Bartels v. Alabama Commercial College, Inc.

United States Court of Appeals,

Eleventh Circuit.

No. 94-8607.

Eddie BARTELS, individually and on behalf of all others similarly
situated, Alethia Pinkney, individually and on behalf of all others
similarly situated, Shirley Travis, individually and on behalf of
all others similarly situated, Iris Huss, individually and on
behalf of all others similarly situated, Sharon Davis, individually
and on behalf of all others similarly situated, Leonie Smart,
individually and on behalf of all others similarly situated, Mary
L. Manley, individually and on behalf of all others similarly
situated, Doretha Young, individually and on behalf of all others
similarly situated, Ruby C. Carr, individually and on behalf of all
others similarly situated, Alfreda C. Bantum, individually and on
behalf of all others similarly situated, Vera Borson, individually
and on behalf of all others similarly situated, Plaintiffs-
Appellants,

v.

ALABAMA COMMERCIAL COLLEGE, INC., dba Riley Training Institute of
Savannah, Waycross and Brunswick, Georgia, et al., Defendants-
Appellees.

June 13, 1995.

Appeal from the United States District Court For the Southern
District of Georgia. (No. CV293-162), Anthony A. Alaimo, Judge.

Before HATCHETT, Circuit Judge, HENDERSON, Senior Circuit Judge,
and YOUNG*, Senior District Judge.

HATCHETT, Circuit Judge:

Appellants, Eddie Bartels and other former students of Alabama

Commercial College, filed this action seeking rescission of their

student loan contracts and other relief. The district court

dismissed their amended complaint for lack of subject matter

jurisdiction. We reverse.

FACTS

Appellants, members of a putative class, are former students

*
Honorable George C. Young, Senior U.S. District Judge for
the Middle District of Florida, sitting by designation.
of the now defunct Alabama Commercial College that did business as

Riley Training Institute of Savannah, Waycross, and Brunswick,

Georgia (the school). The appellees either reinsured, guaranteed,

or purchased student loan contracts that appellants had signed.

The appellees are: the Secretary of the United States Department

of Education, Richard Riley (the Secretary); the Student Loan

Marketing Association (Sallie Mae); the Higher Education

Assistance Foundation (HEAF); and the Georgia Higher Education

Assistance Corporation (GHEAC). This lawsuit is based upon the

appellants' contention that the school fraudulently induced them to

enroll in the school and to enter into federally guaranteed student

loan contracts. According to the appellants, the school then

failed to provide any worthwhile education or job placement. Thus,

upon leaving the school, appellants were left with several thousand

dollars in student loan debt. Through the use of various theories

of vicarious liability, the appellants seek to interpose state

common law fraud and contract claims that they may assert against

the school, as defenses to any collection efforts on the part of

the appellees.

Appellants claim the Guaranteed Student Loan (GSL) program

that Congress authorized through enactment of Part B of Title IV of

the Higher Education Act of 1965 (HEA), 79 Stat. 1219, as amended,

20 U.S.C.A. § 1070 et seq., financed their attendance at the

school.1 The GSL program was designed to encourage private lenders

to provide educational loans to students. In order to further this

1
The GSL program has been renamed the Federal Family
Education Loan (FFEL) program. See Pub.L. No. 102-325, §
411(a)(1), 106 Stat. 510 (1992).
objective, the federal government provides private commercial

lenders with a guaranty that a student's educational loan will be

repaid even if the student defaults.

Under a typical GSL program transaction, a private lender

issues a loan directly to the student. The institution of higher

education ordinarily is not a party to the loan agreement and has

no role in the transaction other than to provide the lender with a

statement of the student's estimated cost of attendance and

financial assistance needs. The federal government, moreover, does

not directly guarantee the loan of the private lender. Rather, a

guarantor, typically a state or private nonprofit agency such as

HEAF and GHEAC, provides the private lender with a guaranty that

the loan will be repaid even if the student defaults. These

guarantors, in turn, enter into reinsurance agreements with the

Department of Education under which the Department of Education

reinsures up to 100 percent of the guarantors' losses in paying

defaulted claims. Thus, in the event a student defaults, the

guarantor reimburses the private lender of the loan, takes

assignment of the loan from the lender, and then seeks

reimbursement from the Department of Education.

The appellants' complaint, as amended, sought the cancellation

of their GSL program indebtedness, an order enjoining further

collection efforts against them on the part of the appellees, and

the return of all GSL program payments previously made. Count I

alleged state law fraud on the part of the school as a result of

its misrepresentations regarding the quality of training the

students would receive and the school's job placement assistance
for students. GHEAC, HEAF and Sallie Mae were also named in this

count based on, among other grounds, the allegation that the

lenders stood in an "origination relationship" with the school,

that the school acted as an agent for the lenders in procuring the

loans, and that GHEAC, HEAF and Sallie Mae were assignees of the

loan contracts.2 Count II alleged breach of contract on the part

of the school, the Secretary, GHEAC, HEAF and Sallie Mae. That

count alleged that the school breached its enrollment contract when

it failed to provide promised educational training and job

placement. Count Two's claims against GHEAC, HEAF and Sallie Mae

were based on the same allegations and relationships stated in

Count One. The breach of contract claim against the Secretary was

premised on, among other things, the assertion that the lenders

stood in an "origination relationship" with the school, that the

Secretary is an assignee of loan agreements between the appellants

and the lenders, and that the promissory notes for those loans are

implied to have included the FTC Holder Rule clause.3 Count III

2
An "origination relationship" between a school and a lender
arises when the lender delegates to the school substantial
loan-making functions ordinarily performed by the lender. 34
C.F.R. § 682.200. The Secretary of Education has adopted an
informal policy of not requiring guarantors to make collection
efforts on defaulted loans when an origination relationship
existed between the school and the lender. The policy is
apparently motivated by the Secretary's desire to ensure that
lenders perform the requisite due diligence prior to making a
loan; and in the absence of such due diligence, lenders should
not be able to avail themselves of the benefit of the federal
guaranty. See 34 C.F.R. § 682.500(c)(1).
3
As part of its effort to afford relief to students who
obtained loans after enrolling in questionable schools, Congress
directed the Department of Education to develop a common loan
application form and promissory note to be used by all
participants in the GSL program. See 20 U.S.C.A. § 1082(m)(1)
(Supp.1995). This form, which went into effect in 1994,
alleged a violation of Georgia's Uniform Deceptive Trade Practices

Act, O.C.G.A. §§ 10-1-370 et seq., on the part of all the appellees

based on, among other grounds, their failure to ensure that the

appellants' student loan contracts contained the FTC Holder Rule,

and failure to comply with the rule. Count Three further alleged

that the appellants' failure to comply with the Higher Education

Act constituted unfair and deceptive trade practices under Georgia

law. Count IV alleged an ex delicto breach of contract on the part

of the school, HEAF and GHEAC due to their failure to ensure that

the appellants' student loan contracts contained the FTC Holder

Rule.

In a section of their amended complaint entitled "Prayer for

Relief," the appellants presented a more particularized assertion

of their bases for relief than was articulated in the counts. They

requested the district court, pursuant to Counts I and II, to

declare all loan contracts they signed unenforceable by the

Secretary, HEAF, GHEAC and Sallie Mae because they stood in an

origination relationship with the lenders and the school. The

appellants also sought injunctive relief under all four counts to

prevent the Secretary, HEAF, GHEAC and Sallie Mae from attempting

to collect on their student loans. That section of the complaint

also sought injunctive relief under all four Counts to prevent the

Secretary, HEAF, GHEAC and Sallie Mae from transferring or

assigning the loans during the pendency of this litigation.

incorporates a Federal Trade Commission (FTC) clause (the FTC
Holder Rule). As applied to this case, the rule would allow a
student to use consumer claims and defenses against a school as
defenses to bank loans. See 16 C.F.R. § 433.2(a).
 PROCEDURAL HISTORY

The appellants filed their complaint in United States District

Court for the Southern District of Georgia on August 17, 1993. On

October 4, 1993, GHEAC filed a motion to dismiss the plaintiffs'

complaint pursuant to rules 12(b)(1) and 12(b)(6) of the Federal

Rules of Civil Procedure. The appellants filed an amended

complaint on October 12, 1993. On November 22, 1993, the Secretary

filed a motion to dismiss pursuant to rules 12(b)(1) and 12(b)(6).

On November 23, 1993, HEAF filed a motion to dismiss pursuant to

rule 12(b)(6). On November 24, 1993, Sallie Mae filed a motion to

dismiss pursuant to rules 12(b)(1) and 12(b)(6). The district

court entered a default judgment against the school on December 9,

1993.

On March 24, 1994, the district court dismissed the complaint

for lack of subject matter jurisdiction. The district court found

federal subject matter jurisdiction lacking because the appellants

failed to allege that their state law claims necessarily turned on

some construction of federal law. The district court believed that

the complaint presented only three arguable federal "ingredients":

the "origination relationship" between the school and the lenders

mentioned in Counts I and II; the FTC Holder Rule mentioned in all

four counts; and the Higher Education Act mentioned in Count III.

The court believed that the best argument for the presence of

federal question jurisdiction was found in the appellants'

assertion of an "origination relationship" between the school and

the lenders. The court concluded, however, that the presence of

the origination issue was not strong enough to support federal
question jurisdiction.

The court also found that the presence of the FTC Holder Rule

in Count III, the Georgia deceptive trade practices count, did not

merit federal question jurisdiction because state law governs

whether the violation of the FTC rule, or its omission from the

students' loan contracts, constituted a violation of Georgia law.

The court also found that Count IV, the ex delicto contract breach

count, did not confer federal question jurisdiction because the

issue of whether the appellees' failure to ensure placement of the

FTC Holder Rule in the loan agreements constituted a breach of the

contract was a question of state law. Alternatively, the court

found that the FTC Act did not provide a private cause of action.

With respect to the presence of the HEA in Count III and in the

appellants' prayer for relief, the court found that the appellants'

ability to succeed on the four counts was not sufficiently tied to

the assertion that the appellees' action violated the HEA.

Therefore, the HEA allegation did not create federal question

jurisdiction.

Appellants filed a motion for reconsideration on April 4,

1994, that more fully developed their argument that the HEA

contained an independent grant of federal question jurisdiction

over non-tort claims for monetary relief against the Secretary.

Appellants relied on 20 U.S.C. § 1082(a)(2)'s "sue and be sued"

clause as support for their argument. On April 19, 1994, the

Secretary filed a response in opposition to the appellants' motion

for reconsideration. The Secretary agreed with the appellants that

section 1082(a)(2)'s "sue and be sued" clause constituted an
independent grant of federal court jurisdiction. The Secretary

argued, however, that the district court's order dismissing the

complaint could be upheld on the alternative ground of failure to

state a claim upon which relief could be granted. In denying the

motion for reconsideration, the district court concluded that the

appellants had not asserted any claims arising under the HEA in any

of the four counts of their complaint. Appellants filed a timely

notice of appeal.

ISSUE

The sole issue in this appeal is whether the district court

err when it ruled that it did not have subject matter jurisdiction

under the "sue and be sued" provision of section 1082(a)(2) of the

HEA.

CONTENTIONS

The appellants contend that jurisdiction was proper because

the case involves the Secretary's administration of the GSL program

and 20 U.S.C. § 1082(a)(2)'s "sue and be sued" clause confers

jurisdiction through its specific reference to the federal courts.

Appellants argue, moreover, that every action that the Department

of Education engages in arises under the federal statutes that

created it and its programs. Therefore, a suit against the

Department of Education necessarily arises under the laws of the

United States.

The Secretary and HEAF agree with the appellants' argument

that jurisdiction was proper because the case involves the

Secretary's administration of the GSL program. They invite us to

uphold the district court's dismissal on the alternative ground
that the appellants have failed to state a cause of action that

entitles them to relief. Sallie Mae and GHEAC assert that the

appellants did not make a jurisdictional allegation under section

1082. Therefore, they did not comply with the well pleaded

complaint rule, and, in any event, section 1082(a)(2)'s "sue and be

sued" clause is limited to claims arising under the HEA.

DISCUSSION

The federal question jurisdiction of the district court is a

question of law subject to de novo review. United States v. Perez,

956 F.2d 1098, 1101 (11th Cir.1992). The Supreme Court has

recently addressed the jurisdictional implications of "sue and be

sued" clauses in American National Red Cross v. S.G., --- U.S. ----

, 112 S.Ct. 2465, 120 L.Ed.2d 201 (1992). In that case, a husband

and wife, who claimed that the wife had contracted acquired immune

deficiency syndrome (AIDS) from a transfusion of contaminated blood

the Red Cross supplied, filed a state law tort action against the

Red Cross in New Hampshire state court. The Red Cross removed the

action to federal district court on the ground that its charter

contained a "sue and be sued" clause that conferred original

federal jurisdiction over suits involving the Red Cross.4 The

district court denied a motion to remand the case to state court on

the ground that the "sue and be sued" provision conferred original

federal jurisdiction. On interlocutory appeal, the United States

Court of Appeals for the First Circuit concluded that the "sue and

4
The American National Red Cross charter authorizes the
organization to "sue and be sued in courts of law and equity,
State or Federal, within the jurisdiction of the United States."
36 U.S.C.A. § 2.
be sued" provision did not confer original federal jurisdiction,

and reversed the district court. The Supreme Court reversed the

court of appeals's decision. The Court drew a distinction between

"sue and be sued" clauses that specifically referenced the federal

courts and those that do not. Relying on Osborn v. Bank of the

United States, 9 Wheat. 738, 6 L.Ed. 204 (1824) and D'Oench, Duhme

& Co. v. Federal Deposit Ins. Corp., 315 U.S. 447, 62 S.Ct. 676, 86

L.Ed. 956 (1942), the Court held that a "sue and be sued provision

may be read to confer federal court jurisdiction if, but only if,

it specifically mentions the federal courts." American National

Red Cross, --- U.S. at ----, 112 S.Ct. at 2471.

Section 432(a)(2) of the HEA provides, in relevant part:

In the performance of, and with respect to, the
functions, powers, and duties, vested in him by this part, the
Secretary may—

....

(2) sue and be sued in any court of record of a State
having general jurisdiction or in any district court of the
United States, and such district courts shall have
jurisdiction of civil actions arising under this part without
regard to the amount in controversy....

20 U.S.C.A. § 1082(a) (emphasis added). Section 1082(a)(2), as was

the case with the congressional charter involved in American

National Red Cross, "specifically mentions the federal courts."

American National Red Cross, --- U.S. at ----, 112 S.Ct. at 2471.

Therefore, the section's "sue and be sued" provision confers

federal court jurisdiction over actions involving "the performance

of" the Secretary's duties under the GSL program or the Secretary's

"functions, powers, and duties" under that program. See 20

U.S.C.A. § 1082(a)(2).
 The district court dismissed the appellants' complaint on the

ground that they had not demonstrated that their claims arose under

the HEA. In interpreting section 1082(a)(2), the district court

emphasized the section's "arising under this part" language to the

exclusion of the "sue and be sued" language.5 The district court's

reliance on the "arising under this part" language of section

1082(a)(2)'s "sue and be sued" provision led it to review the

appellants' amended complaint for compliance with the well pleaded

complaint rule applicable to "arising under" jurisdiction based on

28 U.S.C. § 1331. See Verlinden B.V. v. Central Bank of Nigeria,

461 U.S. 480, 494, 103 S.Ct. 1962, 1971, 76 L.Ed.2d 81 (1983)

(noting that the well pleaded complaint rule only applies to

statutory matters arising under cases). Although the district

court properly applied the law applicable to "arising under"

jurisdiction, we must reverse its dismissal of the amended

complaint because the first clause of section 1082's "sue and be

sued" provision, through its specific mention of the federal

courts, constitutes a separate and independent jurisdictional

grant. See American National Red Cross, --- U.S. at ----, 112

S.Ct. at 2471.

The first clause of section 1082(a)(2)'s "sue and be sued"

provision allows the Secretary to "sue and be sued ... in any

district court of the United States." We believe this first clause

of section 1082(a)(2)'s "sue and be sued" provision provides the

federal courts with an independent jurisdictional grant over cases

5
Section 1082(a)(2)'s "this part" language refers to Part
(b) of Title IV of the HEA; the GSL program is authorized under
that portion of the HEA. See 79 Stat. 1219.
involving the Secretary's administration of the GSL program. The

second clause of the provision provides: "and such district courts

shall have jurisdiction of civil actions arising under this part

without regard to the amount in controversy." 20 U.S.C.A. §

1082(a)(2). The second clause merely clarifies that if the

district court exercises "arising under" jurisdiction over claims

involving the GSL program, it must do so without regard to the

amount in controversy. We do not believe the section's "arising

under this part" language can be properly read as a limitation on

the first clause of the "sue and be sued" provision.

Section 1082(a)(2) was originally enacted in 1965. See Pub L.

89-329, Title 4, section 432 (Nov. 8, 1965), 79 Stat. 1246, 1247.

At that time, 28 U.S.C. § 1331's federal question jurisdiction

provision also contained an amount in controversy requirement. See

13B, Charles A. Wright, et al., Federal Practice and Procedure §

3561.1 at 5-13 (2d ed. 1984). Therefore, if Congress desired to

provide the district courts with jurisdiction over cases arising

under federal law without regard to an amount in controversy,

Congress had to do so specifically in the statute. See 13B,

Charles A. Wright, et al., Federal Practice and Procedure § 3561.1

at 5. Congress, of course, has since eliminated the amount in

controversy requirement for cases arising under federal law. See

28 U.S.C. § 1331. However, in 1965, when Congress stated in

section 1082(a)(2) that the "district court shall have jurisdiction

of civil actions arising under this part without regard to the

amount in controversy," Congress was merely instructing the

district courts that cases arising under the GSL program need not
comply with section 1331's amount in controversy requirement.

Additionally, we do not believe that the "arising under this part"

language of section 1082(a)(2) is a limitation on the "sue and be

sued" clause. In American National Red Cross, the Supreme Court

recognized that its decision in D'Oench, Duhme, involving the

Charter of the Federal Deposit Insurance Corporation, had also

contained a separate jurisdictional provision in addition to a "sue

and be sued" clause. In D'Oench Duhme, as in this case,

jurisdictional overlap existed between the separate jurisdictional

provision and the "sue and be sued" clause. The court,

nevertheless, concluded that such jurisdictional overlap did not

limit the independent grant of federal jurisdiction conferred by

the "sue and be sued" clause. See American National Red Cross, ---

U.S. at ----, 112 S.Ct. at 2470; D'Oench, Duhme & Co., 315 U.S. at

455-56 n. 2, 62 S.Ct. at 679 n. 2. Thus, section 1082(a)(2)'s

reference to cases arising under the GSL program does not limit the

independent jurisdictional grant Congress conferred on the district

courts through the "sue and be sued" clause.

Admittedly, American National Red Cross involved a federally

chartered corporation and this case, in contrast, involves a

federal agency. We are, however, unable to discern any reason why

American National Red Cross 's holdings should be limited solely to

statutory "sue and be sued" clauses involving federally chartered

corporations. The statutory interpretation analysis that the

Supreme Court conducted in American National Red Cross can be

straightforwardly applied to other statutes beyond the realm of

federally chartered corporations. Importantly, the strongest
support for our holding in this case can be found in Justice

Scalia's dissent in American National Red Cross.

In American National Red Cross, Justice Scalia drew a

distinction between "sue and be sued" clauses that merely confer

capacity to be sued in federal courts and "sue and be sued" clauses

that confer both capacity and jurisdiction. --- U.S. at ----, 112

S.Ct. at 2476 (Scalia, J., dissenting). Justice Scalia was of the

opinion that the "sue and be sued" clause at issue in American

National Red Cross "merely establishes that the Red Cross is a

juridical person." American National Red Cross, --- U.S. at ----,

112 S.Ct. at 2476 (Scalia, J., dissenting). Two factors led

Justice Scalia to conclude that the "sue and be sued" provision at

issue in American National Red Cross did not confer federal court

jurisdiction. First, he asserted that the statute's general

reference to the "federal courts" was too broad to confer subject

matter jurisdiction on the federal courts. American National Red

Cross, --- U.S. at ----, 112 S.Ct. at 2477 (Scalia, J.,

dissenting). If the statute had mentioned "a particular federal

court," Justice Scalia believed a stronger argument could be made

that Congress intended to confer subject matter jurisdiction upon

the federal courts. See American National Red Cross, --- U.S. at

----, 112 S.Ct. at 2477 (Scalia, J., dissenting). Second, Justice

Scalia objected to the fact that the statute in American National

Red Cross did not distinguish between federal courts and state

courts. American National Red Cross, --- U.S. at ----, 112 S.Ct.

at 2477 (Scalia, J., dissenting). According to Justice Scalia, the

American National Red Cross charter's parallel treatment of federal
and state courts undermined a jurisdictional reading of the statute

because a federal entity could not file an action in state court

without first "establishing the independent basis of jurisdiction

appropriate under state law." American National Red Cross, ---

U.S. at ----, 112 S.Ct. at 2477 (Scalia, J., dissenting) (citations

omitted).

Section 1082, however, addresses both of the concerns

enumerated by Justice Scalia in his dissent in American National

Red Cross. Section 1082(a)(2) allows the Secretary to "sue and be

sued ... in any district court of the United States." (emphasis

supplied). Congress therefore has clearly indicated the particular

federal court it sought to confer jurisdiction upon. See American

National Red Cross, --- U.S. at ----, 112 S.Ct. at 2477 (Scalia,

J., dissenting). Additionally, section 1082(a)(2) allows the

Secretary to "sue and be sued in any court of record of a state

having general jurisdiction...." (emphasis supplied). Congress,

therefore, has acknowledged that the Secretary may not file a state

court action without establishing "the independent basis of

jurisdiction appropriate under state law." See American National

Red Cross, --- U.S. at ----, 112 S.Ct. at 2477 (Scalia, J.,

dissenting). Moreover, we believe the arguments in support of

federal court jurisdiction in this case are more compelling than in

American National Red Cross. This case involves a federal agency's

oversight and application of a federal statutory and regulatory

scheme. We believe Congress's reasons for ensuring federal court

jurisdiction in this instance would have been greater than for a

federally chartered corporation.
 CONCLUSION

Accordingly, we hold that the "sue and be sued" clause of

section 1082(a)(2) confers federal subject matter jurisdiction

through its specific reference to the federal district courts. The

district court's order dismissing the appellants' complaint with

prejudice is vacated and the case is remanded to the district

court.

VACATED and REMANDED.