inc. (SLFI) and in interpreting the agreements entered between SLFI and the Secretary to allow the continuation of SLFI's guaranty operations even after SLFI terminated the agreements and ceased to guarantee new loans. In the alternative, the Secretary argues that even if SLFI had limited contractual authority to continue its operations, the Secretary has removed this authority by making a "best interest" determination. Finally, the Secretary argues that the district court failed to afford proper deference to the applicable regulations, promulgated pursuant to the Secretary's authority under the Act, in determining the Secretary's rights in SLFI's reserve fund assets.

In its cross-appeal, SLFI argues that the district court erred in requiring SLFI to hold a large portion of the awarded damages in a separate account to be used solely for paying its future obligations on guarantee claims, with any excess to be returned to the Secretary. In addition, SLFI argues that the district court abused its discretion in denying SLFI's motion to amend its complaint to include Bivens claims. The district court had jurisdiction pursuant to 28 U.S.C. § 1331 and 20 U.S.C. § 1082(a)(2). We have jurisdiction of the timely filed appeal and cross-appeal pursuant to 28 U.S.C. § 1291. We reverse and remand.

I.

SLFI is a private non-profit corporation that began in the late 1970s to function as a guaranty agency under the Federal Family Education Loan Program (Loan Program), formerly known as the Guaranteed Student Loan Program. Under the Loan Program, private lenders provide financing to qualifying students attending post-secondary educational programs. The lenders enter into agreements with and pay insurance premiums to a guaranty agency which then guarantees repayment in case of default on the student loans. The ultimate insurer of the loans is, however, the federal government. 20 U.S.C. 1082(o). The Act, 20 U.S.C. § § 1070, et seq., and the regulations promulgated thereunder, 34 C.F.R. Part 682, govern the interaction between the federal government and the guaranty agencies.

The Act obligates the Secretary to provide reinsurance to the guaranty agencies during the life of the guaranteed loans. 20 U.S.C. § 1078(c)(1)(A). However, in order to become a guaranty agency within the meaning of the Loan Program and the Act, a State or private nonprofit organization is first required to contract with the Secretary. See 20 U.S.C. § 1085(j) (defining "guaranty agency" as "any State or non-profit private institution or organization with which the Secretary has an agreement under section 1078(b) of this title."). At the time SLFI contracted with the Secretary (then Commissioner), the Secretary employed a series of standard regulatory agreements for bringing nonprofit entities into the Loan Program. See, e.g., Colorado v. Cavazos, 962 F.2d 968, 969 (10th Cir. 1992) (describing the series of contracts); Educ. Assist. Corp. v. Cavazos, 902 F.2d 617, 619 (8th Cir. 1990) (same). In large part, the provisions of the agreements either restate or implement the requirements of the regulations and the Act. Four of the five agreements entered into between SLFI and the Secretary provide that SLFI is to comply with the Act and the regulations promulgated thereunder. All of the agreements state that they are to be interpreted in the light of the Act and the regulations. Two of the agreements--the reinsurance agreement and supplemental reinsurance agreement--set the rates at which SLFI may obtain reinsurance from the Secretary. The reinsurance agreement provides that the Secretary will reimburse 80% of the amounts expended by SLFI in discharging its insurance obligations "with respect to loans insured by [SLFI] prior to termination of [the] agreement or prior to the expiration of the [reinsurance] authority in the Act." The supplemental reinsurance agreement provides that if the default rate is 5% or less, the Secretary will reimburse 100% of SLFI's expenses. If the default rate is more than 5% but does not exceed 9%, then the Secretary reimburses 90% of expenses. These supplemental reinsurance rates apply only "with respect to loans insured by [SLFI] prior to the expiration of the [reinsurance] authority provided in the Act." These varying contractual rates of reinsurance track the rates then authorized by the regulations. See 34 C.F.R. § 682.404(a)(1) (1988); 34 C.F.R. § 682.405(a)(1) (1988).

The agreements, as well as the Act and regulations, require SLFI to maintain Loan Program funds in a "reserve fund." One of the agreements entered into between SLFI and the Secretary specifies that SLFI is required to deposit into a separate fund, called the Guarantee Fund by SLFI, (1) advances made by the Secretary (2) sums appropriated by the State for the purposes of the Loan Program, (3) money received as loan insurance premiums, (4) amounts "received by[SLFI] through gift, grant, or by other means from other sources" for Loan Program operations, (5) money collected on defaulted loans, and (6) interest or other earnings derived from the investment of the previously listed sources of money. The regulations require that funds from these same sources are to be included in the "reserve fund." 34 C.F.R. 682.410(a). The Act provides that the Secretary may require the return of the entire reserve fund of a guaranty agency only if"the Secretary [1] determines that such return is in the best interest of the operation of the program . . . or [2] to ensure [a] the proper maintenance of such agency's funds or assets or[b] the orderly termination of the guaranty agency's operations and the liquidation of its assets." 20 U.S.C. § 1072(g)(1).

The agreements between SLFI and the Secretary also provided for termination under certain circumstances with results disputed by the parties. It is now undisputed that SLFI invoked this termination provision in April of 1994 and terminated its regulatory agreements effective as of July 1, 1994. In the Secretary's view, upon the termination of the regulatory agreements SLFI ceased to be a guaranty agency within the meaning of the Act and, as a result, was required to yield control over all of its guaranty functions to the Secretary. Here, the Secretary attempted to exercise such control by repeatedly ordering SLFI to end its guaranty operations and to transfer its entire loan portfolio and all of its reserve funds and assets (which in the Secretary's view constitute federal property) to a successor guaranty agency, the Northwest Education Loan Association (NELA).

SLFI refused, however, to comply with the Secretary's directives, asserting that the only effect on its operations of the termination of the agreements was that it could not guarantee new loans. With the exception of $81,841, SLFI has not transferred any reserve fund assets to the Secretary or NELA since June 30, 1994. The Secretary continued to reimburse SLFI until October 1994 at which time the Secretary instituted an offset against SLFI by withholding reimbursement payments. The Secretary suspended the offset during January and February of 1995 by making reimbursement payments in those months. However, since that time no other reimbursement payments have been made by the Secretary.

During September 1994, SLFI brought this action to challenge the legality of the Secretary's orders. The Secretary counterclaimed and, on a motion for summary judgment, ultimately obtained an injunction from the district court requiring SLFI to turn over all of its reserve fund. In the same order granting the injunction, the district court granted SLFI's motion to amend its complaint to include a breach of contract claim. However, the district court denied SLFI's motion to include Bivens claims against the Secretary in his official capacity and three other Department of Education officials.

SLFI appealed from the injunction, and we reversed, holding in an unpublished disposition that there was still a genuine issue of material fact as to whether the Secretary had met the statutory requirements for requiring the return of all reserve funds. Student Loan Fund of Idaho v. Riley, No. 95-36179 (unpublished; table at 107 F.3d 17). SLFI also attempted to gain review of the district court's denial of its motion to amend its complaint to include Bivens claims. Howe...