Sweet v. Cardona

641 F.Supp.3d 814

Theresa SWEET, et al., Plaintiffs, v. Miguel CARDONA, et al., Defendants.

No. C 19-03674 WHA

United States District Court, N.D. California

Signed November 16, 2022

Joseph E. Jaramillo, Housing and Economic Rights Advocates, Oakland, CA, Margaret E. O'Grady, Pro Hac Vice, Legal Services Center of Harvard Law School, Boston, MA, Rebecca Clare Eisenbrey, Pro Hac Vice, Rebecca C. Ellis, Pro Hac Vice, Eileen Mathews Connor, Project on Predatory Student Lending, Inc., Jamaica Plain, MA, for Plaintiff Theresa Sweet.

Joseph E. Jaramillo, Housing and Economic Rights Advocates, Oakland, CA, Rebecca Clare Eisenbrey, Pro Hac Vice, Rebecca C. Ellis, Pro Hac Vice, Eileen Mathews Connor, Project on Predatory Student Lending, Inc., Jamaica Plain, MA, for Plaintiffs Chenelle Archibald, Daniel Deegan, Samuel Hood, Tresa Apodaca, Alicia Davis, Jessica Jacobson.

R. Charlie Merritt, United States Department of Justice, Civil Division, Chicago, IL, Stuart Justin Robinson, U.S. Department of Justice, Civil Division, San Francisco, CA, for Defendants Miguel Cardona, U.S. Department of Education.

Piper A. Waldron, McGuireWoods LLP, Los Angeles, CA, John S. Moran, Pro Hac Vice, McGuireWoods LLP, Washington, DC, for Defendant American National University.

Alexander Akerman, Alston & Bird LLP, Los Angeles, CA, Tania L. Rice, Alston & Bird LLP Alston & Bird LLP, San Francisco, CA, Terance A. Gonsalves, Pro Hac Vice, Alston and Bird LLP, Atlanta, GA, for Defendant Chicago School of Professional Psychology.

ORDER GRANTING FINAL SETTLEMENT APPROVAL

WILLIAM ALSUP, United States District Judge

INTRODUCTION

The United States Secretary of Education has reached a settlement with a class of student-loan borrowers whose complaint alleges that, for years, the Department of Education unlawfully delayed processing, or perfunctorily denied, hundreds of thousands of "borrower-defense" applications — requests by students to discharge their loans in light of alleged wrongful acts and omissions of the schools they attended. The settlement leaps over the borrowers' request to require administrative proceedings and provides for the automatic discharge of billions of dollars of student loans and streamlined claim processing. This settlement is separate and apart from President Biden's broader program to forgive $430 billion in student debt. The key question now at final approval concerns whether the Secretary has the authority to enter into such a settlement.

STATEMENT

Title IV of the Higher Education Act directs the Secretary of Education "to assist in making available the benefits of postsecondary education to eligible students" through financial-assistance programs. The Student Loan Reform Act of 1993 directed the Secretary to promulgate legislative regulations for agency consideration of discharges of loans due to the wrongful acts or omissions of the schools attended by the borrowers. 20 U.S.C. §§ 1070, 1087e(h); Pub. L. No. 103-66 (1993).

The Secretary established the first "borrower defense" program for certain federal loans in 1994, which allowed a borrower to "assert as a defense against repayment of his or her loan 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." 59 Fed. Reg. 61,664, 61,696 (Dec. 1, 1994); see also 60 Fed. Reg. 37,768 (July 21, 1995). These rules went largely unused for the next twenty years (AR 590).

That all changed in May 2015 with the collapse of Corinthian Colleges, Inc., a for-profit college with more than 100 campuses and over 70,000 students. The Department faced a "flood of borrower defense claims submitted by Corinthian students." Secretary John B. King, Jr. quickly moved to update the regulations for handling these applications to expedite processing. 81 Fed. Reg. 39,330, 39,330, 39,335 (June 16, 2016); 81 Fed. Reg. 75,926 (Nov. 1, 2016) (final regulation).¹

The Secretary recruited an interim "Special Master" Joseph Smith to assess the influx of claims, and eventually created a "Borrower Defense Unit" ("BDU") to address the backlog. In total, by the end of the Obama Administration, the Secretary had approved 31,773 applications for discharge and found 245 ineligible, for a 99.2% grant rate (a rate that includes both Corinthian students and claimants who attended other schools). Borrowers, however, had submitted many thousands more which remained unexamined (AR 339-40, 347, 369, 384-85, 392-94, 502-03).

After the 2016 election and a change in administrations, new Secretary Elisabeth DeVos paused claim adjudications in order to review the overall procedure. She did, however, honor 16,164 borrower-defense applications approved but not yet finalized before the change in administrations, albeit with "extreme displeasure" (Dkt. No. 66-3, Ex. 7). Including all prior decisions, by June 2018 the Department had granted in total 47,942 applications and denied or closed 11,940, for an 80% grant rate for borrower defense-claims. (The grant rate under Secretary DeVos alone was 58%.) By that point, borrowers had submitted, in total, 165,880 applications, leaving 105,998 still to be decided (AR 401). The flood of applications continued.

Then, all adjudication stopped. For eighteen months, well into this suit, the Secretary issued zero decisions. As of June 2019, borrowers had filed (from day one) 272,721 applications and 210,168 of them remained pending (AR 350, 397-404, 587-88).

Named plaintiffs accordingly brought this suit to require the Secretary to adjudicate these applications. They argued the Secretary's delay constituted unlawful stonewalling. The complaint spelled out the relief sought: "[Named plaintiffs] do not ask this Court to adjudicate their borrower defenses. Nor do they ask this Court to dictate how the Department should prioritize their pending borrower defenses. Their request is simple: they seek an order compelling the Department to start granting or denying their borrower defenses and vacating the Department's policy of withholding resolution" (Compl. ¶¶ 1, 10).

A Rule 23(b)(2) class was eventually certified as follows:

All people who borrowed a Direct Loan or FFEL loan to pay for a program of higher education, who have asserted a borrower defense to repayment to the U.S. Department of Education, whose borrower defense has not been granted or denied on the merits, and who is not a class member in Calvillo Manriquez v. DeVos, No. 17-7106 (N.D. Cal.) [the latter action concerning Corinthian Colleges specifically]

(Dkt. No. 46 at 14). Afterwards, an administrative record was lodged and cross-motions for summary judgment were filed. At that point, the number of pending applications was around 225,000 (AR 591).

Before an order issued on summary judgment, the parties ostensibly reached a settlement (an earlier one than the settlement now under consideration). A May 2020 order preliminarily approved that proposal as it appeared to impose an eighteen-month deadline for the Secretary to decide claims and a twenty-one-month deadline to effect relief for claims filed by April 7, 2020. That settlement also set reporting requirements and established hefty penalties should the Secretary fail to uphold her end of the bargain (Dkt. No. 103). The parties notified the class and solicited comments for a fairness hearing scheduled for October 2020.

However, unbeknownst to class counsel or the Court, the Secretary had already adopted a practice of sending alarmingly curt form-denial notices, in violation (as class counsel put it) of both the spirit of the proposed settlement and the Administrative Procedure Act. Upon inquiry from the Court, the Secretary acknowledged that, since December 2019 (when decisions on borrower-defense applications had resumed), the Department used four templates to deny 118,300 of 131,800 applications reviewed (for an 89.8% denial rate). This was so out of keeping with the supposed settlement that the Court found there had been no meeting of the minds. An October 2020 order denied the class settlement and restarted discovery. The Secretary thereafter agreed to abstain from those types of form denials until further order (Dkt. Nos. 116, 146, 150).

Plaintiffs filed a supplemental complaint that alleged the Secretary had not actually restarted adjudication of borrower-defense claims. Rather, plaintiffs argued she had violated the law and the settlement by sending boilerplate denials without review. Plaintiffs asserted the Secretary's "presumption of denial" policy constituted further violations of the Administrative Procedure Act and the Due Process Clause of the Fifth Amendment.

After a trip to our court of appeals regarding the extent of permissible discovery (In re Dep't of Education, 25 F.4th 692 (9th Cir. 2022)), an order herein set a new summary judgment schedule with a hearing planned for July 28, 2022. During the pendency of the summary judgment briefing schedule, and after another change in administrations, the parties reached the instant settlement and filed their second motion for preliminary approval.

Separate from our litigation, President Biden announced a different plan to cancel up to $10,000 of student debt for low- to middle-income borrowers. The reader should keep in mind that this order does not consider President Biden's initiative but considers only a discrete settlement for a specific group of borrowers who have filed borrower-defense applications.

In brief, the settlement under consideration here sorts class members into three groups. For group one, approximately 200,000 borrowers or 75% of the class as defined by the settlement, the agreement provides for "full," "automatic" relief, i.e., discharge of the borrower's federal loans, cash refunds of amounts paid to the Department, and credit repair. This "up-front" relief would go to class members who attended one of the 151 schools listed in Exhibit C to the settlement (151 of the 6,000 colleges operating in the United States). The...