Opposition Brief — North Carolina v. United States (Nos. 90-4, 89-1873, 89-2027)

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Nos. 89-1873, 89-2027, and ‘{ HOSES F. SPANIOL, UR

In the Supreme Court of the Bnited States

OCTOBER TERM, 1990

MARYLAND HIGHER EDUCATION LOAN CORPORATION,

PETITIONER

LAURO F, CAVAZOS, SECRETARY OF EDUCATION, ET AL.

SOUTH CAROLINA STATE EDUCATION ASSISTANCE

AUTHORITY, PETITIONER

LAURO F., CAVAZOS, SECRETARY OF EDUCATION, ET AL.

STATE OF NORTH CAROLINA, ET AL., PETITIONERS

Vv.

UNITED STATES OF AMERICA, ET AL.

ON PETITIONS FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

BRIEF FOR THE RESPONDENTS

IN OPPOSITION

KENNETH W. STARR

Solicitor General

STUART M. GERSON

Assistant Attorney General

WILLIAM KANTER

NEIL H. KOSLOWE

Attorneys

Department of Justice

Washington, D.C. 20530

(202) 514-2217

————

BEST AVAILABLE COPY)

QUESTIONS PRESENTED

Section 3001 of the Omnibus Budget Reconciliation Act

of 1987 (OBRA), 20 U.S.C. 1072(e) (repealed), amended

provisions of the Guaranteed Student Loan Program

(GSLP) created by the Higher Education Act of 1965. Sec-

tion 3001 required agencies that guaranty GSLP loans to

transfer “excess” GSLP cash from their reserve funds to

the Secretary of Education, for deposit into the general

GSLP fund maintained by the Secretary for reimburse-

ment purposes. Section 3001 also made the guaranty agen-

cies’ right to receive federal reimbursement for losses sub-

ject to their compliance with the transfer requirement.

Section 3001 has been challenged on the ground that it

violates the Takings Clause of the Fifth Amendment. The

questions presented are:

1. Whether the guaranty agencies had “private prop-

erty” rights to the excess cash within the meaning of the

Takings Clause.

2. Whether Section 3001 “took” the guaranty agencies’

“vested right” to reimbursement under pre-OBRA con-

tracts between the agencies and the Secretary.

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TABLE OF CONTENTS

Page

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ES, Sr 21

TABLE OF AUTHORITIES

Cases:

Bowen v. Public Agencies Opposed to Social Secu-

rity Entrapment, 477 U.S. 41 (1986) ........... 11, 18

Buchanan v. Warley, 245 U.S. 60 (1917) ......... 14

CIR v. Lincoln Savings & Loan Ass’n, 403 U.S. 345

a eG SE ae a pueceees 15

Conn. Student Loan Foundation v. Cavazos, No.

H89-182 (D. Conn. Jan. 10, 1990), appeal with-

drawn by stipulation, No. 90-6111 (2d Cir.

asa n vee eu eewuas 13

Dayton-Goose Creek Ry. v. ICC, 263 U.S. 456

ae ea a ae deh 4 wha 6 OAM we 16

Delaware v. Cavazos, 723 F. Supp. 234 (D. Del.

1989), appeal pending, No. 90-3339 (3d Cir.) ... 13

Durham v. McLeod, 259 S.C. 409, 192 S.E.2d 202

ie wes Ok wk awe e a eee 5 4-85 16

Education Assistance Corp. v. Cavazos, 900 F.2d

617 (8th Cir. 1990), petition for cert. pending,

oe ee aw gees ake pea ne 4 12, 13, 17, 20

Flemming v. Nestor, 363 U.S. 603 (1960) ......... 19

Georgia Student Finance Comm’n v. Cavazos, No.

1:89-cv-160-MHS (N.D. Ga. July 9, 1990) ...... 13

Great Lakes Higher Educ. Corp. v. Cavazos, 711

F. Supp. 485 (W.D. Wis. 1989), appeal pending,

ee ee 13

Looker v. Maynard, 179 U.S. 46 (1900) .......... 18

Lynch v. United States, 292 U.S. 571 (1934) ...... 19, 20

(iI)

Cases — Continued:

Maine State Bd. of Educ. v.

Page

Cavazos, Civil No.

88-0273 (D. Me. July 25, 1990) ...........-+-:

Merrion v. Jicarilla Apache Tribe, 455 U.S. 130

(ee eee

Miller v. The State, 82 U.S. (15 Wall.) 478 (1872) ..

Ohio Student Loan Comm'n v. Cavazos, 900 F.2d

894 (6th Cir. 1990), petition for cert. pending,

PR BES occ ncnccncsaces

seen 22 8S O28 425 6.4

Perry v. United States, 294 U.S. 330 (1935) .....-..

Ruckelshaus v. Monsanto Co., 467 U.S. 986

(. . BPPOPeTePTeTeL acts

State Educ. Assistance Auth. v. Bank of Statesville,

276 N.C. 576, 174 S.E.2d 551 (1970) ..........

Stockholders v. Sterling, 300 U.S. 175 (1937) ..... a

United States v. 50 Acres of Land, 469 U.S. 24

4, rere rere re rs

United States R.R. Retirement Bd. v. Fritz, 449

Se he & Sb 2 a2 80 4S SOS OS

Constitution, statutes, and regulations:

U.S. Const. Amend. V (Takings Clause) ....... li, 12,

Education Amendments of 1976, Pub. L. No.

94-482, 90 Stat. 2081:

§ 127, 90 Stat. 2099:

90 Stat. 2114 .....

90 Stat. 2120 .....

6688 4 4S 2D HE ESO EB BOS

Higher Education Act of 1965, 20 U.S.C. 1071

8 EP eee eee re

y JIA Se, | Ce

20 U.S.C. 1072(a)(1)....

2 USAC. I072le) ....-

20 U.S.C. 1072(e)(1) ...

20 U.S.C. 1072(e)(2) ...

20 U.S.C. 1072(e)(2)(D)

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ebeeae 2 ese eeeeon es 4a 6

TT eeuere Ue ee ee ee ee

ARR EaSSAS O2 RBA EAA OE OSD

12, 13, 17, 20

SNIAYANAHANUYNN

Constitution, statutes, and regulations — Continued:

Me Tal WD 6 ck ohh ba no ee keke

20 U.S.C. 1072(e)(3)(A)(iii) 2.2.2...

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a0 U.S.C. WORIUMEMA) on. cae cece ucn

oe NPBA. NNN cece cbwsdwdescns a

Be APM, “TEP in vv wks So ecnbccas

20 U.S.C. 1078(c)(6)(A)(iii) .. 2. eee,

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OD WGA, TD ov id ic ces wkasecuns

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Pe ens Mae adi Ta cianaseeuentee

wnrtnNIuwna SUN UN ~IUN Ww OW OO

Higher Education Amendments of 1986, Pub. L.

No. 99-498, 100 Stat. 1268:

§ 402(a), 100 Stat. 1308:

ode A HE PN ruta eases 4

100 Stat. 1381 (20 U.S.C. 1078(c)(1(A)). 4, 18

Omnibus Budget Reconciliation Act of 1987, Pub.

L. No. 100-203, 101 Stat. 1330:

Fe BS ee 6, 12,

13, 17, 20

| Joe, ee ee, EP 6, 13

Transportation Act, 1920, ch. 91, § 15a, 41 Stat.

OEE wisi cee otra ane eee Cea » 16

N.C. Gen. Stat. § 116-204(6) (1987) ............. 16

S.C. Code Ann. § 59-115-110 (Law. Co-op 1972) . 16

34 C.F.R.:

MD I Cs vs oa cae ca ease

section GBZ.400(b) . 2.2... cc ccc nccs

EE 3 on esc acecenth cio aed

wn hh Ww Ww

Regulations — Continued: Page

Section 682.410(a)(1) .. 0... 6 ee eee eee 5

Section 682.410(a)(2) .. 0... - eee rere eres 15

Section 682-410(a)(2)-(6) ... 66-562 s ee eres 5

Section 682.411 ......--+5: soeeener genes 3

Miscellaneous:

51 Fed. Reg. (1986):

PD. 40,886 .. 60. c cece e eee eee eee n neces - 15

D, 40,909 ccc rnc een e eer eeeeseesceees 15

H.R. Conf. Rep. No. 495, 100th Cong., Ist Sess.

(HOBT) occ cece cece eee eee e eee neeeeten anes 6

Jn the Supreme Court of the United States

OCTOBER TERM, 1990

No. 89-1873

MARYLAND HIGHER EDUCATION LOAN CORPORA TION,

PETITIONER

Vv.

LAURO F. CAVAZOS, SECRETARY OF EDUCA TION, ET AL.

No. 89-2027

SOUTH CAROLINA STATE EDUCATION ASSISTANCE

AUTHORITY, PETITIONER

LAURO F. CAVAZOS, SECRETARY OF EDUCATION, ET AL.

No. 90-4

STATE OF NORTH CAROLINA, ET AL., PETITIONERS

UNITED STATES OF AMERICA, ET AL.

ON PETITIONS FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

BRIEF FOR THE RESPONDENTS

IN OPPOSITION

(1)

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. la-lla) !

in these consolidated cases is reported at 897 F.2d 1272.

The district court opinion in the Maryland case (89-1873

Pet. App. 17a-!9a) is unreported. The opinion of the

district court in the South Carolina case (89-2027 Pet.

App. 19a-39a) is reported at 716 F. Supp. 886. The opin-

ion of the district court in the North Carolina case (90-4

Pet. App. 1Sa-22a) is unreported.

JURISDICTION

The judgment of the court of appeals was entered on

March 7, 1990. Petitions for rehearing were denied on

March 28, 1990. Pet. App. 12a-14a. The petition for a writ

of certiorari in No. 89-1873 was filed on June 1, 1990. The

petition in No. 89-2027 was filed on June 22, 1990. The

petition in No. 90-4 was filed on June 26, 1990. The juris-

diction of this Court is invoked under 28 U.S.C. 1254()).

STATEMENT

1. a. The Higher Education Act of 1965 (the Act), 20

U.S.C. 1071, established the Guaranteed Student Loan

Program (GSLP). In that program, public and private

lending institutions make low-interest, higher-education

loans, subsidized by the federal government, to students.

State and nonprofit private agencies that participate in the

GSLP must execute an “insurance program agreement”

with the Secretary in which the agencies promise to oper-

' Unless otherwise noted, we will use “Pet. App.” to refer to the ap-

pendix to the petition in No. 89-1873. We will refer to the petitioner in

No. 89-1873 as the “Maryland petitioner,” to the petitioner in No.

89-2027 as the “South Carolina petitioner,” and to the petitioners in

No. 90-4 as the “North Carolina petitioner.”

ate a student loan insurance program that meets GSLP re-

quirements and to guarantee lenders they will pay 100% of

the unpaid principal on a qualifying student loan in case of

default or other failure to repay. 20 U.S.C. 1078(b); 34

C.F.R. 682.410, 682.411. The agreements specify that the

state agency agrees “to be bound by all changes in the Act

or regulations in accordance with their effective dates,”

Pet. App. 8a, and the regulations similarly provide that

“[a}ll of the agreements are subject to subsequent changes

in the Act or the regulations that apply to the GSLP

oe? Cre 682.400(d). In return, the Secretary

agrees to make interest subsidy payments, on behalf of

Students, to lenders whose loans are guaranteed by the

agency. /d. at 269a. The Act authorizes the Secretary to

pay “special allowances” to the lenders, so that their return

is not “less than equitable.” 20 U.S.C. 1087-1(a). See Pet.

App. Sa.

The Higher Education Act of 1965 also authorizes the

Secretary to enter into a “guaranty agreement” with a par-

licipating state guaranty agency in which the Secretary

agrees to reimburse the state guaranty agency for losses

resulting from the default of a student borrower on the un-

paid balance of the principal and accrued interest of any

GSLP loan. 20 U.S.C. 1078(c)(1)(A).? The amount of re-

* Betore 1976, guaranty agencies were required to insure only 80%

of the principal amount of covered loans, and the Commissioner of

Education was authorized to enier into “reinsurance agreement[s]”

with them in which the Commissioner would undertake to reimburse

80% of the agencies’ guaranty losses. See 34 C.F.R. 682.404(a)(1).

Under the Education Amendments of 1976, Pub. L. No. 94-482, 90

Stat. 2114, 2120, the Commissioner was authorized to enter into “sup-

plemental reinsurance agreements” with agencies that insured 100% of

their covered loans, in which the Commissioner would undertake to

reimburse 100% of their guaranty losses if they had an overal! default

raie below 5% of the principal amount of all loans; 90% if the default

iate Was between 5% and 9%: and 80% it the default rate exceeded

imbursement ranges between 80% and 100% of the

amount expended by the agency in discharge of its guar-

anty obligations, depending on the agency’s overall default

rate. Since 1986 guaranty agencies have been required to

pay a reinsurance fee to the Secretary, equal either to

0.25% of the total principal amount of covered loans

guaranteed by the agency that year, or 0.5% if the

agency’s overall default rate exceeded 5%. 20 USA.

1078(c)(9). See Pet. App. Sa.

As amended in 1986, the Higher Education Act of 1965

states that a participating state guaranty agency is

“deemed to have a contractual right against the United

States” during the life of each GSLP loan “to receive reim-

bursement” according to the provisions of that Act.

Higher Education Amendments of 1986, Pub. L. No.

99.498, 100 Stat. 1381 (codified at 20 Ua.

1078(c)(1)(A)). The guaranty agreement, however, like the

insurance program agreement, obliges each state guaranty

agency to comply with “all changes in the Act or Regula-

tions in accordance with their effective dates.” C.A. App.

24a, 28a, 141a-142a, 148a-149a, 270a, 275a; see Pet. App.

8a. The guaranty agreement also provides that the Secre-

tary may withhold or demand compensation for federal

payments — including reimbursements—if the state

guaranty agency fails to comply with the Act or its imple-

menting regulations. /d. at 26a, 31a-32a, 145a-146a, 152a,

270a-271a, 278a.

9%. See 34 C.F.R. 682.405. Under the Higher Education Amend-

ments of 1986, Pub. L. No. 99-498, § 402(a) 100 Stat. 1371, all

guaranty agencies must insure 100% of their covered loans, and the

reimbursement rate is the same as the Commissioner undertook in the

supplemental reinsurance agreements. Since 1986 the “reinsurance”

and “supplemental reinsurance” agreements have been referred to col-

lectively as “guaranty agreements.”

The Higher Education Act of 1965 authorizes or pro-

vides for other sources of revenue to state guaranty agen-

cies. It authorizes the Secretary to make cash advances to

help establish or strengthen such agencies, 20 U.S.C.

1072(a)(1); it permits such agencies to collect a single in-

surance premium from lenders of not more than 3% of the

principal amount of a loan, 20 U.S.C. 1078(b)(1)(H); it

permits such agencies to retain 30% of amounts they col-

lect from defaulting borrowers after reinsurance payments

have been made to them, 20 U.S.C. 1078(c)(2)(D) and

(c)(6)(A)(ii);3 and it directs the Secretary to pay (and pro-

vides that guaranty agencies shall “be deemed to have a

contractual right against the United States to receive”) a

portion of the agencies’ administrative costs, 20 U.S.C.

1078(f)(1)(A) and (B). Pet. App. Sa.

Under the Secretary’s regulations, state guaranty agen-

cies must deposit reimbursements, revenue authorized or

provided by the Act, and all state appropriations, gifts,

grants, and investment earnings, into a “reserve fund.” 34

C.F.R. 682.410(a)(1). The regulations stipulate that none

of the money in the reserve fund may be used for purposes

other than GSLP purposes specified by the Secretary:

namely, guaranteeing loans, paying claims, refunding

overpayments and advances, and administering the -pro-

gram. 34 C.F.R. 682.410(a)(2)-(6).

b. A major problem with the GSLP has been the in-

creasing accumulation and use of cash in the guaranty

agencies’ reserve funds. In a 1986 report commissioned by

Congress, the Comptroller General found that state guar-

> Under 20 U.S.C. 1078(c)(8), a state guaranty agency must assign

to the Secretary any loan for which the Secretary has made a reim-

bursement payment if the Secretary determines that is required to pro-

tect the federal fiscal interest. When such an assignment is made, the

agency may not retain any portion of the collections. 34 C.F.R.

682.409(b).

anty agencies had accumulated huge cash reserves that

“exceed the risks guarant[y] agencies are asked to assume

{at the] expense of the federal government and student

borrowers.” C.A. App. 380a. The Comptroller General

also found that at least some agencies were using the

reserves for improper purposes. /d. 381la-383a. The

Comptroller General recommended, among other things,

that Congress set limits on the amount of cash guaranty

agencies could retain in their reserve funds, to correspond

to the actual financial risks they face. Jd. at 408a-409a.

The Comptroller General later submitted a report to Con-

gress with draft guidelines for establishing maximum cash

reserve levels. Jd. at 434a-471la.

c. On December 22, 1987, Congress enacted the Omni-

bus Budget Reconciliation Act of 1987, Pub. L. No.

100-203, 101 Stat. 1330-36 (the 1987 OBRA Amend-

ments). Section 3001 of OBRA amended several GSLP

provisions of the Higher Education Act of 1965. 20

U.S.C. 1072(e) (repealed).4 Under Section 3002 of the

1987 OBRA Amendments, 101 Stat. 1330-38, the provi-

sions of Section 3001 were scheduled to, and did, expire on

September 30, 1989.

The 1987 OBRA Amendments required the Secretary to

determine the “maximum cash reserve[ ]” permitted each

guaranty agency for fiscal year 1986 under a statutory for-

mula based on the Comptroller General’s draft guidetines.

20 U.S.C. 1072(e)(1) (repealed).* i the Secretary deter-

+ In the legislative history of the OBRA, Section 3001 appears for

the first time in the conference committee report. H.R. Cont. Rep.

No. 495, 100th Cong., Ist Sess. 39-41 (1987).

> The maximum level was the greater of “(A) 40 percent of the total

amount paid by that agency on insurance claims during the preceding

fiscal year; (B) 0.3 percent of the original principal amount of loans

that are insured by that agency and that are outstanding at the end of

such preceding fiscal year; (C) an amount which, when combined with

mined that any guaranty agency had, at the end of fiscal

year 1986, cash reserves in excess of its “maximum,” the

Secretary was required to direct the agency to “eliminate”

the excess by one or more of the following methods: (a) re-

paying advances of federal funds made by the Secretary to

the agency and not otherwise required to be repaid; (b)

withholding and canceling reimbursement claims other-

wise payable by the Secretary to the agency; (c) reducing

the amount of administrative cost allowances for which

the agency otherwise would apply to the Secretary; and (d)

any other method of reducing payments from, or increas-

ing payments to, the federal government. 20 U.S.C.

1072(e)(2) (repealed). The 1987 OBRA Amendments also

included provisions to enforce the transfer requirement.

Those provisions made the state guaranty agencies’ statu-

tory “contractual right” to receive reimbursements and ad-

ministrative cost allowances from the Secretary “subject

to” the agencies’ compliance with the transfer require-

ment. 20 U.S.C. 1078(c)(1)(A) and (f)(1)(B) (repealed).°®

The 1987 Amendments allowed the Secretary to waive

the requirement to eliminate excess cash reserves if he

determined that an agency’s financial position had deterio-

rated significantly since the end of the preceding fiscal

year, that significant changes in economic circumstances

or the agency’s loan insurance program rendered the maxi-

mum reserve level inadequate for the continued function-

all other parts of total agency reserves, equals 0.4 percent of such

original principal amount; (D) $500,000; or (E) the amount required

to comply with the reserve requirements of a State law as in effect on

October 17, 1986.” 20 U.S.C. 1072(e)(1) (repealed).

® Similarly, the 1987 Amendments made the amount of the rein-

surance fee paid by agencies to the Secretary “subject to” the transfer

requirement. 20 U.S.C. 1078(c)(9)(A) (repealed). That allowed agen-

cies to increase the fee in satisfaction of that requirement. See 20

U.S.C. 1072(e)(2)(D) (repealed).

ing of the agency, or that in eliminating the excess cash

reserves the agency would violate contractual obligations

on the date the 1987 OBRA Amendments were enacted re-

quiring the agency to maintain a specific level of reserve

funds. 20 U.S.C. 1072(e)(3) (repealed). The Amendments

also set a nationwide limit of $250 million on the amount

of excess cash reserves to be eliminated. 20 U.S.C.

1072(e)(4) (repealed).

All excess cash transferred to the Secretary by guaranty

agencies under the 1987 Amendments was deposited in the

GSLP student loan insurance fund maintained by the Sec-

retary under 20 U.S.C. 1081. C.A. App. 377a. That fund

is used to make reimbursement payments to guaranty

agencies, as well as to make payments for defaulted loans

insured directly by the Secretary. /bid.

2. As required by the 1987 OBRA Amendments, the

Secretary calculated the statutory “maximum cash reserve”

for the Maryland, South Carolina, and North Carolina

petitioners. The Secretary concluded that each one had ex-

cess cash reserves, and directed each petitioner to transfer

that excess to the federal government.’ After each peti-

7 After calculating the Maryland a maximum cash

reserve, the Secretary informed it that it was required to transfer

$10,797,400 in excess cash reserves. Pet. App. 7a. The Maryland peti-

tioner had certified cash reserves of $22,554,507, and its “maximum

cash reserve” was $10,384,151. C.A. App. 182a. The amount of excess

cash reserves petitioners were directed to transfer was calculated by

subtracting the “maximum” from the amount certified, further sub-

tracting an amount owed to the Secretary under a different statute,

and ratably reducing the result to comply with the $250 million nation-

wide ceiling on the recovery of excess cash reserves. The Maryland

petitioner applied for, but was denied, a waiver of the transfer

requirement. Pet. App. 7a. That denial was not challenged in the

courts below.

The Secretary determined the South Carolina petitioner’s maximum

cash reserve, and he informed it that it was required to transfer

tioner refused to comply with the Secretary’s directive, the

Secretary withheld GSLP reimbursements otherwise pay-

able to each petitioner until the full amount was recov-

ered. Pet. App. 7a.

Petitioners filed separate suits in different district courts

challenging the Secretary’s actions. The courts in Maryland

and South Carolina held that the 1987 OBRA Amendments

were unconstitutional and enjoined their enforcement.®

$2,739,528 of its excess cash reserves. Pet. App. 6a. The South

Carolina petitioner had certified cash reserves of $3,633,720, and a

“maximum cash reserve” of $500,000. C.A. App. 94k. The South

Carolina petitioner applied for, but was denied, a waiver of the trans-

fer requirement. The South Carolina petitioner challenged the denial

of the waiver in the district court, but the district court did not decide

that question. 89-2027 Pet. App. 38a-39a n.9.

The Secretary determined the North Carolina petitioner’s maximum

cash reserve, and he informed it that it was required to transfer

$15,911,946 of its excess cash reserves. Pet. App. 7a. The North Caro-

lina petitioner had certified cash reserves of $18,646,346, and a “maxi-

mum cash reserve” of $1,421,534. C.A. App. 308a-310a. The North

Carolina petitioner applied for a waiver, and the Secretary waived

$13,279,161 of the amount due, based on 20 U.S.C. 1072(e)(3)(A)(iii)

(repealed). C.A. App. 313a-316a. The North Carolina petitioner did

not challenge the Secretary’s waiver decision.

§ In the South Carolina case, the district court held that under the

guaranty agreement and the statute deeming state guaranty agencies to

have a “contract[ } right” to receive reimbursements, the South Caro-

lina petitioner acquired “vested property rights” to reimbursements,

and that the 1987 Amendments violated the Fifth Amendment by

“tak[ing] away that property.” 89-2027 Pet. App. 37a. The Secretary

had argued that the agreement requiring the South Carolina petitioner

to comply with “all changes in the Act or Regulations” defeated any

claim of “vested” rights. The court rejected that argument on the

ground that the reservation was ineffective since it did not appear in

the Higher Education Act of 1965 itself. 89-2027 Pet. App. 34a-37a.

The court enjoined the Secretary from enforcing the 1987 OBRA

Amendments against the South Carolina petitioner, and ordered him

By contrast, the North Carolina court upheld the Amend-

ments. ?

The Secretary appealed from the Maryland and South

Carolina judgments, and his appeals were consolidated

with an appeal in the North Carolina case.'° The court of

appeals reversed the judgments in the Maryland and South

Carolina cases and upheld the judgment in the North Car-

olina case.

The court of appeals rejected the argument that the. 1987

OBRA Amendments could not modify the guaranty agree-

to release to it the reimbursements he had withheld. /bid.

The Maryland district court adopted the decision of the South Car-

olina district court, holding that the amendments were an uncompen-

sated taking of the Maryland petitioner’s right to reimbursement. Pet.

App. 19a. The court stated that “[iJn a nutshell, the excess cash

reserves are the property of the plaintiff, and despite language making

the plaintiff’s contract with the defendants conformable to legislative

changes, the federal government cannot simply take the cash reserves

away from the plaintuff.” /bid.

’ The North Carolina district court held that the North Carolina

petitioner “has none of the essential ‘private property’ rights over the

money in its [reserve fund], including the excess cash reserves.” 90-4

Pet. App. 20a. The court reasoned that “once [the North Carolina

petitioner] executed its GSLP agreements with the Department of

Education and agreed to abide by the Higher Education Act and its

regulations, it necessarily relinquished any ‘ownership’ claim to funds

it thereafter would be permitted to receive and retain for GSLP pur-

poses.” /bid. The court also observed that the North Carolina peti-

tioner was prohibited by the Secretary’s regulations “trom using any

of the money in its reserve fund for purposes other than the GSLP

purposes specified by the Secretary.” /d. at 2la. Since “the federal

government has control over most of the sources and all of the uses ot

{the North Carolina petitioner’s reserve fund],” the district court held,

“the excess cash reserves which are the subject of this action are not

‘private property,’ but public property, and as such are not entitled to

Fifth Amendment protection.” /d. at 22a.

'0 The court of appeals stayed the final judgments in the Maryland

and South Carolina cases pending disposition of the consolidated

appeals.

ments because the Higher Education Act of 1965 did not

expressly reserve to the federal government the right to

modify agreements executed under that Act. Relying on

Bowen v. Public Agencies Opposed to Social Security En-

trapment (POSSE), 477 U.S. 41, 52-53 (1986), the court

held that the power to modify contractual arrangements is

reserved unless it is expressly relinquished. Pet. App. 8a.

For that reason, the court held, Congress had the author-

ity to modify the federal government’s obligations under

the GSLP guaranty agreements. /d. at 8a-9a.

The court of appeals then held that the 1987 OBRA

Amendment requirement that state guaranty agencies

transfer excess reserves to the Secretary did not “take” the

agencies’ “private property” in violation of the Fifth

Amendment Takings Clause, because the agencies did not

have “private property” rights to the excess reserves. Pet.

App. 9a-10a. The court reasoned that “[i]f property comes

within the control of the United States to such an extent

that its use is ultimately under the direction of the United

States, then it loses its character as ‘private’ property, and

becomes public to such an extent that it is not subject to a

takings prohibition under the Fifth Amendment.” /d. at

Ya. Since the Secretary’s regulations “completely control

the reserve funds’ uses,” the court of appeals reasoned,

those regulations were “the sort of ‘existing rules or under-

standings’ which prevent any of the guaranty agencies

from acquiring an ownership interest in its reserve fund

which would entitle it to protection as private property

under the Takings Clause.” Jd. at 10a.

The court of appeals also rejected the argument that the

“private property” at issue was the guaranty agencies’

“vested contractual rights to receive reimbursement pay-

ments,” and that the enforcement provision of the 1987

OBRA Amendments, which empowered the Secretary to

withhold reimbursements from noncomplying agencies,

takes that “property.” Pet. App. 10a. The court noted that

a clause in the guaranty agreements required every guar-

anty to comply with “all changes in the Act or regulations

in accordance with their effective dates” as a condition of

receiving reimbursement. /d. at 11a. That clause, the court

explained, expressly put the agencies on notice that the

Higher Education Act of 1965 could be amended in the

future. Jd. at 10a. Because Congress had not expressly re-

linquished its amendment power, the court stated, the

contractual reservation was effective. /d. at 8a-9a. The

court of appeals concluded that “the public nature of the

reserve funds themselves,” which include “reimbursement

payments destined for inclusion in such reserve funds,”

when “coupled with the express contractual reservation of

the power to amend the terms of the GSL program and the

fact that the legislative changes involve a comprehensive

federal/state social welfare program, forecloses a finding

that the state agencies have obtained unalterable vested

property rights to certain payments.” /d. at Ila.

ARGUMENT

Petitioners have sought review of the court of appeals’

judgment upholding the constitutionality of Section 3001

of the 1987 OBRA Amendments to the Higher Education

Act of 1965 against a challenge based on the Takings

Clause of the Fifth Amendment. The decision below, how-

ever, does not warrant review by this Court, for several

reasons.

1. There is no conflict among the circuits on the ques-

tions presented. The Fourth Circuit’s decision in this case

is fully consistent with the Sixth Circuit’s decision in Ohio

Student Loan Comm’n v. Cavazos, 900 F.2d 894 (1990),

petition for cert. pending, No. 90-13, and the Eighth Cir-

cuit’s decision in Education Assistance Corp. v. Cavazos,

902 F.2d 617 (1990), petition for cert. pending, No. 90-84,

both of which also upheld the 1987 OBRA Amendments

against identical constitutional challenges. !!

2. The questions presented by this case are of no con-

tinuing importance. The amendments to the Higher Edu-

cation Act of 1965 that gave rise to this litigation were

enacted as Section 3001 of the 1987 OBRA Amendments.

An accompanying provision of the 1987 OBRA Amend-

ments, Section 3002, however, stated that the provisions

of Section 3001 would expire on September 30, 1989. Sec-

tion 3001 was not extended and therefore expired on that

date. Moreover, no similar legislation has been introduced

in Congress. Accordingly, the questions presented by this

case are of only historical interest, and review by this

Court is not warranted.

3. The decision below is also correct. The Fourth Cir-

cuit correctly held that Section 3001 of the 1987 OBRA

Amendments did not violate the Takings Clause because

petitioners did not have “private property rights” in regard

to the excess in their reserve funds, and because withhold-

ing reimbursement did not unconstitutionally abrogate

petitioners’ “contract” rights. Accord Education Assist-

ance Corp. v. Cavazos, 902 F.2d at 626-630; Ohio Student

Loan Comm’n v. Cavazos, 900 F.2d at 898-902.

'! District courts in the First, Second, Third, Seventh, and Eleventh

Circuits have also upheld the 1987 Amendments against identical chal-

lenges. Maine State Bd. of Educ. v. Cavazos, Civil No. 88-0273 (D.

Me. July 25, 1990); Conn. Student Loan Foundation v. Cavazos, No.

H89-182 (D. Conn. Jan. 10, 1990), appeal withdrawn by stipulation,

No. 90-6111 (2d Cir. June 18, 1990); Delaware v. Cavazos, 723 F.

Supp. 234 (D. Del. 1989), appeal pending, No. 90-3339 (3d Cir.

docketed May 30, 1990); Great Lakes Higher Educ. Corp. v. Cavazos,

711 F. Supp. 485 (W.D. Wis. 1989), appeal pending, No. 89-2748 (7th

Cir. argued May 15, 1990); Georgia Student Finance Comm’n vy.

Cavazos, No. 1:89-cv-160-MHS (N.D. Ga. July 9, 1990). Ten other

suits challenging the constitutionality of the 1987 OBRA Amendments

are pending in various district courts. 89-1873 Pet. 13-14 n.5.

a. “Private property” is property as to which the

claimant has the rights of “free use, enjoyment, and dis-

posal.” Buchanan v. Warley, 245 U.S. 60, 74 (1917). Such

rights “are created and their dimensions are defined by

existing rules or understandings that stem from an inde-

pendent source,” such as pertinent statutes and regula-

tions. Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1001

(1984). Although the Takings Clause protects “private

property” owned by a state, United States v. 50 Acres of

Land, 469 U.S. 24 (1984), under the GSLP laws and regu-

lations, the amounts in petitioners’ reserve funds are not

properly characterized as their “private property,” for sev-

eral reasons.

First, the federal government is the direct source of or

the indispensable catalyst for virtually all the cash in peti-

tioners’ reserve funds. For example, during the period of

time the Maryland petitioner's excess cash reserves were

determined, its reserve fund deposits consisted of reim-

bursements, administrative cost allowances, insurance

premiums from lenders, and a portion of the collections

from defaulting borrowers on loans for which the

Secretary had already made reimbursement payments. '?

Those reimbursements and administrative cost allowances

came directly from the federal government. The insurance

\2 The record shows that from October I, 1986, through Septem-

ber 30, 1988, the Maryiand petitioner received a total of $75,560,690,

of which $47,901,314 came trom federal reimbursements; $2,888,694

came from federal administrative cost allowances; $16,206,870 came

from the portion of collections on defaulted loans that the Secretary

allowed the Maryland petitioner to retain; and $4,370,791 came from

insurance premiums paid by lenders. C.A. App. 191la, 207a. The

remaining $4,193,021 came from the investment of the reserve fund

cash in Treasury or other federally-approved securities. Ibid. Thus,

the Maryland petitioner’s statement that its cash reserves “were de-

rived entirely from non-federal sources,” 89-1873 Pet. 10, is palpably

incorrect.

Pe)

premiums came from lenders induced to participate in the

GSLP by federally-backed loan guarantees, federal inter-

est subsidies, and federal special allowances. The collec-

tions were give-backs from the federal government of

amounts to which the Secretary was entitled by virtue of

his reimbursement payments, and which he could have

kept for himself by demanding assignment of the underly-

ing loans. Pp. 3-5 & n.5, supra. Second, all of the cash in

petitioners’ reserve funds must be used for GSLP purposes

specified by the Secretary; none of it lawfully can be used

for any other purpose. 34 C.F.R. 682.410(a)(2).'3 Thus,

the court of appeals properly concluded that petitioners

could not freely use, enjoy, and dispose of the cash in their

reserve funds. For those reasons, the court properly held

that the Fifth Amendment does not prohibit the compul-

sory transfer of some of this cash from petitioners’ indi-

vidual reserve funds to the general GSLP fund. '4

The court of appeals’ holding also raises no significant

issue Of federalism. Petitioners are creatures of state law

‘> The Maryland petitioner asserts that the regulation prohibiting

the use of reserve fund cash for non-GSLP purposes “did not even

come into existence until 1986.” 89-1873 Pet. 10 n.1. That is not true.

Before 1986, the same use restriction applied, but in literal terms it ap-

plied only to agencies which were holding federal advances paid under

20 U.S.C. 1072. The Maryland petitioner was such an agency. C.A.

App. 94h. In 1986, the Secretary clarified the regulation in order to

make it applicable to all guaranty agencies regardless of whether they

were holding tederal advances. 51 Fed. Reg. 40,886, 40,909 (1986).

'* The decision below does not conflict with CIR v. Lincoln Savings

& Loan Ass’n, 403 U.S. 345 (1971), as the Maryland petitioner claims.

89-1873 Pet. 10. The question in that case was whether an additional

premium paid by a state-chartered savings and loan association to the

Federal Savings and Loan Insurance Corporation was deductible as an

ordinary and necessary business expense under the Internal Revenue

Code. 403 U.S. at 345-346. That case did not involve a takings

question.

and were required by state law to establish reserve funds.

But once they voluntarily executed insurance program and

guaranty agreements binding themselves to comply with

GSLP statutory and regulatory requirements, petitioners

relinquished any claim of ownership to federally donated

or generated cash that they would receive and deposit in

those funds. Even the state laws cited by the South Caro-

lina and North Carolina petitioners recognize that the cash

in the reserve funds is held by petitioners as trustees, to be

used exclusively for GSLP purposes. S.C. Code Ann.

§ 59-115-110 (Law. Co-op 1972) (reprinted at 89-2027 Pet.

App. 54a); N.C. Gen. Stat. § 116-204(6) (1987); Durham

v. McLeod, 259 S.C. 409, 413, 192 S.E.2d 202, 204 (1972);

State Educ. Assistance Auth. v. Bank of Statesville, 276

N.C. 576, 591, 174 S.E.2d 551, 562 (1970).

This Court’s decision in Dayton-Goose Creek Ry. v.

ICC, 263 U.S. 456 (1924), is instructive in this regard.

That case involved a challenge under the Takings Clause

to the Transportation Act of 1920, ch. 91, § 15a, 41 Stat.

489-491. The Transportation Act fixed a maximum 6%

rate of return for carriers engaged in interstate commerce,

required carriers to transfer any excess return equally to a

reserve fund to be maintained by each carrier and to a

general railroad revolving fund to be maintained by the In-

terstate Commerce Commission. Revenues placed in those

reserve funds could generally be used only for specific pur-

poses, such as paying interest on bonds or other securities,

paying rent on leased railroad lines, paying dividends, and

making loans to other carriers to meet expenses. Dayton-

Goose Creek Ry., 263 U.S. at 476-477. This Court rejected

the railroads’ claim that the statute took their property

without just compensation. The Court reasoned that the

Act made a carrier “only a trustee for the excess over a fair

return received by it,” id. at 484, and that, since the rail-

roads were guaranteed a fair return, it was not unreason-

able to require them to contribute to a fund designed to

help the “weaker” carriers, id. at 484-485. In this case,

state guaranty agencies also have a role akin to that of a

trustee, since they administer funds that flow in and out of

the GSLP. Education Assistance Corp. v. C avazos, 902

F.2d at 627; Ohio Student Loan Comm’n v. Cavazos, 900

F.2d at 899. As the Sixth Circuit put it, “the Secretary is

transferring the funds from a federal program with a state

administrator, not a state program.” /bid. Under these cir-

cumstances, Section 3001 of the 1987 OBRA Amendments

does not take petitioners’ property interest in excess

reserves.

b. There is also no merit to petitioners’ argument that

the Secretary unconstitutionally took their property by not

reimbursing petitioners in accordance with the reimburse-

ment agreements that petitioners had executed with the

Secretary before the 1987 OBRA Amendments became

law.'> Petitioners’ claim rests on the assumption that they

had a contractual (and therefore a property) interest in a

rate of reimbursement that could not be affected by subse-

quent legislation. That assumption, however, is mistaken.

‘* Once the court of appeals decided (correctly) that the petitioners

did not have a “private property” right in excess cash reserves, the

court did not have to reach the other question petitioners present

namely, whether the enforcement provision of the 1987 OBRA

amendments, which made the receipt of reimbursements subject to

compliance with the transfer requirement, unconstitutionally took

petitioners’ coniractual rights to chose reimbursements. Instead, the

court could have upheld the Secretary’s withholding of petitioners’

reimbursements on the basis of petitioners’ guaranty agreements,

which expressly authorize the Secretary to withhold reimbursements

due to an agency’s failure to comply with federal law. C.A. App. 26a,

3la-32a, 145a-146a, 152a, 270a-271a, 2678a. In any event, the court

of appeals correctly held that petitioners have no “vested” or “prop-

erty” rights under their guaranty agreements in reimbursement.

Petitioners rely on the terms of the reimbursement

agreements they had previously executed with the Secre-

tary. 89-1873 Pet. 5; 89-2027 Pet. 13-14; 90-4 Pet. 4-5,

16-23. The very text of those agreements, however, makes

clear that petitioners’ right to reimbursement is con-

tingent; it is expressly conditioned on petitioners’ com-

pliance with whatever provisions of the Higher Education

Act of 1965 and its implementing regulations are currently

in force, whether those provisions existed when the under-

lying loans were made or, as in the case of the 1987 OBRA

Amendments, were added by subsequent amendment.

Because the contingency was spelled out in the agree-

ments, it was effective against petitioners even though the

Higher Education Act of 1965 does not contain express

terms reserving Congress’s power to amend its provisions.

Miller v. The State, 82 U.S. (15 Wall.) 478, 495, 497

(1872). See Stockholders v. Sterling, 300 U.S. 175, 183

(1937); Looker v. Maynard, 179 U.S. 46, 52 (1900). See

generally POSSE, 477 U.S. at 51-54. As this Court ex-

plained in POSSE, 477 U.S. at 52 (quoting Merrion v.

Jicarilla Apache Tribe, 455 U.S. 130, 147, 148 (1982)),

“contractual arrangements, including those to which a

sovereign itself is party, ‘remain subject to subsequent leg-

islation’ by the sovereign,” because “sovereign power, even

when unexercised is an enduring presence that governs all

contracts subject to the sovereign’s jurisdiction, and will

remain intact unless surrendered in unmistakable terms.”

Accordingly, the reimbursement agreements did not

guarantee petitioners immunity from subsequent changes

in the GSLP, as they claim. Quite the contrary, the

agreements were expressly subject to such changes.

Petitioners’ claim to a contractual right to reimburse-

ment also rests on the Higher Education Amendments of

1986, Pub. L. No. 99-498, § 402(a), 100 Stat. 1376

(codified at 20 U.S.C. 1078(c)(1)(A)). That section pro-

vides that state guaranty agencies “shall be deemed to have

a contractual right against the United States” during the

life of each GSLP loan “to receive reimbursement” accord-

ing to the provisions of the Higher Education Act of 1965.

That argument also lacks merit because no one acquires a

property right in legislation. Congress therefore can

modify the terms of social welfare programs without pro-

viding compensation to parties that lose the benefits they

enjoyed under prior law. See United States R.R. Retire-

ment Bd. v. Fritz, 449 U.S. 166, 177-178 (1980); Flemming

v. Nestor, 363 U.S. 603 (1960). Indeed, in social welfare

programs such as the GSLP, it is essential for Congress to

have such flexibility in order to be able to accommodate

the changing needs of a particular program within

budgetary constraints.

Relying on Lynch v. United States, 292 U.S. 571 (1934),

petitioners argue that contracts are a form of property and

that Congress cannot breach its reimbursement contracts

with them.'® Lynch, however, is inapposite. In that case,

this Court held that Congress had not withdrawn jurisdic-

tion from the district courts to consider challenges to a

federal law that repealed provisions of the War Risk Insur-

ance Act, which, in turn, authorized payment of death

benefits under insurance policies taken out by soldiers

before that statute was enacted. This Court observed in

dicta that in consideration for the government’s obligation

to pay benefits, “the insured paid prescribed monthly

premiums” and the insurance policies created “vested

rights” that could not be nullified by a later statute. 292

U.S. at 576, 577. The Court suggested that result would

obtain even though the policies were made subject to

350-351 (1935), but the gold contracts in that case were not similar to

the cooperative federal-state program at issue here, and they also did

not contain a clause in which the private party agreed to be bound by

future changes in the governing legislation.

future legislation, unless Congress had expressly reserved

the power to curtail benefits in the future, Or was acting

under the police power or some other paramount power.

Id. at 578, 579.

This case is not governed by the principle stated in

Lynch, tor several reasons. To begin with, the life insur-

ance policies in Lynch are not comparable to the reim-

bursement agreements al issue here, which were executed

by the state guaranty agencies in connection with a social

welfare program designed for the benefit of third parties.

Also, petitioners’ alleged “contract right” to reimburse-

ment did not vest when petitioners executed their guaranty

agreements; any such right was contingent. In addition,

the enforcement provision has not annulled that contin-

gent right; it simply follows the terms of the guaranty

agreements in withholding reimbursements from peti-

tioners if they do not satisfy their contractual obligation to

comply with valid provisions of the Higher Education Act

of 1965, such as the transfer requirement. Finally, the

1987 OBRA Amendments did not relieve the federal gov-

ernment of its obligation to reimburse the state guaranty

agencies; the purpose of the amendments was to recapture

funds held by the agencies in a fiduciary capacity that

Congress found were unnecessary to their continued func-

tioning. See Education Assistance Corp. v. Cavazos, 902

F.2d at 630; Ohio Student Loan Comm’n v. Cavazos, 900

F.2d at 900-901. Thus, as the court of appeals held, Sec-

tion 3001 of the 1987 OBRA Amendments did not take

from petitioners a vested contract right to reimbursement.

CONCLUSION

The petitions for a writ of certiorari should be denied.

Respectfully submitted.