On April 4, 2024, the U.S. Court of Appeals for the Fifth Circuit issued its opinion in CCST v. U.S. Dept. of Education, reversing the order of the U.S. District Court for the Western District of Texas, and granting a preliminary injunction against the 2022 Borrower Defense to Repayment (BDR) Rule (the 2022 Rule).
The Fifth Circuit held that the 2022 Rule will likely cause irreparable harm to schools and that the plaintiff association is likely to prevail on the merits in the case currently pending in the Western District of Texas.
The Fifth Circuit also held that the preliminary injunction would not be party-restricted and, as a result, would postpone the enforcement of the rule against any institution that receives federal funds under Title IV of the Higher Education Act of 1965, as amended.
Background
On November 1, 2022, the U.S. Department of Education promulgated a final rule that revised the framework for BDR claims as well as other regulatory provisions. The 2022 Rule included BDR provisions that allowed for group discharge claims as well as claims filed by “third-party requestors” on behalf of borrowers. The 2022 Rule established three rebuttable presumptions: “that each member of the group knew about the particular claimed borrower defense; that each member relied on the representation, omission, or other act; and that each member’s reliance was reasonable.”
Procedural Background
An association of Texas career colleges and schools challenged the 2022 Rule by filing a lawsuit in the U.S. District Court for the Western District of Texas, Career Colleges and Schools of Texas v. United States Department of Education, et al., USDC No. 1:23-CV-433.
In the district court, Career Colleges and Schools of Texas (CCST) sought a preliminary injunction to postpone the effective date of the challenged portions of the 2022 Rule. The district court denied the motion and held that CCST failed to show a likelihood of irreparable harm if the 2022 Rule were allowed to go into effect. The district court did not discuss the likelihood of CCST’s success on the merits.
CCST appealed the district court’s denial of its motion for preliminary injunction. On appeal, the U.S. Court Appeals for the Fifth Circuit initially granted a temporary administrative injunction that was limited to CCST and its members. The Fifth Circuit later granted a motion to postpone the effective date of the BDR and closed-school loan discharge (CSLD) provisions of the 2022 Rule pending appeal. The postponement was not party-limited and applied to all Title IV schools.
Ruling by the Fifth Circuit
On April 4, 2024, the Fifth Circuit issued its opinion, reversing the district court’s denial of the preliminary injunction and ordering that the effective date of the 2022 Rule be pushed back until the full resolution of the case. Specifically, the Fifth Circuit ordered the district court to “postpone the effective date of the borrower-defense and closed-school discharge provisions of the [2022] [R]ule pending final judgment.”
The Court’s Analysis
In deciding the appeal, the Fifth Circuit analyzed the two most critical factors to decide a motion for a preliminary injunction: (1) a substantial threat of irreparable harm to the movant absent the injunction and (2) the likelihood of the movant’s ultimate success on the merits.
The Fifth Circuit held that the schools demonstrated sufficient irreparable harm to justify a preliminary injunction because successful BDR or CSLD claims could lead to actions for recoupment against the schools. The Court held that combining this liability “with the greatly expanded number of claims and potential claimants” made it clear that the 2022 Rule “contemplates the imposition of significant financial charges” on the educational institutions.
Additionally, schools would have to significantly expand their recordkeeping operations because the 2022 Rule broadly applies to all communications between schools and their representatives with current or prospective students. The Court added: “Consequently, schools must begin to retain records of virtually every written or oral communication with a student.”
According to the Court, schools also will be irreparably harmed because they will inevitably alter their business operations in anticipation of defending against BDR and CSLD claims. The Court stated that schools’ exposure to “enormous new liabilities” will affect their “operational decisions about whether to consolidate campuses or relocate programs — changes that can often benefit students.”
Finally, the Court identified irreparable harm in the fact that educational institutions would be subjected to “costly and dubiously authorized administrative adjudications” as the Department of Education itself posited that defending each group claim will cost each school more than $17,000. As to the adjudication process, the Court noted:
Schools are not provided with any discovery or cross-examination rights in either the borrower-defense or recoupment stage of the adjudication proceedings established by the Rule despite the fact that a successful borrower discharge claim would give rise to a presumption of liability against the schools in subsequent recoupment proceedings. Nor is there any requirement in the Rule that the Department official(s) in charge of the borrower defense or recoupment adjudication proceedings have any legal training.
Regarding the plaintiff’s likelihood of success on the merits, the Court held that CCST is likely to succeed on the merits of its claim that the Department lacked authority to promulgate affirmative borrower rights against repayment. The Court reasoned that the 2022 Rule transformed “defenses that may be asserted against student loan repayment into affirmative claims, and enabl[ed] full discharges and consolidated loan discharges that expand[ed] into a damages remedy.” The Court held that this raises separation of powers concerns because the 2022 Rule “establishes new federal causes of actions without clear congressional authorization.”
The Court also held that CCST is likely to succeed on the merits of its claim that the Department does not have authority to adjudicate claims against schools. The Court observed that the 2022 Rule “shortcut[s] conventional civil litigation between private parties” and “act[s] to shift debt liability to schools.” Concerning the 2022 Rule’s creation of rebuttable presumptions, the Court held:
The Department’s attempt to substitute its unexplained “experience” regarding “widespread and pervasive” misstatements for proof justifying the presumptions is arbitrary and capricious. . . . Presumptions, especially in administrative proceedings that may generate institution destroying liability, cannot be a matter of Department ipse dixit.
The Court reasoned that the 2022 Rule’s evidentiary presumptions and group-claim procedures “are not designed to further the truth-seeking process” and are instead “policy-driven mechanisms designed to selectively target proprietary schools” because the Department has “stated outright that it sees driving enrollment away from these schools to be a ‘benefit.’”
Finally, the Court held that CCST is likely to succeed on the merits of its claim that the 2022 Rule is overbroad in its scope of CSLD regulations. The Court reasoned that the CSLD provision exceeds the Department’s statutory authority when the 2022 Rule redefines school closure in a manner inconsistent with the plain meaning of the term — instead anchoring “closure” on the Department’s discretion to determine “when the school ceased to provide programs in which most students were enrolled.” The Court also observed that the CSLD provision “arbitrarily authorizes automatic, full discharges of debt without proof causation” and exceeds the Department’s rule-making authority.
Applicability to Non-Parties
The preliminary injunction is applicable to all educational institutions that participate in Title IV because “[t]he almost certainly unlawful provisions of the [2022] Rule” apply to all Title IV participants “and are thus almost certainly unlawful as to all Title IV participants.”
Takeaways
The Fifth Circuit’s decision is a triumph, albeit temporary, for all educational institutions that are navigating the developing landscape of BDR claims and defense. Especially for schools that have received BDR claims, the preliminary injunction will be a helpful tool in any response to contest the application of the 2022 Rule to BDR claims.
On the other hand, the decision prolongs instability around the rules regarding BDR and CSLD claims. It is unclear, for example, what impact, if any, the decision will have on Sweet settlement-related claims that the Department has been providing to institutions over the past 8 months.
As of this writing, the 2019 BDR Rule — which is subject to a different litigation challenge in the Second Circuit — is the currently enforceable framework. Many of the arguments made by the plaintiffs in the Fifth Circuit, however, could readily be applied to the 2019 BDR Rule, as well as to the 1994 and 2016 BDR Rules. Any future litigation against prior BDR Rules would rely heavily upon the Fifth Circuit’s decision. The Fifth Circuit’s opinion could be the thread that unravels the BDR regulatory scheme as a loan forgiveness method.
With an election in 2024, an executive change in January 2025 could put the 2022 Rule in jeopardy and result in the new administration halting the government’s defense of the 2022 Rule and, potentially, conducting negotiated rulemaking on yet another BDR regulatory framework. Alternatively, another administration may determine that the BDR regulatory scheme is in excess of statutory authority in light of more recent Supreme Court precedent.
McGuireWoods will continue to monitor this case as developments unfold. McGuireWoods has a dedicated education team that can assist with any issues in this area. Please contact the authors of this article or your McGuireWoods contact for more information.