Petition for Writ of Certiorari — Jackson v. Culinary School of Washington, Ltd.

94 886 NOV 1 5 199%

NO. ees Bie cutex

IN THE

Supreme Court of the GAnited States

OCTOBER TERM, 1994

MICHAEL JACKSON, ET AL.,

Petitioners,

Vv.

CULINARY SCHOOL OF WASHINGTON, LTD.,

ET AL.,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

Michael E. Tankersley Clare L. McCulla

(Counsel of Record) LEGAL SERVICES OF

Alan B. Morrison NORTHERN VIRGINIA

David C. Viadeck 110 N. Royal Street,

Public Citizen Litigation Group Suite 505

2000 P Street, N.W., Suite 700 Alexandria, VA 22314

Washington, D.C. 20036 (703) 684-5566

(202) 833-3000

Counsel for Petitioners

November 15, 1994

QUESTIONS PRESENTED

1. Did the Court below violate the rule of Klaxon Co. v.

Stentor Electric Manufacturing Co., 313 U.S. 487 (1941),

and subsequent cases holding that federal courts are required

to apply the choice of law rules of the forum in which they

sit, by directing the district court to refuse to entertain an

action for declaratory relief on the grounds that the choice of

law issues presented by a declaratory action must be resolved

in accordance with the choice of law rules of the forum

chosen by the defendant for a future coercive action?

2. May a federal court refuse to entertain an action for

declaratory relief on the ground that the issues should be

decided in a future coercive action, where such a coercive

action is not pending and may never be brought, and the

federal court’s refusal to entertain the action may deny the

plaintiffs any opportunity to have any determination of their

claims?

ii

PARTIES TO THE PROCEEDINGS BELOW

Petitioners are fifty-eight former students of the Culinary

School of Washington, Ltd., a vocational school operated in

the District of Columbia. Petitioners, who were plaintiffs

and appellants in the proceedings below, are Michael

Jackson, Mark Herrin, Daniel Love, Don Johnson, Randall

Hildebrand, Juana E. Lara, Darlene Pierce, Edwin Figueroa,

Matthew Depompa, Lois Flowers, Maria V. Vasquez, Mark

Turner, John Leonard, Michael Wiggins, Robert Jester,

Theresa Clark, Stephen Batchelor, Douglas Paris, Assad

Ghafoori, Jerome Lewis, James Gordon, Dorothy Valerie,

Pablo Cortes, Ronald Seegers, Bertha Habib, Colleen

Mahoney, Ricky Patterson, Carlton Goodwin, David Grant,

Alvin Brown, Mary Nwoye Turner, Sonia Magana, Maria

Guardado, Ralph Brown, Carlos Narvaez, Guillermo Moa,

Andy Fallas, Pamela Head, Heriberto Vasquez, Allen

French, Lolita Roberts, Robert Jones, Major Warren, Lee

Vernick, Braudulina Ruiz, Andrew Kirksey, Ronnie Lyons,

Joseph Link, Gwendolyn Coley, Linford Finn, John Quinn,

Warren Irving, Castro Vadell, John McCray, Clyde Cogdill,

Jacqueline Roswell, Elhambra Olatunji, and Arthur

Thompson.

The defendants-appellees in the proceedings for which

review is sought were Secretary of Education Richard Riley,

in his official capacity as reinsurer of all petitioners’ loans

under the Higher Education Act and assignee of some of

petitioners’ loans, see 20 U.S.C. §§ 1078(c), 1082; Crestar

Bank and Fifth Third Bank of Toledo, lenders which hold

loans issued to some of the petitioners; Virginia State

Education Assistance Authority, Ohio Student Loan

Commission, “igher Education Assistance Foundation, Great

Lakes Higher Education Corporation, Nebraska Student Loan

Program, and Texas Guaranteed Student Loan Corporation,

which acted as the guaranty agencies for petitioners’ loans

under 20 U.S.C. § 1085(j), and are the assignees of some of

the loans.

Another student who was a party to the judgment below,

Antonio Orr, is now deceased. Three other former students

of the Culinary School of Washington, Ricky Stokes,

Michael Tillman, and Cecelia Roberts, were plaintiffs in the

district court proceedings below, but did not appeal. The

Culinary School of Washington, Ltd., was a defendant in the

district court proceedings, but did not appear, and a default

judgment was entered against it. The Chairman and owner

of the Culinary School of Washington, Barkev Kibarian, was

initially named as a defendant in the district court, but was

dismissed upon the filing of plaintiffs’ Amended Complaint

on June 2, 1992. The Student Loan Marketing Association

was a defendant in the district court, but the claims against

it were dismissed without prejudice on March 26, 1992, and

that ruling was not appealed. None of these parties

participated in the appeal which resulted in the judgment of

the Court of Appeals for the District of Columbia for which

review is sought here.

(THIS PAGE INTENTIONALLY LEFT BLANK)

Vv

TABLE OF CONTENTS

os ee ae i

PARTIES TO THE PROCEEDINGS BELOW ..... ii

TABLE OF AUTHORITIES ................ vii

Pee UE. nb seas 8 Keene ee eee en l

PEED 6 RA ER l

STATUTORY PROVISIONS INVOLVED ........ |

STATEMENT OF THE CASE ... cc cececsvcs 2

A. The Guaranteed Student Loan Program. ..... 3

Pee GS es Powe heave eekewe 5

C. The Appellate Court’s Ruling. ........... 9

REASONS FOR GRANTING THE WRIT ....... 13

I. THE DECISION BELOW CONFLICTS WITH THE

DECISIONS OF THIS COURT THAT REQUIRE

FEDERAL COURTS DECIDING QUESTIONS OF

STATE LAW TO APPLY THE CHOICE OF LAW

PRINCIPLES OF THE FORUM IN WHICH THEY

Oks 2b bee eee de eee eee 13

Il. THIS COURT SHOULD REVIEW THE COURT OF

APPEALS’ RULING THAT A FEDERAL COURT

IS REQUIRED TO REFUSE TO ADJUDICATE AN

ACTION FOR DECLARATORY JUDGMENT

EVEN WHERE, AS HERE, DENIAL OF SUCH

RELIEF MAY DENY THE PLAINTIFF ANY

FORUM IN WHICH TO LITIGATE HIS OR HER

P| MPEP Ee Te Pee Re eee ree re 17

vi

(THIS PAGE INTENTIONALLY LEFT BLANK)

vii

TABLE OF AUTHORITIES

CASES PAGE

Aetna Life Ins. Co. v. Haworth, 300 U.S. 227 (1937) . 16

Bogart v. Nebraska Student Loan Program, 313 Ark.

me Re Oe Oe. ee re 6

Brillhart v. Excess Ins. Co., 316 U.S. 491

SEES aoe wa Kae Sk ek oa eee 12, 17-19, 23

Clay v. Sun Ins. Office, 363 U.S. 207 (1960) ...... 17

Colorado River Water Conservation District v. United

States, 4244 U.S. BID CISTB) ww cece wcces 18

Day & Zimmerman, Inc. v. Challoner, 423 U.S. 3

NS 6 o6 da Re Re ere wa 14

Eli Liliy and Co. v. Home Ins. Co., 764 F.2d 876

Ge a Se eke eke eee 16, 17

Ferens v. John Deere Co., 494 U.S. 516 (1990) .... 15

Games v. Cavazos, 737 F. Supp. 1368 (D. Del.

MER SO See e Tera ES SEUSS Por eee 19

Gerrard v. United States Office of Education, 656 F.

Se, Fe eas Cs SOE 8 ae wee ees 20

Gibson v. Berryhill, 411 U.S. 564 (1973) ........ 19

Griffin v. McCoach, 313 U.S. 498 (1941) ........ 14

Keams v. Temple Technical Institute, Inc., 807 F.

Pe. Dae a Se SE Se heb at hewn sees 6

viii

Klaxon Co. v. Stentor Electric Manufacturing Co., 313

Jt of). eer ee eae i, 2, 14-17

Melville v. American Home Assur. Co., 584 F.2d 1306

GE. TEE 6c oe eh ee emeasesexvcdves 16

Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp.,

2 eS: eee a a ae a eo 18

Munter v. Lankford, 127 F. Supp. 630 (D.D.C.

SE cog bak ewe Cee wee ae we ae 11

Tempco Elec. Heater Corp. v. Omega Engineering

Inc. , 819 F.2d 746 (7th Cir. 1987) .......... 22

Thomas v. Bennett, 856 F.2d 1165 (8th Cir.

SE 5a bo 6 66S ee ee ee. 20, 21

Tipton v. Secretary of Education, 768 F. Supp. 540

RS AO were es er ee eee eee 6

United States v. Griffin, 707 F.2d 1477 (D.C. Cir.

re area See a eee ee 9

United States v. Kimbell Foods, Inc., 440 U.S. 715

CON 6 bee oO ae he oe ee ee es 11, 16

Van Dusen v. Barrack, 376 U.S. 612 (1964) ...... 15

Whirlpool Corp. v. Ritter, 929 F.2d 1318 (8th Cir.

ia a ee ga ay ae a ae ee a ae ee 16

Will v. Calvert Fire Ins. Co., 437 U.S. 655 (1978) .. 23

Williams v. National School of Health Technology,

Inc., 836 F. Supp. 273 (E.D. Pa. 1993) ........ 6

ix

STATUTES

Higher Education Act of 1965, 20 U.S.C. §§

I sR in in 3

Oe Sire POT EP aS oc hb ek ce ee ww 4

i ME Sor oo 6 ho oe ko Se 2

Pe ae es bs a's oko eek kee 3

I a ee aoe 5

PP I 6s a oe hare ws ad ae 2

ee ee PD oo kn bh 6 ck eee ee 4

eR SR ee 2,4

ae es I io boo bb on oe bea es 3

ee Was ED os os bw hat oe bee 5, 21

a Oe Ek iG 6 6a He wees 4,5

Pub. L. No. 102-325, § 411, 106 Stat. 510 (1992) ... .3

8 ot | ARE N otuearareee tree oes luee 21

Pe Se PE oe oS eka OS l

rs I ho ete irate erties 15

fr aes OE bdo hv ok he ohh 15

The Rules of Decision Act, 28 U.S.C. § 1652 ... is 32

The Declaratory Judgment Act, 28 U.S.C. § 2201 ....2

ae a TEE Sa ee eA Uo be oes 22

PP PO So oo Wk bea Oe eae 4, 21, 22

Ariz. Rev. Stat. Ann. § 44-145 (1994) ........... 8

D.C. Code § 28-3807-09 (1991) ............... 8

x

N_Y. Gen. Bus. Law § 253 (Consol. 1993) ........ 8

Mass. Gen. Ann. Laws ch. 255, § 12F (1988) ...... 8

Md. Code Ann., Com. Law. § 12-309 (1993) ....... 8

REGULATIONS

16 C.F.R. § 433.2 (1994) 2... ee eee ee ee ees 8

26 C.F.R. § 301.6402-6(1) (1994) .. 2... ee eee 21

34 C.F.R. § 30.24-26 (1994) .. 1... ee eee ee eee 20

34 C.F.R. § 30.33 (1994) 2... ee cee wees 4, 5, 20

34 C.F.R. § 668.7(a)(7) (1993)... ....--+-+- 5, 22

MCP. COMO CD 2 nce cc cucescsvee

34 C.F.R. § 682.200 (1993) ... 2... cece eee eees g

34 C.F.R. § 682.208(b) (1993)... 2... ee ee ees 5, 21

34 C.F.R. § 682.404(g) (1993)... 6 ee ee ee eee 4

34 C.F.R. § 682.409 (1993) 2... ce eee ee eee ees 4

34 C.F.R. § 682.410 (1993) 2... 2. ee eee ees 4, 22

34 C.F.R. § 682.410(b)(6), 59 Fed. Reg. 22488 (April

SS cs aun ae 4, 19

34 C.F.R. § 682.410(b)(10), 59 Fed. Reg. 22488

teeth DD GOW 6 in co secs adetersseest 4

xi

ee eer ee Se fk isk wc hee keen. 19

34 C.F.R. § 682.604(f)(2)(iii) (1993) .......0.002.. 9

LEGISLATIVE MATERIALS

Abuses in Federal Student Aid Programs, Hearings

before the Permanent Subcommittee on

Investigations of the Committee on Governmental

Affairs, 101st Cong., 2d Sess., S. Hrg. 101-659

Pd 356 0'c Se ead eee Oo eS eS Oe 6,7

Abuses in Federal Student Aid Programs, 102d Cong..,

Ist Sess., S. Rep. 102-58 (1991).......... 5, 22

General Accounting Office, Analysis of Student Default

Rates at 7,800 Postsecondary Schools, GAO/HRD-

ee ae a ss bs ee cea ee es 5

Office of Inspector General, U.S. Department of

Education, SEMIANNUAL REPORT TO CONGRESS,

No. 22, October 1, 1990 - March 31, 1991 ...... 6

ADMINISTRATIVE MATERIALS

40 Fed. Reg. 53507-16, 53524-25 (1975) ......... 8

oe ae Oe, See GUD 8 bs hve eeu eeeeeeees 9

59 Fed. Reg. 22472, 22487, 22488 (April 29, 1994)... 4

Department of Education, Office of Inspector General,

Inspection Report of Culinary School of

Washington, Ltd. (Insp. No. N-0000903) (May 21,

EE he he oe ke ee ee ee a ee we 3

xii

MISCELLANEOUS

E. Borchard, DECLARATORY JUDGMENTS 2d

Py ye ee ee ee ee eo 18, 19, 22

Joseph D. Boyd and Carol Wennerdahl, THE

CHARACTERISTICS OF STAFFORD STUDENT LOAN

BORROWERS IN REPAYMENT AND THE IMPACT ON

EDUCATIONAL DEBT ON PERSONAL AND

ECONOMIC LIFE DECISIONS (June 1993) ........ 4

The College Board, Trends in Student Aid: 1982 to

1992 (September 1992) .......ce ee eeeves ,

J. Fonseca, HANDLING CONSUMER CREDIT CASES (3d

i Se oes one ck owes eee ee eee 8

RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 187

5) Seeman re ptr ean re tS 11

Uniform Consumer Credit Code, 1974 Act, 7A U.L.A.

Se SE bak ce are eesket arene tere 8

IN THE

Supreme Court of the United States

OCTOBER TERM, 1994

MICHAEL JACKSON, ET AL..,

Petitioners,

Vv.

CULINARY SCHOOL OF WASHINGTON, LTD.,

ET AL.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

OPINIONS BELOW

The opinion of Court of Appeals for the District of

Columbia Circuit is reported at 27 F.3d 573, and is reprinted

in the Appendix to this petition at pages Al-A24. The

decision of the District Court for the District of Columbia is

set forth in two opinions, a March 26, 1993 Opinion and

Order reported at 788 F. Supp. 1233, which granted in part,

and denied in part, certain motions to dismiss petitioners’

claims, and a January 6, 1993 Opinion ieported at 811 F.

Supp. 714, which granted defendants’ motions for summary

judgment on all remaining claims. These opinions are

reprinted in the Appendix at pages A25-A94.

JURISDICTION

The judgment of the Circuit Court of Appeals for the

District of Columbia was entered on June 24, 1994. A

timely petition for rehearing was denied on August 17, 1994.

See A95. This Court has jurisdiction under 28 U.S.C.

§ 1254(1).

STATUTORY PROVISIONS INVOLVED

The Rules of Decision Act, 28 U.S.C. § 1652, provides:

The laws of the several states, except where the

Constitution or treaties of the United States or Acts of

Congress otherwise require or provide, shall be

2

regarded as rules of decision in civil actions in the

courts of the United States, in cases where they

apply.

The Declaratory Judgment Act, 28 U.S.C. § 2201,

provides, in pertinent part:

In a case of actua) controversy within its jurisdiction,

. . any court of the United States, upon the filing of

an appropriate pleading,*may declare the nghts and

other legal relations of any interested party seeking

such declaration, whether or not further relief is or

could be sought.

STATEMENT OF THE CASE

Petitioners are borrowers under the federal guaranteed

Student loan program administered by the Secretary of

Education who maintain that their loans are unenforceable

because the school that arranged the loans made false

representations and failed to deliver the educational services

it promised. In the decision below, the Court of Appeals for

the District of Columbia Circuit held that borrowers cannot

bring a declaratory relief action to have these defenses

adjudicated and enjoin further enforcement of the notes by

the Secretary of Education and other participants in the

federal guaranteed loan program.

The Court of Appeals’ ruling that the federal courts

cannot entertain petitioners’ action for declaratory relief

raises two issues, either of which would require reversal of

the judgment below if resolved in petitioners’ favor. First,

the Court concluded that declaratory relief is not available

because choice of law issues presented by the borrowers’

defenses are governed by the choice of law rules of the

forum in which a future coercive action would be brought,

and the forum of a future coercive action could nui be

determined with certainty. That conclusion, however, is

inconsistent with decisions of this Court, beginning with

Klaxon Co. v. Stentor Electric Manufacturing Co. , 313 U.S.

3

487 (1941), holding that federal courts are obligated to apply

the choice of law rules of the forum in which they sit.

Second, although the Court of Appeals assumed that there

would be future coercive actions brought by defendants, it

never examined whether such actions were likely or would

adequately protect the borrowers’ right to raise their

defenses. In fact, the federal student loan program allows

the Secretary of Education and guaranty agencies to collect

from borrowers who are alleged to be in default, and to

impose penalties on them, without ever instituting an action

that would allow borrowers to present their defenses in court.

Thus, the denial of declaratory relief here does not simply

defer the issues to a hypothetical future proceeding, but may

deprive the plaintiffs of any remedy.

A. The Guaranteed Student Loan Program.

The Guaranteed Student Loan Program (“GSLP”) is one

of a number of programs established by the Higher Education

Act of 1965, 20 U.S.C. § 100i-1146a (“HEA”). See 34

C.F.R. § 682.100 (1992). Under the relevant portion of the

Program, the federal government encourages lenders to make

loans for student tuition, fees, and expenses by paying

interest subsidies and special allowances to the lenders, and

covering the lenders’ losses in the event of default, provided

that certain federal requirements are met. See 20 U.S.C.

§§ 1078, 1087-1. The value of the loans issued annually

under this program has steadily grown from approximately

$9 billion in 1986, to almost $14 billion in 1992.’

Under the GSLP, private lenders make loans to eligible

students to attend schools that the Secretary of Education has

accepted for participation in the program as “eligible

' The College Board, Trends in Student Aid: 1982 to 1992 at

4, Table 1 (September 1992). Subsequent to the execution of the

loans at issue here, the Higher Education Act Amendments of 1992

renamed the GSLP the “Federal Family Education Loan

Program.” Pub. L. No. 102-325, § 411, 106 Stat. 510 (1992).

4

institutions.” 20 U.S.C. § 1085(a). State and private

guaranty agencies insure these loans against default, and the

Secretary of Education, in turn, reinsures the guaranty

agencies against their losses. If the borrower defaults, the

lender is reimbursed for the unpaid balance by the guaranty

agency, and the guaranty agency may recover up to 100% of

its losses, including administrative costs related to collection

of the loan, from the Secretary of Education. See 20 U.S.C.

§ 1078(c)(1), (7). After making a reinsurance payment to a

guaranty agency, the Secretary may demand an assignment

of the loan or have the guaranty agency collect the loan on

his behalf. See id. §§ 1078(c)(2)(D), 1078(c)(8); 34 C.F.R.

$§ 682.404(g), 682.409 (1993).

The Secretary and guaranty agencies may initiate judicial

proceedings to collect defaulted loans or invoke special

remedies allowing them to collect from borrowers through

extra-judicial means. The Higher Education Act authorizes

the Secretary and guaranty agencies to garnish the wages of

any borrower in default without filing a civil action. 20

U.S.C. § 109Sa; 59 Fed. Reg. 22488 (April 29, 1994) (to be

codified as 34 C.F.R. § 682.410(b)(10)). In addition,

guaranty agencies and the Secretary can collect on the loans

by having the Internal Revenue Service withhold tax refunds

owed to borrowers. See 31 U.S.C. § 3720A; 34 C.F.R.

§ 30.33 (1994); 59 Fed. Reg. 22472, 22487 (April 29, 1994)

(to be codified at 34 C.F.R. § 682.410(b)(6)(i)). Collections

through tax offsets alone have accounted for almost 25% of

the total collections on GSLP loans.? Before the loans are

collected through administrative wage garnishment or

intercepting tax refunds, the borrower is given notice by

Joseph D. Boyd and Carol Wennerdahl, THE

CHARACTERISTICS OF STAFFORD STUDENT LOAN BORROWERS IN

REPAYMENT AND THE IMPACT ON EDUCATIONAL DEBT ON

PERSONAL AND ECONOMIC LIFE DECISIONS, Appendix, Table X-

7.1 (June 1993),

5

mail, and may request that the Secretary or guarantee agency

review the existence, amount or enforceability of the debt,

but no judicial proceedings are required before garnishing

wages or intercepting tax refunds. See 20 U.S.C.

§ 1095a(a)(5); 34 C.F.R. § 30.33(b)(3)(ii) (1994).

In addition, the Higher Education Act imposes penalties

on borrowers in default, even if no efforts are ever made to

collect on the loan through judicial proceedings, wage

garnishment, or tax intercepts. Borrowers in default on a

GSLP loan are barred from receiving any grant, loan, or

other financial assistance under “he Higher Education Act of

1965. 20 U.S.C. § 1091(a)(3); 34 C.F.R. § 668.7(a)(7)

(1993). In addition, lenders and guaranty agencies are

required to issue adverse credit reports to national credit

bureaus on any borrowers who fail to make payments on

their loans. 20 U.S.C. § 1080a; 34 C.F.R. §§ 682.208(b),

682.410(b)(S) (1993).

B. Plaintiffs’ Claims.

In recent years, 20-30 percent of all GSLP loan funds

have gone to proprietary and vocational schools offering

relatively short term programs (six months to a year) in

trades or job skills.’ The default rate for students attending

vocational schools using GSLP loans, however, is

disproportinately high. For example, in 1987, the loan

default rate for students at vocational schools was 39%, in

contrast to 10% default rate for borrowers at 4 year

schools.‘ Investigations into the GSLP program have

repeatedly found that many vocational schools have engaged

> The College Board, Trends in Student Aid, at 3, 9, Table 6

(Sept. 1992).

* Abuses in Federal Student Aid Programs, §. Rep. 102-58,

102d Cong., Ist Sess. 2 (1991); General Accounting Office,

Analysis of Student Default Rates at 7,800 Postsecondary Schools,

GAO/HRD-89-63BR, at 15 (July 1989).

6

in fraud or other abuses to induce students to sign GSLP

loans, or failed to provide adequate training to students after

they enrolled.’ Numerous suits have been filed by former

students challenging the enforceability of GSLP loans

arranged by such vocational schools.°

The Culinary School of Washington (CSW) was a

proprietary school headquartered in Washington, D.C.,

which financed the enrollment of most of its students by

arranging for them to execute GSLP loans. Overall, CSW

received over $18.8 million in federal loans, including

approximately $6.6 million in 1989. App. at A26 n.4.

CSW recruited students by representing that it would

provide vocational training in the culinary arts which, after

25 weeks, would qualify students as certified gourmet chefs.

Among other things, the school promised to provide training

by master chefs in professionally equipped kitchens in

various embassies, as well as transportation, housing,

financial assistance, and job placement services. Relying on

these representations, petitioners in this case enrolled in the

school, and signed GSLP loans. App. at A5S-6.

CSW arranged petitioners’ loans, and the students had no

direct contact with the lenders. CSW presented the students

with pre-printed loan applications and promissory notes,

* Abuses in Federal Student Aid Programs, Hearings before the

Permanent Subcommittee on Investigations of the Committee on

Governmental Affairs, \101st Cong., 2d Sess., S. Hrg. 101-659, Pt.

2, 153-58 (1990); Office of Inspector General, U.S. Department

of Education, SEMIANNUAL REPORT TO CONGRESS, No. 22,

October 1, 1990-March 31, 1991, at 9-23.

° See, e.g., Tipton v. Secretary of Education, 768 F. Supp.

540 (S.D.W.Va. 1991); Keams v. Temple Technical Institute, Inc. ,

807 F. Supp. 569 (D. Ariz. 1992); Williams v. National School of

Health Technology, Inc., 836 F. Supp. 273 (E.D. Pa. 1993);

Bogart v. Nebraska Student Loan Program, 313 Ark. 656, 858

S.W.2d 78 (1993).

7

selected the lenders for the students’ loans, completed

portions of the loan notes, and was responsible for presenting

the terms of the loan to the students. CSW then forwarded

the completed forms to the lenders and guaranty agencies,

which approved the loans and issued the funds to CSW.

App. at A6é.

Official investigations of CSW repeatedly found that

CSW misrepresented its services, failed to fulfill its promises

to students, and mishandled loan funds.’ The training

provided by CSW was inadequate, its facilities were

unsanitary and outdated, and it often failed to provide the

transportation and housing it promised. App. A6. In

January 1990, after repeated complaints concerning its

misconduct, and in the midst of an investigation by the

District of Columbia Educational Licensure Commission,

CSW filed for bankruptcy, and the school ceased operations.

Id.

In 1991, petitioners filed this action against CSW, the

lenders on their loans, the guaranty agencies, and the

Secretary of Education. Petitioners alleged that CSW

fraudulently induced them to enroll and to execute GSLP

loans, and had breached its contractual obligations.

Petitioners further alleged that, because of CSW’s

involvement in arranging the loans, their claims and defenses

against CSW could be asserted as defenses to enforcement by

the lenders, the guaranty agencies, and the Secretary.

” See, e.g., Department of Education, Office of Inspector

General, Inspection Report of Culinary School of Washington, Ltd.

(Insp. No. N-0000903) (May 21, 1990); Abuses ir Federal Student

Aid Programs, Hearings before the Permanent Subcommittee on

Investigations of the Committee on Governmental Affairs, 10\st

Cong., 2d Sess., S. Hrg. 101-659, Pt. 2, 308-379 (1990)

(describing investigations by the District of Columbia Educational

Licensure Commission, the Department of Education, the Higher

Education Assistance Foundation, and accrediting agencies).

‘

8

Petitioners’ claims against the Secretary, guaranty

agencies, and the lenders rest on state and federal consumer

laws that provide that, when the seller arranges a loan in a

consumer transaction, the consumers’ claims and defenses

against the seller are preserved and can be raised against the

lender or assignees of the loan. A number of states and the

District of Columbia have adopted consumer protection laws

that provide for such preservation of consumer defenses in

order to prevent the use of financing arrangements to

abrogate or “cut-off” consumer claims and defenses. See,

e.g., D.C. CODE § 28-3807-09 (1991); ARIZ. REV. STAT.

ANN. § 44-145 (1994); N. Y. GEN. Bus. Law § 253

(Consol. 1993); MASS. GEN. ANN. Laws ch. 255, § 12F

(1988); Mp. CoDE ANN., Com. LAw. § 12-309 (1993); see

also Uniform Consumer Credit Code, 1974 Act, § 3.405, 7A

U.L.A. 130-31 (1985).

This principle of preserving consumer defenses is also

embodied in the Federal Trade Commission’s rule on the

“Preservation of Consumer Claims and Defenses,” which

requires that, if the seller and lender cooperate in arranging

financing, the loan must include a provision stating that the

it is subject to all claims and defenses that the borrower has

against the seller. See 16 C.F.R. § 433.2 (1994) (“FTC

Holder Rule”); see generally 40 Fed. Reg. 53507-16, 53524-

25 (1975) (discussing rationale for FTC Holder Rule); J.

Fonseca, HANDLING CONSUMER CREDIT CASES, § 2.18-20,

at 69-84 (3d ed. 1986) (discussing FTC Holder Rule and

state laws). Finally, the Department of Education, and its

predecessor, the Office of Education, have stated that the

FTC Holder Rule is applicable to GSLP loans and, if

loanmaking functions are delegated to a school in an

“origination relationship,” 34 C.F.R. § 682.200 (1993), the

school’s failure to deliver the services purchased by the loan

9

provides the student with a defense against the obligation to

repay the lender all or part of the loan.*

CSW failed to appear, and the district court entered a

default judgment finding the school liable for fraud and

breach of contract. The district court, however, rejected

each of petitioners’ arguments that CSW’s misconduct gave

rise to defenses against the lenders, the guaranty agencies

and the Secretary, on the basis that petitioners’ claims were

preempted by federal law or failed to state a claim, or on the

ground that the claims did not survive defendants’ summary

judgment motions. App. at A7-8.

C. The Appellate Court's Ruling.

On appeal, petitioners challenged four aspects of the

district court’s rulings, three of which involved, in part,

issues of state law, and one of which rested entirely on

federal law. First, petitioners challenged the district court’s

ruling that the District of Columbia statutes that preserve

claims and defenses on consumer loans are preempted by

* See App. at A22-23 (quoting Department of Education

Statements that “where there is an origination relationship between

the school and the lender, the student’s claims and defenses as to

the school can be asserted as defenses to the loan contract, whether

rights under the loan contract are being asserted by the lending

bank, the guaranty agency or the Secretary.”); 34 C.F.R.

§ 682.604(f)(2)(iii) (1993) (students should be counselled that they

cannot raise school-related defenses on a loan, “other than a loan

made or originated by the school.”); 55 Fed. Reg. 48327 (1990)

(referring to “longstanding view” that defenses are preserved if

“origination relationship” exists between school and lender);

United States v. Griffin, 707 F.2d 1477, 1480-84 (D.C. Cir. 1983)

(describing 1976 Office of Education bulletin stating that FTC

Holder Rule applies to student loans, and Office of Education

regulations on preservation of student defenses on school

originated loans); App. at AS n.5 (Department of Education has

incorporated FTC Holder Rule Notice in new loan application

forms).

10

federal law. App. at A39-40, A5S4-55. Petitioners also

raised claims based on the FTC Holder Rule in which they

challenged the district court’s ruling that, although the FTC

Holder Rule applies to GSLP loans, the provisions of the

Notice required by the Rule could not be implied into the

notes under state common law principles, App. at A43-48,

and its ruling that neither the District of Columbia statutes,

nor the District of Columbia’s proprietary school regulations,

provided any remedy against enforcement of loans issued in

violation of the Holder Rule. App. at AS5-57, A87-90.

Finally, petitioners challenged the district court’s holding that

the Secretary of Education was entitled to summary judgment

on petitioners’ claim that their defenses were preserved under

the Secretary’s statements on “origination” because the

allegations that CSW originated the loans were not supported

by the evidence. App. at A83-86.

The Court of Appeals only decided the merits of this last

claim. Although the Secretary had never raised the issue in

the district court, the Court of Appeals requested

supplementary briefing on whether the Secretary's statements

concerning “origination” represent a binding “rule”

enforceable by third parties. App. at A1l8-20. The Court of

Appeals concluded that the language and context of

Secretary's statements indicated that the statements were not

intended to create new rights or defenses as a matter of

federal law, particularly because the Department has

indicated that “it preferred continuation of the regime of state

defenses to the promulgation of a uniform federal rule.”

App. at A24.

The Court of Appeals also ruled that Congress had not

displaced state defenses and established a uniform federal

rule by express preemption or implied preemption of the

field, and state law governs the rights of the lenders and

guaranty agencies unless it is in “actual conflict” with federal

law. App. at Al3-15. Moreover, the Court held that the

Secretary's rights to enforce the loans under federal law must

also be determined by reference to state law. Although the

1]

rights and obligations of the Secretary were governed by

federal common law, the content of federal common law in

the federal loan context is determined by the applicable state

standards, absent proof that those standards are in conflict

| with the federal law. App. at A9 n.9 (citing United States v.

) Kimbell Foods, Inc., 440 U.S. 715, 727 (1979)).

) The Court of Appeals ultimately held, however, that it

would not resolve the state law and the federal common law

} issues presented by petitioners’ challenges to the district

court’s rulings on preemption and the FTC Holder Rule.

Although no party had questioned the appropriateness of

declaratory relief in the district court or on appeal, the Court

. of Appeals, without requesting any briefing on the issue,

ruled that the district court acted improperly in addressing

these claims on the merits, and directed that all claims

requiring the resolution of issues of state law be dismissed

without prejudice. App. at A3, A9-A17.

The Court of Appeals maintained that declaratory relief

; was inappropriate because it could not determine which

choice of law rules to apply. Although most, if not all, of

the students signed their loan forms at CSW in the District

of Columbia, one defendant (Crestar Bank) had argued that

petitioners could not rely on District of Columbia law

because the loans were approved by lenders outside the

District of Columbia, or contained choice of law provisions

Stating that the loan should be governed by the law of other

states. In response, petitioners argued that the choice of law

provisions, even if otherwise valid, cannot be used to defeat

the fundamental policies of the forum state that cannot be

waived by agreement, such as the District of Columbia

consumer protection laws at issue here. See RESTATEMENT

(SECOND) OF CONFLICT OF LAWS § 187 (1971)); Munter v.

Lankford, 127 F. Supp. 630, 632-33 (D.D.C. 1955).

The Court of Appeals, however, refused to resolve this

issue on the grounds that “we have no way of knowing what

choice of law rules will obtain.” App. at Al5. The Court

—————— 2& LLL

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12

maintained that choice of law issues are governed by the

choice of law rules of the forum in which a future coercive

action would be brought, and “we can only speculate whether

D.C. law will govern any future coercive suit brought by the

declaratory judgment defendants.” App. at A9. “In light of

this uncertainty,” the Court held that it would not resolve

“whether D.C. law, which may or may not apply in a future

coercive action,” is preempted by federal law, id. at App.

A15, nor decide petitioners’ claims that their defenses are

preserved under the FTC Holder Rule. App. at Al7.

In holding that the district court was required to dismiss

petitioners’ request for declaratory and injunctive relief in

favor of “future coercive action[s] brought by the declaratory

judgment defendants,” App. at Al5, the Court of Appeals

did not examine whether such actions were likely or would

provide an adequate mechanism for resolving petitioners’

defenses. Nor did the court address petitioners’ claims for

injunctive relief “to remove adverse information relating to

these loans from the Plaintiffs’ credit records and restore

eligibility of the Plaintiffs to participate in the GSL program

and Pell Grant Program.” Complaint, Prayer for Relief, 4

4 (JA 308).

The Court of Appeal’s analysis of the declaratory relief

and choice of law issues originated solely with the Court, as

no party had raised such claims, and the parties had no

opportunity to present evidence or legal argument on these

issues before the Court of Appeals made its decision. After

the decision, petitioners filed a motion for rehearing arguing

that the Court of Appeals’ novel analysis of the choice of law

issues violated the rule of Klaxon Co. v. Stentor Electric

Manufacturing Co. , 313 U.S. 487 (1941), and that the denial

of declaratory and injunctive relief in favor of future coercive

actions could not be reconciled with Brillhart v. Excess Ins.

Co., 316 U.S. 491 (1942), particularly where extra-judicial

collection was authorized and there was no assurance that

petitioners would ever be able to obtain a determination of

their defenses in another proceeding. The petition for

13

rehearing was denied, without elaboration, on August 17,

1994. App. at A95.

REASONS FOR GRANTING THE WRIT

The Court of Appeals’ decision severely restricts the

availability of declaratory relief in situations where an action

for a declaratory judgment may be the only way a party can

obtain adjudication of his or her claim. Because this ruling

presents substantial questions concerning the rules of decision

in federal courts, and the ability of federal courts to refuse

to entertain declaratory judgments when there is no adequate

alternative remedy, this Court should grant review.

I. THE DECISION BELOW CONFLICTS WITH THE

DECISIONS OF THIS COURT THAT REQUIRE

FEDERAL COURTS DECIDING QUESTIONS OF

STATE LAW TO APPLY THE CHOICE OF LAW

PRINCIPLES OF THE FORUM IN WHICH THEY

SIT.

This Court should grant review to resolve whether the

canon that federal courts are required to apply the choice of

law rules of the forum in which they sit applies in

declaratory judgment actions or, as the Court below

concluded, the federal courts must look to the choice of law

rules of the forum of future coercive actions. This question

not only affects the applicable rules of decision, but also

affects the scope of the declaratory relief remedy. If, as the

Court below concluded, declaratory judgment actions are

governed by the choice of law rules of the potential future

coercive actions, the availability of declaratory relief will be

severely restricted because federal courts will be required to

dismiss such actions wherever choice of law issues exist and

future coercive actions may be brought in more than one

‘urisdiction.

The central premise of the decision below is that, when

choice of law issues are presented in a declaratory judgment

action, and it is uncertain where a future coercive action by

the defendant will be brought, declaratory relief is

14

unavailable in the federal courts because the court must apply

the choice of law rules of the forum of a future coercive

action and “we have no way of knowing what choice of law

rules will obtain.” App. at AIS. This ruling ignores the

well-established rule of that federal courts must follow the

choice of law rules of the jurisdictions in which they sit.

Klaxon Co. v. Stentor Electric Manufacturing Co. , 313 U.S.

487 (1941). This Court has made clear that this rule applies

even where the federal court disagrees with the wisdom of

the choice of law rules of the local jurisdiction, Day &

Zimmerman, Inc. v. Challoner, 423 U.S. 3, 4-5 (1975), and

where the issue is whether the local choice of law rules

would refuse to give effect to contractual terms because they

are contrary to the public policy of the forum. Griffin v.

McCoach, 313 U.S. 498, 503-04 (1941). No prior case of

this Court supports the Court of Appeals’ assumption that the

Klaxon rule does not apply to declaratory judgment actions.

Moreover, the Court of Appeals’ conclusion that Klaxon

does not apply to declaratory judgment actions frustrates the

very purpose of Klaxon and the Rules of Decision Act, 28

U.S.C. § 1652. Federal courts are required to apply the

choice of law rules of the forum in which they sit because

any other result would “disturb the equal administration of

justice in co-ordinate state and federal courts sitting side by

side.” Klaxon, 313 U.S. at 496 (citing Erie R. Co. v.

Tompkins, 304 U.S. 64, 74-77 (1938)). This rationale is

fully applicable to declaratory judgments. A declaratory

judgment brought in federal court should be governed by the

same legal rules, including choice of law rules, as a parallel

action in local courts seeking the same relief. The decision

below violates this Court’s teaching that federal courts are

“not free to engraft onto [state choice of law rules]

exceptions or modifications,” which deny litigants remedies

that would otherwise be available if the action were brought

in state court. Day & Zimmerman, Inc. v. Challoner, 423

U.S. at 4.

sii

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iia ts Sa ek aa Sa RLF rtd Mi Re nina Acta BN ee i.

15

Indeed, the issue is starkly presented in the context of

this case because of the federal government's removal

authority. As with other GSLP borrowers, the loans of many

of the petitioners in this action have been assigned to the

Secretary of Education. See infra note 9. Thus, even if

these borrowers were to initiate an action for declaratory and

injunctive relief against enforcement of the loans in state

court, the Secretary would be free to remove the action to

federal court. 28 U.S.C. § 1442(a)(1). Under the Court of

Appeals’ decision, however, the federal court would be

required to dismiss the action without ever adjudicating the

merits. Thus, in this context, failing to apply the choice of

law rules of the forum not only results in the federal court

reaching a different result, but it precludes borrowers from

ever obtaining relief that may be authorized by state law.

The Court of Appeals’ conclusion that declaratory relief

must be denied in order to allow the defendant to select the

forum and, thus, the governing choice of law rules, is also

in conflict with the rationale of other decisions of this Court.

In Van Dusen v. Barrack, 376 U.S. 612, 629-40 (1964), this

Court held that, even where a plaintiffs’ action is transferred

to another forum for the convenience of the parties and

witnesses, the choice of law rules of the forum selected by

the plaintiff still govern because plaintiffs should be allowed

“to retain whatever advantages may flow from the state laws

of the forum they have initially selected.” Jd. at 633. The

Court concluded that nothing in the language or policy of the

28 U.S.C. § 1404(a) would “justify its use by defendants to

defeat the advantages accruing to plaintiffs who have chosen

a forum which, although it was inconvenient, was a proper

venue.” Jd. at 634; accord Ferens v. John Deere Co., 494

U.S. 516 (1990) (Van Dusen holding also applies where

plaintiff initiates transfer). In the same way, nothing in the

Declaratory Judgment Act alters the normal rule that

plaintiffs are entitled to the benefit of their chosen forum, or

suggests that federal courts should deny declaratory relief in

order to allow the defendant to chose the forum.

16

Finally, the decision below warrants review because it

substantially restricts the availability of declaratory relief in

the federal courts. If, as the decision below holds, federal

courts must dismiss claims for declaratory relief where

choice of law issues exist and future coercive actions could

be brought in more than one jurisdiction, many actions

historically adjudicated through declaratory judgments could

not be maintained.

For example, the declaratory judgment act is designed to

provide a mechanism for addressing insurance coverage and

other contractual disputes by declaring the rights and

obligations of the parties. See Aetna Life Ins. Co. v.

Haworth, 300 U.S. 227 (1937). Such cases frequently raise

difficult choice of law issues, and involve disputes in which

a coercive action may be brought in any one of a number of

jurisdictions. See, e.g., Whirlpool Corp. v. Ritter, 929 F.2d

1318, 1320-21 (8th Cir. 1991); Eli Lilly and Co. v. Home

Ins. Co., 764 F. 2d 876, 880-81 (D.C. Cir. 1985); Melville

v. American Home Assur. Co. , 584 F.2d 1306, 1310-11 (3d

Cir. 1978). Moreover, federal programs involving loans and

other contractual obligations will generally be governed by

state law principles and, thus, will raise potential choice of

law issues. See, e.g., United States v. Kimbell Foods, Inc. ,

440 U.S. 715, 728-29 (1979) (Small Business Administration

loans generally governed by state law principles unless they

frustrate federal objectives).

Under the decision below, however, the availability of

declaratory judgments for these actions is severely restricted

because the federal court cannot determine which forum’s

law governs the choice of law issues and, thus, it must

dismiss such actions without addressing the merits. Indeed,

the choice of law issues presented in this case are typical of

those that arise in cases concerning contracts involving

parties in different states. The issue of whether contractual

provisions in the loan supplant District of Columbia law

presents an ordinary conflict of law issue to be decided by

the federal court or, if necessary, certified to the local

a le Oe Se ee ee

17

courts. See Clay v. Sun Ins. Office, 363 U.S. 207 (1960);

Eli Lilly and Co. v. Home Ins. Co., 764 F.2d at 884. But if

Klaxon does not apply to declaratory judgment actions, such

issues are indeterminable because it is impossible to ascertain

which choice of law rules govern, and federal courts will be

unable to entertain actions for declaratory relief when such

issues are involved.

Ii. THIS COURT SHOULD REVIEW THE COURT OF

APPEALS’ RULING THAT A FEDERAL COURT IS

REQUIRED TO REFUSE TO ADJUDICATE AN

ACTION FOR DECLARATORY JUDGMENT EVEN

WHERE, AS HERE, DENIAL OF SUCH RELIEF

MAY DENY THE PLAINTIFF ANY FORUM IN

WHICH TO LITIGATE HIS OR HER CLAIM.

This Court should also review the Court of Appeal’s

ruling that a federal court may (indeed, in this case, is

required to) dismiss a plaintiff's action for declaratory relief

in favor of a future coercive action by the defendant -- even

where such an action may be inadequate or may never be

brought. Although the decision below purports to reserve the

resolution of the federal preemption and other legal questions

for “future coercive suit[s] brought by the declaratory

judgment defendants,” App. at A9, borrowers under the

GSLP are subject to penalties before any such actions are

brought and, moreover, defendants may collect on the loans

without bringing a civil action. Consequently, the decision

below does not simply postpone an inevitable adjudication,

but may deny petitioners any opportunity for adjudication of

the merits of their claims that such penalties and collection

actions are unlawful because their loans are subject to valid

defenses.

This holding is inconsistent with this Court’s

jurisprudence concerning when federal courts may dismiss or

abstain in declaratory judgment actions, or other proceedings,

in favor of an alternative proceeding. In Brillhart v. Excess

Ins. Co. of America, 316 U.S. 491, 495 (1942), this Court

18

held that, even where there is another pending state court

action, a plaintiff should not be denied the opportunity to

obtain declaratory relief unless the alternative action is shown

to provide a better mechanism for adjudicating the plaintiffs’

claims. Commentators have likewise maintained that “[i]t is

only where the court believes that more effective relief can

and should be obtained by another procedure . . . that it is

justified in refusing a declaration because of the availability

of another remedy.” E. Borchard, DECLARATORY

JUDGMENTS 2D, 303 (1941).

In other contexts, this Court has also heid that federal

courts should not abstain or dismiss actions in favor of a

concurrent proceeding unless it is shown that the other

proceeding “will be an adequate vehicle for the complete and

prompt resolution of the issues between the parties.” Moses

H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S.

1, 28 (1983) (improper to stay federal suit seeking arbitration

in deference to parallel state court action); see also Gibson

v. Berryhill, 411 U.S. 564, 577 (1973) (abstention in favor

of state court prosecution “naturally presupposes the

opportunity to raise and have timely decided by a competent

state tribunal the federal issues involved.”); Colorado River

Water Conservation District v. United States, 424 U.S. 800,

817-19 (1976) (federal courts have “virtually unflagging

obligation” to exercise jurisdiction given them and “[o]nly

the clearest justifications will warrant dismissal” in favor of

state court proceedings). Indeed, this Court’s decisions teach

that if there is “any substantial doubt” that the alternative

proceeding is adequate, stay or dismissal of a plaintiff's

federal action in deference to the alternative proceeding is “a

serious abuse of discretion.” Moses H. Cone Mem. Hosp,

460 U.S. at 28.

The decision below is at odds with these principles

because it provides that declaratory relief must be denied to

borrowers in the student loan program even where there is no

other pending action and, indeed, no assurance that there will

ever be an action in which the claims will be adjudicated.

si ata aaa

19

Where Brillhart held that it was improper to deny declaratory

relief in favor of a pending state action unless it was first

determined that action provided an adequate opportunity to

present the claims in the declaratory judgment action, the

decision below provides that declaratory relief must be

denied, despite the absence of any pending action, or even

imminent threat that such an action will be brought. See E.

Borchard, supra at 349 (declaratory action should be

dismissed in favor of an imminent action “only in the

clearest case.”)

Moreover, the decision below mandates the dismissal of

declaratory relief without conducting any inquiry into

whether future coercive actions will be adequate to protect

borrowers’ rights. Because the appropriateness of

declaratory relief was never questioned by the district court

or the parties, the Court of Appeals denied declaratory relief

without any record and without giving the parties any

opportunity to be heard on the likelihood or adequacy of

future coercive actions. Compare Brillhart, 316 U.S. at 495-

97 (issues concerning adequacy of pending state garnishment

action should be remanded to the district court to conduct

appropriate inquiry).

More importantly, for many borrowers in the GSLP, the

prospect of a future coercive action is illusory. Under the

GSLP, lenders do not bring suit to enforce contested loans,

but are fully reimbursed by the guaranty agencies after they

have made demands for payment. 34 C.F.R. § 682.411

(1993). Guaranty agencies are also entitled to reimbursement

from the Secretary without ever filing suit if they determine

that the cost of litigation exceeds the likely recovery, or that

the borrower lacks the means to satisfy a judgment on the

debt. 59 Fed. Reg. 22488 (April 29, 1994) (to be codified

at. 34 C.F.R. § 682.410(b)(6)(vii)(B)). Moreover, the

Secretary and guaranty agencies can, and frequently do,

collect loans through wage garnishment or tax refund

intercepts without ever filing a civil action. See, e.g.,

Games v. Cavazos, 737 F. Supp. 1368, 1370-72 (D. Del.

ee ew

20

1990) (private agency assigned loan to Secretary for

collection through tax intercepts after a series of collection

notices); Thomas v. Bennett, 856 F. 2d 1165, 1166 (8th Cir.

1988) (only collection action was by tax offset nine years

after loan was made); Gerrard v. United States Office of

Education, 656 F. Supp. 570, 571-72 (N.D. Cal. 1987)

(same). Indeed, the Secretary and guaranty agencies have

every incentive to use these less costly, non-judicial

collection methods, particularly where the amounts of

individual loans are relatively modest and the borrower’s

resources are limited.°

Thus, denying declaratory relief effectively forecloses the

opportunity for many borrowers in the GSLP to litigate the

validity of their defenses to the loans. If the Secretary or

guaranty agencies pursue collection through wage

garnishment or tax intercepts, the borrower may request that

they review “the existence, amount, enforceability, or past

due status of the debt.” 34 C.F.R. § 30.33(b)(3)(ii) (1994).

But this procedure is plainly not a substitute for declaratory

relief, or equivalent to the ability to raise defenses in a civil

action to enforce the loan. Apart from the fact that the

review is conducted by the Secretary or the guaranty agency,

the procedure provides no mechanism to compel testimony or

gather evidence, see id. § 30.24-26 (1994), and no means to

litigate the “difficult preemption questions” and other

* Because the propriety of declaratory relief was never

contested below, the record on the extent to which the tax intercept

procedure has been, and is being used, to collect from the

petitioners here was not developed. Nonetheless, the record shows

that by 1992 the Secretary had already taken assignment of loans

to students attending the Culinary School of Washington for the

purpose of intercepting the borrowers’ federal tax refunds. See

Response of Secretary of Education to Plaintiffs’ First

interrogatories, Inter. Nos. 2-4 (May 1i, 1992) (reproduced in

Joint Appendix below at JA 818-820).

21

complex issues that the Court of Appeals declined to

adjudicate. App. at A9.

In addition, if the loan is collected by intercepting tax

refunds, review of the Secretary of the Treasury’s actions is

precluded by statute, 26 U.S.C. § 6402(e), so the only means

to challenge the government’s claim that withholding of the

borrowers’ tax refunds is justified by a “legally enforceable

debt,” 31 U.S.C. § 3720A(a), is through an action for

declaratory or injunctive relief against the Department of

Education or the guaranty agency that claims that the debt is

enforceable. See Thomas v. Bennett, 856 F. 2d at 1167-68;

26 C.F.R. § 301.6402-6(1) (1994). This, however, is

precisely the type of action foreclosed by the decision

below.'°

Furthermore, even if the Secretary and guaranty agencies

never seek to collect the disputed loan through tax intercepts,

wage garnishment, or civil actions, borrowers are subject to

penalties for which they have no redress if declaratory relief

is foreclosed. Lenders and guaranty agencies are required to

report defaulted loans to credit bureaus even if no civil

enforcement action is initiated and, indeed, before any such

action would be initiated. See 34 C.F.R. §§ 682.208(b),

682.410(b)(5) (1993). In addition, any borrower who is in

default on a GSLP loan, even if the debt is disputed, is

barred from receiving any grant, loan, or other financial

assistance under the Higher Education Act of 1965. 20

U.S.C. § 1091(a)(3); 34 C.F.R. § 668.7(a)(7) (1993).

Injunctive or declaratory relief is generally available to

remedy such harms “to prevent one party from continually

‘© The Court of Appeals’ decision does not necessarily

foreclose a borrower from whom funds have already been collected

through administrative garnishment, or other means, from bringing

an action for monetary relief. A borrower, however, should not

be compelled to wait until money is collected on a disputed loan

before he or she can contest its enforceability.

22

accusing the other, to his detriment, without allowing the

other to secure an adjudication of his rights by bringing

suit.” Tempco Elec. Heater Corp. v. Omega Engineering

Inc., 819 F.2d 746, 749 (7th Cir. 1987); accord E.

Borchard, supra, at 304, 349 (declaratory action to

adjudicate defenses should be available to protect the legal

interest of a prospective defendant “in repelling an unjust

claim, and in clearing his right or title”). Under the decision

below, however, declaratory relief is not available to the

millions of borrowers who have participated in the GSLP.

The hypothetical prospect of a future coercive action

provides no » medy since these injuries occur from the time

the borrower refuses to pay the contested loan, and

regardless of whether any coercive action is ever pursued.

Finally, this ruling has important implications beyond this

case for the GSLP and other federal programs where similar

issues arise. The allegations underlying this action are not

isolated; there are numerous reports documenting widespread

fraud and misrepresentation, inadequate training, and other

abuses in the GSLP program.'' The reported cases

concerning student claims, see supra note 6, reflect only a

small fraction of the disputes concerning the effect of such

abuses on the enforceability of student loans. Moreover,

other federal programs present similar issues because federal

law gives agencies the authority to collect on alleged

obligations through tax intercepts, 31 U.S.C. § 3720A, and

“administrative offsets” of funds owed by the government,

id. § 3716, without instituting a civil action. The decision

below raises important questions concerning the availability

'' See, e.g. Abuses in Federal Student Aid Programs, S. Rep.

102-58, 102d Cong., Ist Sess. 11-13 (1991).

23

of declaratory relief to resolve disputes concerning

enforcement of such obligations."

CONCLUSION

This Court should issue a writ of certiorari to review the

decision of the Court of Appeals for the District of Columbia

Circuit in this action.

Respectfully submitted,

Michael E. Tankersley Clare L. McCulla

(Counsel of Record) LEGAL SERVICES OF

Alan B. Morrison NORTHERN VIRGINIA

David C. Vladeck 110 N. Royal Street,

Public Citizen Litigation Group Suite 505

2000 P Street, N.W., Suite 700 Alexandria, VA 22314

Washington, D.C. 20036 (703) 684-5566

(202) 833-3000

Counsel for Petitioners

November 15, 1994

Although it is not clear whether it was determinative of the

outcome of the judgment below, subsidiary to each of the questions

presented here is the question of the standard for appellate review

of a district court’s decision to exercise its discretion to grant or

deny declaratory relief. As the Court of Appeals’ opinion

observes, the circuit courts are divided over this issue: the District

of Columbia and six other circuits have held that the district

court’s decision to exercise its discretion is reviewed de novo, four

circuits hold that such decisions are reviewed only for abuse of

discretion, and two circuits apply an intermediate standard of

review. See App. at A10-12 (citing cases). This Court’s decisions

Suggest, contrary to the decision below, that the question of

whether it is appropriate to defer to an alternative proceeding

should be examined by the district court in the first instance, see

Brillhart, 316 U.S. at 495-97, and that the resolution of this issue

is committed to the district court’s discretion. See Will v. Calvert

Fire Ins. Co., 437 U.S. 655, 664 (1978).