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

98 F.4th 220

CAREER COLLEGES AND SCHOOLS OF TEXAS, Plaintiff-Appellant, v. UNITED STATES DEPARTMENT OF EDUCATION; Miguel Cardona, Secretary, U.S. Department of Education, in his official capacity as the Secretary of Education, Defendants-Appellees.

No. 23-50491

United States Court of Appeals, Fifth Circuit

FILED April 4, 2024

Appeal from the United States District Court for the Western District of Texas, USDC No. 1:23-CV-433, Robert L. Pitman, U.S. District Judge

Stephen Blake Kinnaird (argued), Allyson B. Baker, Michael F. Murray, Sameer P. Sheikh, Tor Tarantola, Attorney, Paul Hastings, L.L.P., Washington, DC, Katherine Hancock, Philip Avery Vickers, Cantey Hanger, L.L.P., Fort Worth, TX, for Plaintiff-Appellant.

Jennifer Utrecht (argued), Cody T. Knapp, Joshua Marc Salzman, U.S. Department of Justice, Civil Division, Washington, DC, for Defendants-Appellees.

Adam R. Pulver, Esq., Public Citizen Litigation Group, Washington, DC, for Amici Curiae Public Citizen, Project on Predatory Student Lending.

David Kravitz, Office of the Attorney General for the State of Massachusetts, Boston, MA, for Amici Curiae State of Massachusetts, State of California, State of Colorado, State of Connecticut, State of Delaware, District of Columbia, State of Hawaii, State of Illinois, State of Maine, State of Maryland, State of Minnesota, State of Nevada, New Jersey, State of New Mexico, State of New York, State of North Carolina, State of Oregon, State of Pennsylvania, State of Rhode Island, State of Vermont, State of Washington, State of Wisconsin.

Before Jones, Duncan, and Wilson, Circuit Judges.

Edith H. Jones, Circuit Judge:

An association of Texas career colleges and schools challenges the Department of Education's new regulations that will significantly facilitate certain student loan discharges while creating uncertainty, complexity and potentially huge liability for the association's members. The Rule overturns recent regulations issued by the previous Administration and upends thirty years of regulatory practice. The district court declined to issue a preliminary injunction against the Rule solely on the basis that the plaintiffs had not shown irreparable harm. Not only do we disagree with that finding, but we assess a strong likelihood that the plaintiffs will succeed on the merits in demonstrating the Rule's numerous statutory and regulatory shortcomings.¹ Therefore, we REVERSE the district court's order denying a preliminary injunction and REMAND with instructions to enjoin and postpone the effective date of the challenged provisions pending final judgment. Our stay pending appeal remains in effect until the district court imposes a preliminary injunction consistent herewith.

I. BACKGROUND

A. The 2022 Rule

On November 1, 2022, the Department promulgated a final rule that revamped various aspects of the federal student loan program, including provisions governing student loan discharges based on the acts, omissions, or closures of higher education institutions. See Institutional Eligibility Under the Higher Education Act of 1965, 87 Fed. Reg. 65,904 (Nov. 1., 2022) (final rule) ("Rule"). Appellant Career Colleges and Schools of Texas ("CCST"), an association of private postsecondary career schools in Texas, sued the Department and Secretary Miguel Cardona, challenging various provisions of the rule, including those relating to borrower defenses against repayment and closed school loan discharges.

1. Borrower-Defense Provision

Under the borrower-defense provision of the Rule, student loan borrowers can apply to the Department for a full discharge of their student debt² when they meet certain criteria. Borrowers with a balance due on their loans are eligible for full discharge if the Department concludes "by a preponderance of the evidence that the institution committed an actionable act or omission and, as a result, the borrower suffered detriment of a nature and degree warranting" full discharge. 34 C.F.R. § 685.401(b).

The Rule identifies various categories of "actionable act[s] or omission[s]" that give rise to borrower discharge claims:

• A school's "substantial misrepresentation ... that misled the borrower in connection with the borrower's decision to attend, or to continue attending, the institution or the borrower's decision to take out a covered loan," or a "substantial omission of fact" by the school that had the same misleading effect on the borrower and was also connected "with the student's decision to attend or continue attending the school, or to take out a covered loan." 34 C.F.R. § 685.401(b)(1-2).³

• A school's "fail[ure] to perform its obligations under the terms of a contract with the student [if] such obligation was undertaken as consideration or in exchange for the borrower's decision to attend, or to continue attending, the institution, for the borrower's decision to take out a covered loan, or for funds disbursed in connection with a covered loan." Id. § 685.401(b)(3).

• A school's "engage[ment] in aggressive or deceptive recruitment conduct or tactics as defined in [34 C.F.R. §§ 668.500, .501] in connection with the borrower's decision to attend, or continue attending, the institution or the borrower's decision to take out a covered loan." Id. § 685.401(b)(4).

• A governmental agency's or the borrower's (as an individual or a member of a class) obtainment of a favorable judgment against the school on a state or federal law claim for an act or omission related to the borrower's loan or the educational services for which it was disbursed. Id. § 685.401(b)(5)(i).

• The Department's denial of the school's Title IV recertification or revocation of the school's program participation agreement due to "acts or omissions that could give rise to a borrower defense claim," for misrepresentation, omission, aggressive and deceptive recruitment tactics, or breach of contract. Id. § 685.401(b)(5)(ii).

If a borrower's discharge claim is successful in the administrative adjudication process established by the Rule (a process discussed at further length below), then the Department can seek recoupment from the school of the full amount discharged. Id. § 668.125, 685.409. In these proceedings, the school bears the burden of proof "to demonstrate that the decision to discharge the loans was incorrect or inconsistent with law and that the institution is not liable for the loan amounts discharged or reimbursed." Id. § 668.125(e)(2). Further, the only evidence parties may submit during recoupment proceedings consists of:

(i) Materials submitted to the Department during the process of adjudicating claims by borrowers relating to alleged acts or omissions of the institution, including materials submitted by the borrowers, the institution or any third parties;

(ii) Any material on which the Department relied in adjudicating claims by borrowers relating to alleged acts or omissions of the institution and provided by the Department to the institution; and

(iii) The institution may submit any other relevant documentary evidence that relates to the bases cited by the Department in approving the borrower defense claims and pursuing recoupment from the institution.

Id. § 668.125(e).

The Rule also establishes an adjudication process for addressing borrower discharge claims, which can be brought by borrowers individually or as members of a group. Id. § 685.402-403. Under the group claims process, the 2022 Rule establishes "a rebuttable presumption that the act or omission giving rise to the borrower defense 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) (emphasis added). Thus, the Rule presumes damages. Schools are not provided with any discovery or cross-examination rights in either the borrower-defense or recoupment stage of the adjudication proceedings established by the Rule despite the fact that a successful borrower discharge claim would give rise to a presumption of liability against the schools in subsequent recoupment proceedings. Id. §§ 668.125(e)(2), 685.405,.406(b)-(c). Nor is there any requirement in the Rule that the Department official(s) in charge of the borrower defense or recoupment adjudication proceedings have any legal training. See id. § 685.401(a) (defining "Department official").

2. Closed School Provision

The Rule also ushers in multiple changes to the closed-school discharge provision of existing regulations, under which the Department will either cancel a Direct Loan or pay a federally insured loan on a borrower's behalf if the student was unable to complete his or her course of study due to a school's shutdown. See id. §§ 685.214 (Direct Loan), 674.33(g) (Federal Perkins Loan), 682.402(d) (Federal Family Education Loan ("FFEL")).

First, the new closed-school discharge provision redefines a location's "closure date":

[T]he school's closure date is the earlier of: the date, determined by the Secretary, that the school ceased to provide educational instruction in programs in which most students at the school were enrolled, or a date determined by the Secretary that reflects when the school ceased to provide educational instruction for all of its students[.]

Id. § 685.214(a)(2)(i) (emphasis added).

Second, the Rule's new closed-school discharge provision substantially enlarges the scope of automatic discharges by expanding the types of borrowers who would be eligible for a closed school discharge without applying to the Department for such relief. Under the 2022 Rule, borrowers are eligible for an automatic discharge one year after either (1) the newly defined closure date if the student did not complete a program at another branch or location of the school or through a teach-out agreement at another school with the same accreditation and state authorization, or (2) the student's last date of attendance at that continuation program if he failed to complete the program for any reason. Id. §...