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Education Corporation of America v. United States Department of Education

United States District Court, N.D. Alabama, Southern Division

November 5, 2018

EDUCATION CORPORATION OF AMERICA, et al., Plaintiffs,
v.
UNITED STATES DEPARTMENT OF EDUCATION, et al., Defendants.

          MEMORANDUM OPINION

          ABDUL K. KALLON UNITED STATES DISTRICT JUDGE

         Education Corporation of America, Virginia College, LLC, and New England College of Business and Finance, LLC (collectively, “ECA”) assert claims against the United States Department of Education and Betsy DeVos, in her official capacity as the Secretary of Education (collectively, the “DOE”), for declaratory and equitable relief. Doc. 1. In particular, as part of its efforts to keep operating its educational institutions, ECA seeks a declaration that a proposed restructuring plan will not interfere with its ability to participate in federal financial aid programs regulated by the DOE. Id. at ¶ 42. In addition, ECA filed an Emergency Motion for the Appointment of a Receiver and Entry of a Temporary Restraining Order and Preliminary Injunction. Doc. 2. Basically, ECA asks this court (1) to enter an order enjoining certain actions and lawsuits against ECA by its creditors and (2) to appoint a receiver to take possession of ECA's assets and execute the restructuring plan. Doc. 1 at ¶¶ 44-50; see also doc. 2. Following an initial hearing on October 18, 2018, the court entered a stipulated order that, among other things, gave the DOE an opportunity to file a formal response to the motion. Doc. 10. The court also entered a temporary restraining order on October 19, 2018, staying and enjoining certain actions against ECA by its creditors to maintain the status quo until October 29, when the court held a second hearing on ECA's motion. Doc. 12. Immediately after the second hearing, the court extended its TRO by seven days, to allow it an opportunity to consider the parties' arguments. Doc. 38. As a result, the TRO is set to expire at 5:00 p.m. Central Time today.

         The DOE opposes the motion and argues that the court does not have jurisdiction to hear this lawsuit. Doc. 19. Specifically, the DOE argues that there is no evidence before the court that ECA has submitted its restructuring plan to the DOE or that the DOE has rejected the plan. As such, the DOE maintains that there is no case or controversy as required by Article III for the court to have jurisdiction to hear this case. After careful consideration of the parties' briefs, docs. 2; 19; 24; 48; 51; 53, [1] and with the benefit of oral argument, the court concludes that ECA has not shown the existence of a case or controversy within the meaning of Article III, § 2 of the United States Constitution. As a result, the court does not have subject matter jurisdiction over ECA's claims, and this action is due be dismissed without prejudice.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         ECA operates colleges and career training schools at seventy-four campuses throughout the United States, including five campuses in Alabama. Docs. 1 at ¶¶ 3-6; 24-2 at ¶¶ 7, 10. To generate revenue, ECA depends upon tuition and fees from its students, most of whom receive federal student loans authorized under Title IV of the Higher Education Act (“HEA”). Docs. 1 at ¶¶ 13-15, 20; 24-2 at ¶¶ 17, 19-20. Thus, ECA's colleges and schools must remain eligible to participate in Title IV funding for ECA to maintain its revenue stream. See doc. 24-2 at ¶¶ 19-20, 35. The DOE regulates ECA's eligibility for Title IV programs, and ECA's participation in the programs requires DOE approval. Docs. 1 at ¶¶ 15-18; 19-1 at ¶¶ 5-8; 24-2 at ¶ 19.

         Declining enrollment over several years has led to significant revenue shortfalls for ECA. The shortfalls caused ECA to default on many of its obligations, including its lease agreements, leading numerous landlords to institute or threaten eviction proceedings. See docs. 1 at ¶¶ 14, 20, 26; 24-2 at ¶¶ 20-21, 24-25, 32. ECA contends that it cannot seek protection by “a traditional bankruptcy filing” from these lawsuits because, under the HEA, a bankruptcy filing disqualifies an institution from participating in Title IV funding programs. Doc. 24-2 at ¶ 34; see also 20 U.S.C. § 1002(a)(4)(A).

         Due to its financial difficulties, on September 5, 2018, ECA informed the DOE that it plans to close twenty-six of its schools and to teach-out the students currently enrolled at those schools. Docs. 19-1 at ¶ 14; 24-2 at ¶¶ 27-28; see also docs. 1 at ¶ 24; 19-1 at 12-13. After informing the DOE of its intention to close the teach-out schools, ECA developed a proposed “restructuring plan” that would provide financing to continue its operations in the short term and allow ECA to sell its remaining schools (the “go-forward schools”) to a group of lenders. See docs 1 at ¶¶ 21, 33; 24-2 at ¶¶ 22, 30, 36. According to ECA, the lenders require the appointment of a receiver as a condition of their financing and purchase of the go-forward schools. Doc. 24-2 at ¶ 22.

         During a phone call on October 10, ECA notified a representative of the DOE that it intended to seek a receivership. Docs. 19-1 at ¶ 18; 24-2 at ¶ 40. Although ECA inquired, the DOE representative refused to assure ECA that seeking the appointment of a receiver would not adversely impact ECA's eligibility to participate in Title IV funding programs. Doc. 24-2 at ¶ 40. Instead, the individual informed ECA that it should not assume that the DOE will accept a receivership over ECA and that “ECA should proceed at its own risk.” Id. ECA did not present evidence of further communication with the DOE regarding its proposed restructuring plan, or that it has presented its proposed plan to the DOE for consideration. See docs. 1; 2; 24.

         Six days after the phone call, ECA filed this action against the DOE seeking a declaration in Count I that its proposed restructuring plan would not interfere with its ability to participate in Title IV funding programs and that the appointment of a receiver would not constitute a change in control under DOE regulations. In Counts II and III, respectively, ECA also seeks an order enjoining certain actions against ECA by its creditors[2] and an order appointing a receiver “to take possession of ECA's business and assets to oversee the administration of the closure of the Teach-Out Schools and to execute the [proposed] restructuring plan . . . .” Id. at 17-21. These last two counts seek remedies and are not substantive causes of action.

         II. DISCUSSION

         Federal courts are courts of limited jurisdiction, and a federal district court must be satisfied that it can exercise jurisdiction over a claim before reaching the merits of the claim. E.g., Morrison v. Allstate Indemnity Co., 228 F.3d 1255, 1260-61 (11th Cir. 2000) (citations omitted). Therefore, because the DOE contends that the court lacks jurisdiction to hear this dispute, the court begins, as it must, with determining whether it has subject matter jurisdiction over this matter.

         A. Whether a Case or Controversy Exists

         As the party seeking a federal forum, ECA bears the burden of proving the existence of subject matter jurisdiction. See Federated Mut. Ins. Co. v. McKinnon Motors, LLC, 329 F.3d 805, 807 (11th Cir. 2003) (citations omitted). To support its contention that the court has jurisdiction over its claims, ECA directs the court to § 1082(a)(2) of the HEA. Docs. 1 at ¶ 10; 24 at 3. This section provides that the DOE may “sue and be sued . . . 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 . . .; but no attachment, injunction, garnishment, or other similar process [] shall be issued against the [DOE] . . . .” 20 U.S.C. § 1082(a)(2); see also Bartels v. Alabama Commercial Coll., Inc., 54 F.3d 702, 707 (11th Cir. 1995) (finding that § 1082(a)(2) “provides the federal courts with an independent jurisdictional grant over cases involving the [DOE's] administration of the [Guaranteed Student Loan] program”).

         The DOE argues that, regardless of § 1082(a)(2), ECA must still show the existence of a case or controversy and that it has standing to pursue its claims against the DOE.[3] Doc. 19 at 6-11. Absent such a showing, the DOE maintains that the court lacks subject matter jurisdiction over this dispute. Id. Indeed, notwithstanding § 1082(a)(2), ECA's claim for declaratory relief must still satisfy Article III's case or controversy requirement for the court to exercise subject matter jurisdiction over the claim. See Susan B. Anthony List v. Driehaus, 573 U.S. 149, 134 S.Ct. 2334, 2341 (2014) (“Article III of the Constitution limits the jurisdiction of federal courts to ‘Cases' and ‘Controversies.'”) (quoting U.S Const., Art. III, § 2); Aetna Life Ins. Co. of Hartford, Conn. v. Haworth, 300 U.S. 227, ...


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