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Wednesday, August 19, 2015

Ind. Decisions - 7th Circuit decided another Indiana case yesterday, a reversal, re guaranteed federal student aid loan

Bryana Bible v. United Student Aid Funds, Inc. (SD Ind., Pratt), is an 82-page opinion, with a majority opinion by Judge Hamilton, a concurring opinion by Judge Flaum, and a concur/dissent by Judge Manion. J. Hamilton:

Plaintiff Bryana Bible obtained a student loan under the Federal Family Education Loan Program. She defaulted in 2012 but promptly agreed to enter into a rehabilitation agreement that required her to make a series of reduced monthly payments. She timely made all of the payments that were required of her under this agreement, and she remains current on her loan payments. Although Bible complied with her obligations under the repayment agreement, a guaranty agency assessed over $4,500 in collection costs against her.

The terms of Bible’s loan were governed by a form document known as a Federal Stafford Loan Master Promissory Note (MPN). This form has been approved by the U.S. Department of Education and is used in connection with many student loans across the country. The MPN incorporates the Higher Education Act and its associated regulations. In pertinent part, the MPN provides that Bible must pay “reasonable collection fees and costs, plus court costs and attorney fees” if she defaults on her loan. As we will see, “reasonable collection fees and costs” are defined by regulations issued by the Secretary of Education under the authority expressly conferred by the Higher Education Act. The MPN provided that Bible would owe only those collection costs that are permitted by the Higher Education Act and its regulations.

Bible sued the guaranty agency (defendant United Student Aid Funds, Inc.) alleging breach of contract and a violation of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et seq. Her breach of contract theory is that the MPN incorporated federal regulations that prohibit the guaranty agency from assessing collection costs against her because she timely entered into an alternative repayment agreement and complied with that agreement. Her RICO claim alleges that the guaranty agency, in association with a debt collector and a loan service provider, committed mail fraud in violation of 18 U.S.C. § 1341 and wire fraud in violation of 18 U.S.C. § 1343 when it assessed collection costs of more than $4,500 against her despite its representations that her “current collection cost balance” and “current other charges” were zero and that these costs would be “reduced” once she completed the rehabilitation process.

The district court granted the guaranty agency’s motion to dismiss Bible’s first amended class action complaint (we call this the “amended complaint”) under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim for relief. The district court held that both claims were “preempted” by the Higher Education Act. It reasoned that both claims depend on alleged violations of the Act and should not be permitted because the Act does not provide a private right of action. The district court held in the alternative that the amended complaint failed to state a claim that is plausible on its face. It concluded that the breach of contract claim failed because both the MPN and the Higher Education Act expressly permit imposing collection costs against borrowers who default on their loans. The district court also concluded that the RICO claim failed because Bible’s amended complaint “has not shown participation in a scheme to defraud; commission of an act with intent to defraud; or the use of mails or interstate wires in furtherance of a fraudulent scheme.” Bible v. United Student Aid Funds, Inc., No. 1:13-CV- 00575-TWP-TAB, 2014 WL 1048807, at *10 (S.D. Ind. Mar. 14, 2014).

We reverse. Neither of Bible’s claims is preempted by the Higher Education Act. Bible’s state law breach of contract claim is not preempted because it does not conflict with federal law. The contract at issue simply incorporates applicable federal regulations as the standard for compliance. Accordingly, the duty imposed by the state law is precisely congruent with the federal requirements. A state law claim that does not seek to vary the requirements of federal law does not conflict with federal law.

We apply the Secretary of the Education’s interpretation of the applicable statutes and regulations, which is consistent with Bible’s. (The Secretary accepted our invitation to file an amicus brief addressing the question.) The Secretary interprets the regulations to provide that a guaranty agency may not impose collection costs on a borrower who is in default for the first time but who has timely entered into and complied with an alternative repayment agreement. Nor is Bible’s RICO claim preempted. RICO is a federal statute and thus is not preempted by another federal statute, and we see no conflict between RICO and the Higher Education Act. On the merits, both the breach of contract and RICO claims satisfy the plausibility standard under Rule 12(b)(6). * * *

Neither of Bible’s claims is preempted or otherwise displaced by federal law, and she has plausibly alleged all of the elements of both claims. The judgment of the district court is REVERSED and the case is REMANDED for further proceedings.

[p.50] J. Flaum, concurring in part and concurring in the judgment.

I join in full Judge Hamilton’s analysis of USA Funds’ preemption argument and Bible’s RICO claim. With respect to Bible’s breach of contract claim, I agree with the portion of the analysis that defers to the Secretary of Education’s interpretation of the statute and corresponding regulations. However, I am unable to join subsection II.A.1.b.i of Judge Hamilton’s opinion, which offers an alternative ground for holding that USA Funds was prohibited from assessing collection costs against Bible—that is, that the text of the regulations unambiguously supports Bible’s interpretation of the statutory and regulatory scheme. Instead, I find the regulatory landscape sufficiently complex to merit deference to the agency’s reasonable interpretation. * * *

[p.55] J. Manion, concurring in part and dissenting in part.

I agree with the court’s conclusion that Bible’s claims are not preempted, but I disagree that she pleaded a valid breach of contract or RICO claim. As a matter of law, United Student Aid Funds, Inc., did not breach the Master Promissory Note (MPN) and did not commit the fraud upon which Bible’s RICO claim is predicated. Bible’s entire theory is erected atop an erroneous equivocation, that the loan rehabilitation agreement of 34 C.F.R. § 682.405 is the same as the repayment agreement of § 682.410. I say Bible’s theory because it truly is her own contrivance. There is no evidence to suggest that the Department of Education ever interpreted the regulations in the manner advanced by Bible prior to our request for an amicus brief in this case. In fact, the record reflects that the Department agreed with USA Funds’ interpretation and had no cause to question USA Funds’ regulatory compliance, that is, until the Department filed its amicus brief. Applying the Department’s post hoc rule to USA Funds is both wrong and unjust. The fraud is on the guarantors and, because the Department ultimately guarantees the loans, on the taxpayer. For this and for the detailed reasons that follow, I respectfully dissent.

Posted by Marcia Oddi on August 19, 2015 09:52 AM
Posted to Ind. (7th Cir.) Decisions