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AMERICAN INST. OF DESIGN v. RILEY

June 24, 1997

AMERICAN INSTITUTE OF DESIGN, et al.
v.
RICHARD W. RILEY, SEC'Y OF THE UNITED STATES DEP'T OF EDUCATION



The opinion of the court was delivered by: YOHN

 Yohn, J.

 June 24, 1997

 This action was commenced by several post-secondary proprietary schools after the Secretary of Education terminated them from participation in the Federal Family Education Loan program. The plaintiffs have sought judicial review of this final decision of the Secretary of Education pursuant to the Administrative Procedures Act, 5 U.S.C. §§ 702-06. The only remaining plaintiff, *fn1" McCarrie Schools of Health Sciences & Technology, Inc. ("McCarrie") has filed its brief in support of its argument on the merits in this case, which the court will treat as a motion for summary judgment pursuant to Federal Rule of Civil Procedure 56. The Secretary of Education has also filed a brief on the merits which the court will treat as a cross motion for summary judgment. *fn2" Because the plaintiff has failed to demonstrate that the Secretary's actions in terminating it from participation in the program were arbitrary, capricious, or otherwise contrary to law, the defendant is entitled to summary judgment.

 McCarrie is a Delaware corporation which provides educational training to students in several specialized fields relating to the medical arts. Students who graduate from McCarrie receive either an Associate in Specialized Technology degree or an Associate in Specialized Business degree. Most of McCarrie's students are economically disadvantaged, and rely heavily on federally subsidized loans in order to finance their education.

 Under Title IV of the Higher Education Act ("HEA"), 20 U.S.C. § 1070 et seq., eligible educational institutional are entitled to participate in several federally sponsored student loan programs, including the Federal Family Education Loan ("FFEL") program. The FFEL program includes "Stafford" loans for students and "PLUS" loans for parents.

 FFEL loans are not issued directly by the federal government. Rather, participating lending institutions, such as banks, savings and loan associations, and credit unions make the loans directly to the students. These loans are then "guaranteed" by participating state guaranty agencies. The guaranty agencies are, in turn, guaranteed payment by the United States Department of Education ("Department"). See generally 20 U.S.C. § 1078(b)-(c); 34 C.F.R. § 682.100 et seq. (1996).

 Before a lender may seek payment from its guaranty agency on a defaulted loan, lenders are required to demonstrate to the guaranty agency that they have performed certain "due diligence" procedures. See 34 C.F.R. § 682.411 (specifying due diligence required by lending institutions). The guaranty agencies are expected to ensure that such due diligence has occurred before paying claims to lenders and requesting payment from the federal government. See 20 U.S.C. § 1078(c)(2)(A); 34 C.F.R. § 682.406(a)(3).

 In 1990, Congress amended the HEA to require termination of schools from participation in Title IV programs if they have an exceptionally high percentage of students in default on their federal loans. The amendments require the Secretary of Education ("Secretary") to calculate a cohort default rate ("CDR") for each school on a yearly basis. See 20 U.S.C. § 1085(m)(4). The CDR essentially measures the percentage of those current and former students entering repayment in a fiscal (or "cohort") year who default on their loan in that fiscal year or the following fiscal year. See 20 U.S.C. § 1085(m)(1). "An institution whose cohort default rate is equal to or greater than [25%] for each of the three most recent years for which data are available" becomes ineligible to participate in the FFEL program. 20 U.S.C. § 1085(a)(2).

 Cohort default rates are calculated by accumulating data collected from the guaranty agencies reflecting guaranty payments made for defaulted loans for students at each participating school. Before the Department calculates a final cohort default rate from this data, the schools are provided with a pre-publication rate. See 20 U.S.C. § 1085(m)(1)(A); 34 C.F.R. § 668.17(j). The pre-publication rate allows schools to examine the data used to calculate their CDR and to contest the accuracy of that data with their relevant guaranty agency. See id. If the guaranty agency agrees that some of the data used to calculate the school's CDR were inaccurate, and the Secretary accepts such findings, the information is corrected before a final CDR is published by the department. See 34 C.F.R. § 668.17(j)(5).

 If an institution's published CDR is 25% or greater for each of the last three fiscal years for which data are available, the institution is notified by the department that it is no longer eligible to participate in the FFEL program. See 20 C.F.R. § 668.17(b). Once the school receives that notification, it has 30 days in which to file an appeal of the Department's decision to terminate the school from the program. See 34 C.F.R. § 668.17(c); see also 34 C.F.R. § 668.17(b)(6) (allowing a school to continue to participate in FFEL programs pending the resolution of its properly filed appeal). Appeals to the Secretary may be based on one or more of three grounds: (1) that the CDR for any of the three fiscal years includes erroneous or incorrect data, see 20 U.S.C. § 1085(a)(2)(A)(i), (2) that there are exceptional mitigating circumstances that would make disqualification based on excessive cohort default rates inequitable, see 20 U.S.C. § 1085(a)(2)(A)(ii), and (3) that the data for any of the three fiscal years includes loans "which, due to improper servicing or collection would . . . result in an inaccurate or incomplete calculation of such cohort default rate." 20 U.S.C. § 1085(m)(1)(B); see 20 U.S.C. § 1085(a)(3).

 In February of 1996, the Department issued official cohort default rates for fiscal year 1993. *fn3" Because McCarrie's 1991, 1992 and 1993 cohort default rates were each above 25%, the school was informed in February 1996 that it was no longer eligible to participate in the FFEL program. McCarrie filed timely appeals based, inter alia, on improper loan servicing with regard to the 1993 CDRs, inclusion of erroneous data with regard to the 1991 CDRs, and a mitigating circumstances appeal based on the 1993 CDRs. McCarrie had previously filed a mitigating circumstances appeal based on its 1992 cohort default rate.

 While its appeals were pending, McCarrie received its pre-publication rate for its fiscal year 1994 cohort default rate. In May 1996, the Department informed McCarrie that its pre-publication rate was 16.4%, well below the 25% threshold. Although McCarrie had hoped that this rate would be made final before the Department resolved its pending appeals, thus making one of the three most recent official CDRs below 25%, the 1994 cohort default rates were not made official until January 8, 1997.

 On August 30, 1996, McCarrie received a letter from the Department resolving its 1993 loan servicing appeal. Based on the loan servicing appeal, the Department revised McCarrie's 1993 CDR from 35.9% to 35.5%--still well above the 25% threshold. On August 30, 1996, McCarrie also received a letter from the Department rejecting its 1993 mitigating circumstances appeal. On September 26, 1996, McCarrie received a letter from the Department dismissing its 1992 mitigating circumstances appeal as moot. Finally, on September 30, 1996, McCarrie received a letter from the Department resolving its 1991 erroneous data appeal. Although the Department did make several minor changes to the school's cohort default rates for fiscal years 1990-1993, McCarrie's CDR for each of the three most recent fiscal years was still greater than the 25% threshold. McCarrie's participation from the FFEL programs was, therefore, terminated upon receipt of this letter. *fn4"

 Plaintiff, along with several other schools which had been terminated from the FFEL program, filed suit in this court on September 23, 1996 seeking review of the Secretary's actions under the Administrative Procedures Act ("APA"), 5 U.S.C. § 702 et seq. This court denied the plaintiff's motion for a preliminary injunction on December 11, 1996. *fn5" Only McCarrie remains as a plaintiff in the suit. The parties having provided briefing on the merits, the court is now prepared to enter judgment.

 I. Standard of Review

 McCarrie raises a host of issues in its brief which the court will address in turn. It is first necessary, however, to set out the appropriate standard of review of administrative action under the Administrative Procedures Act.

 The Administrative Procedures Act provides for judicial review of final agency action, unless another statutory provision specifically precludes such review. See 5 U.S.C. § 702; Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 410, 28 L. Ed. 2d 136, 91 S. Ct. 814 (1971). The parties agree that the Secretary's actions in this case are subject to review under this provision. The scope of such review is, in the first instance, dictated by statute:

 
To the extent necessary to decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning and applicability of the terms of an agency action. The reviewing court shall--
 
(1) compel agency action unlawfully withheld or unreasonably delayed; and
 
(2) hold unlawful and set aside agency action, findings, and conclusions found to be--
 
(A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;
 
(B) contrary to constitutional right, power, privilege, or immunity;
 
(C) in excess of statutory jurisdiction, authority, or limitations, or short of statutory right;
 
(D) without observance of procedure required by law;
 
(E) unsupported by substantial evidence in a case subject to sections 556 and 557 of this title or otherwise reviewed on the record of an agency hearing provided by statute; or
 
(F) unwarranted by the facts to the extent that the facts are subject to trial de novo by the reviewing court.
 
In making the foregoing determinations, the court shall review the whole record or parts of it cited by a party, and due account shall be taken of the rule of prejudicial error.

 5 U.S.C. § 706.

 In the seminal case of Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 81 L. Ed. 2d 694, 104 S. Ct. 2778 (1984), the Supreme Court announced a two step inquiry which must be made when an agency's action under a statute is challenged:

 
When a court reviews an agency's construction of the statute it administers, it is confronted with two questions. First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines that Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute.

 Chevron, 467 U.S. at 842-43.

 Thus, unless the statutory provision clearly speaks to the issue, the court must defer to an agency's reasonable interpretations of how the statute is to be applied in a given case. See id.

 Further, when an agency is operating under a statute which grants it discretion in a decision making process, "a court, in reviewing informal agency action, *fn6" 'is not entitled to substitute its judgment for that of the agency.'" C.K. v. New Jersey Dep't of Health and Human Services, 92 F.3d 171, 181 (3d Cir. 1996) (quoting Overton Park, 401 U.S. at 416). Agency action "is entitled to a presumption of regularity." Overton Park, 401 U.S. at 415. Nonetheless, the district court is required to conduct a "substantial inquiry." Overton Park, 401 U.S. at 415.

 
This "substantial inquiry" is pursuant to APA "arbitrary or capricious" review: "Agency action must be set aside if the action was 'arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law" . . . . The APA thus requires a finding that the actual choice made was neither arbitrary nor capricious. To make this finding, the court must confine its review to the "full administrative record that was before the Secretary at the time he made his decision," and "consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment."

 C.K., 92 F.3d at 182 (internal citations omitted).

 In determining whether an agency action is "arbitrary or capricious" the court must determine whether the agency "has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise." Motor Vehicle Manuf. Assoc. v. State Farm Mutual Auto. Ins. Co., 463 U.S. 29, 43, 77 L. Ed. 2d 443, 103 S. Ct. 2856 (1983).

 II. Failure to Treat 1994 Pre-Publication Rate as One of the Three Most Recent Years for ...


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