American Association of Cosmetology Schools v. Richard W. Riley, Secretary of Education

RYMER, Circuit Judge:

In this case the American Association of Cosmetology Schools (AACS) seeks to invalidate the appeals process applied by the Secretary of Education to schools subject to termination from certain federally guaranteed educational loan programs under Title IV of the 1965 Higher Education Act (HEA), as amended, 20 U.S.C. § 1070 el seq., and to nullify appeal decisions that were adversely affected by the Secretary’s application of regulations and deadlines. The district court concluded that the action seeks the equivalent of injunctive relief which is precluded by the anti-injunction provision of 20 U.S.C. § 1082(a)(2), and granted summary judgment for the Secretary. While we agree that the action may not proceed in its present form, our decision is in part for jurisdictional, and in part for prudential, reasons. As such, neither AACS nor any individual institution is foreclosed from seeking judicial review on the ground that the Secretary’s decision in a particular appeal should not stand for the same reasons AACS asserts in this action. Therefore, we affirm the judgment of dismissal, but vacate the order granting summary judgment so that it may not be mistaken as a judgment on the merits.

I

Title IV of the Higher Education Act of 1965(HEA), as amended, 20 U.S.C. §§ 1070-1099, authorizes the Secretary of Education to administer a variety of student loan and grant programs, including the Federal Family Education Loan (FFEL) programs whose purpose is to allow students to obtain federally guaranteed educational loans. Under the FFEL programs, a student receives a loan from a participating lender (usually a bank), to pay postsecondary education-related expenses such as tuition, fees and living expenses at an eligible institution. Repayment of the student loan is insured by a guaranty agency. See 20 U.S.C. § 1078(b)-(c). In the event of default, the guaranty agency pays the lender the unpaid portion of the outstanding loan. The Department of Education reinsures the guaranty agencies for payments made to lenders on defaulted loans. See 20 U.S.C. § 1078(c); 34 C.F.R. § 682.404.

Due to the increasing number of students defaulting repayment of their student loans, Congress amended the HEA in 1990 by passing the Student Loan Default Prevention Initiative Act, Title III of the Omnibus Budget Reconciliation Act of 1990, Pub.L. No. 101-508, § 3004(a), 104 Stat. 1388-25, 1388-26 (1990) (codified at 20 U.S.C. § 1085(a)(2),(3)), to reduce the number of defaulted loans by revoking the eligibility of postsecondary schools whose students had excessively high default rates. The amended HEA now ties a school’s eligibility for continued participation in FFEL programs to its “cohort default rate” (CDR), the percentage of current and *1252former students that enter repayment on their loans during a given fiscal year who default before the end of the following fiscal year. See 20 U.S.C. § 1085(a),(m). The Secretary calculates a school’s CDR by taking the number of current or former students who enter the repayment period in a given fiscal year and dividing that number by the number of those students who default by the end of the following fiscal year. See 20 U.S.C. § 1085(m)(l)(A). Schools whose CDRs for the three most recent fiscal years exceed a statutorily-prescribed threshold percentage are subject to termination from eligibility for FFEL participation. See 20 U.S.C. § 1085(a)(2)(A),(B); 34 C.F.R. § 668.17(a)(3). A school subject to termination from FFEL participation can appeal the Secretary’s calculation of its CDR in one of three ways, via (1) an erroneous data appeal, see 20 U.S.C. § 1085(a)(2)(A)(i); (2) an improper loan servicing or collection appeal, see 20 U.S.C. § 1085(a)(3); or (3) an exceptional mitigating circumstances appeal, see 20 U.S.C. § 1085(a)(2)(A)(ii). Pursuant to statutory mandate, see 20 U.S.C. § 1094(e)(1), the Department has promulgated extensive administrative procedures for hearing and appeal after notice of termination. See 34 C.F.R. §§ 668.81-97. A school’s FFEL eligibility is not terminated during the pendency of a timely and proper CDR appeal. See 20 U.S.C. § 1085(a)(2),(m)(l)(B); 34 C.F.R. § 668.17(b)(6).

II

AACS is a voluntary association whose membership consists of approximately 600 cosmetology schools located throughout the United States, many of which participate in Title IV FFEL programs. In its July 15, 1996 Corrected Complaint, AACS challenges the Secretary’s administration of improper loan servicing or collection appeals, and his methods of calculating CDRs and determining loan repayment dates.

The complaint alleges that the Secretary issued regulations implementing § 1085 on April 29, 1994, see 59 Fed.Reg. 22,278 (Apr. 29, 1994), but amended these regulations the following November to exclude defaulted loans under a different set of standards. See 59 Fed.Reg. 61,192 (Nov. 29, 1994). The Secretary stated in his regulatory preamble to the November Regulations that he would apply whichever standard would be more favorable to the institution in adjudicating pending appeals. See id. at 61,193. However, the complaint alleges, the Secretary in fact has acted in accordance with his statement in only two CDR loan servicing appeal decisions and has otherwise applied only the standards of the November regulations. AACS also alleges that the retroactive application of the November regulations to institutional CDR appeals filed before their promulgation, and drafted under the then-governing April 1994 regulations, without adequate notice violates both due process and the notice and publication provisions of the Freedom of Information Act, 5 U.S.C. § 552(a)(1). AACS seeks a declaration that “the Secretary’s application of the November 1994 regulations to FY 1992 loan servicing appeals and any other prior year loan servicing appeals pending when the November 1994 Regulations were issued, or FY 1992 appeals filed before July 1, 1995 [the effective date of the November 1994 Regulations], is illegal and in violation of the Fifth Amendment, the Administrative Procedure Act and the Freedom of Information Act.”

AACS further challenges the Secretary’s substantive methods of determining the date upon which student loans enter repayment for purposes of CDR calculations. Section 1078(b)(7) provides that certain loans (known as “Stafford loans”) are to enter repayment on the first day after six months following a student’s graduation or withdrawal from postseeondary schooling. See 20 U.S.C. § 1078(b)(7)(A)(i),(ii). The Secretary’s regulation tracks the statutory language. See 34 C.F.R. § 682.209(a)(3)(i)(B) (providing certain Stafford loans enter repayment “six months following the date on which the borrower is no longer enrolled on at least a halftime basis at an eligible school”). However, AACS contends that the Secretary has, in practice, violated both the express terms of 20 U.S.C. § 1078(b)(7)(A) and his own implementing regulation by non-uniformly permitting guaranty agencies and lenders to calculate the start of repayment periods based either on the month following six months after the borrower withdrew from an institu*1253tion, or the month after a borrower’s grace period expired. The effect of ignoring the statute’s day-specific mandate, AACS claims, is to allow loans whose repayment period should begin in the last month of one fiscal year (e.g., September of FY93) to begin instead in the first month of the following fiscal year (i.e., October of FY94). Should these students subsequently default at any point during the two following fiscal years (i.e., from October 1994, the beginning of FY94, until September 1996, the end of FY95), their default would be included by the Secretary in the institution’s CDR for the previous fiscal year (i.e., FY94). AACS’s complaint contends that the Secretary’s failure to require a day-specific method of determining the date borrowers enter repayment is invalid as it is in contradiction of § 1078(b)(7), and that his failure to require all lenders and guarantors to follow the regulation violates § 1232(c), which requires the Secretary’s regulations to be applied and enforced uniformly. It seeks a declaration that “the Secretary’s failure to require uniformly a day-specific method of determining the repayment date of Stafford loans is in violation of 20 U.S.C. § 1078(b) and 20 U.S.C. § 1232(e).”

Lastly, AACS contends the erroneous data CDR appeals process fails to provide institutions challenging their CDRs with an opportunity to review and rely upon certain loan servicing documentation in preparing and prosecuting their appeals. Due to purportedly short and strict administrative deadlines, AACS alleges that institutions are required to identify all erroneous data — in both the pre-CDR publication and post-publication process — without the opportunity to review the loan servicing records of the affected borrowers. Furthermore, it avers, when an institution does discover erroneous data based on information in the loan servicing records, the Secretary’s appeal procedures often preclude the institution from asserting those errors because the deadline for filing an erroneous data appeal has passed. This prevents institutions from presenting a full and complete challenge to their CDRs as required by 20 U.S.C. § 1085(a)(2), and the Administrative Procedure Act. AACS seeks a declaration that “the CDR appeal process as configured by the Secretary is in violation of the Administrative Procedure Act, Title IV of the HEA, and the Fifth Amendment to the U.S. Constitution in that it fails to provide institutions challenging their CDR the opportunity to review and rely upon loan servicing documentation in preparing their erroneous data appeals.”

In addition, AACS requests a declaratory judgment that “the adverse decisions issued against institutions who appealed their FY 1992 CDRs or prior year CDRs and whose appeals were decided exclusively under the November 29, 1994 loan servicing appeal standards are null and void,” as are “all CDRs and CDR appeal decisions affected adversely by the Secretary’s waiver of the day-specific method of determining the repayment date,” and “all CDRs and CDR appeal decisions adversely affected by institutions’ inability to review and rely upon loan servicing documentation in preparing their erroneous data appeals....”

On September 3, 1996, AACS applied ex parte for a temporary restraining order and preliminary injunction, which the district court denied. The Secretary then moved to dismiss AACS’s Corrected Complaint on standing and jurisdictional grounds, or alternatively for summary judgment. AACS opposed the Secretary’s motion, and cross-moved for summary judgment.

The district court denied AACS’s motion for summary judgment, and granted the Secretary’s. This appeal timely followed.

Ill

AACS argues that an action for declaratory relief is not barred by the anti-injunction provision of 20 U.S.C. § 1082(a)(2).1 Section 1082(a)(2) is the “sue and be sued” provision of HEA which reads, in pertinent part,

(a) 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, and action *1254instituted under this subsection by or against the Secretary shall survive notwithstanding any change in the person occupying the office of the Secretary or any vacancy in that office; but no attachment, injunction, garnishment, or other similar process, mesne or final, shall be issued against the Secretary or property under the Secretary’s control

20 U.S.C. § 1082 (West Supp.1998) (emphasis added).

AACS points out that there are differences between claims for declaratory relief and injunctions, see, e.g., Olagues v. Russoniello, 770 F.2d 791, 803 (9th Cir.1985) (recognizing the “considerable difference between ordering a government official to conduct his activities in a certain manner, and simply pronouncing that his conduct is unlawful and should be corrected”), and that § 1082(a)(2) does not by its terms exclude declaratory relief from the forms of relief as to which the Secretary may “sue and be sued.” AACS further submits that no such exclusion should be implied. As we see it, however, AACS’s focus is largely misplaced because the district court did not hold that declaratory relief actions, as such, are barred. Neither does the government argue otherwise to us. Rather, the district court concluded that declaratory relief of the type sought by AACS is barred by the anti-injunction statute where such declaratory relief would produce the same effect as an injunction. For this reason, we have no need to decide the question that AACS argues.

Assuming that declaratory relief actions as such are not precluded by the anti-injunction statute,2 it seems obvious that the anti-injunction bar cannot be skirted by the simple expedient of labeling an action that really seeks injunctive relief as an action for “declaratory relief.” Yet this is precisely what AACS’s complaint does when it asks for decisions adversely affecting member institutions to be declared null and void; if these decisions were voided and the appeals process restarted, adversely affected institutions would be reinstated to the FFEL program— despite an administrative determination having been made that they were ineligible— because they continue to participate while appeals are pending.3 See 34 C.F.R. § 668.17(b)(6) (participation continues until Secretary issues decision on appeal); see also 20 U.S.C. § 1085(a)(2)(A) (Secretary may permit institution to continue to participate during appeal). To this extent, the relief requested is plainly coercive and therefore prohibited by the anti-injunction statute no matter what name it’s given.4

*1255Beyond this, we also believe it would be impossible as a practical matter for the district court to make, or enforce, a judgment on whether institutions are “adversely affected” without a complete administrative record to review. While we recognize that the complaint seeks to invalidate the entire appeals process on due process grounds, we also believe that it would be difficult if not impossible to determine whether institutions had insufficient prior notice of the November regulations to be prejudiced or were misled, as AACS argues, without an administrative record to review. Whether an institution’s due process rights were violated necessarily depends on when its appeal was taken, how the Secretary responded and how the school was treated. This is equally true with respect to whether the Secretary’s failure uniformly to require a day-specific method of determining repayment dates makes any difference in particular appeals, as AACS claims, or whether deadlines actually passed, such that an institution could not adequately support its appeal.

As the Secretary notes, HEA provides an administrative process through which schools may challenge the Secretary’s calculation of their cohort default rate's. See 20 U.S.C. § 1085(a),(m)(l)(b); 34 C.F.R. § 668.17. Institutions may seek judicial review, but not until the Secretary has issued a decision. See 34 C.F.R. § 668.17(h)(3)(vii); see also Career Education, Inc. v. Dep’t of Education, 6 F.3d 817, 820 (D.C.Cir.1993) (dismissing school’s HEA lawsuit where it failed to exhaust administrative remedies first). AACS has not participated in any administrative process, yet seeks to invalidate the appeals process because of decisions that might have come out differently under a different set of procedures based on different factual determinations. We believe this is best accomplished through the ordinary channels of judicial review after final agency action.

AACS’s suggestion that it, and its member institutions, will be without a remedy unless its action proceeds is not persuasive. An institution (together with AACS if it wishes to join) can seek judicial review of the correctness of the Secretary’s CDR calculation and his ultimate decision to terminate a school’s participation in FFEL programs. There is no reason why the same arguments that AACS now presses cannot be made then by the adversely affected institutions, alone or with AACS’s help, on constitutional or statutory grounds. See 20 U.S.C. § 1094(c)(1)(F) (the Secretary can make a suspension or termination decision only “after reasonable notice and opportunity for a hearing”). Indeed, AACS concedes that a single school can raise precisely the same systemic flaws it raises here. The difference, as we see it, is that following an administrative adjudication the court will have a record to review and the regulatory process — which may or may not turn out to be unfavorable to particular AACS members— will not have been unduly disrupted.

Although couched in part as a constitutional challenge to how appeals are processed, in reality AACS’s challenge is not to a policy that has an outcome in all cases. In this respect, its challenge is quite different from that in California Cosmetology Coalition v. Riley, 110 F.3d 1454 (9th Cir.1997), where CCC and AACS sought (and received) a permanent injunction against the enforcement of regulations governing the amount of tuition and other fees postseeondary schools must refund when a student receiving Title IV federal aid withdraws from classes before completing the term for which those fees had been charged. CCC contended that the regulations contradicted the express language of the statute, by requiring institutions to refund a larger amount than is required under state or accrediting agency refund standards. As such, the challenge was across-the-board and could be resolved by the court without regard to how the regulation was applied. That simply is not the case here.

In sum, we agree with the district court that the nullification AACS seeks of decisions “adversely affected” by the Secretary’s application of regulations or the deadlines in place for preparing certain appeals would have the same coercive effect as an injunction, and is therefore precluded by § 1082(a)(2)’s anti-injunction provision. To the extent that *1256AACS seeks to restrain the administrative appeal process as a whole, the relief sought— even assuming it is declaratory and not coercive — is practically and prudentially inappropriate without a record of what the Secretary has done in individual appeals.

We do, however, wish to be clear that neither our opinion nor the district court’s order precludes a challenge on similar grounds by AACS or its member schools after final agency action has been taken. For this reason, we vacate the district court’s order granting the Secretary’s motion for summary judgment (which was made on the merits), and remand so that it may enter judgment dismissing the action for lack of jurisdiction. Otherwise, we affirm.

AFFIRMED IN PART, VACATED AND REMANDED IN PART.

. In this it is supported by amicus curiae, the Career College Association.

.See, e.g., Thomas v. Bennett, 856 F.2d 1165, 1168 (8th Cir.1988) (affirming denial of Secretary’s motion to dismiss plaintiff’s declaratory relief complaint in which individual taxpayer challenged a student loan-related tax offset, notwithstanding § 1082(a)(2)); Ulstein Maritime, Ltd. v. United States, 833 F.2d 1052, 1055-56 (1st Cir.1987) (explaining differences between declaratory judgments and injunctions and permitting request for declarative relief to proceed against SBA despite anti-injunction provision); Bank of America NT & SA v. Riley, 940 F.Supp. 348, 350-51 (D.D.C.1996) (declaratory relief action brought by nine banks challenging Secretary’s refusal to pay $ 16 million in 'special allowances’ not precluded by HEA), aff'd, 132 F.3d 1480 (D.C.Cir.1997) (unpublished opinion); Student Loan Marketing Ass'n v. Riley, 907 F.Supp. 464, 474 (D.D.C.1995) (refusing to dismiss for lack of jurisdiction SallieMae's declaratory relief action challenging Secretary’s announced intention to apply a statutory offset fee to certain assets), aff'd, 104 F.3d 397 (D.C.Cir.), cert. denied, - U.S. -, 118 S.Ct. 295, 139 L.Ed.2d 227 (1997); Pro Schools, Inc. v. Riley, 824 F.Supp. 1314, 1315-16 (E.D.Wis.1993) (allowing cosmetology schools operator to challenge Secretary’s termination of its FFEL eligibility in an action for declaratory relief).

. Indeed, AACS sought an injunction shortly after filing its complaint for declaratory relief on the ground that it needed immediate relief because its member schools with high cohort default rates were losing their eligibility to participate in FFEL programs.

. The dissent characterizes the First Circuit's holding in Ulstein Maritime as "rejecting” the position we adopt here, but we don’t see how since the Ulstein Maritime plaintiffs were seeking reversal of a particular agency determination of their own rights following an administrative adjudication. 833 F.2d at 1054-56. In Ulstein Maritime, the district court granted plaintiffs’ request for a declaration under the APA that a "certificate of competency" issued by the SBA to one of plaintiffs’ competitors for a naval procurement contract was invalid. The court then set aside the SBA certificate and remanded the matter to the Navy for further consideration, and the First Circuit affirmed. The plaintiffs there were not seeking a broad declaration concerning the SBA’s application of its regulations in myriad, unspecified cases as AACS does in this case by *1255seeking to nullify all administrative decisions where its member-schools were allegedly “adversely affected” by the Secretary’s application of its regulations.