Blanchett v. DeVos, Civil Action No.: 19-1775 (RC)

490 F.Supp.3d 26

Tamara BLANCHETT, Plaintiff,

v.Elisabeth DEVOS, in her official capacity as U.S. Secretary of Education, et al., Defendants.

Civil Action No.: 19-1775 (RC)

United States District Court, District of Columbia.

Signed September 22, 2020

Alexander S. Elson, Eric Rothschild, Robyn K. Bitner, National Student Legal Defense Network, Washington, DC, for Plaintiff.

Karen Bloom, U.S. Department of Justice, Washington, DC, R. Charlie Merritt, U.S. Department of Justice, Richmond, VA, for Defendants.

MEMORANDUM OPINION

GRANTING DEFENDANTS’ MOTION TO DISMISS

RUDOLPH CONTRERAS, United States District Judge

I. INTRODUCTION

As alleged in the complaint, Plaintiff Tamara Blanchett took out federal student loans to finance her education at the Minnesota School of Business ("MSB"). MSB staff told her that if she completed an associate degree in criminal justice, she would be able to work as a probation officer in Minnesota and that her credits would easily transfer to other institutions. These representations were not true. With thousands of dollars in student debt, Plaintiff eventually found herself unable to keep up with her monthly payments and she defaulted. Defendants, the Secretary of Education ("Secretary") and the Department of Education ("Education"), sought to collect on Plaintiff's debt by referring it to the Department of Treasury's ("Treasury") Treasury Offset Program ("TOP"), which allows federal agencies to collect past-due, legally enforceable debts through tax refund offsets. Plaintiff filed this lawsuit alleging that Defendants’ actions violate the Administrative Procedure Act ("APA") and her rights to due process. She claims that Defendants knew about the fraudulent activities of MSB and failed to consider them before certifying that her debt was legally enforceable. She also claims that Defendants should have provided notice of her right to challenge collection efforts based on the fraudulent actions of MSB. Defendants have moved to dismiss and argue that Plaintiff fails to state a claim. For the reasons set forth below, the Court grants Defendants’ motion but will allow Plaintiff to amend her complaint.

II. BACKGROUND

A. Statutory and Regulatory Framework

When a person defaults on a loan owed to a federal agency, one way that federal law allows the agency to collect on that debt is through tax refund offsets. 31 U.S.C. § 3720A(a). Debt collection through tax refund offsets is managed by Treasury through TOP. See 31 C.F.R. § 285.5. Prior to collection of a debt through TOP, the agency to which the debt is owed must, inter alia , notify the person of its intent to seek collection through a tax refund offset, provide at least sixty days to present evidence "that all or part of such debt is not past-due or not legally enforceable," and "consider[ ] any evidence presented by such person and determine[ ] that an amount of such debt is past due and legally enforceable." 31 U.S.C. § 3720A(b). Treasury's regulations require that the agency certify that "[t]he debt is past-due and legally enforceable in the amount submitted" when it refers a debt to TOP. 31 C.F.R. § 285.2(d). Treasury defines "legally enforceable" for purposes of TOP in the following manner:

Legally enforceable refers to a characteristic of a debt and means there has been a final agency determination that the debt, in the amount stated, is due, and there are no legal bars to collection by offset. Debts that are not legally enforceable for purposes of this section include, but are not limited to, debts subject to the automatic stay in bankruptcy proceedings or debts covered by a statute that prohibits collection of such debt by offset. For example, if a delinquent debt is the subject of a pending administrative review process required by statute or regulation, and if collection action during the review process is prohibited, the debt is not considered legally enforceable for purposes of this section.

Nothing in this section is intended to define whether a debt is legally enforceable for purposes other than offset under this section.

31 C.F.R. § 285.5(b). The agency must recertify the debt at least annually as legally enforceable. Id. § 285.5(d). Treasury's regulations do not specify what particular actions are required prior to an agency certifying a debt as legally enforceable.

Education also has regulations that govern collection of student loan debt through TOP. See 34 C.F.R. §§ 30.24, 30.33. These regulations require the Secretary to give a debtor sixty-five days from the date notice is provided to the debtor of the Secretary's intent to use TOP to request a review of the existence, amount, enforceability, or past-due status of the debt. 34 C.F.R. § 30.33. A request for review must include "the debtor's Social Security number" and "[a]n explanation of the reasons the debtor believes that the notice" provided is inaccurate. 34 C.F.R. § 30.24. Relatedly, federal law requires that the Secretary "specify in regulations which acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of a loan." 20 U.S.C. § 1087e(h). In fulfilment of this duty, a separate portion of Education's regulations allows borrowers¹ to assert a "borrower defense" to repayment based on "any act or omission of the school attended by the student that relates to the making of the loan for enrollment at the school ... that would give rise to a cause of action against the school under applicable State law." 34 C.F.R. § 685.206(c)(1). A borrower defense may be asserted both as "[a] defense to repayment" and as "[a] claim to recover amounts previously collected." Id. The Secretary has promulgated regulations that specify how a borrower may assert borrower defenses, including how such defenses can be asserted and considered as a group. See id. § 685.222.

B. Factual Background and Procedural History

For the purposes of considering Defendants’ motion to dismiss, the Court accepts as true the factual allegations in Plaintiff's complaint, which she filed on June 18, 2019. See Compl., ECF No. 1.²

Plaintiff attended MSB from approximately January 2009 until May 2011. Id. ¶ 62. To finance her education, she borrowed $23,500 in federal student loans. Id. ¶ 63. Plaintiff attended MSB to pursue a degree in criminal justice because she wanted to become a probation officer. Id. ¶¶ 64–66. An MSB representative had assured her "that upon graduation from the two-year program she could begin her career as a probation officer." Id. ¶ 66 (internal quotations omitted). After explaining to the representative that she wanted to transfer to another school at some point, she was falsely told that transferring credits would not be a problem. Id. ¶ 67. Plaintiff has not completed her degree. Id. ¶ 68. After she was forced to suspend her studies due to her life circumstances, she resumed working as a waitress and bartender. Id. ¶¶ 68–69. During this time, she struggled financially and eventually defaulted on her student loans. Id. ¶¶ 69–70.

In 2016, the Minnesota Attorney General secured a judgment against MSB and an affiliated school for violation of state consumer fraud and deceptive trade practices laws. Id. ¶ 51; see also State v. Minnesota Sch. of Bus., Inc. (MSB) , No. 27-CV-14-12558, 2016 WL 9709976 (Minn. Dist. Ct. Sep. 08, 2016). The court's findings related specifically to MSB's criminal justice program and the unfounded representation that an associate degree would be sufficient to secure a job as a probation officer. Compl. ¶ 52; MSB , 2016 WL 9709976, at *49. The court also made findings of fact about specific MSB students, including Plaintiff. Compl. ¶ 53; MSB , 2016 WL 9709976, at *36–37 (factual findings about Plaintiff).

In December 2016, the Minnesota Attorney General sent a copy of the state court findings and judgment to Education. Compl. ¶ 54. Education relied on the state court decision when it denied recertification for MSB to participate in federal student aid programs under Title IV. Id. ¶¶ 55–61. Education "explicitly incorporated in its recertification denials the Minnesota District Court's factual findings about MSB's ... misrepresentations to specific students who testified or submitted sworn affidavits, including [Plaintiff]." Id. ¶ 61.

Although Education had knowledge of these findings, the Secretary certified Plaintiff's debt as "legally enforceable" and referred the loans for collection to TOP. Id. ¶ 71. Plaintiff alleges that, while she did receive notice of the Secretary's intent to use TOP, she was "unable to hire legal counsel to help her interpret the notice" of proposed tax refund offset. Id. ¶ 72. The notice, however, "did not specifically alert [Plaintiff] to the fact that she could dispute the proposed offset by raising a defense against repayment." Id. ¶ 71. She alleges that "TOP seized at least $1,906 of [her] 2017 state tax refund." Id. ¶ 74. Although Plaintiff has since "successfully rehabilitated her defaulted student loans," id. ¶ 76, she claims that her limited financial resources make it possible she will default again and that "she will not be able to get out of default through loan rehabilitation a second time," id. ¶ 77. As of January 2019, she has $29,418 in outstanding student loan debt. Id. ¶ 78.

Plaintiff's complaint raised one cause of action under the APA and another under the Due Process Clause of the Fifth Amendment. With respect to the APA claim, Plaintiff argues that "[i]n light of [Education's] actual knowledge of MSB's ... illegal misconduct ... Secretary DeVos’[s] and [Education's] final agency determination that [Plaintiff's] ... student loan debt was legally enforceable is arbitrary and capricious." Id. ¶ 91. Plaintiff's due process claim alleges that Education failed to provide notice about "the possibility of challenging the offset by asserting a defense to repayment." Id. ¶ 96. Furthermore, Plaintiff alleges the notice should have explained that MSB's misconduct rendered her debt not legally...