The opinion of the court was delivered by: CHARLES R. RICHEY
I. Introduction and Analysis 4-6
II. The Secretary's Motion to Dismiss Shall be Granted in Part and Denied in Part
A. Given the Secretary's Own Policy Statements, Plaintiffs May Defend Against Collection by the Secretary on the Basis of an Alleged Origination Relationship Between the Lenders and CSW 7-9
B. Plaintiffs Have Adequately Alleged an Estoppel Against the Secretary Due to the Alleged Agency Relationship Between the Secretary and CSW 9-15
C. The Higher Education Act Does Not Wholly Preempt State Law Governing the Enforceability of Student Loan Promissory Notes 16-47
1. Plaintiffs Have Stated a Cause of Action Under D.C. Code § 28-3809(a)(3) and the Secretary's Motion to Dismiss This Claim Shall Be Denied 22-28
2. Although the FTC Holder Rule Does Not Provide Plaintiffs Relief as a Matter of Federal Law, Plaintiffs Have Stated a Claim for Failure to Include the Notice of Defenses Clause Pursuant to D.C. Code § 28-3904 and the Motions to Dismiss Shall Be Denied 28-41
3. Plaintiffs Have Failed to State a Claim Upon Which Relief Can be Granted With Respect to D.C. Code § 28-3808 and the Defendants' Motions to Dismiss shall Be Granted 41-44
4. Plaintiffs Have Failed to State a Claim Upon Which Relief Can be Granted Under D.C. Code § 28-3807 and the Defendants' Notions to Dismiss these Claims Shall Be Granted 44-45
5. Plaintiffs Have Failed to State a Cause of Action Pursuant to the D.C. Licensing Regulations for Proprietary Schools and the Defendants' Motions to Dismiss these Claims Shall be Granted 45-47
D. Because Plaintiffs Do Not Have a Private Cause of Action Under the Higher Education Act as a Matter of Law, These Claims Against the Secretary Shall Be Dismissed 47-54
E. Plaintiffs Cannot Assert Claims Against the Secretary on the Basis of an Ultimate Lender Theory 54-55
III. The Guaranty Agencies' Motions to Dismiss Shall be Granted in Part and Denied in Part
A. Plaintiffs Do Not Have a Private Right of Action Against the Guaranty Agencies Under the HEA 56-57
B. Because Plaintiffs Cannot Assert Claims Against the Guaranty Agencies on the Basis of an Origination Relationship, the Court Shall Dismiss these Counts of the Complaint with Respect to the Guaranty Agencies 58-64
IV. The Lenders' Motions to Dismiss Shall Be Granted in Part and Denied in Part 64-66
V. Pursuant to Fed. R. Civ. P. 12(b)(6), the Court Shall Dismiss the Complaint Against Sallie Mae, Without Prejudice 66-69
I. INTRODUCTION AND ANALYSIS
This is a putative class action
in which Plaintiffs, former students at the now-defunct Culinary School of Washington (hereinafter, "CSW", or "the school"), seek declaratory and injunctive relief against the Secretary of Education ("Secretary"), Crestar Bank, First National Bank of Toledo, certain State and private Guaranty Agencies
and the Student Loan Marketing Association ("Sallie Mae").
Plaintiffs contend that the school not only promised educational training in the culinary arts but employment opportunities thereafter for its students. According to the Plaintiffs, the school fraudulently misrepresented its facilities and the strength of its educational program, and thereby fraudulently induced the students to take out GSLs.
Complaint at 25, P59. Plaintiffs are now in default on these student loans. In this action, Plaintiffs seek declaratory and injunctive relief such that their student loans would be null and void and subject to various federal and state law claims and defenses. At bottom, the Plaintiffs contend that the Court should prevent the Secretary, the Guaranty Agencies, the lenders and Sallie Mae from collecting on these loans because the GSLs were extended to the students herein despite the fact that "the Secretary, the guaranty agencies and the banks all knew or had reason to know that CSW was ineligible for the GSL program. " Complaint at 43, P158.
The Court has been inundated with papers by all parties. In view of the importance and complexity of these issues, this is not surprising. The Plaintiffs' 102-page Complaint asserts numerous causes of action and is hardly the model of clarity. The Secretary of Education, the Guaranty Agencies, the lenders and Sallie Mae have predictably filed voluminous Motions to Dismiss the various and sundry claims. Rule 12 of the Federal Rules of Civil Procedure "streamlines litigation by dispensing with needless discovery and factfinding." Neitzke v. Williams, 490 U.S. 319, 109 S. Ct. 1827, 1832, 104 L. Ed. 2d 338 (1989). In particular, "Rule 12(b)(6) authorizes a court to dismiss a claim on the basis of a dispositive issue of law." Id. However, in determining whether the Plaintiffs have failed to state a claim as a matter of law, the Court must construe the Complaint liberally, granting the Plaintiffs "the benefit of all inferences that can be derived from the facts alleged." Schuler v. United States, 199 App. D.C. 23, 617 F.2d 605, 608 (D.C. Cir. 1979) (quoting Jenkins v. McKeithen, 395 U.S. 411, 421, 23 L. Ed. 2d 404, 89 S. Ct. 1843 (1969)).
Prior to evaluating the Defendants' respective Motions to Dismiss, it is important to outline the basic structure of the GSL program in which the Plaintiffs participated. A student meeting the prescribed needs test may obtain a GSL. See 20 U.S.C. §§ 1087kk- 1087uu (1986). However, GSLs are available only if the student attends an "eligible institution" as defined by 20 U.S.C. §§ 1085(a)-(c). CSW was deemed an eligible institution and entered into a program participation agreement with the Secretary. Pursuant to the GSL program, Plaintiffs executed promissory notes with private lenders, such as the Defendants Crestar and First National Bank of Toledo. Non-profit Guaranty Agencies and the Secretary subsidized the program by guaranteeing payment to the private lenders in the event of a student's default on the loan. See 20 U.S.C. §§ 1078, 1087. In the event of default, the private lender may assign the loan to the Guaranty Agency and the Guaranty Agency could begin collection efforts against the student. Pursuant to the Secretary of Education's contractual reinsurance agreements with the Guaranty Agencies, the Secretary could receive an assignment of the loan and could then undertake collection efforts upon reimbursing the Guaranty Agencies for any losses incurred on the defaulted loan. See 20 U.S.C. § 1078; 34 C.F.R. § 682.410(b)(4). In this action, the Plaintiffs seek to halt the collection efforts of the lenders, the Guaranty Agencies and the Secretary under a variety of theories. In evaluating the Defendants' respective Motions to Dismiss, the Court must determine whether the Plaintiffs have stated a basis upon which to defend against the collection of their student loans.
II. THE SECRETARY OF EDUCATION'S MOTION TO DISMISS SHALL GRANTED IN PART AND DENIED IN PART
A. Given the Secretary's Own Policy Statements. Plaintiffs May Defend Against the Secretary's Collection Efforts When There Exists an Origination Relationship Between the Lender and the School.
Plaintiffs seek to assert claims arising out of CSW's alleged wrongdoing against the Secretary on the basis of an alleged "origination" relationship between the lenders and CSW as defined by federal law.
Complaint at 72, P266(a); id. at P174 (alleging the existence of an origination relationship between CSW and the banks). In various letters and policy statements, the Secretary has promised to abstain from collection of those defaulted student loans arising from an origination relationship. See Complaint at 30, P81. The Secretary's position is evidenced in a July 21, 1988 letter from Dewey L. Newman, Deputy Assistant Secretary for Student Financial Assistance at the DOE, to the Commissioner of Education at the Texas Education Agency:
If a loan is not legally enforceable, it is not insurable by the Department, and the Department would not encourage or require a lender or guaranty agency to attempt to collect such a loan. As a legal matter, however, a student who borrows under the GSL program from a third party lender remains responsible for repaying the loan even if the school closes, unless a relationship exists between the lender and the school that would make the school's failure to render educational services a defense to repayment of the loan to the lender. . . . The agency has termed such an agency relationship an "origination relationship." 34 C.F.R. § 682.200.
Ex. 2, attached to Complaint. The Secretary acknowledges the existence of this long-standing policy in his Motion to Dismiss. See Secretary's Motion to Dismiss at 14. Given that the Secretary has unequivocally expressed an intention to be bound by these statements, the students may assert school-based claims arising out of an origination relationship against the Secretary. See Tipton v. Secretary of Education, 768 F. Supp. 540 (S.D. W.Va. 1991). Cf. Morton v. Ruiz, 415 U.S. 199, 235, 39 L. Ed. 2d 270, 94 S. Ct. 1055 (1974) (agency obligated to adhere to its own internal guidelines). Vietnam Veterans v. Secretary of the Navy, 269 App. D.C. 35, 843 F.2d 528, 538 (D.C. Cir. 1988).
B. Plaintiffs Have Adequately Alleged a Basis for an Estoppel Against the Secretary Due to the Alleged Agency Relationship Between the Secretary and CSW.
According to the Plaintiffs, the Secretary "as the principal in all the transactions with the named Plaintiffs and members of the class, is responsible for the acts of its agents, the Guaranty Agencies and CSW." Complaint at 76, P270. Plaintiffs disavow any attempt to impose liability upon the Secretary in tort. See Pl. Opp. at 70. However, Plaintiffs apparently proceed under a contract theory of fraudulent inducement or under principles of equitable estoppel. Id. The Secretary moves to dismiss these claims, arguing that the Plaintiffs cannot, as a matter of law, posit the existence of an agency relationship between the Secretary and CSW and the Guaranty Agencies. See Secretary's Reply at 24. Upon consideration of the arguments, the Court must deny the Secretary's Motion to Dismiss the Plaintiffs' estoppel claims arising from the alleged agency relationship between CSW and the Secretary. However, the Court shall grant the Secretary's Motion with respect to the remaining estoppel claims and shall dismiss the estoppel claims with respect to the alleged wrongdoing of the Secretary himself and the Guaranty Agencies.
The Secretary first contends that the agency issue is of limited importance because the Secretary has already agreed to forbear from collecting loans determined to be legally unenforceable under applicable state law. In the Secretary's view, the agency argument would address "only . . .those loans held to be legally enforceable." Secretary's Reply at 24, n.27. The Secretary's attempt to mitigate the impact of the agency argument fails. If CSW or the Guaranty Agencies are, in fact, agents of the Secretary, then the Secretary, as a principal, may be charged with the alleged misrepresentations of these agents as a matter of law. See, e.g., 3 C.J.S. Agency § 401, at 238-240 (1973). Thus, the existence of an agency relationship with the Secretary may influence the Secretary's ability to enforce the underlying loan contracts because the agent's misrepresentations may well spawn a defense to the Secretary's collection efforts.
The Secretary vociferously challenges Plaintiffs' attempt to define CSW or the Guaranty Agencies as agents of the Secretary. In his reply, the Secretary abandoned the analogy to the Federal Tort Claims Act and instead sought to show that the Plaintiffs could not, as a matter of law, make out an agency relationship. According to the Secretary, Plaintiffs failed to "identify a task or function that the Department as a principal performs, and show that this function was delegated by the Department" to CSW. Secretary's Reply at 24. This defense to the Plaintiffs' agency claim is weak. Contrary to the Secretary's contention, the Plaintiffs do identify certain functions which the Secretary performs, such as administration of the HEA, which are delegated to the participating schools. See, e.g., Complaint at 23-24, P51 (by regulation, the Secretary designated each school as a "fiduciary of the Secretary in administering Higher Education Act programs"); id. at 24-25, P56 (Secretary paid CSW an administrative cost allowance).
Second, the Secretary incorrectly assumes that an agency relationship cannot exist when a private entity, such as CSW or a Guaranty Agency, undertakes the performance of tasks at the request of the government pursuant to a government program. The Supreme Court has frequently described independent entities which provide administrative assistance to the government as "agents" of the government. Heckler v. Community Health Services, 467 U.S. 51, 81 L. Ed. 2d 42 1 (1984), is among those Supreme Court cases. In Community Health Services, the Court described the Travelers Insurance Company, which was serving as a fiscal intermediary in the Medicare program, as a "responsible Government agent." 476 U.S. at 51. In fact, the Court referred to agency principles throughout the Community Health Services Opinion. Thus, the Court cannot dismiss this claim under Fed. R. Civ. P. 12(b)(6) on the Secretary's bald assertion that an agency relationship cannot arise pursuant to a federal program. The existence of an agency relationship is ordinarily a question of fact which, depending upon the existence of any disputed issues of material fact, is more appropriately addressed on summary judgment or at trial. See, e.g., Henderson v. Charles E. Smith Management, Inc., 567 A.2d 59, 62 (D.C. 1989).
The Secretary is correct that the Complaint does not support an estoppel claim with respect to actions performed by the Secretary himself. In order to successfully maintain an estoppel claim against the government, Plaintiffs must demonstrate the existence of an egregious injustice and must convince the Court that estopping the government will not cause undue damage to the public interest. See, e.g., Int'l Org. of Masters v. Brown, 225 App. D.C. 370, 698 F.2d 536, 551-552 (D.C. Cir. 1983). Moreover, the Plaintiffs may assert an estoppel claim against the government only in the event of affirmative misconduct by the government or its agents. See Office of Personnel Management v. Richmond, 496 U.S. 414, 110 S. Ct. 2465, 2469-2470, 110 L. Ed. 2d 387 (1990) (although equitable estoppel "will not lie against the Government as against private litigants," the Court recognized that "some type of affirmative misconduct might give rise to an estoppel against the government"). Plaintiffs have not made an allegation of affirmative misconduct with respect to the Secretary's own actions. Even if the Secretary "knew or should have known" that CSW was not technically eligible to participate in the GSL program, see Complaint at 43, P158, this allegation is not tantamount to an allegation of affirmative misconduct by the Secretary. The Court cannot, as a matter of law, infer affirmative misconduct from the Secretary's inaction. As explained in Section I.D., infra, the Secretary has broad enforcement prerogatives and may decline to suspend a school for policy reasons.
However, Plaintiffs have stated an estoppel claim against the Secretary with respect to the acts of the Secretary's alleged agent, CSW. The Plaintiffs have alleged affirmative misconduct on the part of CSW. See Complaint at Counts IV and V. This alleged misconduct implicates the school's educational program as well as the school's compliance with the HEA rules and regulations. See Complaint at 11-12, P2 (CSW flaunted the rules and failed to properly credit and calculate student refunds). Moreover, the Plaintiffs have alleged that they "were induced by CSW's false and misleading representations to take out guaranteed student loans." Complaint at 25, P59. Assuming for purposes of the instant Motion to Dismiss that CSW is the agent of the Secretary, these estoppel claims may proceed.
Although, as explained above, the Plaintiffs have alleged the existence of an agency relationship between the Secretary and the Guaranty Agencies sufficient to withstand a motion to dismiss, the Court bust dismiss the Plaintiffs' estoppel claim with respect to the alleged action or inaction of the Guaranty Agencies. In order to withstand a motion to dismiss the estoppel claim, the Complaint must allege (1) that the Guaranty Agencies made a false representation or wrongly concealed material facts; (2) that the Guaranty Agencies intended for the students to act upon this representation or omission; (3) that the Guaranty Agencies had knowledge of the misrepresentation or omission; (4) that the students did not have knowledge of the actual situation; and (5) that the students reasonably relied upon the misrepresentation or omission to their detriment. See, e.g., Int'l Org. of Masters v. Brown, supra; Perpetual Bldg. Ltd. Partnership v. District of Columbia, 618 F. Supp. 603 (D.D.C. 1985). Plaintiffs cannot make out an estoppel claim with respect to the acts or omissions of the Guaranty Agencies because, by Plaintiffs' own admission, the Guaranty Agencies did not make any statement or representation upon which the students could have placed reliance. See Complaint at 37, P119 ("the consumer never met with, or talked to, anyone from the banks or guaranty agencies"). In fact, the students did not even know of the Guaranty Agencies' existence at the time these transactions were consummated. See Id. ("As a result of this regulatory framework, the class members had no knowledge that any entity was involved in the guaranteed student loan except 'the government' [Defendant Secretary of the U.S. Department of Education] and the school"). In light of the utter lack of contact between the Plaintiffs and the Guaranty Agencies, the Complaint fails to state an estoppel claim with respect to the Guaranty Agencies as a matter of law. See Banze v. American Int'l Exports, Inc., 454 A.2d 816, 818 (D.C. 1983). Plaintiffs' resort to the equities and pleas to prevent manifest injustice cannot not salvage an estoppel claim which falls short of the required technical elements. American Savings v. Bell, 562 F. Supp. 4, 9 (D.D.C. 1981).
C. The Higher Education Act Does Not Wholly Preempt State Law Governing the Enforceability of Student Loan Promissory Notes.
Plaintiffs also challenge the enforceability of the student loan promissory notes on the basis of state law. See Complaint at 72-74, PP266(b),(g) (claims against all defendants); id. at 77, P274 (Guaranty Agencies). Although the Secretary concedes that the Higher Education Act, 20 U.S.C. § 1070, et seq., does not close off state law contract remedies, the Secretary contends that none of the D.C. statutes are applicable to the case at bar. For the reasons indicated below, the Court finds that state law defenses are available to student borrowers. However, the Court shall deny the Secretary's Motion to Dismiss the state law defenses asserted by the Plaintiffs herein with respect to D.C. Code § 28-3809(a)(3) and § 28-3904 (1981). The Secretary's Motion to Dismiss the remaining state law claims pursuant to D.C. Code §§ 28-3808, 28-3807, and D.C. Mun. Regs., tit. 16, §§ 1212, shall be granted, however.
The 85-page Opinion issued by Judge Copenhaver in Tipton v. Secretary of Education, supra, exhaustively discusses the preemption issue presented herein. Upon analyzing California Fed. Sav. & Loan v. Guerra, 479 U.S. 272, 280-81, 93 L. Ed. 2d 613, 107 S. Ct. 683 (1986) and United States v. Kimbell Foods, Inc., 440 U.S. 715, 59 L. Ed. 2d 711, 99 S. Ct. 1448 (1979), the Tipton Court correctly concluded that the HEA does not explicitly preempt state law defenses, and that the statute, the legislative history and the agency's subsequent regulations leave certain matters to be regulated by the states. However, as the Tipton Court found, state law is preempted to the extent that it would "stand as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress," Hines v. Davidowitz, 312 U.S. 52, 67, 85 L. Ed. 581, 61 S. Ct. 399 (1941), or to the extent that compliance with both federal and state law would be impossible. See Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-143, 10 L. Ed. 2d 248, 83 S. Ct. 1210 (1963).
Given the range of the Tipton opinion, there is no need for a full exegesis of the case law and regulatory framework. Rather, the Court shall address the arguments advanced by the Guaranty Agency and lender Defendants in opposition to the Tipton ruling and shall apply the Tipton standards to the District of Columbia law. First, the Guaranty Agency and lender Defendants contend that the HEA occupies the student loan field. According to these Defendants, Congress did not intend for Plaintiffs to resort to state law because Congress specifically addressed the potential for school misconduct by providing for administrative remedies. See HEAF Motion to Dismiss at 15-16. This claim is not convincing. Although the HEA did not provide Plaintiffs with a remedy to prosecute school wrongdoing as a matter of federal law, the HEA and its implementing regulations do not divest Plaintiffs of any contract-based defenses. See Tipton, supra, at 553-560. See generally 20 U.S.C. § 1077(a)(2)(A) (federal government can insure only those Stafford loans which are valid obligations "under the applicable law"). See also 34 C.F.R. § 682.206(d)(1) (1986) (lenders in the GSL program "shall obtain from the borrower an executed legally-enforceable promissory note for each loan"). Congress delineated which state contract laws would be preempted
and, by implication, suggested that the remaining contract defenses would lie. Finally, as Tipton, supra, at 553, pointed out, there is no indication that Congress meant to exclude from liability those lenders which had a close connection to a participating school, provided that the close connection is not purely a product of the HEA itself. In short, because Congress did not manifest any desire to deprive consumers of student loans of their traditional state-based contract remedies, Defendants cannot overcome the "presumption against finding pre-emption of state law in areas traditionally regulated by States." California v. ARC America Corp., 490 U.S. 93, 109 S. Ct. 1661, 1665, 104 L. Ed. 2d 86 (1989). See also Hillsborough County v. Automated Medical Laboratories, Inc., 471 U.S. 707, 716, 85 L. Ed. 2d 714, 105 S. Ct. 2371 (1985); Florida Lime & Avocado Growers, supra, 373 U.S. at 146 (regulation to prevent deception of consumers is within the power traditionally reserved to states).
The Guaranty Agency and lender Defendants also protest that the Tipton Court ignored the commercial realities of the GSL program. See HEAF Motion, supra, at 14. According to these Defendants, application of state law contract defenses "would convert student loans into an investment nightmare." Id. at 17. These claims are also not well-founded. Although the GSL program depends upon the infusion of capital from the private sector, the program is not designed to insulate wayward lenders and Guaranty Agencies from liability stemming from fraudulent activities or unfair business practices. Rather, as the Tipton Court explained, the HEA permits students to proceed under state law if the actions or omissions of the lender or Guaranty Agency would render recission of the underlying promissory note appropriate. See Tipton, supra, at 54-62. See Veal v. First American Sav. Bank, supra, 914 F.2d at 914-915, n.1 (dicta) ("If sued by a lender in state court for collection of one of these [GSL] loans, each of these plaintiff students would be entitled to assert any defenses available under state law that are applicable to his or her particular loan"). Allowing students to protect themselves from vendors who abuse the GSL program ...