On February 28, 2023, Career Colleges and Schools of Texas (CCST) filed a lawsuit in the United States District Court for the Northern District of Texas seeking to have the U.S. Department of Education's 2022 Borrower Defense to Repayment (BDR) final rule vacated and enjoined. Among other claims, CCST argued that the final rule creates unlawful processes, fails to serve any legitimate purpose under the Higher Education Act (HEA) and "represents enormous executive overreach" by the Biden administration in violation of the Department's statutory authority and the Constitution's separation of powers.
Since then, the case has taken a number of twists, including a significant amount of media coverage, a transfer of venue and most recently, an interlocutory appeal to the U.S. Court of Appeals for the Fifth Circuit of the District Court's denial of CCST's motion for preliminary injunction.
On August 7, 2023, a three-judge Fifth Circuit panel granted CCST's motion for an injunction pending appeal, which stayed the effective date of the borrower defense and closed school loan discharge provisions of the final rule. The stay is in effect until at least November 6, 2023, when that same Fifth Circuit panel will hear the appeal.
The Fifth Circuit's action has major ramifications, and the very short order?only two pages?raises more concerns than it resolves. In this Q&A format Alert, we will break down what CCST appealed, what the court could do in November and handicap what the outcome of the case will be. In addition, we will identify some of the challenging questions that institutions face until the case has a final determination, including what should schools be doing with currently outstanding claims and what BDR rule?if any?is currently in place.
What Did CCST Request in Its Appeal to the Fifth Circuit?
CCST's motion specifically asked the Fifth Circuit to stay the effective date of the final rule. In support of this request, CCST argued that the Department lacks the statutory authority to adjudicate BDR claims or seek recovery from institutions. Further, they argued that multiple provisions of the BDR rule are unlawful, including the Department's failures to define "acts or omissions" with enough specificity for schools to conform their conduct; to reach reasonable and appropriately explained conclusions regarding the strict-liability standard for misrepresentations and omissions; and to justify presumptions in favor of borrowers in group and closed-school claims that are not ultra vires, arbitrary and capricious, and do not violate due process. In addition, CCST identified the compelled compliance and costs associated with the final rule, including recordkeeping and the increased demand for the training and monitoring of institutional staff, as well as the need for a change in conduct to avoid running afoul of the expanded closed-school loan discharge provisions. Finally, CCST identified the imminent threat of unlawful borrower defense and recoupment actions, both in terms of financial harm and subjection of schools to unlawful proceedings.
To Whom Does the Injunction Apply?
At the outset of the appeal, the Fifth Circuit issued and briefly extended an administrative stay that paused the rule temporarily, but only for CCST and its members. However, the August 7 stay is not party-restricted. CCST's motion in the Fifth Circuit explicitly argued in favor of not limiting the appeal to CCST members on the grounds that all Title IV schools would suffer irreparable injuries comparable to CCST members. The Department specifically opposed this request and argued that any stay should be limited to the plaintiff-appellant. The Fifth Circuit signaled their agreement with CCST by granting the motion without the limitation sought by the Department. As a result, we conclude that the final rule is stayed for all institutions that participate in Title IV HEA programs. The Department evidently agrees, as it has not, to date, sought any clarification of the Fifth Circuit's ruling.
What Provisions of the Final Rule Are Enjoined?
The plaintiff brought the complaint challenging the entirety of the Department's November 1, 2022, final rule, citing to 87 FR 85904. CCST asked for the final rule to be declared unlawful, vacated and set aside, requesting that any action taken by the Department pursuant to the final rule be declared null and void. However, CCST's motion for preliminary injunction and its motion for an injunction pending appeal specifically asked for relief from the borrower defense and closed school loan discharge provisions. As a result, the other provisions of the final rule?the prohibition on pre-dispute arbitration agreements and class action waivers; the elimination of certain interest capitalization events for federal student loans; changes to total and permanent disability discharges; revisions to false certification regulations; and amendments to the Public Service Loan Forgiveness program?remain in effect.
What Are the Potential Outcomes of the November Fifth Circuit Hearing?
There are several potential outcomes for the November hearing, each of them with significant consequences for institutions subject to the final rule. First, the Fifth Circuit could reverse the District Court's denial of CCST's preliminary injunction and remand the case back to the District Court for it to revisit the preliminary injunction issue, since it previously focused solely on the issue of irreparable harm and did not reach the question of whether CCST had a probability of succeeding on the merits of its challenge to the final rule. Further, appellate courts generally want to see a lower court's reasoning on an issue first. In this scenario, the Fifth Circuit would likely extend the stay of the final rule until the District Court reached a decision on the preliminary injunction. A decision of this nature would probably be issued fairly soon after the November 6 oral argument. Having granted nationwide relief in the August 7 stay, it is likely that the Fifth Circuit would continue that scope of relief, but it could decide to limit it to CCST and its members. We do not believe that such narrowing is likely given how the case has unfolded on appeal.
Second, the Fifth Circuit could reverse the District Court's denial of preliminary relief and order such relief itself enjoining the effective date of the final rule until the case is decided on the merits by the District Court. Whether CCST has a probability of success on the merits is a legal question that the appellate court can resolve without the District Court's input. Probability of success is a legal issue on which the appellate court is not required to defer to lower court, and sending the case back on this basis would be inefficient. We believe that this is the most likely outcome and, again, based on how the case has fared thus far, the pause on the final rule would be nationwide. Such a stay would last until final judgment is entered in the District Court. An Administrative Procedure Act case challenging a rulemaking like this could easily take in excess of a year to resolve in the District Court. The result could mean that the CCST litigation might not be fully resolved until after the 2024 presidential election.
Third, the Fifth Circuit could take the remarkable, though not unprecedented, step of simply deciding CCST's challenge to the final rule without remanding back to the District Court, thereby striking down the borrower defense and closed school loan discharge provisions of the final rule. Appellate courts rarely displace district courts in this way, but it is not without precedent or authority. If the Fifth Circuit finds that the final rule is an example of executive overreach and an egregious violation of the Constitution, the final rule?and, as discussed later, potentially the entire BDR framework?could be eventually vacated. Whether the final rule exceeds the agency's authority and is unconstitutional is largely a legal issue.
Fourth, the Fifth Circuit could rule against CCST and uphold the District Court's denial of the preliminary injunction for failure to establish irreparable harm. We do not believe that this outcome is likely. The panel that will hear arguments in November is the same panel that granted the August 7 stay. To get a stay, the applicant has to have irreparable harm. So, having at least implicitly found such irreparable harm once in granting, extending and broadening the stay, it would not seem likely that the panel would go the other way on this issue on November 6.
A stay also requires the applicant to have a probability of succeeding on the merits and must show that an injunction is in the public interest. The panel has essentially signaled its view already that these standards have been met with the granting of the August 7 stay. Moreover, the panel is comprised of one judge appointed by President Reagan (Jones) and two appointed by President Trump (Duncan and Wilson). Judge Jones authored the Chamber of Commerce v. U.S. Dep't. of Labor opinion cited in the order which vacated, in toto?meaning "as a whole"?a Department of Labor regulation on the ERISA fiduciary rule. Judge Duncan was involved in the highly publicized protest that he confronted at Stanford Law School that resulted in the firing of a university employee. It is hard to imagine a panel that would give the plaintiff more confidence.
How Has the Department Responded to the Fifth Circuit's Decision?
As of this writing, the Department has only acknowledged the court's ruling, stating on its website that it is "evaluating the impact of the court's order and will provide more information soon." We expect the Department to provide a more comprehensive response and, potentially, guidance documents at a later date. We will update this Alert when appropriate.
What BDR Rule, if Any, Is Enforceable Now?
In its February complaint, CCST asked the District Court to declare the final rule unlawful, requesting the court to stop the regulations from taking effect. In its emergency motion, the plaintiff requested the Fifth Circuit stay the final rule's effective date, to which the court agreed. As a result, the practical effect of the August 7 decision is that the final rule, legally speaking, has yet to go into effect. Unless and until the Department announces otherwise, the Fifth Circuit stay means a return to the status quo prior to the final rule's effective date of July 1, 2023, meaning that the currently enforceable rule is the 2019 BDR rule, promulgated during the Trump administration.
How Does Enforcement of the 2019 BDR Rule Differ from the Final Rule?
There are a number of differences between the 2019 and 2022 final rules. As a result of the Fifth Circuit's ruling, none of the 2022 final rule provisions are enforceable.
The significant differences between the rules are as follows. First, the bases in the 2019 BDR rule are more limited than the final rule, including the interpretation of what constitutes "misrepresentation" for purposes of BDR claims and the expanded bases for BDR claims in the final rule (including "aggressive and deceptive recruitment").
Second, while the preponderance of the evidence standard is the same, the standard for borrower applications under the 2019 BDR rule does include a showing of "harm" in order to have a claim granted. This is opposed to the concept of "detriment" in the final rule, which is a lower requirement for the borrower to satisfy.
Third, the 2019 BDR rule does not provide for group claims as opposed to the final rule, which allows for Department-driven group claims as well as "third-party requestor" claims that are filed by state attorneys general, other state-level higher education regulators and, when certain characteristics are satisfied, legal assistance organizations.
Next, the multiple presumptions in the borrower's favor in the final rule are not part of the 2019 BDR rule.
Finally, the recoupment provisions are significantly different between the two final rules, including the processes (Subpart G (2019) v. Subpart H (2022)), the adjudication procedures and the timelines of a recovery action.
What Is the Impact on Currently Outstanding BDR Claims?
As of November 2022, the Department had about 443,000 BDR claim applications awaiting adjudication. Assuredly, the number of pending claims has increased since then. It is undeniable that the judicial stay of the final rule has put a wrench into the Biden administration's adjudication of borrower claims. This crisis is made worse by the administration's insistence on loan forgiveness as a cornerstone of their higher education policy agenda.
Despite this policy setback, the Department is likely to continue to adjudicate BDR claims and to announce significant amounts of discharges associated with the settlement of the Sweet v. Cardona litigation. To our knowledge, the Department has already started to grant discharges associated with the settlement but are a long way off from completion. The total amount of "automatic discharges" associated with the settlement is believed to be around $6 billion. We believe that these claims were not subject to the final rule and, therefore, are unaffected by the judicial stay.
For non-Sweet settlement claims, the final rule does not currently apply to them because, legally, the final rule never went into effect.
What About BDR Claims Noticed to Institutions and Subject to a 60-Day Response Period?
We are aware of a number of schools who have received BDR claims since July 1, 2023, with the understanding that such claims were subject to the final rule. As a result of the Fifth Circuit decision, at least for the time being, that understanding is no longer accurate.
However, the risks of not responding to BDR claims shared by the Department since July 1 are high, as a failure to respond could be interpreted by the Department as an institution's agreement with the claim allegations or as the equivalent of a default judgment.
This is a complex issue. On the one hand, the Fifth Circuit order suspends the effectiveness of the final rule during the period in which the order is in effect. On the other hand, notwithstanding interim injunctive relief, if the courts ultimately uphold the final rule, that ruling could be retroactive to July 1, 2023, when the final rule originally took effect. Judicial decisions usually are retroactive in this respect. Thus, institutions will benefit from working with counsel on this topic, including on the possibility of reaching out to the Department for specific guidance on how to proceed.
For many institutions, the process of responding to BDR claims?which involves a number of institutional offices, resources devoted to acquiring sufficient and appropriate evidence, and multilayered workflows for the drafting of institutional responses?is hard to stop at a moment's notice and, even worse, get restarted if the Department decides to forge ahead.
Until instructed otherwise by the Department, institutions should abide by the time frames and frameworks included in the 2019 BDR rule to respond to noticed claims. At this time, our analysis indicates that schools should not suspend responding to BDR claims because of the risks associated with doing so. Rather, institutions should observe the timeframes and accompanying rule provisions created by the regulatory language at: 34 CFR § 685.206(c) for loans first disbursed prior to July 1, 2017; 34 CFR § 685.222 for loans first disbursed on or after July 1, 2017, and before July 1, 2020; and 34 CFR § 685.206(e) for loans first disbursed on or after July 1, 2020.
What Is the Future of BDR Claims?
The ramifications of the Fifth Circuit's ruling could prove very significant. While CCST's complaint only asks for relief as it pertains to the final rule, the underlying arguments?i.e., that the HEA does not contain sufficient authority to create a BDR-adjudication and recoupment apparatus that significantly burdens institutions?could just as easily be applied to the other BDR rule frameworks.
Consequently, a Fifth Circuit decision that declares that the final rule lacks appropriate statutory authority and, therefore, cannot stand, would undermine all of the Department's efforts to promulgate any regulations under HEA, at 20 U.S.C. § 1087e(h).
This would be a monumental ruling and would cut short all currently ongoing BDR adjudications, stop any current or future recovery actions against an institution, and could potentially disturb the settlement agreement in Sweet. Much like past litigation against Department regulations, this could require that the Department go back to the drawing board and completely rethink the loan forgiveness program and, with an election 15 months away, could spell the end of the BDR rule.
For More Information
If you have any questions about this Alert, please contact John M. Simpson, Kristina Gill, Jonathan Helwink, any of the attorneys in our Higher Education Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.
