Virginia State Educ. Assistance Auth. v. Alexander
| Decision Date | 30 July 1991 |
| Docket Number | Civ. A. No. 88-00874-R,89-00586-R. |
| Citation | 770 F. Supp. 1110 |
| Parties | VIRGINIA STATE EDUCATION ASSISTANCE AUTHORITY, Plaintiff, v. Lamar ALEXANDER, Secretary of Education, et al., Defendants. Lamar ALEXANDER, Secretary of Education, Plaintiff, v. VIRGINIA STATE EDUCATION ASSISTANCE AUTHORITY, Defendant. |
| Court | U.S. District Court — Eastern District of Virginia |
Richard C. Kast, Virginia Office of Atty. Gen., Richmond, Va., for plaintiff.
Debra J. Prillaman, Asst. U.S. Atty., Neil H. Koslowe, Civ. Div., Dept. of Justice, Shawn B. Jensen, Trial Atty., pro hac vice, Washington, D.C., for defendants.
This action is before the Court on the parties' Cross Motions for Summary Judgment. The parties have fully briefed the issues before the Court, and the motion is ripe for decision.
The Plaintiff Virginia State Education Assistance Authority ("VSEAA") commenced this action in January 1989 to challenge the constitutionality and lawfulness of a portion of the Omnibus Reconciliation Budget Act of 1987, Pub.L. No. 100-203, 101 Stat. 1330, which amended Section 422 of the Higher Education Act of 1965, 20 U.S.C. §§ 1001 et seq. ("the Act"). The VSEAA's suit asserted that Section 3001 of the law, codified at 20 U.S.C. § 1072(e), violated the Constitution's Fifth Amendment, constituted a breach of contract, and was an unconstitutional enactment of a tax that discriminated against the several states. Although Section 1072(e) — by its own terms — is no longer in effect, the VSEAA challenges the past implementation of the statute and its continuing resonance in the actions of the United States Department of Education ("the Department"). The Department filed its action against the VSEAA to enforce the dictates of Section 1072(e).
The Higher Education Act established the federal Guaranteed Student Loan Program ("GSLP") to assist post-secondary students in their educational pursuits. See 20 U.S.C. §§ 1070-1098. Under the GSLP, private lenders make government-subsidized, low-interest loans to qualifying students. Repayment of these loans is insured by various state guaranty agencies, such as the VSEAA, which operate the loan programs pursuant to federal guidelines.1 To establish their role as program operators these guaranty agencies enter contracts with the Department. With these contracts, the agencies agree to follow federal regulations, and the Department generally agrees to reimburse 80-100% of any amounts expended by the guaranty association to repay defaulted loans.
Subject to statutory limitations, a guaranty agency is authorized to receive certain funds: for example, an insurance premium on each loan, a set percentage of collections on defaulted loans and investment earnings. A guaranty agency receiving these funds is required to deposit them in a "reserve fund," which may be used only for specified purposes in furtherance of the GSLP's goals. See 34 C.F.R. § 682.410(a). In response to the growth of these reserve funds, Congress enacted the challenged amendment, 20 U.S.C. § 1072(e) (repealed September 30, 1989). Section 1072(e) created a formula for calculating allegedly "excess" reserves and required the guaranty agencies to eliminate these excess reserves. Under the statute this could occur by one of four methods, including by the transfer of the excess to the Department or by the Department's withholding reimbursement funds owed any guaranty agency with excess reserves. 20 U.S.C. § 1072(e)(2)(A)-(D). Section 1072(e) specifically provided that the Department was to deposit recovered funds in a federal loan insurance fund, earmarked for reimbursement payments to the state guaranty agencies for defaulted loans. See 20 U.S.C. § 1081(a).
In reliance on 20 U.S.C. § 1072(e), on February 9, 1988, the Department notified the VSEAA that its reserve fund exceeded the statutorily allowed limit. After granting the VSEAA a waiver of several million dollars of the excess reserves, the Department determined that the VSEAA reserve funds were excessive in the amount of $20,842,452. The VSEAA, which disagreed, refused to pay and filed the instant suit challenging the constitutionality of Section 1072(e). While this action was pending, the Department has set off amounts it owed the VSEAA against the disputed excess in accordance with Section 1072(e)(2)(B). The set-off amounts arose pursuant to the Department's contractual obligations to the VSEAA to reimburse it for payments tendered to lenders for defaulted loans. Some of the set offs occurred after 20 U.S.C. § 1072(e) lapsed of its own terms on September 30, 1989. Attempting to assure its right to continued set offs against claims by the state agency for defaulted loans after the lapsing of Section 1072(e) — until the excess has been recovered by the Department — the Department filed suit against the VSEAA in September 1989.
The Court consolidated the two suits, which present identical legal issues for resolution. During the pendency of these actions more than half of the Circuit Courts of Appeal, including the Fourth Circuit, have assessed the constitutionality of the challenged provisions, each time holding them lawful. See South Carolina State Educ. Assistance Auth. v. Cavazos, 897 F.2d 1272 (4th Cir.), cert. denied, ___ U.S. ___, 111 S.Ct. 243, 112 L.Ed.2d 202 (1990).2 As discussed below, these decisions severely limit the viability of the plaintiff's central arguments.
Because the parties do not dispute the material facts, the action is properly decided on these Cross Motions for Summary Judgment. See Fed.R.Civ.P. 56; Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986).
The parties initially briefed their respective motions for summary judgment prior to the ruling of the Fourth Circuit in South Carolina State Education Assistance Authority v. Cavazos ("South Carolina SEAA"), 897 F.2d 1272 (4th Cir.), cert. denied, ___ U.S. ___, 111 S.Ct. 246, 112 L.Ed.2d 205 (1990). The decision in South Carolina SEAA, which held that Section 1072(e) was constitutional, lays to rest the VSEAA's primary argument. Yet, the VSEAA also forwards several alternative arguments for summary judgment in its favor that the Court will assess in greater detail.
In South Carolina SEAA, the Fourth Circuit upheld Section 1072(e) in the face of a constitutional challenge, holding that its mandate of repayment of the excess reserves or set off of federal reimbursements did not amount to a taking in contravention of the Fifth Amendment. Id. at 1276-77. The court reasoned that the guaranty agencies did not have a property interest protected by the taking clause.
Underlying the court's analysis was a finding that through both federal regulations and the Department-guaranty agency contracts, the federal government reserved the right to amend the terms of the contracts at any time. Id. at 1275-76. With this in mind, the circuit court concluded that requiring payment of the excess reserve funds to the Department did not amount to a taking because the guaranty agencies lacked a mature property interest in the reserve funds, an interest that must underlie any claimed taking. Id. at 1276. Similarly, the Fourth Circuit held that the remedial set offs did not constitute a taking of contractual property rights. The court reasoned that as the fund itself did not constitute property subject to the takings clause, "reimbursement payments destined for inclusion in such reserve funds is not the type of property subject to the `takings' prohibition." Id. at 1277. In other words, the guaranty agencies' right to reimbursement for payments already made on defaulted loans did not give rise to a vested contractual property right.3
In its initial Motion for Summary Judgment, the VSEAA primarily argued that both the required return of excess funds from the reserve funds, 20 U.S.C. § 1072(e)(2)(A), and the alternative withholding of reimbursements, 20 U.S.C. § 1072(e)(2)(B), were takings in violation of the Fifth Amendment. The Fourth Circuit precedent directly on point, which conclusively determines that the federal actions did not impinge private property of the VSEAA and therefore did not involve a taking, forecloses these arguments. See South Carolina SEAA, supra. In addition, the Fourth Circuit opinion, sustaining the statute renders unsuccessful the VSEAA's argument that the Section 1072(e) is unconstitutional as patently irrational and therefore in violation of equal protection. The VSEAA, nonetheless, offers several other arguments not directly discussed by the Fourth Circuit to challenge the viability of Section 1072(e).
The VSEAA first argues that the amendments to the Act, as applied, constitute a retroactive invalidation of vested contractual commitments in violation of the Fifth Amendment's guarantee of due process. Although the Constitution's contract clause does not apply to the federal government, the Supreme Court has held that Fifth Amendment due process imparts a degree of protection from federal impairment of pre-existing contractual rights and duties. See Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467 U.S. 717, 733, 104 S.Ct. 2709, 2719, 81 L.Ed.2d 601 (1984). Generally, Fifth Amendment due process applies "less searching standards" on federal legislation than the contract clause applies to similar state regulation, demanding only that it not be arbitrary and irrational. Id. A viable argument, however, exists that due process demands a closer review where the contracts impaired are, as here, contracts to which the federal government is a party for in such instances the United States Trust Co. v. New Jersey, 431 U.S. 1, 26,...
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