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OLIVER SCHS., INC. v. FOLEY

August 24, 1994

OLIVER SCHOOLS, INC., d/b/a THE STRATFORD SCHOOLS, Plaintiff,
v.
CORNELIUS J. FOLEY, GILBERT HARWOOD, MILTON G. WRIGHT. ROBERT E. BUTLER and JOSEPH A. BRADLEY, Officers, Agents, and Employees of the NEW YORK STATE HIGHER EDUCATION SERVICES CORPORATION, sued in their individual capacities, Defendants.



The opinion of the court was delivered by: MICHAEL A. TELESCA

 INTRODUCTION

 Plaintiff Oliver Schools Inc. ("OSI") seeks summary judgment declaring illegal and unconstitutional the March 17, 1989 decision of the New York State Higher Education Services Corporation ("HESC") which (1) immediately suspended the issuance of Guaranteed Student Loan letters of guarantee to lenders originating loans to OSI students and which (2) initiated administrative proceedings to suspend OSI's eligibility to participate further in federal loan programs administered by HESC. OSI claims that HESC's actions violated 42 U.S.C. §§ 1983 and 1985, the Fourteenth Amendment to the United States Constitution, § 1078(b)(1)(T) of the Federal Higher Education Act and § 680(2) of the New York State Education Law.

 Defendants, HESC employees who are sued in their individual capacities, seek summary judgment upholding the legality and constitutionality of their actions or, in the alternative, dismissing OSI's action on qualified immunity grounds.

 For the reasons set forth below, OSI's motion for summary judgment is denied and the defendants' motion for summary judgment is granted. *fn1"

 BACKGROUND

 The following facts are undisputed, except where noted. At all times relevant to this action, OSI (also known as the "Stratford Schools") was a New York corporation which operated business schools located in Buffalo, Rochester, Syracuse, and Albany, New York. The majority of OSI's students were economically disadvantaged, and thus the school derived much of its tuition revenue from various grant and loan assistance programs, including the Guaranteed Student Loan ("GSL") program.

 The GSL program is a joint federal-state student loan program created pursuant to the Federal Higher Education Act of 1965. The GSL program is comprised of four separate loan programs: the Stafford Loan Program, the PLUS loan program, the Consolidation Loan Program and the Supplemental Loan for Student Program. See 34 C.F.R. § 682.100. In New York, the GSL program is administered by HESC, a state educational corporation within the New York State Education Department. See N.Y. Education Law, Art. 14, § 651, et seq. HESC determines educational institution eligibility for GSL funds, monitors institutional compliance with a myriad of state and federal regulations and administers penalties for institutional violations of pertinent statutes and regulations. Once a school is deemed eligible to participate in the GSL program, its students can apply for low-interest educational loans from private lenders to finance their schooling. HESC guarantees the repayment of these loans and is, in turn, reinsured by the United States Department of Education.

 As a school participating in the GSL program, OSI was obligated to make timely refunds of loans in the event that a student receiving GSL funds failed to enroll for classes or withdrew from school before the end of the loan period. OSI could only retain that portion of the loan proceeds needed to cover the student's tuition for the period of time the student attended classes. Pursuant to federal regulations in effect between 1986 and 1988, OSI was required to make loan refunds no later than thirty days after the HESC was notified of a student's withdrawal. 34 C.F.R. § 682.607(c)(1). If, after a student withdrew, OSI failed to refund the loan balance to a lender and the student was not forgiven the refund amount, the student remained liable for the full amount of the loan, plus interest.

 In 1986, OSI experienced financial difficulties due to the expected opening and expansion of two campuses, a higher than expected enrollment and changes in state regulations governing the disbursement of student loan proceeds. Appendix to Plaintiff's Summary Judgment Motion at 179 (hereinafter cited as "A. "). As a result of the financial strain, OSI failed to make timely loan refunds for those GSL students who had withdrawn from OSI. In February 1987, OSI informed HESC of its predicament and asked to discuss "available options and plans" to resolve the refund payment problem. (A.72). At the time, OSI estimated that it owed HESC $ 214,000 in unpaid refunds. OSI also owed another loan agency, the Higher Education Assistance Foundation ("HEAF"), an additional $ 200,000 in unpaid refunds. OSI Chairman of the Board, Michael Kelly, told HESC that OSI needed "a few months" before it could begin making refund payments.

 In March 1987, Gilbert Harwood, HESC's General Counsel, and Patricia Mullins, HESC Director of Loan Services, met with OSI to discuss the repayment problem. At Harwood's request, OSI provided HESC with information pertaining to its then current financial condition, but stated that a future "cash flow forecast" was unavailable and would be sent to HESC at a later date. (A.75). OSI indicated that regulatory changes in the disbursement of student loan proceeds prevented it from giving HESC a then accurate picture of its cash-flow status.

 In April 1987, HESC Manager of the Office of Program Review, Steven Bomeisl, confirmed OSI's indebtedness with HEAF and recommended that a repayment agreement be implemented to remedy OSI's indebtedness to both agencies. Acknowledging that an informal resolution of the repayment problem might not be possible, Bomeisl stated:

 
However, Stratford Schools should be advised that their failure to make the scheduled payments to either HEAF or HESC would lead to an immediate suspension by both agencies.

 (A. 70).

 On May 18, 1987, OSI's Chairman of the Board proposed that OSI settle its liability by making refund payments of $ 10,000 per month. (A.92). According to HESC, unaudited OSI financial information indicated, however, that OSI's refund liability for fiscal year 1986-87 amounted to $ 12,500 per month. Based in part on this information, Milton Wright, Vice-President of HESC, wrote OSI and rejected its proposal. (A.98). Instead, HESC demanded that OSI fully repay its outstanding GSL refunds by September 1, 1987 (estimated to be $ 240,000 including interest and a special allowance) and informed OSI that a failure to do so would likely result in the initiation of limitation, suspension, or termination proceedings against the school. As of June 1987, OSI refund indebtedness to HESC had risen to $ 341,800.

 HESC and OSI officials met again in July 1987, during which OSI stated that it could not commit to full repayment by September 1, 1987. OSI provided HESC with supplemental financial information and a list of paid refunds. (A.114). OSI also proposed that it immediately pay approximately $ 56,000 in overdue refunds from fiscal 1985-86 and repay all remaining overdue refunds by June 30, 1988. (A.182).

 In November 1987, HESC conducted a review of OSI's Albany school to confirm that OSI had paid the refunds as promised (A.37, 242). During this review, HESC discovered that OSI had incurred approximately $ 15,000 in additional refund indebtedness since June 1987. This development stunned HESC because it understood that OSI would not incur any new refund indebtedness after June 1987. OSI denies that it literally promised HESC it would not incur new debt, stating only "that it would attempt to prevent new refunds from falling into arrears, while working out the terms and schedule for payment of the existing . . . arrearage." Plaintiff's Reply to Defendants' Rule 25 Statement of Undisputed Facts ("Plf. Fact Reply") PP 16-17. Unquestionably, OSI would have to agree that it had committed itself to preventing further refund liability, whether or not it literally "promised" HESC it would do so.

 During the Albany audit, OSI Financial Aid Director Kenneth Clough criticized OSI's management practices and suggested that OSI was financially unstable. Clough stated that he was looking for another job, apparently because he believed that OSI's financial situation was precarious. (A.242).

 As of January 1988, OSI owed HESC approximately $ 225,982 in unpaid refunds. (A.125). In yet another effort to address OSI's predicament, HESC attempted to craft an agreement to bind OSI to a refund repayment schedule. (A.126, 127). In May 1988, defendant Harwood provided Simone Rockwell, Acting President of OSI, with the agreement, which included a provision requiring OSI to hire an independent certified accountant and to pay all overdue refunds within six months of their identification by the accountant. (A.128). Harwood again warned OSI that a failure to accept the agreement would likely result in the commencement of suspension, limitation, or termination procedures against it:

 
Note however, that if you fail or refuse to execute or comply with the Agreement, the Corporation will be forced to resort to its legal remedies, including action to suspend, limit or terminate Oliver School's further participation in NYSHESC's financial aid programs.

 Id. OSI responded with several proposed amendments to the agreement, and significantly, refused to hire an accountant. HESC found this response unacceptable and chose not to reply to OSI's counterproposal.

 In July 1988, Rockwell informed HESC that OSI had not paid refunds due as of March 1988. Rockwell stated that approximately $ 66,000 in overdue refunds from September and October 1987 had not been paid, but that checks for that amount had been sent to lenders. HESC asked for, but never received, satisfactory confirmation from OSI that the $ 66,000 was in fact paid.

 Despite attempts by OSI to pay off its liability during 1988, defendant Bradley states that in January 1989 Rockwell informed him that OSI had fallen behind badly in the last six months and that it had cash flow problems. According to Bradley, Rockwell stated that she was unaware of OSI's then current refund repayment status. Bradley's recollection of this discussion is documented in a memorandum prepared on the same day he spoke with Rockwell. (A.111). Nevertheless, OSI claims that Rockwell never made these statements, Plf. Fact Reply P 21, and attempts to refute Bradley's version of events through an affidavit prepared by Rockwell in 1990 for use in OSI's then-pending summary judgment proceedings before Judge McAvoy in the Northern District of New York. See A.221-23. Not only does Rockwell's affidavit completely fail to challenge Bradley's recollection, it lacks trustworthiness because it was prepared expressly for litigation over one year after the conversation took place. This Court finds that there is no genuine issue of material fact as to the specifics of the conversation between defendant Bradley and Simone Rockwell, and adopts Bradley's version of events for purposes of this decision.

 Based on information provided by OSI, between 1985 and April 1988, OSI had incurred refund debt of approximately $ 954,450, of which $ 703,965 was paid, leaving $ 250,485 still outstanding. (A.111). Alarmed by OSI's persistent refund liability problem, HESC directed that a program review be conducted of OSI's Rochester and Buffalo campuses. A random sampling of students attending the Buffalo school revealed that 100 percent of the refunds due to students who had withdrawn were paid between two to twenty-six months late, and that 18 percent of those refunds had not been paid at all. (A.3). Similarly, a review of the Rochester campus found that 100 percent of the refunds due were between two to seventeen months late, and that 68 percent of them had not been paid at all as of the review date. (A.13).

 HESC did not publicly announce its action. However, pursuant to federal regulations, it informed the United States Department of Education ("DoE") of its actions against OSI. DoE, in turn, notified OSI that it remained eligible to participate in federal loan programs but would no longer receive loan funds in advance. Instead, OSI would be reimbursed for loans made to students from its own revenues. Concerned about the immediate loss of revenues from HESC's and DoE's actions, OSI requested a meeting with HESC to discuss whether the emergency action could be suspended pending the negotiation of another repayment agreement.

 On March 28, 1989, OSI's attorney, Henry Wyman, met with HESC officials and proposed (orally and in writing) that HESC immediately lift its suspension, in return for which OSI would begin to make refund repayments in the third quarter of 1989, and repay the total amount by December 31, 1989. (A.22). When pressed by HESC officials, Wyman estimated that OSI's unpaid refunds had risen to approximately $ 740,000, not including interest and special allowances. *fn2" Several weeks later, in an attempt to convince HESC to rescind its decision, OSI submitted additional financial information pertaining to HESC. (A.27). HESC rejected Wyman's proposal, demanding prompt payment of the total amount of outstanding debt. No agreement was reached, and on April 17, 1989, OSI closed all of its schools in New York State.

 PLAINTIFF'S CLAIMS

 OSI brings this action against five HESC employees individually, who served in the following capacities during the events at issue: Cornelius Foley, the President of HESC; Milton G. Wright, Vice-President of HESC; Gilbert Harwood, HESC's General Counsel; Robert E. Butler, the Assistant Vice-President for the Guaranteed Student Loan Division of HESC; and Joseph A. Bradley, the Manager of the Office of Program Review in the Guaranteed Student Loan Division. *fn3"

 OSI claims that defendants' violated 42 U.S.C. §§ 1983 and 1985, through their failure to provide OSI with a "trial-type" hearing before suspending OSI's receipt of loan guarantees and initiating suspension proceedings against it. (Counts I and II). OSI also claims that the defendants' actions damaged its business reputation and good standing in the community, thereby implicating a Constitutionally protected liberty interest. (Count III). Finally, OSI alleges that defendants' actions violated ...


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