Veal v. First American Sav. Bank
| Decision Date | 05 November 1990 |
| Docket Number | Nos. 89-1895 and 89-1919,s. 89-1895 and 89-1919 |
| Citation | 914 F.2d 909 |
| Parties | 62 Ed. Law Rep. 930 Kerry VEAL, et al., Plaintiffs-Appellants, v. FIRST AMERICAN SAVINGS BANK, et al., Defendants-Appellees. Paul GRAHAM, et al., Plaintiffs-Appellants, v. SECURITY SAVINGS AND LOAN ASSOCIATION, et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Ivan E. Bodensteiner, Linda D. Moskowitz, Seymour H. Moskowitz, Valparaiso, Ind., for plaintiffs-appellants.
James L. Turner, David O. Tittle, Donald J. Graham, Bingham, Summers, Welsh & Spilman, Indianapolis, Ind., Paul A. Rake, Sherry L. Clarke, Eichhorn, Eichhorn & Link, Hammond, Ind., for First American Savings Bank.
Henry S. Weinstock, Nossaman, Guthner, Knox & Elliott, Los Angeles, Ca., for California Student Loan Finance Corp.
Richard M. Malad, Cohen & Malad, Indianapolis, Ind., for Western Loan Marketing Assn.
Mark E. Shure, Bruce H. Schoumacher, Kevin T. Keating, McDermott, Will & Emery, Chicago, Ill., Lambert C. Genetos, Burke, Murphy, Costanza & Cuppy, Merrillville, Ind., for Higher Educ. Assistance Foundation.
Andrew B. Baker, Jr., Asst. U.S. Atty., Office of the U.S. Atty., Hammond, Ind., Theodore R. Carter, III, Dept. of Justice, Civ. Div., Washington, D.C., for Dept. of Educ.
James L. Turner, Lloyd T. Wilson, Jr., Donald J. Graham, Bingham, Summers, Welsh & Spilman, Indianapolis, Ind., Mark S. Lucas, Merrillville, Ind., for Security Sav. and Loan.
Before BAUER, Chief Judge, CUMMINGS, Circuit Judge, and WILL, Senior District Judge. 1
The appellants (plaintiffs below), former students at the Gary, Indiana, branch of the Adelphi Business College ("Adelphi") ("the students"), seek rescission of their guaranteed student loans, 2 reinstatement of their eligibility for Pell Grants, and damages. The appellees (defendants below) are First American Savings Bank and Security Savings and Loan Association (the "Lenders"), which issued their student loans, the Higher Education Assistance Foundation ("HEAF"), which guaranteed the loans, the United States Department of Education ("DOE"), which reinsured the loans, the California Student Loan Finance Corporation ("CSLFC") and the Western Loan Marketing Association ("WLMA") (collectively referred to as "the defendants"), which subsequently bought some of the loans in the secondary market. The gravamen of the students' complaint is that Adelphi fraudulently induced them to enroll at the school, made arrangements for them to obtain guaranteed student loans through the defendant Lenders, and then failed to provide them with an education. The students, however, do not name Adelphi as a defendant in their complaint. (Adelphi filed for bankruptcy prior to the commencement of this lawsuit.) Rather, they allege that because of the "close connection" between Adelphi and the Lenders, the defendants stand in the position of Adelphi. The students' complaint therefore charges the defendants with numerous violations of state law and violations of the Higher Education Act of 1965 (the "HEA"), 20 U.S.C. Secs. 1070 et seq. The district court was unimpressed by the students' "close connection" argument and granted the defendants' motion to dismiss for failure to state a claim. 125 F.R.D. 687. The district court also found that remedies under the HEA were limited to those enumerated in the statute and that the HEA preempted the students' state law remedies. We agree that the students have failed to state a claim for relief against the defendants, and therefore affirm on this ground alone.
According to the allegations in the students' complaint, Adelphi Business College was a blight on the educational system. It preyed on the jobless and uneducated, luring them into what should have been the hallowed halls of an educational institution with promises of skills and jobs. Adelphi, however, had no intention of honoring these promises because Adelphi was in the education business only to make a quick buck and beat a hasty retreat.
The students contend that Adelphi ordered its troops of public relations representatives into the streets of Gary to recruit candidates for enrollment. The scope of the search was constrained only by Adelphi's preference that the candidates have a verifiable permanent address, a phone number, and no job. Paul Graham was approached on the streets of Gary by an Adelphi recruiter who promised the availability of "high technology" job opportunities upon graduation. Shortly thereafter, Graham applied at Adelphi, took a ten-minute "entrance examination," and signed a promissory note for $2,500. He also applied for a Pell grant. A couple of weeks later, Graham began a "bookkeeping" course. Upon completion, he attempted to enroll in a computer course only to discover that Adelphi, despite its promises of "high technology training," had neither a computer course nor a computer. Graham never received a diploma nor a certificate for the coursework he completed, nor was he provided with any job placement assistance prior to July 24, 1987, when Adelphi closed its doors.
Hattie Carter was stopped on the street by an Adelphi recruiter who inquired whether she was looking for a job. When Carter answered in the affirmative, the recruiter took her phone number. Another recruiter called a couple of days later and asked Carter to come to Adelphi. The next day, Carter went to Adelphi, took a ten-minute "exam," signed a promissory note and enrolled in a "bookkeeping" course. She was unable to complete the course before Adelphi ceased operations. Carter thereafter was informed by Mitchell Sweet & Associates, which serviced the loan for CSLFC, that she would have to begin repaying her loan immediately because she was no longer enrolled in school.
Kerry Veal received a phone call at home from an Adelphi recruiter who told him that Adelphi could help him find a job. Veal went to Adelphi, where he was told that a loan had been arranged for him and that he did not need to worry about money. Veal took an "exam," signed a promissory note and enrolled in a "bookkeeping" course. Veal was informed by the financial aid office of Adelphi that after paying for his books and tuition he was entitled to a refund of $1,233 from the proceeds of his guaranteed student loan and Pell grant. Veal never received his refund and, like the other students, was unable to complete his coursework before Adelphi closed. He also received letters from Mitchell Sweet & Associates demanding repayment of his loans.
And so the story goes. The allegations of the other students are variations on the above theme. After the several financial institutions that held their student loans began demanding payment, the students filed suit against the institutions, seeking a declaration that their loans were void and therefore unenforceable. Although Kerry Veal, Hattie Carter and Othella Bolton ("the Veal plaintiffs") name First American Savings Bank as the defendant Lender, and Paul Graham and Estella Sanders ("the Graham plaintiffs") (both groups collectively referred to as "the students") name Security Savings and Loan as the defendant Lender, both complaints charge the same violations of state and federal law--only the factual allegations with respect to each student are different. Count 1 of both complaints charges that Adelphi breached its agreement to provide vocational training and placement services to the students. Count 2 charges that Adelphi made fraudulent, material misstatements to the students in order to induce them to enroll at Adelphi and that the students then enrolled as a result of these misleading statements. In Count 3, the students allege that Adelphi breached its duty of care by negligently failing to take reasonable measures to ensure the truthfulness and accuracy of the statements, representations, and information provided to the students by Adelphi. In Count 4, the students allege that Adelphi and the Lenders violated the Higher Education Act of 1965, 20 U.S.C. Sec. 1070 et seq. Count 5 charges that Adelphi breached its fiduciary duty to the students and Count 6 charges that Adelphi and the Lenders violated the Indiana Deceptive Practices Act, I.C. 24-5-0.5-1 et seq.
In response to the students' complaints, the defendants filed a motion to dismiss, arguing that federal law preempted state law in this area, that the HEA did not contemplate a private right of action, and that, in any event, the students failed to allege any wrongdoing on the part of any of the named defendants. The district court agreed with all three of these contentions and granted the motion to dismiss.
The students appealed. They disagree with the district court's disposition of the preemption and private right of action issues. They also contend that the factual allegations against Adelphi are legally sufficient against the defendants. Plaintiffs claim that, because of the "close connection" between Adelphi and the Lenders, an "origination relationship" existed between Adelphi and the Lenders, thereby subjecting the defendants to their defenses against Adelphi, 34 C.F.R. Secs. 682.512(d)(1) and 682.512(e); second, that the Federal Trade Commission ("the FTC") regulation on the preservation of consumer defenses applies to the defendants, 16 C.F.R. Sec. 433.2(a); and third, that under Ind.Code Ann. Sec. 26-1-3-306 (Burns 1986), the defendants are subject to all their defenses against Adelphi. 3
Dismissal for failure to state a claim is proper if it appears that plaintiffs can prove no set of facts in support of their claims that would entitle them to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957). In order to prevail upon a motion to dismiss, the defendant must demonstrate that the plaintiff's claim, as set forth by the complaint, is without legal consequence. Gomez v. Illinois State Bd. of Education, 811 F.2d...
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