Tipton v. Secretary of Educ. of US, Civ. A. No. 2:90-0105.

Citation768 F. Supp. 540
Decision Date21 June 1991
Docket NumberCiv. A. No. 2:90-0105.
CourtU.S. District Court — Southern District of West Virginia
PartiesTimothy Wayne TIPTON, Lyle Breece, George W. Leeson, Jr., and John Wilburn, individually and on behalf of all others similarly situated, Plaintiffs, v. SECRETARY OF EDUCATION OF the UNITED STATES; Higher Education Assistance Foundation, Inc., a Minnesota corporation; Charleston National Bank, a national banking association; One Valley Bank, a national banking association; Fed One Savings Bank, FA, a national banking association, including its Dunbar Branch (formerly The Bank of Dunbar); Community Bank & Trust, a national banking association; Atlantic Financial Federal-West Virginia, a federal savings association (formerly Magnet Bank); First Federal Savings & Loan Association of Morgantown, a federal savings association; Commercial Banking & Trust Company, a national banking association; Higher Education Loan Program of West Virginia, Inc., a corporation; Central National Bank, a national banking association; Wachovia Bank & Trust Company, a national banking association; Wachovia Services, Inc., a corporation; Marine Midland Bank, a national banking association; and Union Bank & Trust, Defendants.

Daniel F. Hedges, Charleston, W.Va., William W. Carter, Fayetteville, W.Va., for plaintiffs.

Rebecca A. Betts, King, Betts & Allen, Charleston, W.Va., George J. Anetakis, Weirton, W.Va., Keith J. Pappas, Morgantown, W.Va., Stephen R. Brooks, Furbee, Amos, Webb & Critchfield, Fairmont, W.Va., K. Paul Davis, Spilman, Thomas, Battle & Klostermeyer, Charleston, W.Va., Fred Marinucci, U.S. Dept. of Justice, Washington, D.C., James K. Brown, John Philip Melick, Jackson & Kelly, Dana F. Eddy, Joseph R. Goodwin, Michael L. Keller, Goodwin & Goodwin, Charleston, W.Va., George A. Markusic, Morgantown, W.Va., Gary A. Call, Asst. U.S. Atty., Charleston, W.Va., for defendants.

MEMORANDUM ORDER

COPENHAVER, District Judge.

This matter is before the court on the motions to dismiss filed by the Secretary of Education of the United States, the Higher Education Assistance Foundation, Inc., and each of the defendant banks named in the plaintiffs' amended complaint.1

I.

The plaintiffs, Timothy Wayne Tipton, Lyle Breece, George W. Leeson, Jr., and John Wilburn,2 filed this action for declaratory and other relief under the Higher Education Act of 1965 (hereinafter "HEA"), 20 U.S.C. § 1071, et. seq., and implementing regulations,3 against the defendant Secretary of Education of the United States, (hereinafter "Secretary"), the Higher Education Assistance Foundation, Inc. (hereinafter "HEAF"), and the following bank defendants named in the amended complaint: Charleston National Bank; Community Bank & Trust; One Valley Bank of Morgantown; Fed One Savings Bank; United National Bank; Atlantic Financial Federal-West Virginia; First Federal Savings & Loan Association of Morgantown; Commercial Banking & Trust Company; Higher Education Loan Program of West Virginia, Inc. (hereinafter "HELP");4 Central National Bank; Wachovia Bank & Trust Company; Wachovia Services, Inc.; Marine Midland Bank; and Union Bank and Trust.

Plaintiffs in this action were former vocational students at the now defunct Northeastern Business College (hereinafter "NBC"), whose educations at that institution were funded in part with student loans obtained through the federally sponsored Guaranteed Student Loan Program ("GSLP").5 The plaintiffs' loans were received from one or more of the defendant banking institutions, consistent with the GSLP, in order to pay their tuition and other costs related to their attendance at NBC. The defendant HEAF guaranteed these loans, and the defendant Department of Education, which administers the GSLP, provided the lenders with interest subsidies on the loans and contracted to reinsure HEAF for its losses occasioned by payments made on its loan guarantees.

In their amended complaint, plaintiffs allege that they were unable to obtain adequate educational training at NBC because the school was inadequately staffed and equipped to provide such training. Plaintiffs further allege that NBC fraudulently misrepresented its ability to provide them the vocational training upon which the subject indebtedness is based. Although NBC is not named as a defendant in this action, plaintiffs seek a declaration that their student loan obligations, now in default, are unenforceable by the named defendants, arguing that, under various theories of state and federal law, the defendants are each subject to the claims and defenses which the plaintiffs could raise against NBC on the enforceability of the subject loans. In addition to seeking a declaration from the court that their student loans are void and subject to no further enforcement by any of the named defendants, plaintiffs seek a rescission of any future payment obligations on the loans and reimbursement of any monies previously paid in partial satisfaction of the loans. Plaintiffs expressly disavow, however, any claim for monetary damages for noncompliance by the defendants with the statutory and regulatory requirements of the guaranteed student loan program. See Plaintiffs' Brief in Opposition to Defendants' Motions to Dismiss at 137.

Each of the defendants has filed motions to dismiss pursuant to Rule 12(b) of the Federal Rules of Civil Procedure, alleging that the plaintiffs have failed to state claims against them upon which relief can be granted. In analyzing the viability of the various legal theories advanced by plaintiffs to avoid repayment of their loan obligations, and the defendants' motions in opposition thereto, it is helpful at the outset to briefly examine the plaintiffs' allegations regarding their experience with, and the eventual demise of, Northeastern Business College.

II.

According to plaintiffs, Northeastern Business College operated during the period of time in question in this case as a mere "sham" organization which grossly misrepresented its facilities and fraudulently promised to potential enrollees non-existent educational and employment opportunities. Plaintiffs argue that, despite gaining notoriety for its fraudulent and deceptive educational practices,6 NBC was improperly permitted to continue to participate in the GSLP until 1986, and consequently collected millions of dollars in tuition fees from GSLP loans issued to what plaintiffs describe as undereducated, low income students.

One of the named plaintiffs' experiences with NBC is said to be representative. Finding his minimum wage job insufficient to support his wife and two young children, the plaintiff responded to a newspaper advertisement by NBC regarding its offering of a "security and law enforcement" course. He was allegedly told by NBC representatives, among other things, that he would be eligible for part-time work while attending school, that all course materials and polygraph training would be provided, that the school had extensive equipment and library facilities, and that the training would cost nothing at the time — "the federal government would provide GSL loans to pay for his training."

The course offering was, according to plaintiffs, meaningless. They contend, for example, that NBC did not have the facilities represented, did not offer the training promised, and that the course was designed merely to attract a large number of low income individuals with minimal educational achievement who would qualify for GSL program funds. The only promise kept, plaintiffs' allege, is that the individual received a loan for his education, albeit one which he did not receive.

Plaintiffs assert that NBC could not have existed without the GSLP, as managed by the Secretary and HEAF, and contend that the school was improperly permitted to arrange for thousands of students to take out GSL loans, with the proceeds of those loans being paid directly to the school, thereby bypassing the students entirely. Plaintiffs assert that the Secretary and HEAF, being knowledgeable about the improper practices of the school, stood idly by while NBC "pocketed the cash," leaving the students with nothing but dashed hopes and additional indebtedness:

Although HEAF and the Secretary knew of the numerous problems at NBC, neither did anything to sanction NBC or to otherwise protect students whose GSL loans were going straight to NBC. NBC had an open-ended contract with the Secretary to participate in the GSL program.... Because of the Secretary's and HEAF's failure to monitor NBC's use of the GSL program, class members were recruited to sign GSL loans, with the proceeds going to NBC for vocational training that NBC could not provide.
Now the defrauded students are being pursued by the Secretary, HEAF, and various banks to pay amounts pursuant to these notes for something they never received. As a result, their individual lives are being substantially and detrimentally affected.

Plaintiffs' Brief, at pp. 3-4.

Plaintiffs contend that, after ceasing to pay on their student loans for education never received, they have been subjected to a wide range of coercive collection practices. Specifically, plaintiffs allege that they have received threatening telephone calls and "dunning" letters, have had income tax refunds intercepted, have been precluded from qualifying for other educational loans, and have had their credit records ruined. They assert:

The collection practices of the government and HEAF are often more onerous than those of many private creditors. The government turns over student loans to out-of-state collection agencies which often violate federal and state collection laws. The guaranty agency HEAF does some of its own collection work and contracts out a substantial portion to collection agencies. Their collection practices are similarly onerous and abusive.
In virtually no situations known to plaintiffs' counsel have suits been initiated against the class members so that they might have the
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