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December 17, 1981

Terrel H. BELL, Defendant

The opinion of the court was delivered by: ROBINSON, JR.

 AUBREY E. ROBINSON, Jr., Chief Judge.

 Citizens Savings (Citizens) *fn1" initiated this action to obtain the payment of over $600,000 in insurance claims on 441 loans allegedly insured under the Federal Insured Student Loan Program (FISLP). *fn2" Citizens contends that the defendant breached its contract of insurance entered into with Bank of California (BOC) and Beverly Hills National Bank (BHNB) under which Citizens claims rights as assignee of the loans. Before the Court at this time are plaintiff's and defendant's cross-motions for summary judgment. The Court finds that Citizens failed to comply with the FISLP regulations which require satisfaction as a precondition to insurance coverage and therefore deny in full plaintiff's motion for summary judgment. Because certain factual issues remain unresolved at this time, the government's motion is partially granted and partially denied.



 BOC and BHNB, both eligible lenders under the FISLP, processed 214 and 248 FISLP loan applications, respectively, between March and June, 1973, for loans which were to be made to students of the Institute of Continuing Education (ICE). *fn3" These completed loan applications were submitted to the Office of Education (OE) during this time period to obtain insurance commitments thereon. OE reviewed and approved each of the loan applications, designating such approval by affixing to each application OE's stamp of insurance. This approval process was complete by June 31, 1973.

 The facts leading up to the loan purchase transaction are in considerable dispute. The parties disagree on the nature of the relationship between ICE and BHNB, and the arrangement and execution of Citizen's purchase transaction. For this reason, the Court declines to grant the government summary judgment with respect to its entire counterclaim. *fn4" Throughout the remainder of the opinion the Court will assume, solely for the sake of the remaining analysis, that the loan purchase was executed in accordance with FISLP regulations.

 On July 13, 1973, a purchase agreement was executed between Citizens and the two banks with respect to the loans at issue in this litigation. On the same date, Citizens enlisted the services of Academic Services Plan (ASP), a company which services and does collection work for federally insured student loans. *fn5" When Citizens purchased the loans, business had been going poorly at ICE for some time and by the end of 1973, things were rapidly deteriorating. On January 8, 1974, ICE lost its accreditation (and hence its eligibility to participate in the FISLP) and essentially ceased to operate. *fn6" Charles Heller, the Assistant Vice-President of Citizens who conducted much of the purchase transaction, became aware of ICE's closing in October, 1974 and traveled from bank headquarters in Illinois to California in November to visit ASP and determine the status of its collection activities. Due to certain confusion regarding the precise closing date of ICE, no collection activities on Citizens' ICE loans had yet started.

 Collection activity belatedly commenced in June, 1975 and continued throughout the following two months until final delinquency notices were sent to students at the end of July, with final demand letters following thereafter in early September. In July, 1975, OE placed a "hold" on all claims originating with ICE students until it could complete an investigation of the school's activities. Also in July, Citizens was granted a "Program Review" whereby OE's regional office in Chicago examined Citizens' FISLP activities to determine if they were in conformity with FISLP regulations. This brief review stated that possibly serious irregularities existed in the original purchase transaction, but otherwise indicated that Citizens was operating in an appropriate fashion. Citizens submitted a few claims for payment in January, 1976, but did not submit the vast bulk of claims until after March 12, 1976.

 Citizens' claims remained on hold (although other lenders' claims were released) until OE could conduct a full investigation into the apparent problems with the purchase transaction. In April, 1979, the completed investigation concluded that the acquired loans were uninsured because they had not been properly disbursed prior to transfer and in addition that their acquisition was illegally induced in violation of 45 C.F.R. § 177.6(e). *fn7" On May 31, 1979, OE officials met with Citizens' president and attorneys to discuss the findings of the investigation. Two weeks later, OE issued its final determination denying payment of the claims, and shortly thereafter, Citizens filed this lawsuit.



 When OE ultimately denied plaintiff's claim for reimbursement under the FISLP, it stated essentially two reasons for such denial: (1) the banks from which plaintiff purchased these loans had not properly disbursed the loans prior to their transfer to plaintiff and (2) the purchase of the loans was illegally induced in violation of 45 C.F.R. § 177.6(e). Defendant has raised herein as an affirmative defense that plaintiff failed to exercise due diligence in collecting the loans in question, thus violating the express requirement of 45 C.F.R. § 177.48(a). *fn8" Plaintiff contends that the government is barred from raising any defenses now that were not raised at the time of the initial denial. This contention is based upon "settled principles of administrative law" as well as the contract theory of equitable estoppel.

 A. This Court is Not Limited to the Agency Record in a Breach of Contract Action.

 Plaintiff seeks relief under two separate theories. The first is a breach of contract action wherein money damages are sought, and the second is to have the agency action set aside as arbitrary and capricious. If plaintiff was seeking only judicial review of OE's decision, it is absolutely clear that this Court would evaluate that decision based exclusively on the grounds that were initially provided by the agency for the denial of insurance benefits. In Camp v. Pitts, 411 U.S. 138, 93 S. Ct. 1241, 36 L. Ed. 2d 106 (1973), the Supreme Court reviewed the denial by the Comptroller of the Currency to issue a bank charter and concluded that:

the validity of the Comptroller's decision [to deny the charter] must stand or fall on the propriety of [the findings provided in the denial letter], judged, of course, by the appropriate standard of review.

 Id. at 143, 93 S. Ct. at 1244.

 The gravamen of this case however is not review of the agency's decision to deny insurance benefits to Citizens. It is instead a breach of contract claim, one under which plaintiff seeks to obtain over $600,000 in insurance benefits allegedly due it under the FISLP. And, notwithstanding the clear authority which limits a court's review to the agency record when agency action itself is under scrutiny, plaintiff has offered no support for the proposition that this Court should be equally bound in a situation where the agency is sued on a contract claim. Thus, the rules which constrict a court in its review of agency action qua agency action do not apply here. This Court has de novo review of the breach of contract count, and plaintiff's arguments to the contrary are without merit.

 B. The Government is not Estopped From Raising Defenses Which Were Not Included in the Denial Letter.

 Plaintiff alternatively contends that the government should be estopped on equitable grounds from asserting defenses which were not raised in the denial letter. In limited circumstances, the government may be subject to the rules of estoppel. However, this case is not one which can be included in this narrow category.

 In the landmark case of Federal Crop Insurance Corp. v. Merrill, 332 U.S. 380, 68 S. Ct. 1, 92 L. Ed. 10 (1947), the Supreme Court set forth the general rule regarding the assertion of estoppel against the government, holding that the government may not be estopped by the acts of its agents when it is acting in a sovereign capacity. This general proposition has been subject to attack in recent years (most notably from the Ninth Circuit Court of Appeals), and some doubt has been expressed as to whether the distinction between a government's sovereign activity and its proprietary actions for purposes of estoppel remains viable. In Molton, Allen & Williams v. Harris, 613 F.2d 1176 (D.C.Cir.1980), the Court placed heavy emphasis on whether the government agent had authority to act as he did and virtually ignored the issue of the nature of the government's conduct. However, the Court did determine that the government had entered "the domain of commerce" and was thus subject "to the same principles of ...

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