Bartels v. Alabama Commercial College, Inc.

United States Court of Appeals,
Eleventh Circuit.
No. 94-8607.
Eddie BARTELS, individually and on behalf of all others similarly
situated, Alethia Pinkney, individually and on behalf of all others
similarly situated, Shirley Travis, individually and on behalf of
all others similarly situated, Iris Huss, individually and on
behalf of all others similarly situated, Sharon Davis, individually
and on behalf of all others similarly situated, Leonie Smart,
individually and on behalf of all others similarly situated, Mary
L. Manley, individually and on behalf of all others similarly
situated, Doretha Young, individually and on behalf of all others
similarly situated, Ruby C. Carr, individually and on behalf of all
others similarly situated, Alfreda C. Bantum, individually and on
behalf of all others similarly situated, Vera Borson, individually
and on behalf of all others similarly situated, Plaintiffs-
Appellants,
v.
ALABAMA COMMERCIAL COLLEGE, INC., dba Riley Training Institute of
Savannah, Waycross and Brunswick, Georgia, et al., Defendants-
Appellees.
June 13, 1995.
Appeal from the United States District Court For the Southern
District of Georgia. (No. CV293-162), Anthony A. Alaimo, Judge.
Before HATCHETT, Circuit Judge, HENDERSON, Senior Circuit Judge,
and YOUNG*, Senior District Judge.
HATCHETT, Circuit Judge:
Appellants, Eddie Bartels and other former students of Alabama
Commercial College, filed this action seeking rescission of their
student loan contracts and other relief. The district court
dismissed their amended complaint for lack of subject matter
jurisdiction. We reverse.
FACTS
Appellants, members of a putative class, are former students
*
Honorable George C. Young, Senior U.S. District Judge for
the Middle District of Florida, sitting by designation.
of the now defunct Alabama Commercial College that did business as
Riley Training Institute of Savannah, Waycross, and Brunswick,
Georgia (the school). The appellees either reinsured, guaranteed,
or purchased student loan contracts that appellants had signed.
The appellees are: the Secretary of the United States Department
of Education, Richard Riley (the Secretary); the Student Loan
Marketing Association (Sallie Mae); the Higher Education
Assistance Foundation (HEAF); and the Georgia Higher Education
Assistance Corporation (GHEAC). This lawsuit is based upon the
appellants' contention that the school fraudulently induced them to
enroll in the school and to enter into federally guaranteed student
loan contracts. According to the appellants, the school then
failed to provide any worthwhile education or job placement. Thus,
upon leaving the school, appellants were left with several thousand
dollars in student loan debt. Through the use of various theories
of vicarious liability, the appellants seek to interpose state
common law fraud and contract claims that they may assert against
the school, as defenses to any collection efforts on the part of
the appellees.
Appellants claim the Guaranteed Student Loan (GSL) program
that Congress authorized through enactment of Part B of Title IV of
the Higher Education Act of 1965 (HEA), 79 Stat. 1219, as amended,
20 U.S.C.A. § 1070 et seq., financed their attendance at the
school.1 The GSL program was designed to encourage private lenders
to provide educational loans to students. In order to further this
1
The GSL program has been renamed the Federal Family
Education Loan (FFEL) program. See Pub.L. No. 102-325, §
411(a)(1), 106 Stat. 510 (1992).
objective, the federal government provides private commercial
lenders with a guaranty that a student's educational loan will be
repaid even if the student defaults.
Under a typical GSL program transaction, a private lender
issues a loan directly to the student. The institution of higher
education ordinarily is not a party to the loan agreement and has
no role in the transaction other than to provide the lender with a
statement of the student's estimated cost of attendance and
financial assistance needs. The federal government, moreover, does
not directly guarantee the loan of the private lender. Rather, a
guarantor, typically a state or private nonprofit agency such as
HEAF and GHEAC, provides the private lender with a guaranty that
the loan will be repaid even if the student defaults. These
guarantors, in turn, enter into reinsurance agreements with the
Department of Education under which the Department of Education
reinsures up to 100 percent of the guarantors' losses in paying
defaulted claims. Thus, in the event a student defaults, the
guarantor reimburses the private lender of the loan, takes
assignment of the loan from the lender, and then seeks
reimbursement from the Department of Education.
The appellants' complaint, as amended, sought the cancellation
of their GSL program indebtedness, an order enjoining further
collection efforts against them on the part of the appellees, and
the return of all GSL program payments previously made. Count I
alleged state law fraud on the part of the school as a result of
its misrepresentations regarding the quality of training the
students would receive and the school's job placement assistance
for students. GHEAC, HEAF and Sallie Mae were also named in this
count based on, among other grounds, the allegation that the
lenders stood in an "origination relationship" with the school,
that the school acted as an agent for the lenders in procuring the
loans, and that GHEAC, HEAF and Sallie Mae were assignees of the
loan contracts.2 Count II alleged breach of contract on the part
of the school, the Secretary, GHEAC, HEAF and Sallie Mae. That
count alleged that the school breached its enrollment contract when
it failed to provide promised educational training and job
placement. Count Two's claims against GHEAC, HEAF and Sallie Mae
were based on the same allegations and relationships stated in
Count One. The breach of contract claim against the Secretary was
premised on, among other things, the assertion that the lenders
stood in an "origination relationship" with the school, that the
Secretary is an assignee of loan agreements between the appellants
and the lenders, and that the promissory notes for those loans are
implied to have included the FTC Holder Rule clause.3 Count III
2
An "origination relationship" between a school and a lender
arises when the lender delegates to the school substantial
loan-making functions ordinarily performed by the lender. 34
C.F.R. § 682.200. The Secretary of Education has adopted an
informal policy of not requiring guarantors to make collection
efforts on defaulted loans when an origination relationship
existed between the school and the lender. The policy is
apparently motivated by the Secretary's desire to ensure that
lenders perform the requisite due diligence prior to making a
loan; and in the absence of such due diligence, lenders should
not be able to avail themselves of the benefit of the federal
guaranty. See 34 C.F.R. § 682.500(c)(1).
3
As part of its effort to afford relief to students who
obtained loans after enrolling in questionable schools, Congress
directed the Department of Education to develop a common loan
application form and promissory note to be used by all
participants in the GSL program. See 20 U.S.C.A. § 1082(m)(1)
(Supp.1995). This form, which went into effect in 1994,
alleged a violation of Georgia's Uniform Deceptive Trade Practices
Act, O.C.G.A. §§ 10-1-370 et seq., on the part of all the appellees
based on, among other grounds, their failure to ensure that the
appellants' student loan contracts contained the FTC Holder Rule,
and failure to comply with the rule. Count Three further alleged
that the appellants' failure to comply with the Higher Education
Act constituted unfair and deceptive trade practices under Georgia
law. Count IV alleged an ex delicto breach of contract on the part
of the school, HEAF and GHEAC due to their failure to ensure that
the appellants' student loan contracts contained the FTC Holder
Rule.
In a section of their amended complaint entitled "Prayer for
Relief," the appellants presented a more particularized assertion
of their bases for relief than was articulated in the counts. They
requested the district court, pursuant to Counts I and II, to
declare all loan contracts they signed unenforceable by the
Secretary, HEAF, GHEAC and Sallie Mae because they stood in an
origination relationship with the lenders and the school. The
appellants also sought injunctive relief under all four counts to
prevent the Secretary, HEAF, GHEAC and Sallie Mae from attempting
to collect on their student loans. That section of the complaint
also sought injunctive relief under all four Counts to prevent the
Secretary, HEAF, GHEAC and Sallie Mae from transferring or
assigning the loans during the pendency of this litigation.
incorporates a Federal Trade Commission (FTC) clause (the FTC
Holder Rule). As applied to this case, the rule would allow a
student to use consumer claims and defenses against a school as
defenses to bank loans. See 16 C.F.R. § 433.2(a).
PROCEDURAL HISTORY
The appellants filed their complaint in United States District
Court for the Southern District of Georgia on August 17, 1993. On
October 4, 1993, GHEAC filed a motion to dismiss the plaintiffs'
complaint pursuant to rules 12(b)(1) and 12(b)(6) of the Federal
Rules of Civil Procedure. The appellants filed an amended
complaint on October 12, 1993. On November 22, 1993, the Secretary
filed a motion to dismiss pursuant to rules 12(b)(1) and 12(b)(6).
On November 23, 1993, HEAF filed a motion to dismiss pursuant to
rule 12(b)(6). On November 24, 1993, Sallie Mae filed a motion to
dismiss pursuant to rules 12(b)(1) and 12(b)(6). The district
court entered a default judgment against the school on December 9,
1993.
On March 24, 1994, the district court dismissed the complaint
for lack of subject matter jurisdiction. The district court found
federal subject matter jurisdiction lacking because the appellants
failed to allege that their state law claims necessarily turned on
some construction of federal law. The district court believed that
the complaint presented only three arguable federal "ingredients":
the "origination relationship" between the school and the lenders
mentioned in Counts I and II; the FTC Holder Rule mentioned in all
four counts; and the Higher Education Act mentioned in Count III.
The court believed that the best argument for the presence of
federal question jurisdiction was found in the appellants'
assertion of an "origination relationship" between the school and
the lenders. The court concluded, however, that the presence of
the origination issue was not strong enough to support federal
question jurisdiction.
The court also found that the presence of the FTC Holder Rule
in Count III, the Georgia deceptive trade practices count, did not
merit federal question jurisdiction because state law governs
whether the violation of the FTC rule, or its omission from the
students' loan contracts, constituted a violation of Georgia law.
The court also found that Count IV, the ex delicto contract breach
count, did not confer federal question jurisdiction because the
issue of whether the appellees' failure to ensure placement of the
FTC Holder Rule in the loan agreements constituted a breach of the
contract was a question of state law. Alternatively, the court
found that the FTC Act did not provide a private cause of action.
With respect to the presence of the HEA in Count III and in the
appellants' prayer for relief, the court found that the appellants'
ability to succeed on the four counts was not sufficiently tied to
the assertion that the appellees' action violated the HEA.
Therefore, the HEA allegation did not create federal question
jurisdiction.
Appellants filed a motion for reconsideration on April 4,
1994, that more fully developed their argument that the HEA
contained an independent grant of federal question jurisdiction
over non-tort claims for monetary relief against the Secretary.
Appellants relied on 20 U.S.C. § 1082(a)(2)'s "sue and be sued"
clause as support for their argument. On April 19, 1994, the
Secretary filed a response in opposition to the appellants' motion
for reconsideration. The Secretary agreed with the appellants that
section 1082(a)(2)'s "sue and be sued" clause constituted an
independent grant of federal court jurisdiction. The Secretary
argued, however, that the district court's order dismissing the
complaint could be upheld on the alternative ground of failure to
state a claim upon which relief could be granted. In denying the
motion for reconsideration, the district court concluded that the
appellants had not asserted any claims arising under the HEA in any
of the four counts of their complaint. Appellants filed a timely
notice of appeal.
ISSUE
The sole issue in this appeal is whether the district court
err when it ruled that it did not have subject matter jurisdiction
under the "sue and be sued" provision of section 1082(a)(2) of the
HEA.
CONTENTIONS
The appellants contend that jurisdiction was proper because
the case involves the Secretary's administration of the GSL program
and 20 U.S.C. § 1082(a)(2)'s "sue and be sued" clause confers
jurisdiction through its specific reference to the federal courts.
Appellants argue, moreover, that every action that the Department
of Education engages in arises under the federal statutes that
created it and its programs. Therefore, a suit against the
Department of Education necessarily arises under the laws of the
United States.
The Secretary and HEAF agree with the appellants' argument
that jurisdiction was proper because the case involves the
Secretary's administration of the GSL program. They invite us to
uphold the district court's dismissal on the alternative ground
that the appellants have failed to state a cause of action that
entitles them to relief. Sallie Mae and GHEAC assert that the
appellants did not make a jurisdictional allegation under section
1082. Therefore, they did not comply with the well pleaded
complaint rule, and, in any event, section 1082(a)(2)'s "sue and be
sued" clause is limited to claims arising under the HEA.
DISCUSSION
The federal question jurisdiction of the district court is a
question of law subject to de novo review. United States v. Perez,
956 F.2d 1098, 1101 (11th Cir.1992). The Supreme Court has
recently addressed the jurisdictional implications of "sue and be
sued" clauses in American National Red Cross v. S.G., --- U.S. ----
, 112 S.Ct. 2465, 120 L.Ed.2d 201 (1992). In that case, a husband
and wife, who claimed that the wife had contracted acquired immune
deficiency syndrome (AIDS) from a transfusion of contaminated blood
the Red Cross supplied, filed a state law tort action against the
Red Cross in New Hampshire state court. The Red Cross removed the
action to federal district court on the ground that its charter
contained a "sue and be sued" clause that conferred original
federal jurisdiction over suits involving the Red Cross.4 The
district court denied a motion to remand the case to state court on
the ground that the "sue and be sued" provision conferred original
federal jurisdiction. On interlocutory appeal, the United States
Court of Appeals for the First Circuit concluded that the "sue and
4
The American National Red Cross charter authorizes the
organization to "sue and be sued in courts of law and equity,
State or Federal, within the jurisdiction of the United States."
36 U.S.C.A. § 2.
be sued" provision did not confer original federal jurisdiction,
and reversed the district court. The Supreme Court reversed the
court of appeals's decision. The Court drew a distinction between
"sue and be sued" clauses that specifically referenced the federal
courts and those that do not. Relying on Osborn v. Bank of the
United States, 9 Wheat. 738, 6 L.Ed. 204 (1824) and D'Oench, Duhme
& Co. v. Federal Deposit Ins. Corp., 315 U.S. 447, 62 S.Ct. 676, 86
L.Ed. 956 (1942), the Court held that a "sue and be sued provision
may be read to confer federal court jurisdiction if, but only if,
it specifically mentions the federal courts." American National
Red Cross, --- U.S. at ----, 112 S.Ct. at 2471.
Section 432(a)(2) of the HEA provides, in relevant part:
In the performance of, and with respect to, the
functions, powers, and duties, vested in him by this part, the
Secretary may—
....
(2) sue and be sued in any court of record of a State
having general jurisdiction or in any district court of the
United States, and such district courts shall have
jurisdiction of civil actions arising under this part without
regard to the amount in controversy....
20 U.S.C.A. § 1082(a) (emphasis added). Section 1082(a)(2), as was
the case with the congressional charter involved in American
National Red Cross, "specifically mentions the federal courts."
American National Red Cross, --- U.S. at ----, 112 S.Ct. at 2471.
Therefore, the section's "sue and be sued" provision confers
federal court jurisdiction over actions involving "the performance
of" the Secretary's duties under the GSL program or the Secretary's
"functions, powers, and duties" under that program. See 20
U.S.C.A. § 1082(a)(2).
The district court dismissed the appellants' complaint on the
ground that they had not demonstrated that their claims arose under
the HEA. In interpreting section 1082(a)(2), the district court
emphasized the section's "arising under this part" language to the
exclusion of the "sue and be sued" language.5 The district court's
reliance on the "arising under this part" language of section
1082(a)(2)'s "sue and be sued" provision led it to review the
appellants' amended complaint for compliance with the well pleaded
complaint rule applicable to "arising under" jurisdiction based on
28 U.S.C. § 1331. See Verlinden B.V. v. Central Bank of Nigeria,
461 U.S. 480, 494, 103 S.Ct. 1962, 1971, 76 L.Ed.2d 81 (1983)
(noting that the well pleaded complaint rule only applies to
statutory matters arising under cases). Although the district
court properly applied the law applicable to "arising under"
jurisdiction, we must reverse its dismissal of the amended
complaint because the first clause of section 1082's "sue and be
sued" provision, through its specific mention of the federal
courts, constitutes a separate and independent jurisdictional
grant. See American National Red Cross, --- U.S. at ----, 112
S.Ct. at 2471.
The first clause of section 1082(a)(2)'s "sue and be sued"
provision allows the Secretary to "sue and be sued ... in any
district court of the United States." We believe this first clause
of section 1082(a)(2)'s "sue and be sued" provision provides the
federal courts with an independent jurisdictional grant over cases
5
Section 1082(a)(2)'s "this part" language refers to Part
(b) of Title IV of the HEA; the GSL program is authorized under
that portion of the HEA. See 79 Stat. 1219.
involving the Secretary's administration of the GSL program. The
second clause of the provision provides: "and such district courts
shall have jurisdiction of civil actions arising under this part
without regard to the amount in controversy." 20 U.S.C.A. §
1082(a)(2). The second clause merely clarifies that if the
district court exercises "arising under" jurisdiction over claims
involving the GSL program, it must do so without regard to the
amount in controversy. We do not believe the section's "arising
under this part" language can be properly read as a limitation on
the first clause of the "sue and be sued" provision.
Section 1082(a)(2) was originally enacted in 1965. See Pub L.
89-329, Title 4, section 432 (Nov. 8, 1965), 79 Stat. 1246, 1247.
At that time, 28 U.S.C. § 1331's federal question jurisdiction
provision also contained an amount in controversy requirement. See
13B, Charles A. Wright, et al., Federal Practice and Procedure §
3561.1 at 5-13 (2d ed. 1984). Therefore, if Congress desired to
provide the district courts with jurisdiction over cases arising
under federal law without regard to an amount in controversy,
Congress had to do so specifically in the statute. See 13B,
Charles A. Wright, et al., Federal Practice and Procedure § 3561.1
at 5. Congress, of course, has since eliminated the amount in
controversy requirement for cases arising under federal law. See
28 U.S.C. § 1331. However, in 1965, when Congress stated in
section 1082(a)(2) that the "district court shall have jurisdiction
of civil actions arising under this part without regard to the
amount in controversy," Congress was merely instructing the
district courts that cases arising under the GSL program need not
comply with section 1331's amount in controversy requirement.
Additionally, we do not believe that the "arising under this part"
language of section 1082(a)(2) is a limitation on the "sue and be
sued" clause. In American National Red Cross, the Supreme Court
recognized that its decision in D'Oench, Duhme, involving the
Charter of the Federal Deposit Insurance Corporation, had also
contained a separate jurisdictional provision in addition to a "sue
and be sued" clause. In D'Oench Duhme, as in this case,
jurisdictional overlap existed between the separate jurisdictional
provision and the "sue and be sued" clause. The court,
nevertheless, concluded that such jurisdictional overlap did not
limit the independent grant of federal jurisdiction conferred by
the "sue and be sued" clause. See American National Red Cross, ---
U.S. at ----, 112 S.Ct. at 2470; D'Oench, Duhme & Co., 315 U.S. at455-56 n. 2, 62 S.Ct. at 679 n. 2. Thus, section 1082(a)(2)'s
reference to cases arising under the GSL program does not limit the
independent jurisdictional grant Congress conferred on the district
courts through the "sue and be sued" clause.
Admittedly, American National Red Cross involved a federally
chartered corporation and this case, in contrast, involves a
federal agency. We are, however, unable to discern any reason why
American National Red Cross 's holdings should be limited solely to
statutory "sue and be sued" clauses involving federally chartered
corporations. The statutory interpretation analysis that the
Supreme Court conducted in American National Red Cross can be
straightforwardly applied to other statutes beyond the realm of
federally chartered corporations. Importantly, the strongest
support for our holding in this case can be found in Justice
Scalia's dissent in American National Red Cross.
In American National Red Cross, Justice Scalia drew a
distinction between "sue and be sued" clauses that merely confer
capacity to be sued in federal courts and "sue and be sued" clauses
that confer both capacity and jurisdiction. --- U.S. at ----, 112
S.Ct. at 2476 (Scalia, J., dissenting). Justice Scalia was of the
opinion that the "sue and be sued" clause at issue in American
National Red Cross "merely establishes that the Red Cross is a
juridical person." American National Red Cross, --- U.S. at ----,
112 S.Ct. at 2476 (Scalia, J., dissenting). Two factors led
Justice Scalia to conclude that the "sue and be sued" provision at
issue in American National Red Cross did not confer federal court
jurisdiction. First, he asserted that the statute's general
reference to the "federal courts" was too broad to confer subject
matter jurisdiction on the federal courts. American National Red
Cross, --- U.S. at ----, 112 S.Ct. at 2477 (Scalia, J.,
dissenting). If the statute had mentioned "a particular federal
court," Justice Scalia believed a stronger argument could be made
that Congress intended to confer subject matter jurisdiction upon
the federal courts. See American National Red Cross, --- U.S. at
----, 112 S.Ct. at 2477 (Scalia, J., dissenting). Second, Justice
Scalia objected to the fact that the statute in American National
Red Cross did not distinguish between federal courts and state
courts. American National Red Cross, --- U.S. at ----, 112 S.Ct.
at 2477 (Scalia, J., dissenting). According to Justice Scalia, the
American National Red Cross charter's parallel treatment of federal
and state courts undermined a jurisdictional reading of the statute
because a federal entity could not file an action in state court
without first "establishing the independent basis of jurisdiction
appropriate under state law." American National Red Cross, ---
U.S. at ----, 112 S.Ct. at 2477 (Scalia, J., dissenting) (citations
omitted).
Section 1082, however, addresses both of the concerns
enumerated by Justice Scalia in his dissent in American National
Red Cross. Section 1082(a)(2) allows the Secretary to "sue and be
sued ... in any district court of the United States." (emphasis
supplied). Congress therefore has clearly indicated the particular
federal court it sought to confer jurisdiction upon. See American
National Red Cross, --- U.S. at ----, 112 S.Ct. at 2477 (Scalia,
J., dissenting). Additionally, section 1082(a)(2) allows the
Secretary to "sue and be sued in any court of record of a state
having general jurisdiction...." (emphasis supplied). Congress,
therefore, has acknowledged that the Secretary may not file a state
court action without establishing "the independent basis of
jurisdiction appropriate under state law." See American National
Red Cross, --- U.S. at ----, 112 S.Ct. at 2477 (Scalia, J.,
dissenting). Moreover, we believe the arguments in support of
federal court jurisdiction in this case are more compelling than in
American National Red Cross. This case involves a federal agency's
oversight and application of a federal statutory and regulatory
scheme. We believe Congress's reasons for ensuring federal court
jurisdiction in this instance would have been greater than for a
federally chartered corporation.
CONCLUSION
Accordingly, we hold that the "sue and be sued" clause of
section 1082(a)(2) confers federal subject matter jurisdiction
through its specific reference to the federal district courts. The
district court's order dismissing the appellants' complaint with
prejudice is vacated and the case is remanded to the district
court.
VACATED and REMANDED.