Career Colls. & Sch. of Tex. v. U.S. Dep't of Educ.

681 F.Supp.3d 647

CAREER COLLEGES & SCHOOLS OF TEXAS, Plaintiff, v. UNITED STATES DEPARTMENT OF EDUCATION,and Miguel Cardona, in his official capacity as the Secretary of Education, Defendants.

1:23-cv-433-RP

United States District Court, W.D. Texas, Austin Division

Signed June 30, 2023

Allyson B. Baker, Meredith L. Boylan, Pro Hac Vice, Sameer P. Sheikh, Stephen Blake Kinnaird, Tor Tarantola, Pro Hac Vice, Michael Murray, Paul Hastings LLP, Washington, DC, Philip Avery Vickers, Katherine R. Hancock, Cantey Hanger LLP, Fort Worth, TX, for Plaintiff.

Cody T. Knapp, Christine L. Coogle, Robert Charles Merritt, U.S. Department of Justice, Federal Programs Branch, Civil Division, Washington, DC, for Defendants.

ORDER

ROBERT PITMAN, UNITED STATES DISTRICT JUDGE

Before the Court is Plaintiff Career Colleges & Schools of Texas's ("CCST" or "Plaintiff") motion for preliminary injunction, (the "Motion"). (Dkt. 23). Defendants United States Department of Education ("DOE") and Secretary Miguel Cardona (collectively "Defendants") filed a response, (Dkt. 56), Plaintiff filed a reply, (Dkt. 64), and the Court held an evidentiary hearing on the motion on May 31, 2023. Having considered the briefing, the arguments made at the hearing, the evidence, and the relevant law, the Court will deny the motion.

I. BACKGROUND

A. Parties

CCST is a trade association a trade association dedicated to the interests of for-profit colleges and similar post-secondary institutions in Texas. (See England Decl., Dkt. 25, at 25). Its membership is comprised of more than 70 schools located throughout Texas. (Id.) Like many other public and nonprofit schools, the majority of CCST's members participate in Title IV programs under the Higher Education Act of 1965 ("HEA"), which allows their enrolled students to pay for tuition using federal student loans. (Id. at 27). The U.S. Department of Education ("DOE") is an executive agency of the United States government, 5 U.S.C. §§ 101, 105, subject to the Administrative Procedure Act ("APA"), id. § 551(1). Defendant Miguel Cardona is the current Secretary of Education and is responsible for DOE's promulgation and administration of the challenged regulations. He is sued in his official capacity only.

B. Statutory & Regulatory Background

DOE distributes federal student loans via Title IV of the HEA. Most funding is disbursed through the William D. Ford Federal "Direct Loan Program," in which DOE issues federal loans directly to eligible students who attend institutions of higher education that participate in Title IV. 20 U.S.C. § 1087a. In 1993, Congress amended the HEA by adding a provision that enables students who have been the victims of certain types of institutional misconduct to have their federal student loans forgiven. Specifically, Section 455(h) of the HEA provides:

Notwithstanding any other provision of State or Federal law, the Secretary shall 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 made under this part, except that in no event may a borrower recover from the Secretary, in any action arising from or relating to a loan made under this part, an amount in excess of the amount such borrower has repaid on such loan.

20 U.S.C. § 1087e(h). In a separate provision, the HEA also requires the Department to "discharge [a] borrower's liability on [a] loan" where that borrower "is unable to complete the program in which such student is enrolled due to the closure of the institution." Id. § 1087(c) (the "Closed-School Discharge").

Over the next 30 years, DOE published four different iterations of regulations governing borrower defense to repayment ("BDR"). The first BDR rule was published in 1994. See 59 Fed. Reg. at 61,664 (Dec. 1, 1994). The 1994 rule allowed borrowers to "assert as a defense against repayment . . . any act or omission of the school attended by the student that would give rise to a cause of action against the school under applicable State law," but did not specify a process by which a student could assert a borrower defense claim. The rule also provided a non-exhaustive list of proceedings in which the borrower could assert a defense, id., and created a "system for adjudicating claims by borrowers that have a defense against repayment of a loan based on the acts or omissions of the school," id. at 61,671. The 1994 rule left to the Secretary's discretion the relief to be afforded to successful borrower defense applicants. See id. at 61,696.

For the next 20 years, DOE received few requests for discharges under the BDR. See 81 Fed. Reg. at 75,926 (Nov. 1, 2016). However, in 2015 the number of BDR applications increased significantly following the collapse of a large network of proprietary schools owned by Corinthian Colleges, Inc. See id. In response to this influx of claims, DOE commenced a negotiated rulemaking process to update its BDR regulations and published a final rulemaking on November 1, 2016. See id. Among other changes, the 2016 rule adopted a federal standard for actionable misstatements, permitting borrowers to obtain debt relief upon showing that their school made a "substantial misrepresentation," defined as (1) intentional falsehoods and (2) statements that have "the likelihood or tendency to mislead under the circumstances," including statements that omit information in a "false, erroneous, or misleading" way. 34 C.F.R. §§ 668.71(c), 668.222(d) (2016). The 2016 rule also allowed DOE to begin adjudicating factually similar BDR claims together on a groupwide basis. Id. §§ 685.206(c)(2), 685.222(e) (2016).

Following a change in presidential administrations, DOE again amended its BDR regulations, publishing a new final rulemaking on September 23, 2019. See 84 Fed. Reg. at 49,788 (Sept. 23, 2019). Among other changes, the 2019 rule narrowed the 2016 rule's definition of actionable "misrepresentations" to require evidence of an institution's intent to mislead or its reckless regard of the truth. It also restricted actionable misrepresentations to those made in writing, and it required borrowers to prove financial harm other than their student loan debt. See 34 C.F.R. § 685.206(e)(3), (e)(4) (2019). The 2019 rule also abolished the group claim process and required that DOE consider each borrower claim independently. See 84 Fed. Reg. at 49,799.

C. The 2022 Final Rule

DOE initiated the latest BDR rulemaking in 2021. See 86 Fed. Reg. 28,299 (May 26, 2021). After engaging in a negotiated rulemaking process, the Department published a notice of proposed rulemaking (NPRM) in July 2022 proposing "several significant improvements to existing programs authorized under the [HEA] that grant discharges to borrowers who meet specific eligibility conditions." 87 Fed. Reg. at 41,879. After a public comment period, DOE issued its final rule, updating regulations governing borrower defense and closed school discharges, along with a number of other provisions affecting a broad swath of statutory programs. See 87 Fed. Reg. 65,904 (Nov. 1, 2022) (the "Rule").

According to CCST, the new Rule "upends critical regulations governing borrower defenses" and "greatly broadens the substantive grounds for relief to borrowers (and liability for schools)" by imposing borrower-friendly standards, new adjudicatory schemes, and prejudicial evidentiary presumptions. (Complaint, Dkt. 1, at 2). CCST claims the Rule is designed "to accomplish massive loan forgiveness for borrowers and to reallocate the correspondingly massive financial liability to institutions of higher education." (Id.). The Complaint discusses various aspects of the Rule, but the specific provisions challenged in CCST's motion can be grouped into the following categories.

1. Borrower Defenses to Repayment

The Rule amends the substantive grounds for borrower relief by recognizing five types of "acts" or "omissions" by an institution that can give rise to a BDR claim: (1) a substantial misrepresentation; (2) a substantial omission of fact; (3) breach of contract; (4) "aggressive or deceptive" recruitment tactics; or (5) a state or federal judgment or final Department action against an institution that could give rise to a borrower defense claim. See 34 C.F.R. § 685.401(b)(1)-(5) (2022). A misrepresentation is deemed "substantial" if a borrower reasonably relied upon it or "could reasonably be expected to rely" upon it to his or her detriment. 34 C.F.R. § 668.71. Because a misrepresentation need not be intentional, knowing, or negligent, 87 Fed. Reg. at 65,921, and any "absence of material information" is actionable, CCST contends the Rule effectively imposes "strict liability" on schools for even erroneous or non-material representations or omissions. (Compl, Dkt. 1, at 24-25).

2. Borrower Claim Adjudication

The Rule establishes new adjudicative procedures by which DOE receives and adjudicates borrowers' BDR claims. While institutions do not participate in the BDR claim adjudication process, DOE must give institutions notice of any claims against them, and the Rule provides a 90-day window for the school to respond by submitting relevant materials relating to the claim. 34 C.F.R. § 685.405. Moreover, during the initial BDR claim adjudication, the institution cannot engage in discovery or otherwise test evidence submitted by the borrower. 34 C.F.R. §§ 685.405, 685.406(b), (c). The Rule also reinstates a procedure for the groupwide adjudication of BDR claims. Id. §§ 685.402, 685.403. For group claims, the Rule creates a "rebuttable presumption that the act or omission giving rise to [the claim] affected each member of the group in deciding to attend, or continue attending, the institution, and that such reliance was reasonable." Id. § 685.406(b)(2). Similarly, for "Closed-School" claims, the Rule creates a presumption "that the detriment suffered warrants relief." Id. § 685.401(e). The Rule does not prescribe a limitation period for BDR claims; they may be filed...