Opposition Brief — Education Assistance Corp. v. Cavazos

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FILED

SEP 1 1990

No. 90-84

JOSEPH F. SPANIOL, JR

In the Supreme Court of the Ginited States

OCTOBER TERM, 1990

OA eh LER TOT RO TTR

EDUCATION ASSISTANCE CORPORATION, PETITIONER

v.

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

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

BRIEF FOR THE RESPONDENTS

IN OPPOSITION

KENNETH W. STARR

Solicitor General

STUART M. GERSON

Assistant Attorney General

WILLIAM KANTER

NEIL H. KOSLOWE

Altorneys

Department of Justice

Washington, D.C. 20530

(202) 514-2217

“BEST AVAILABLE COPY

RR Se ea eae

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of 1987 (OBRA), 20 U.S.C. 1072(e) (repealed}, amended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 guarantee 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 and Due Process Clauses of the Fifth

Amendments. 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” or abrogated the

guaranty agencies’ “vested right” to reimbursement under

pre-OBRA contracts between the agencies and the

Secretary.

(1)

TABLE OF CONTENTS

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TABLE OF AUTHORITIES

Cases’

Bowen v. Agencies Opposed to Social Security En-

trapment, 477 U.S. 41 (1986)... 2... oe. ae oe

Great Lakes Higher Educ. Corp. v. Cavazos, No.

89-2748 (7th Cir. Aug. 29, 1990) .............. 1]

Statutes and regulation:

Higher Education Act of 1965S, 20 U.S.C. 107]

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Higher Education Amendments of 1976, Pub. L.

No. 94-482, 90 Stat. 2081:

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Higher Education Amendments of 1986, Pub. L.

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Omnibus Budget Reconciliation Act of 1987, Pub.

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

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Section 682.410(aM2)-(6) ..................

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Miscellaneous:

H.R. Cont. Rep. No. 495, !00th Cong., Ist Sess.

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U.S. Government Accounting Office:

Better Criteria Needed for Financing Guaran-

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Guidelines for Reducing Guaranty Agency

Se SE wn wn cals Dene es ce kes 5

Jn the Supreme Court of the Gnited States

OCTOBER TERM, 1990

No. 90-84

EDUCATION ASSISTANCE CORPORATION, PETITIONER

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

ON PETITION FOR A WRIT CF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

BRIEF FOR THE RESPONDENTS

IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. la-25a)

is reported at 902 F.2d 617. The district court opinion

(Pet. App. 27a-47a) is not reported.

JURISDICTION

The judgment of the court of appeals was entered on

April 10, 1990. The petition for a writ of certiorari was

filed on July 9, 1990. The jurisdiction of this Court is in-

voked under 28 U.S.C. 1254(1).

(1)

2

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-

ate a student loan insurance program that meets GSLP re-

quirements and to guarantee lenders they will pay 100% ot

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 respective effec-

tive dates,” Pet. App. 3a, and the regulations similarly

provide that “[a]ll of the agreements are subject to subse-

quent changes in the Act or the regulations that apply to

the GSLP * * *.” 34 C.F.R. 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. Pet. App. 2a-3a. 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),

The Higher Education Act of 1965 also authorizes the

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

ticipating 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 on any

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

' Before 1976, guaranty agencies were required to insure only 80°%o

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

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 U.S.C.

1078(c)(9).

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 U.S.C.

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-

Education was authorized to enter 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 Higher Education Amendments of 1976, Pub. L. No.

94-482, 90 Stat. 2114, 2120, the Commissioner was authorized to enter

into “supplemental 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

overall default rate below 5% of the principal amount of all loans;

90% if the default rate was between 5% and 9%; and 80% if the

default rate exceeded 9%. See 34, C.F.R. 682.405. Under the Higher

Education Amendments 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 tn the supplemental reinsurance agreements. Since 1986 the

“reinsurance” and “supplemental reinsurance” agreements have been

reterred to collectively as “guaranty agreements.”

4

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

21, 25-26. The guaranty agreement also provides that the

Secretary may withhold or demand compensation for

federal payments — including reimbursements — if the state

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

plementing regulations. /d. at 23, 28.

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 tenders 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 trom defaulting borrowers after reinsurance payments

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

(c)(6)(A)(ii);?_ 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(H(1)(A) and (B).

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

? 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 f ay not retain any portion of collections. 34 C.F.R.

682.409(b).

overpayments and advances, and adminisiering 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-

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.” U.S. Government Accounting Office: Better

Criteria Needed for Financing Guarantee Agencies |

(1986). The Comptroller General also found that at least

some agencies were using the reserves for improper pur-

poses. /d. at 4. 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. /bid. The Comptroller General later submitted a

report to Congress with draft guidelines for establishing

maximum cash reserve levels. U.S. Government Account-

ing Office: Guidelines for Reducing Guaranty Agency

Reserves (1986).

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

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

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

Section 3001 of OBRA amended several GSLP provisions

of the Higher Education Act of 1965. 20 U.S.C. 1072{e)

(repealed).’ Under Section 3002 of the 1987 OBRA Amena-

ments, 101 Stat. 1330-38, the provisions of Section 300!

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

‘ In the legislative hisory of the OBRA, Section 3001 appears |

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

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

6

guaranty for fiscal year 1986 under a statutory formula

based on the Comptroller General’s draft guidelines. 20

U.S.C. 1072(e)(1) (repealed).* If the Secretary determined

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

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

tary was required to direct the agency to “eliminate” the

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

ing advances of federal funds made by the Secretary to the

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

holding and canceling reimbursement claims otherwise

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’ stat-

utory “contractual right” to receive reimbursements and

administrative 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 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 Gutstanding at the end of

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

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

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

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

tober 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-

‘

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

deteriorated significantly since the end of the preceding

fiscal year, that significant changes in economic circum-

stances or the agency’s loan insurance program rendered

the maximum reserve level inadequate for the continued

functioning of the agency, or that in eliminating the excess

cash reserves the agency would violate contractual obliga-

tions on the date the 1987 OBRA Amendments were

enacted requiring 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

Secretary under 20 U.S.C. 1081. Pet. App. 4a. 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. /d. at 4a-Sa.

2. On the day the 1987 OBRA Amendments became

effective, petitioner notified the Secretary that it con-

sidered them to abrogate the Secretary’s contractual

obligations, and that it would not comply with the transfer

requirement. Pet. App. 6a. Petitioner also announced that

it would no longer guarantee student loans, and it made

arrangements for another agency to guarantee student

loans in South Dakota. /bid. The Secretary counseled peti-

tioner against the steps it had taken, and he warned peti-

tioner that its refusal to guarantee student loans consti-

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

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

tuted a termination of the existing GSLP agreements and

would end the Secretary’s reinsurance commitment for

loans guaranteedeby petitioner on or after December 21,

1987. Ibid.

Meanwhile, as required by the 1987 OBRA Amend-

ments, the Secretary calculated the statutory “maximum

cash reserve” for petitioner. The Secretary concluded that

petitioner had excess cash reserves, and directed petitioner

to transfer most of that excess to the federal government.°®

Petitioner applied for, but was denied, a waiver of the

transfer requirement. After petitioner continued to refuse

to comply with the Secretary’s directive, the Secretary

withheld GSLP reimbursements otherwise payable to peti-

tioner until the full amount of excess cash reserves Owed

was recovered. Pet. App. 7a.

Petitioner filed suit challenging the constitutionality of

the 1987 OBRA Amendments and the Secretary’s denial of

a waiver. The district court upheld the Amendments and

the Secretary’s action, and the court of appeals affirmed.

On the constitutional issues, the court of appeals first

held that the reserve fund “does not constitute property

deserving protection of the fifth amendment’s due process

or taking clause.” Pet. App. 17a.’ Rather than deciding

® Petitioner was required to transter $6,607,592 in excess cash

reserves. Pet. 7. Petitioner had certified to the Secretary that it had

cash reserves of $9,948,781, and the Secretary determined that peti-

tioner’s “maximum cash reserve” was $1,254,384. The amount of ex-

cess cash reserves petitioner was required 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 court of appeals initially addressed the waiver issue, because

resoluion of that issue in petitioner’s favor would have precluded con-

sideration of the constitutional issues. Pet. App. 7a-8a. After review-

ing the administrative record, the court held that the Secretary’s denial

9

whether or to what extent petitioner had a property in-

terest in the various and unsegregated sources of the

reserve fund, the court of appeals examined the fund “as a

whole,” and found that it was “entirely a creature of

federal regulation.” /bid. The court of appeals concluded

from the purpose of petitioner and its reserve fund, from

the understandings expressed in the GSLP agreements,

and from the governing regulations, that petitioner had no

protected Fifth Amendment interest in this fund. Jd. at

18a-20a.

Next, the court of appeals held that the Secretary’s im-

plementation of the 1987 OBRA Amendments authorizing

him to withhold reimbursements from non-complying

guaranty agencies, such as petitioner, did not unconstitu-

tionally abrogate petitioner’s contractual rights. While the

Amendments modified previous statutory language stating

that guaranty agencies had a “contractual right” to reim-

bursements, by making that right “subject to” the agencies’

compliance with the transfer requirement, the court of ap-

peals pointed out that this “did not alter [petitioner’s] pre-

existing legal rights” because petitioner’s right to reim-

bursement “was always contingent on [petitioner’s}] com-

pliance with federal law and regulations.” Pet. App. 20a.

Furthermore, the court of appeals noted that the guaranty

agreements themselves authorized the Secretary to

withhold reimbursements where, as here, petitioner failed

to comply with an applicable law. fd. at 21a.

Finally, the court of appeals ruled that even if the

Amendments authorizing the Secretary to withhold reim-

bursements were deemed to alter the terms of petitioner’s

guaranty agreements, they did not violate the Fifth

Amendment. Pet. App. 2la-25a. Relying on Bowen v.

Agencies Opposed to Social Security Entrapment, 477

of a waiver was not arbitrary, capricious, or otherwise contrary to

law. /d. at 8a-1Sa. The waiver issue is not presented in this petition.

10

U.S. 41 (1986), the court of appeals found that because the

GSLP “is essentially a social welfare program designed to

help the nation’s youth gain access to higher education

that they otherwise could not afford,” and because the

Higher Education Act “needs to be responsive to ‘ever-

changing’ conditions,” Congress implicitly reserved the

right to impose additional requirements On guaranty agen-

cies not contemplated when the guaranty agreements were

signed. Pet. App. 22a-23a. While the court of appeals

noted that Congress could not impose additional re-

quirements that effectively nullified a contractual obliga-

tion, the conditioning of petitioner’s receipt of reim-

bursements upon its compliance with the transfer require-

ment did not abrogate petitioner’s contractual right to

reimbursements, and merely “add[ed] to the numerous

statutory and regulatory requirements with which * * *

[petitioner] must comply” before it may receive reim-

bursements. /d. at 25a.

ARGUMENT

Petitioner has sought review of the court of appeals’

jQdgment upholding the constitutionality of Section 3001

of the 1987 OBRA Amendments to the Higher Education

Act of 1965. The questions presented in the petition are

identical to the questions presented in Maryland Higher

Education Loan Corp. v. Cavazos, No. 89-1873, South

Carolina State Education Assistance Auth. v. Cavazos,

No. 89-2027, and North Carolina v. Cavazos, No. 90-4, ali

of which seek review of the judgment of the Fourth Circuit

upholding the constitutionality of Section 3001. Our con-

solidated brief in Opposition in those cases (a copy of

which has been provided to petitioner’s counsel) fully

1]

explains why review should not be granted in any of these

cases.

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

KENNETH W. STARR

Solicitor General

STUART M. GERSON

Assistant Attorney General

WILLIAM KANTER

Nett H. KOSLOWE

Attorneys

SEPTEMBER 1990

* Since the filing of that brief, another court of appeals has joined

the Fourth, Sixth, and Eighth Circuits in upholding Section 3001.

Great Lakes Higher Educ. Corp. v. Cavazos, No. 89-2748 (7th Cir.

Aug. 29, 1990). No court of appeals has ruled to the contrary.

US GOVERNMENT PRINTING OFFICE 1990 — 262.203/20100