U.S. v. Tilleraas

• Decision Date: 17 June 1983
• Docket Number: No. 82-3077,82-3077
• Citation: 709 F.2d 1088
• Parties: , 12 Ed. Law Rep. 24 UNITED STATES of America, Plaintiff-Appellee, v. Elizabeth A. TILLERAAS, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1088

709 F.2d 1088

73 A.L.R.Fed. 295, 12 Ed. Law Rep. 24

UNITED STATES of America, Plaintiff-Appellee, v. Elizabeth A. TILLERAAS, Defendant-Appellant.

No. 82-3077.

United States Court of Appeals Sixth Circuit.

Argued Jan. 14, 1983.

Decided June 17, 1983.

John E. Duda (argued), Duda, Elk & Wohl, Cleveland, Ohio, for defendant-appellant.

Solomon Oliver, Marcia W. Johnson (argued), Asst. U.S. Attys., Cleveland, Ohio, for plaintiff-appellee.

Before JONES and WELLFORD, Circuit Judges, and MILES, ^* District Judge.

WELLFORD, Circuit Judge.

Defendant-appellant, Elizabeth Tilleraas, applied for and received three student loans totalling $3,500.00 under the Federal Insured Student Loan Program (FISLP) of the Higher Education Act of 1965, 20 U.S.C. Sec. 1071, et seq. These loans were secured by three promissory notes executed, respectively, on September 4, 1969, June 18, 1970, and October 5, 1970, in favor of Dakota National Bank & Trust Co., Fargo, North Dakota. Under terms of these student loans, periodic payments were required commencing twelve months after Tilleraas ceased to carry at least one-half of a fulltime academic workload at an eligible institution. 20 U.S.C. Sec. 1077(a)(2)(B). Her student status terminated on January 28, 1971, and the first installment payment thus became due January 28, 1972. Appellant never made any payment on any of her loans. The United States insured to the lender bank the repayment in event of any failure to pay by the borrower under the terms of the FISLP.

Under 20 U.S.C. Sec. 1080(e)(2)(B), it is provided:

the term "default" includes only such defaults as have existed for ...

(B) one hundred eighty days in the case of a loan which is repayable in less frequent [than monthly] installments.

The first payment due on the loans was in "default" within the meaning of the law on or about July 27, 1972, one hundred and eighty days after the failure to make the first installment payment had continued to exist. It was not until December 17, 1973, that the Dakota National Bank sent notice of its election under the provisions of the loan to accelerate the maturity of the note. The Bank demanded payment in full of the full principal due by December 27, 1973. It then filed FISLP insurance claims against the United States on May 6, 1974, and assigned the three Tilleraas notes to the United States on May 10, 1974. The government, in turn, paid the Bank's claim in full on July 5, 1974. It was not until June 4, 1980, that the appellee government filed suit in Cleveland, Ohio, against the original borrower-recipient of this largess intended to assist students in obtaining a higher education. ¹

The government's suit was met in the trial court by defendant-appellant's motion for a summary judgment based on her contention that the action of the United States was barred by the six year statute of limitations set forth in 28 U.S.C. Sec. 2415(a). ² The complaint in the cause alleged that the government paid the Bank's insurance claim and was assigned title to the notes after default on the loan and payment by the government pursuant to 45 C.F.R. Sec. 177.48.

It is clear that we must apply federal law, not state law, in determining the validity of appellee's statute of limitation defense. United States v. Scholnick, 606 F.2d 160, 164 (6th Cir.1979). This rule of law applies because of the federal interest in the protection of its funds. It is crucial, then, to determine under that federal law when the government's cause of action "accrued". Appellant asserts that it accrued when she first defaulted, July 27, 1972. The government responds that the limitation period under 28 U.S.C. Sec. 2416(c) ³ was tolled because of appellant's failure to notify the creditor Bank (or the United States) of her change of address, preventing by this omission the commencement of suit against her. The government further contends that its cause of action accrued when it paid the insurance claim filed by the lender Bank.

The government admits that under 20 U.S.C. Sec. 1080(b), which provides that upon payment of the lender's claims the government becomes subrogated to all of the lender's rights and is entitled to assignment of the note, and that its rights as assignee are co-extensive with those of the lender. See Guaranty Trust Co. v. U.S., 304 U.S. 126, 141, 58 S.Ct. 785, 793, 82 L.Ed. 1224 (1937). The government argues, however, that it is not limited to assignee status, since it may also rely on its common law right as a surety to bring an action against the principal for reimbursement. Since a surety's or guarantor's cause of action for indemnity does not accrue until payment of the principal's liability, see Commercial Insurance Co. v. Pacific Peru Construction Corp., 558 F.2d 948 (9th Cir.1977); Hercules, Inc. v. Stevens Shipping Co., 629 F.2d 418 (5th Cir.1980), the government claims that it also has a cause of action which accrued on the date it paid the lender, July 6, 1974, a cause which was timely when this action was filed.

It is uncontroverted that Tilleraas did not inform the lender Bank, nor the United States, of her change of address from North Dakota to Cleveland upon her marriage and move to Ohio. The government claims that it was not until 1979 that it finally obtained a current address on appellant prior to institution of suit in 1980. Thus, the government would exclude this approximate five year period from the running of the six year statute here involved.

We agree with the district court, 538 F.Supp. 1, that it is unnecessary to decide this contention of the United States, because we affirm the judgment of District Judge William K. Thomas that the government's right of action did not accrue, for purposes of this statute, until July of 1974.

The use of the word "insurance" in the statute is not determinative in light of the realities existing between the relevant parties. The nature of the substantive rights and duties among the parties clearly reflects a surety-principal-lender relationship. Insurance is a contract where one undertakes to indemnify another against loss, damage or liability caused by an unknown or contingent event. Since the insured pays the insurer for the promise of indemnity, the insurer benefits to the extent that a contingency never occurs. Where a contingency does occur, the insurer can still be made whole, by virtue of subrogation, to the extent that the insured would be able to recover damages from a third party. Despite the presence of this right of subrogation it is clear that when the contract is formed all legal rights and obligations flow between the insurer and the insured. At this initial stage, there is no legal obligation owing from the third party to the insurer. In fact, it is unknown at that stage whether such a third party obligation will ever arise and, if so, who that third party will be.

A surety, on the other hand, promises to assume the responsibility for the payment of a debt incurred by another should he or she fail to repay the creditor. The arrangement is made to induce the creditor to deal with the borrower where there might otherwise be a reluctance to do so. Under this arrangement, the nature, size, and source of the possible loss to the creditor is known from the start. In addition, there is no payment from the creditor to the surety or guarantor for this "insured" payment. Rather, a kind of tripartite relationship is formed. The consideration running from the creditor to the debtor is deemed sufficient to support the surety's promise to make the debt good. In turn, the benefit flowing to the debtor by virtue of the surety's promise places that debtor under an implied legal obligation to make good any loss incurred by any payment the surety must ultimately make to the creditor. 74 Am.Jur.2d Suretyship Sec. 171 (1974). It is clear then that the two contracts are materially distinguishable, as are the rights and duties of the parties involved. See Madison County Farmers Association v. American Employers Insurance Co., 209 F.2d 581 (8th Cir.1954). See also United States v. Bellard, 674 F.2d 330 (5th Cir.1982).

Under the FISLP the student contracts to borrow money with no collateral and upon favorable interest and repayment terms. The lender, in turn, contracts with the Department of Education to insure repayment should the student default. This has consistently been interpreted as creating a third-party surety contract, despite its nomenclature. See U.S. v. Bellard, supra; U.S. v. Frisk, 675 F.2d 1079 (9th Cir.1982); U.S. v. Stevenson, No. CV80-100 (E.D.Wash.1980); Grove City College v. Harris, 500 F.Supp. 253, 260, 268 (W.D.Pa.19...