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Salazar v. King

United States Court of Appeals, Second Circuit

May 12, 2016

ANA SALAZAR, MARILYN MERCADO, ANABERNARDEZ, JEANNETTE POOLE, LISA BRYANT, CHERRYLINE STEVENS, EDNA VILLATORO, on behalf of themselves and others similarly situated, Plaintiffs-Appellants,
JOHN B. KING, JR., in his official capacity as Secretary of the United States Department of Education, [*] Defendant-Appellee.

Argued: November 4, 2015

Plaintiffs-Appellants, former students of for-profit beauty schools operated by Wilfred American Educational Corporation ("Wilfred"), claim that Wilfred schools fraudulently certified their eligibility for federal student loans. Plaintiffs brought this class action on behalf of themselves and similarly situated Wilfred borrowers against the United States Department of Education ("DOE"), alleging that, despite regulations that require the DOE to temporarily suspend the collection of loans and notify borrowers of their discharge rights when a borrower "may be eligible for a discharge" because of a school's fraudulent certification of the student's eligibility to borrow, the DOE arbitrarily and capriciously refused to provide this relief to the putative class members. The district court granted the DOE's motion to dismiss, holding that the DOE's actions were unreviewable because they were committed to agency discretion by law, and were not final. The district court then denied the plaintiffs' motion for class certification as moot. Because we hold that there is sufficient law to apply and that the challenged decisions of the DOE were final, we VACATE the decision of the district court granting the defendant's motion to dismiss and denying plaintiffs' request for class certification as moot, and REMAND for proceedings consistent with this decision, including consideration of plaintiffs' class certification motion.

EILEEN CONNER (Beth E. Goldman, Jane Greengold Stvens, Danielle Tarantolo, Jason Glick, on the brief), New York Legal Assistance Group, New York, NY, for Plaintiffs-Appellants.

CHRISTINA S. POSCABLO (Ellen London, Emily E. Daughtry, on the brief), for Preet Bharara, United States Attorney for the Southern District of New York, New York, NY, for Defendant-Appellee.

Toby R. Merrill, Legal Services Center of Harvard Law School, Jamaica Plain, MA, for Amici Curiae East Bay Community Law Center, Legal Services Center of Harvard Law School, National Consumer Law Center, New Economy Project, in Support of Plaintiffs- Appellants.

Before: Hall and Lynch, Circuit Judges, and Rakoff, District Judge. [**]

GERARD E. LYNCH, Circuit Judge:

Plaintiffs-Appellants Ana Salazar, Marilyn Mercado, Ana Bernardez, Jeannette Poole, Lisa Bryant, Cherryline Stevens, and Edna Villatoro, ("plaintiffs") brought this class action against Defendant-Appellee Arne Duncan, in his official capacity as the Secretary of the United States Department of Education ("DOE").[1] Plaintiffs allege that federal student loans were fraudulently procured on their behalf when the Wilfred American Educational Corporation's ("Wilfred") for-profit beauty schools falsely certified that plaintiffs had an ability-to-benefit ("ATB") from the education they received from Wilfred. Plaintiffs allege that the DOE's refusal to temporarily suspend collection of the student loan debt of putative class members, and refusal to send them notice of their potential eligibility for a discharge, was arbitrary and capricious in violation of the Administrative Procedure Act ("APA"). The United States District Court for the Southern District of New York (Robert W. Sweet, Judge) granted the DOE's motion to dismiss, holding that plaintiffs had not adequately alleged a final agency action that may be subject to judicial review. Because the district court dismissed the complaint, it also denied plaintiffs' motion for class certification as moot.

As a preliminary matter, the DOE argues that the case has become moot because all the named plaintiffs' Wilfred loans have now been discharged. We have jurisdiction to review this case because the plaintiffs had standing when they filed their class action complaint and this case fits into the narrow exception to the mootness doctrine for class action claims that are "inherently transitory." Exercising our jurisdiction to review plaintiffs' APA challenge, we hold that plaintiffs are entitled to judicial review because there is sufficient law to apply to the challenged agency decisions. The text of the relevant statute directs that the DOE "shall" discharge a borrower's loan liability when a school has falsely certified a student's ATB. DOE's regulations and informal agency guidance direct that the DOE "shall" temporarily suspend collection on loans and notify borrowers of their possible eligibility for a discharge when the DOE has reliable information that a borrower "may be eligible" for dicharge. We therefore hold that plaintiffs' claims are judicially reviewable under the APA. Accordingly, we VACATE the judgment of the district court and REMAND the case for further proceedings consistent with this decision.


I. Statutory and Regulatory Structure of Student Loan Discharge

Title IV of the Higher Education Act of 1965 ("HEA"), 20 U.S.C. §§ 1070- 1099, provides the statutory authorization for federal student loans, including both Federal Family Education Loans ("FFEL"), id. § 1071 et seq., [2] and William D. Ford Federal Direct Loans ("Direct Loans"), id. § 1087a et seq. Under the FFEL program, private lenders issue subsidized student loans, which are then insured by guaranty agencies (a state or private non-profit organization), which, in turn, are insured by the DOE. Id. § 1078(b)–(c); 34 C.F.R. § 682.200 (defining guaranty agency). Under the Direct Loans program, the government lends money to students directly.

To qualify for federal educational financial assistance under either loan program, a student must attend an eligible institution and must have a high school diploma or recognized equivalent. If the student lacks a diploma, the institution must demonstrate the student has an ATB from the training that she would receive using the financial aid. 20 U.S.C. §§ 1091(a), (d). The particulars of how a school must demonstrate that the student has an ATB have changed over the years; however, a student generally must pass a standardized test. See 34 C.F.R. § 668.32(e); U.S. Dep't of Educ., GEN-95-42, Dear Colleague Letter, at 2 (Sept. 1995) ("DCL 95-42ʺ) (summarizing changes in ATB requirements between 1986 and 1995).

The ATB test, which between 1987 and 1991 was based on criteria developed by private accrediting agencies and could be administered and evaluated by the school itself, proved to be a target of fraud; some schools falsified results or never even gave prospective students the test. See U.S. Dep't of Educ., GEN-89-55, Dear Colleague Letter, at 4 (Dec. 1989). Although after 1991, the ATB tests had to be approved by the DOE and independently administered, and after 1992 the DOE specified a required score, fraudulent ATB testing continued unabated. See U.S. Dep't of Educ., GEN-91-20, Dear Colleague Letter, at 1-2 (June 1991); DCL 95-42 at 2; U.S. Gov't Accountability Office, GAO-09-600, Proprietary Schools: Stronger Department of Education Oversight Needed to Help Ensure Only Eligible Students Receive Federal Student Aid 22 (2009) ("Through separate investigations at proprietary schools, we, along with other federal and state investigative agencies, found test administrators or school officials violating rules to ensure prospective students without high school diplomas passed required tests and obtained access to Title IV aid.").

Similarly, the Senate Permanent Subcommittee on Investigations Report found that students were the victims of "unscrupulous and dishonest school operators" of private, for-profit trade and other vocational institutions that provide postsecondary education that "leav[e] them with huge debts and little or no education." Abuses in Federal Student Aid Programs, S. Rep. 102-58, at 10 (1991). The subcommittee also found that "a virtually complete breakdown in effective regulation and oversight had opened the door for fraud, abuse, and other serious problems at every level." S. Rep. 102-58, at 11.

In response to these findings of pervasive fraud in federal student loans and contentions of lack of adequate supervision by DOE, Congress passed a statute in 1992 directing that the Secretary of the United States DOE ("Secretary") "shall discharge the borrower's liability on the loan (including interest and collection fees) by repaying the amount owed on the loan" if the borrower received a federal student loan on or after January 1, 1986, and the "studentʹs eligibility to borrow under this part was falsely certified by the eligible institution." Pub. L. No. 102-325 § 437 (July 23, 1992), codified at 20 U.S.C. § 1087 (emphasis added). Additionally, the statute provides that a "borrower whose loan has been discharged pursuant to this subsection shall not be precluded from receiving additional grants, loans, or work assistance . . . for which the borrower would be otherwise eligible" and that the borrower must have her adverse credit history repaired. 20 U.S.C. § 1087(c)(4), (5).

To implement the statute, the Secretary issued two similar regulations, one to govern the FFEL program and one to govern the Direct Loans program. Both state that the Secretary "shall discharge the borrower's liability on [a] loan" made after 1986 when the "student's eligibility to borrow under this part was falsely certified." Id. § 1087(a)(1), (c)(1); see 34 C.F.R. § 682.402(e) (governing discharge of FFEL program loans due to false certification); 34 C.F.R. § 685.215 (governing discharge of federal Direct Loans due to false certification). These regulations include obligations to ensure that the congressional directive is fulfilled by the guaranty agencies that administer the FFEL program and by the DOE, which is the final insurer of the FFEL program and administers the Direct Loans program.

The regulation governing the FFEL program provides that

[i]f the guaranty agency receives information it believes to be reliable indicating that a borrower whose loan is held by the agency may be eligible for a discharge under paragraph (e) ["False certification by a school of a student's eligibility to borrow"] of this section, the agency shall immediately suspend any efforts to collect from the borrower on any loan received for the program of study for which the loan was made (but may continue to receive borrower payments), and inform the borrower of the procedures for requesting a discharge.

34 C.F.R. § 682.402(e)(6)(ii) (emphasis added). Although it speaks of "the guaranty agency, " that regulation also implicates the obligations of the DOE because, as our Court has recognized, "[i]t is the obligation of the Department of Education to see that [the role of guaranty agencies] is properly performed." McNamee, Lochner, Titus & Williams, P.C. v. Higher Educ. Assistance Found., 50 F.3d 120, 124 (2d Cir. 1995). The DOE accepts that the FFEL regulation also applies to the DOE for the purposes of this litigation.[3]

Another regulation speaks directly to the DOE's obligations under the Direct Loan program, stating:

If the Secretary determines that a borrower's Direct Loan may be eligible for a discharge under this section, the Secretary mails the borrower a disclosure application and an explanation of the qualifications and procedures for obtaining a discharge. The Secretary also promptly suspends any efforts to collect from the borrower on any affected loan. The Secretary may continue to receive borrower payments.

34 C.F.R. § 685.215(d)(1) (emphasis added). Although the language in the two regulations is slightly different, the DOE has acknowledged that the "FFEL and Direct Loan regulations on false certification discharges have the same rules with respect to a discharge based on an improper determination of the studentʹs ability-to-benefit." Federal Family Education Loan (FFEL) Program and William D. Ford Federal Direct Loan Program, 65 Fed. Reg. 46, 316, 46, 318 (proposed July 27, 2000) (to be codified at 34 C.F.R. pts. 682, 685).[4]

In addition to the statute and regulations, the DOE has issued Dear Colleague Letters ("DCLs") to provide additional guidance about discharges based on a school's fraudulent determination of a student's ATB. Two DCLs provide specific guidance concerning the evidence that guaranty agencies and the DOE should consider to determine whether a borrower's ATB was falsely certified and thus whether the loan should be discharged. DCL 95-42; U.S. Dep't of Educ., FP-07-09, Dear Colleague Letter (Sept. 2007) ("DCL 07-09ʺ).

The Secretary, as the head of the DOE, is required to try to collect federally guaranteed student loan debt. See 31 U.S.C. § 3711(a)(1). The Secretary is authorized to take a variety of actions in order to collect a debt, including charging interest, fees, and penalties; reporting debts to consumer reporting agencies; garnishing wages; and imposing "offsets." 34 C.F.R. §§ 30.1, 30.21, 30.33, 30.35, 34.1. Imposing an offset allows an administrative agency to withhold government funds otherwise due to an individual, such as social security payments or tax refunds, to pay an outstanding debt owed to the government. See, e.g., Lockhart v. United States, 546 U.S. 142, 143-44 (2005) (upholding the government's withholding of individual's social security payments to offset a debt owed on a federally reinsured student loan incurred between 1984-1989). The DOE's regulations require that when garnishing wages or imposing an offset the Secretary must provide written notice to the debtor with certain enumerated information. 34 C.F.R. §§ 30.22, 34.5. The regulations do not require this notice to include any information about the possibility of discharging debt that was incurred through fraudulent certification.

II. Factual Background[5]

Plaintiffs are former students of a (now-defunct) chain of for-profit beauty schools run by Wilfred. Each alleges that Wilfred fraudulently certified that she was eligible for federal student aid by falsely certifying that she had the ATB from a Wilfred program. All of their loans were initiated under the FFEL program; however, some borrowers later consolidated their FFEL loans under the Direct Loan program. Plaintiffs allege that the DOE knows that Wilfred fraudulently certified the eligibility of a large percentage of borrowers, but has failed to notify plaintiffs that they may be eligible for relief and has continued to collect on their loans. Plaintiffs brought this action on behalf of themselves and a proposed class consisting of "many thousands of individuals" whose eligibility for federal student loans was falsely certified by the Wilfred schools beginning in 1986. JA 20 ¶ 48.

Wilfred began as a small chain of schools offering vocational training in beauty-related professions. By the late 1980s, it had expanded to a nationwide chain of 58 campuses, with over 11, 000 students enrolled annually. Between 1980 and 1989, Wilfred received $405 million in federal student aid, which accounted for between 80 and 90 percent of Wilfred's revenue. According to the DOE, at least 61, 300 FFEL program loans were issued to Wilfred students between 1986 and 1994. Plaintiffs allege that "Wilfred targeted and recruited immigrants and economically disadvantaged individuals for enrollment in its schools." JA 22 ¶ 63.

The facts alleged by the named plaintiffs include examples of the fraud that plaintiffs allege is common to the class. According to the complaint, not one of the named plaintiffs was ever asked if she had a high school diploma or its equivalent. Further, no named plaintiff was given a test to determine if she had the "ability to benefit" from the Wilfred program, as required in lieu of a high school diploma. Several plaintiffs allege that the Wilfred campus they attended was closed without advance notice, making it impossible for them to complete the program.

Each named plaintiff has a student loan that was paid directly to Wilfred. Each had her federal income tax refund seized to pay the debt on her student loan at the direction of the DOE, and at least one also had her wages garnished at the direction of the DOE. At the time the lawsuit was filed, all named plaintiffs continued to be burdened with the responsibility for their loans and to suffer consequences of that indebtedness. Many allege that the Wilfred student debt ruined their credit scores, making it impossible for them to obtain credit to pay for basic necessities. Outstanding Wilfred debt has also made plaintiffs unable to access educational opportunities decades after they were the victims of fraud.

A. The Named Plaintiffs

Plaintiff Ana Salazar alleges that she was recruited to attend Wilfred in late 1988. She did not have a high school diploma or its equivalent and was not given an ATB test. Salazar did not speak English, but was told she qualified and was given forms to sign in English. The Wilfred school she attended closed without warning, and she was unable to finish the program. She made payments toward her Wilfred debt for thirteen years, pursuant to a payment plan arranged with collectors of the debt. The IRS seized her federal income tax refund approximately five times at the direction of the DOE. Salazar never received any communication from the DOE informing her ...

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