for the ninth circuit martin calvillo …...no. 18-16375 in the united states court of appeals for...

No. 18-16375

IN THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

MARTIN CALVILLO MANRIQUEZ, JAMAL CORNELIUS, RTHWAN DOBASHI and JENNIFER CRAIG, on behalf of

themselves and all others similarly situated

Plaintiffs-Appellees,

v.

ELISABETH DEVOS, in her official capacity as Secretary of the United States Department of Education and THE UNITED STATES

DEPARTMENT OF EDUCATION,

Defendants-Appellants.

On Appeal from the United States District Court for the Northern District of California

No. 17-cv-07210 Hon. Sallie Kim

PLAINTIFFS-APPELLEES’ SUPPLEMENTAL BRIEF

Attorneys for Plaintiffs-Appellees

Noah Zinner Megumi Tsutsui HOUSING & ECONOMIC RIGHTS ADVOCATES 1814 Franklin Street, Suite 1040 Oakland, CA 94612 (510) 271-8443

Eileen M. Connor Toby R. Merrill Joshua D. Rovenger LEGAL SERVICES CENTER OF HARVARD LAW SCHOOL 122 Boylston Street Jamaica Plain, MA 02130 (617) 522-0715

Case: 18-16375, 03/05/2019, ID: 11216954, DktEntry: 60, of 27

TABLE OF CONTENTS INTRODUCTION ..................................................................................................... 1

ARGUMENT ............................................................................................................. 3

I. Even assuming that the Department could use “value” as a means to calculate borrower defense relief, the Department failed to meet its goal of measuring the “value” received by any given Corinthian Student. .................................. 3

A. The Average Earnings Rule sets its comparison, and thus the borrower defense remedy, on the basis of an irrelevant denominator. ................. 4

B. The Average Earnings Rule sets its comparison, and thus the borrower defense remedy, on the basis of an unrepresentative numerator. ......... 9

C. The Average Earnings Rule, in its totality, is a conceptually flawed and illogical apples-to-oranges calculation. ............................................... 12

II. A borrower defense remedy, under longstanding department practice, regulation, and Students’ Master Promissory Notes, is tied to the state law cause of action and thus the average earnings rule is impermissible. ........... 14

CONCLUSION ........................................................................................................ 20

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE


TABLE OF AUTHORITIES

Cases

Am. Wild Horse Pres. Campaign v. Perdue,

873 F.3d 914 (D.C. Cir. 2014) ....................................................................... 20

Brower v. Evans,

257 F.3d 1058 (9th Cir. 2001) ......................................................................... 8

Encino Motorcars, LLC v. Navarro,

136 S.Ct. 2117 (2016) .................................................................................... 20

FCC v. Fox Television Stations, Inc.,

556 U.S. 502 (2009)....................................................................................... 15

Gonzales v. Cal. Dep’t of Corr.,

739 F.3d 1226 (9th Cir. 2014) ....................................................................... 19

Graham v. Bank of Am., N.A.,

226 Cal. App. 4th 594 (2014) ........................................................................ 19

Howe Investments Ltd. v. Quarles & Brady, LLP,

No. 17-55483, 2019 WL 581370 (9th Cir. Feb. 13, 2019) ............................ 19

Jicarilla Apache Nation v. U.S. Dep’t of the Interior,

613 F.3d 1112 (D.C. Cir. 2010) ..................................................................... 15

Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto Ins. Co.,

463 U.S. 29 (1983) ......................................................................................... 11

Regents of U. Cal. v. U.S. Dep’t of Homeland Security,

908 F.3d 476 (9th Cir. 2018) ........................................................................... 4

Statutes

5 U.S.C. § 552a ........................................................................................................ 14


Other Authorities

12 Harry D. Miller & Marvin B. Starr, Cal. Real Estate § 40:17 (4th ed. 2017). ... 19

79 Fed. Reg. 16426 (March 25, 2014) ....................................................................... 6

79 Fed. Reg. 64890 (Oct. 31, 2014). ................................................................. 5, 6, 7

Bureau of Labor Statistics, Occupational Employment Statistics, (May 2014) ...... 10

CJ Libassi & Ben Miller, How Gainful Employment Reduces the Government’s Loan Forgiveness Costs, Center for Am. Progress (June 8, 2017) ................. 7

Regulations

34 C.F.R. § 668.405 ................................................................................................. 13

34 C.F.R. § 668.406 ................................................................................................. 13

34 C.F.R. § 685.206 ................................................................................................. 18

34 C.F.R. § 685.222 ................................................................................................. 18


1

INTRODUCTION

Named Plaintiffs and members of the student class (“Corinthian Students” or

“Students”) attended for-profit programs operated by Corinthian Colleges. After a

lengthy investigation, the Department of Education (the “Department”) determined

that these programs were so rife with fraud that Students were entitled to a full loan

discharge upon the submission of a simple form (the “Corinthian Rule”). In 2017,

without reference to its prior findings and legal conclusions, the Department

abandoned the Corinthian Rule in favor of one that ties a Student’s borrower

defense remedy to the “value” she received from her Corinthian program (the

“Average Earnings Rule” or “AER”). This Court has requested supplemental

briefing on whether the Department acted arbitrarily and capriciously in

developing this Average Earnings Rule. It did.

First, even assuming that the Department could use a generic measure of

“value” imparted by a failed institution to reduce the amount of the borrower

defense remedy available to a given (or representative) Corinthian Student, the

Average Earnings Rule does not measure whether a Student obtained any benefit

from her Corinthian education. Indeed, the Department settled on an illogical

denominator and comparator for its assessment: the 2014 average earnings of

students from schools that passed a debt-to-earnings standard under the Gainful

Employment “GE” regulation. GE does not claim to measure “value,” and the


2

Department has not shown why the earnings of students attending passing GE

programs should set the standard for borrower defense relief or why this data

stands for “the value of the education…that would have met students’ reasonable

expectations of preparation for gainful employment.” (ER 111).

The Department’s selection of the numerator was no better. The Department

created 79 artificial groups that comprised students who attended different

Corinthian programs, at discrete times, in distinct locations; the data about these 79

groups says nothing about the value a Student received from a specific Corinthian

program at a given location and time. The numerator also included earnings from

students not covered by the Corinthian Rule and not included in GE metrics. It

then excluded earnings from Students who have yet to apply for borrower defense,

or have applied but, like Plaintiff Jennifer Craig, were attending school in 2014,

the very year the Department drew data from.

Taken as a whole, the comparison is conceptually flawed. It rests on the

unsupported premise that Students’ “reasonable expectations” were confined to a

choice between Corinthian—which induced them to enroll on the basis of

fraudulent misrepresentations—and the comparator schools. It simply does not

speak to the difference between what Corinthian promised, and what Corinthian

delivered. It also ignores the Department’s own findings that Corinthian falsely

took credit for placing Students in jobs that they obtained wholly apart from their


3

Corinthian program. In short, the Department has created an arbitrary rule that

compares apples to oranges.

Second, “value” as a function of earnings is not, in fact, a permissible way

for the Department to determine a borrower defense remedy in this instance. Both

the Students’ Master Promissory Notes, and the Department’s own regulations,

require the Department to use applicable state law to determine the amount of a

claimant’s loan discharge. Here, California law requires restitution. Until January

20, 2017, the Department agreed with this interpretation and used state law to

decide the remedy for each and every borrower defense application it decided,

under the Corinthian Rule and otherwise. The Department has not explained its

changed interpretation.

Ultimately, the Department’s arbitrary and capricious conduct is further

harming approximately 110,000 defrauded Students. This Court should protect

these Students by affirming the District Court’s entry of a preliminary injunction.

ARGUMENT

I. EVEN ASSUMING THAT THE DEPARTMENT COULD USE “VALUE” AS A MEANS TO CALCULATE BORROWER DEFENSE RELIEF, THE DEPARTMENT FAILED TO MEET ITS GOAL OF MEASURING THE “VALUE” RECEIVED BY ANY GIVEN CORINTHIAN STUDENT. The Department’s development of the Average Earnings Rule “must be

upheld, if at all, on the basis articulated by the agency itself.” Regents of U. Cal. v.


4

U.S. Dep’t of Homeland Security, 908 F.3d 476, 505 (9th Cir. 2018) (internal

quotation and citations omitted). In its memorandum explaining the Average

Earnings Rule, the Department stated: “This methodology was developed to

provide borrowers relief consistent with and appropriate to the harm they incurred

from the misrepresentation by CCI, thereby making them whole. It is rooted in a

determination of the value of the claimant’s CCI education.” (ER 124); see also

(ER 115) (explaining that “harm to certain CCI students may be determined by

assessing the value students received from the education provided by CCI, as

compared to that provided by other schools to students in similar programs”). The

AER fails to achieve this goal.1

A. The Average Earnings Rule sets its comparison, and thus the borrower defense remedy, on the basis of an irrelevant denominator.

The denominator of the AER metric is “2014 earnings of students

completing programs with the same CIP code and credential [as the relevant “CCI

Program Credential/Group” of applicants] that earned passing scores as part of the

1 The record fully details the Department’s development of the Average Earnings Rule. See (ER 106) (Declaration of James Manning); (ER 113) (Declaration of Phillip Juengst); (ER 124) (Borrower Defense Relief Methodology for CCI Claimants Memorandum); (Supp ER 24) (Declaration of Frank Curran); (Supp ER 29) (Crosswalk of CIP Codes); (Supp ER 39 & 63) (findings lists with relief amounts).


5

programs in the Department’s GE program[.]” (ER 126). The choice of this

comparator is the product of pretext and faulty reasoning.

The Department claims that GE metrics released in January 2017 showed

that “programs at CCI schools performed relatively well, overall” (ER 110),

causing the Department to “reevaluate the assumption that CCI students … had not

received any value from their education.” (ER 110-11).2 But data were available

for only 106 Corinthian programs (ER 116), at 17 of 37 locations (ER 116),

representing 24 CIP codes (id.). There were no data for any of the approximately

800 Heald programs, nor for 56 of 61 WyoTech programs. (Dist. Ct. Dkt. No. 42-

2 at 62-63) (Corinthian GE results). Yet, the Department concluded that a new

rule was needed for all CCI Programs, which represented exactly twice the number

of CIP codes as for which there was GE data. (ER 130-31) (Crosswalk of 48 CIP

codes).3

2 The Department also suggests that its conduct was warranted by the significant number of pending borrower defense claims. (ER 111). However, this is no rational basis for change because the Department knew the precise number of Students eligible for relief when it crafted the Corinthian Rule and actively worked with and encouraged states to find additional applicants. See Br. of Amicus Curiae Cal., et. al. at 9-12. Further, the Department highlights the limited Student testimony on harm in their attestation forms, (ER 109), but ignores the fact that it designed the forms to eliminate a Student’s need to show that she was “affected by the school’s fraud.” 80 Fed. Reg. 32944, 45 (June 10, 2015).

3 In promulgating GE, the Department projected that the majority (74 percent) of programs would pass the test, and only a small fraction (8 percent) would fail. 79 Fed. Reg. 64890, 64921 (Oct. 31, 2014). Nothing about the small set of Corinthian’s results was noteworthy.


6

More fundamentally, GE does not measure “value.” A school’s program

passes GE if a cohort of students completing the program in a given year earn

enough, on average, two years later to “manage their debt” under one of two

metrics. 79 Fed. Reg. 64890, 64913 (Oct. 31, 2014); accord (ER 110) (noting that

the goal is to “see if those students have the ability to repay the educational debt

incurred for attending such programs”). One GE metric compares a typical

program graduate’s annual earnings against the typical debt load of program

graduates from that cohort, and the other compares the discretionary earnings of a

typical program graduate against the typical debt load.4 Both are designed to

measure “the relationship between the total student loan debt and earnings,” 79

Fed. Reg. 16426, 16651 (March 25, 2014), and “not . . . actual benefits,” 79 Fed.

Reg. at 64916; see also 79 Fed. Reg. at 64914 (“As a responsible lender, one

important role for the Department is to hold all GE programs to a minimum

standard that ensures students are able to service their debt without undue hardship,

regardless of whether students experience earnings gains upon completion”).5 Put

4 The AER allows Corinthian Students’ earnings to be compared to programs that passed GE solely on the basis of this discretionary income metric. A program that fails the annual earnings metric still passes GE if it yields sufficient discretionary income because it “ha[s] graduates who have higher earnings even though they have large amounts of debt.” 79 Fed. Reg. at 64921.

5 In adopting the GE regulation, the Department expressly rejected proposals that would better measure “value” because GE, it clarified, was solely focused on “discouraging institutions from saddling students with unmanageable amounts of debt.” 79 Fed. Reg. at 64913; see also id. at 64915.


7

another way, the thresholds are not set to identify “good” programs offering

“value,” but to create an eligibility criteria designed to weed out “bad” programs

that present an untenable financial risk to students and taxpayers. See 79 Fed. Reg.

at 64913.

In any event, even if the Department now believes that a GE passing

program is, by definition, one of high “value,” the AER’s basis of comparison is

arbitrary.6 The AER includes programs in the denominator that passed a debt-to-

earnings ratio, but measures “value” solely on the basis of earnings. This is ironic

because it is debt, not earnings, that drives whether a program passes or fails GE.

See Carmello (CJ) Libassi & Ben Miller, How Gainful Employment Reduces the

Government’s Loan Forgiveness Costs, Center for Am. Progress (June 8, 2017),

available at: http://perma.cc/NN7DHKNG. In fact, programs can pass GE in spite

of the low earnings of completers. By Plaintiffs’ count, there are 443 programs

included in the AER denominator where Students earned less than the 2014

national minimum wage (approximately $15,080). (Dist. Ct. Dkt. No. 42-2 at 65-

192) (GE data chart). The typical graduate of each of the 443 programs had zero

6 The converse is that any program that failed GE provided low or no value. But the AER does not follow this logic. The six programs reviewed that failed GE, (Dist. Ct. Dkt. No. 42-2 at 62-63) (Corinthian GE results), are slotted for between 20 and 50 percent loan cancellation under the AER, (Supp ER 38-61).


8

debt. The inclusion of these programs in the denominator skews the results of the

AER, rendering it arbitrary and capricious.

For example, graduates of the Pharmacy Tech program at Austin

Community College had zero debt and average yearly earnings of approximately

$25,000. (Dist. Ct. Dkt. No. 42-2 at 121) (GE data chart). In contrast, graduates of

the Pharmacy Tech program at Everest in Colorado earned a comparable salary,

but owed an average of $13,000 in student debt over a ten-year period. (Dist. Ct.

Dkt. No. 42-2 at 67) (GE data chart). Under the Department’s logic, this Everest

Pharmacy Tech student obtained virtually the same “value” from her program, and

should be forced to pay back the majority of her loans. The Department ignores

that the Everest Student would necessarily spend her earnings on loan payments

and that the debt has significant and longstanding financial consequences. See

Brower v. Evans, 257 F.3d 1058, 1065 (9th Cir. 2001) (explaining that an agency

cannot “entirely fail[] to consider an important aspect of the problem”). The

Department acted irrationally in “failing to consider” debt as part of its “value”

analysis.7

7 The Department notes that it made several decisions that were to the benefit of the borrower. Defs’ Reply Br. 24. However, a rule that utterly fails to achieve the Department’s articulated goal cannot be saved merely because the Department did not make the wrong choice at every juncture.


9

B. The Average Earnings Rule sets its comparison, and thus the borrower defense remedy, on the basis of an unrepresentative numerator.

The borrower defense remedy that any Corinthian Student receives under the

AER is also driven by which one of 79 “CCI Program/Credential groups” (ER 126)

the Department places her in, which other Corinthian students the Department

placed in that group, and the average income that certain members of the group—

those who applied for borrower defense prior to July 31, 2017, subject to additional

exclusions—earned, according to the SSA, in 2014. The Department offers no

basis to conclude that the numerator is a reasonable estimate of a given Corinthian

student’s earnings, let alone the “value” that she received from Corinthian.

Initially, despite claiming that it grouped Corinthian data “on a program by

program basis,” Defs’ Reply Br. 23, the Department actually cobbled together

Students from different programs, who attended school at various locations, at

distinct times, into 79 “CIP Program/Credential Group[s].” For example, the

Department points to the “Pharmacy Technician (Diploma) group as an example of

a “program” where all students will receive a partial denial. Defs’ Br. at 2. But,

the grouping is unreasonable given the variety of Students crammed into it,

including: Students who attended the Pharmacy Technician Program at Everest in

Miami in July 2010, and Students who attended in Aurora, Colorado, in September

2012, and Students who attended in San Francisco in 2014. (Supp ER 29-38)


10

(showing the various and divergent programs that were lumped together into 79

programs). Although the Department claims that these 79 groups are “essentially

the equivalent of a GE Program for comparison purposes,” (ER 124), this is not

true. A GE “program” includes only completers of a specific program at a specific

school in a particular year. The AER is based off of 2014 earnings, and determines

borrower defense remedy for all Corinthian Students, regardless of whether they

completed and when they attended.8

The Department then erred by calculating the earnings for each grouping

based on a dataset that is not representative of those to whom it is applied. The

dataset is drawn from the subset of 61,717 former Corinthian borrowers who

submitted borrower defense claims by July 31, 2017 “regardless of whether a claim

had already been decided by the Department,” (ER 117), and irrespective of whether

the student was asserting a job placement rate claim, (ER 124) (referencing

Guaranteed Jobs and Transferability of Credits claims).9 The Department fails to

8 The Rule also ignores critical distinctions in earnings that are driven solely by a person’s location. For instance, in 2014, the median annual income for a medical assistant in San Francisco was nearly $40,000, whereas it was $24,630 Springfield, MO. Similarly, a massage therapist in the Boston area earned, on average, $43,130 a year, whereas a massage therapist in Merillville, IN earned $21,470. See Bureau of Labor Statistics, Occupational Employment Statistics, (May 2014) available at: https://www.bls.gov/oes/tables.htm.

9 It is telling that the Department misled a co-equal federal agency to engage in this data experiment and that it did so in a way that betrayed information to the SSA—that these were individuals who applied for borrower defense—beyond what would have been included in a proper GE disclosure, and in a manner that was blatantly inconsistent with the authority provided in that agreement, (ER 153).


11

explain how the average earnings of Students who applied for borrower defense

before this arbitrary cut-off reflect the earnings of the tens of thousands of Students

who have not yet even applied for borrower defense or the thousands of Students

whose data was discounted from the disclosure.

In addition to excluding Students who had not yet applied by July 31, 2017,

the data subset did not include students “for which the department lacked sufficient

data to map to CIP code and credential level . . . students who started CCI programs

in 2014 or after,” and “claimants in groups with fewer than 10 individuals.” (ER

118).10 The AER’s numerator expressly excludes—and cannot be representative

of—the “value,” lack of “value,” or harm suffered by Students like Plaintiff Jennifer

Craig, who were attending Corinthian in 2014 and 2015. The Department excluded

her and others because it “assumed CCI programs would have been unlikely to have

influenced 2014 earnings outcomes for such students.” (ER 118). There is nothing

to support this assumption, and reason to question whether this exclusion inured to

the benefit of Corinthian Students if, for example, students did not pursue full time

10 The Department’s reason for excluding the latter students from 2014 earnings dataset is that “groups with fewer than 10 individuals may not produce earnings data that would be reasonably representative of the value a CCI program.” (ER 118). The same concern infects the AER in a number of other ways that should have given the Department pause. It is the Department’s burden, not the Plaintiffs’, to establish that it has “examined the relevant data and articulated a satisfactory explanation for its action including a rational connection between the facts found and the choice made.” Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto Ins. Co., 463 U.S. 29, 43 (1983) (internal quotation and citation omitted).


12

employment while enrolled at Corinthian. In any event, applying the results of the

AER to Students who attended at precisely the time that the Department found

Corinthian’s behavior to be getting worse, see, e.g., (Dist. Ct. Dkt. No. 35-7 at 5-6)

(fine action letter), fails to address the unique harm suffered by such Students.11

C. The Average Earnings Rule, in its totality, is a conceptually flawed and illogical apples-to-oranges calculation.

The AER methodology is complex. But, complexity does not always

indicate rigor or rationality. Here, even if the Department had adopted a

reasonable formula, the rule is arbitrary and capricious because it is conceptually

flawed.

The Department baldly asserts that “the harm” to Students from Corinthian’s

conduct can be “measured as the difference between the value of the education that

the students received and an education that would have met students’ reasonable

expectations of preparation for gainful employment,” (ER 111) and further

determines, implicitly, that every Corinthian Student’s 2014 annual earnings as

reported by SSA is reasonable as a sole proxy for “the value of the education”

received. The AER is based on the faulty and unsupported assumption that, had

Corinthian not defrauded Students, and convinced them to enroll on the basis of

11 To be clear, even if “value” were a permissible metric for borrower defense relief, Plaintiffs do not believe that an individualized assessment of every Student’s experience would be required. However, the Department, in the name of efficiency, cannot rely on an irrational methodology that fails to capture what it purports to.


13

false representations, the Students would have enrolled in some other for-profit

program subject to gainful employment. (ER 111). The Department provides no

explanation or evidence to justify this premise.

Furthermore, the rule ignores the Department’s own findings about the

specific way that Corinthian wronged its students. In April 2015, the Department

fined Corinthian $30 million for, among other things, including “placements that

were clearly out of the student’s field of study as in-field placements,” and failing

“to disclose that it counted as ‘placed’ those graduates whose employment began

prior to graduation, and in some cases even prior to the graduate’s attendance at

Heald.” (Supp ER 140-41). In other words, the Department recognized that many

Students found employment for reasons entirely independent of Corinthian. In

developing the Average Earnings Rule, the Department simply shrugged and

ignored these prior findings.

Nor does the AER provide Students with process to highlight these

distinctions and to contest the Department’s inapt “value” assessment. Unlike the

process provided to institutions in the GE regulations, see, e.g., 34 C.F.R. §§

668.405 & 406, here, Students have no opportunity to contest any step of the

Department’s construction of the AER, and its application to them. This is exactly

the kind of challenge that the Department should have provided pursuant to the


14

Privacy Act. See, e.g., 5 U.S.C. § 552a(p) (requiring the Department to provide

Students with an opportunity to contest the findings of the matching program).

Although the Department boasts that the AER cuts “the overall amount of

relief granted by around 60 percent” (ER 74), and saves the Department tens of

millions of dollars (Supp ER 27-28), the Department’s rule, taken piecemeal and

collectively, creates an apples-to-oranges comparison that fails to meet the

Department’s stated goal of determining the “value” a given Corinthian Student

received. It is arbitrary and capricious.12

II. A BORROWER DEFENSE REMEDY, UNDER LONGSTANDING DEPARTMENT PRACTICE, REGULATION, AND STUDENTS’ MASTER PROMISSORY NOTES, IS TIED TO THE STATE LAW CAUSE OF ACTION AND THUS THE AVERAGE EARNINGS RULE IS IMPERMISSIBLE. The Department independently acted in an arbitrary and capricious manner

in developing the Average Earnings Rule because it failed to “forthrightly

acknowledge[]” its past interpretation of the borrower defense provision, and failed

to provide a “reasoned explanation…for disregarding facts and circumstances that

underlay or were engendered by the prior policy” under which it adjudicated the

claims of Corinthian Students. FCC v. Fox Television Stations, Inc., 556 U.S. 502,

12 Even accepting “earnings” as a reasonable, stand-alone proxy for “value,” and accepting “value” as the appropriate inquiry, a true apples-to-apples comparison could entail assessment of a borrower’s earnings before attending a school and her earnings after leaving the school.


15

515-17 (2009). An agency “that neglects to do so acts arbitrarily and

capriciously.” Jicarilla Apache Nation v. U.S. Dep’t of the Interior, 613 F.3d 1112,

1119 (D.C. Cir. 2010).

As discussed supra, Section I(A), the Department has proffered a pretextual

explanation for reworking its policy with respect to defrauded Corinthian Students.

Additionally, it mischaracterized the rule it replaced as “based on the assumption

that CCI borrowers received a worthless education and therefore that the discharge

of the total amount of borrowers’ loans and reimbursement of all payments was

appropriate for all CCI borrowers with valid claims.” (ER 109).

In reality, the Department unfailingly applied the Corinthian Rule until

January 20, 2017, and the Rule rested on far more than an “assumption” about

value.13 A Department Inspector General Report from December 2017

underscores the factual findings and legal analysis that justified the Corinthian

Rule. It notes: “it was the OUS [Office of the Under Secretary], OGC [Office of

the General Counsel], and the Special Master who determined in 2015 that “full

relief” (defined as full discharge of loans associated with the program at issue with

a full refund of amounts paid) was appropriate for Heald, Everest, and WyoTech

13 The District Court disagreed with Plaintiffs and stated that “the parameters of the Corinthian Rule are not clearly defined.” (ER 38). For the reasons discussed in this section, the District Court erred in this conclusion.


16

borrowers with approved Job Placement Rate (JPR) claims.” (Supp ER 130). It

further reflects that “BD [Borrower Defense] attorneys continued review of JPR

claims under the same review criteria, legal framework, and relief previously

established by OUS, OGC, and the Special Master. Enforcement agreed with

OGC’s legal conclusions that: 1) borrowers who met the criteria required in the

Heald and Everest/WyoTech attestation forms were eligible for borrower defense

discharges; and 2) that full relief was appropriate.” (Supp ER 131) (emphasis

added); see also (Supp ER 131) (“[T]here was no uncertainty regarding OGC’s

legal positions on review criteria, legal framework, or relief”).14

Similarly, the Special Master for Borrower Defense explained in his first

report that “the Department looked to California law and determined that Heald’s

misrepresentations of placement rates constituted prohibited unfair competition

under California’s Unfair Competition Law (UCL). Accordingly, students that

relied on such misleading placement rates when they enrolled at Heald would have

a cause of action under state law.” (Dist. Ct. Dkt. No. 35-7 at 5) (Special Master

14 This Report references a number of memorandum that further detail the legal and factual basis of the Corinthian Rule. (Supp ER 120). The Department has taken the position that some of these reports are privileged and will form no part of the administrative record. (Dist. Ct. Dkt. No. 64 at 3-5) (Defs’ Supplemental Br. in Response to Preliminary Injunction Order). The dispute about the record was partially briefed, (Dist. Ct. Dkt. No. 80) (Pls’ Motion for Declaration that Documents are Not Privileged), before the District Court stayed the litigation pending this appeal.


17

First Report). The remedy for a UCL violation is restitution. See Br. of Amicus

Curiae Cal., et. al. at 13-18.15 In his Second Report, the Special Master further

stated that, “the Department’s determination, after consultation with the Office of

the California Attorney General, that students who relied upon false or misleading

placement rate disclosures in enrolling in Heald College programs would have

established a borrower defense claim as to which relief would be granted under

California law.” (ER 62).

And, another Department memorandum, concerning the borrower defense

remedy for students at a different for-profit school, provides additional evidence

that the Corinthian Rule was not based on a mere “assumption.” Indeed, it refers

to a rich factual record evidencing “[r]epeated misleading statements to students,

regulators, and accreditors; misrepresentations regarding completion rates; [and]

elaborate job placement fraud.” (Supp ER 6). It further highlighted student

testimony on how “their affiliation with the school was an impediment rather than

an asset as they sought employment.” Id.

This same memo also confirms the Department’s longstanding

interpretation of the borrower defense regulation and the Students’ Master

15 A California Court has already determined that California law demands full restitution for Corinthian students. Final Judgment, People v. Heald Coll., Case No CGC-13-534793, 2016 WL 1130744 (Cal. Sup. Ct., filed Mar. 23, 2016) (Karnow, J.) (“California Corinthian Judgment”).


18

Promissory Notes (“MPN”) as tethering the borrower defense remedy as a whole

to the state law cause of action. (Supp ER 5-6) (discussing damages and remedy as

a function of state law). This interpretation was well justified. See Pls’ Opening

Br. at 48-50. The governing regulation states:

(c) Borrower defenses.

(1) In any proceeding to collect on a Direct Loan, the borrower may assert as a defense against repayment, any act or omission of the school attended by the student that would give rise to a cause of action against the school under applicable State law. … (2) If the borrower’s defense against repayment is successful, the Secretary notifies the borrower that the borrower is relieved of the obligation to repay all or part of the loan and associated costs and fees that the borrower would otherwise be obligated to pay. The Secretary affords the borrower such further relief as the Secretary determines is appropriate under the circumstances. Further relief may include, but is not limited to…[.]

34 C.F.R. § 685.206. 16 It then goes on to specify certain discretionary remedial

steps within the Secretary’s authority under the Higher Education Act. Id. The

MPN similarly defines a borrower defense as “a legal cause of action against the

school under applicable state law.” (ER 140).

The term “cause of action” is critical; that phrase implicates both the

substance of a claim and a claimant’s remedy. For example, to plead a cause of

16 A new borrower defense regulation went into effect in October 2018. See 34 C.F.R. § 685.222. That regulation incorporates the borrower defense provision in 34 C.F.R. § 685.206(c) for individuals who borrowed loans before the new regulation was effective. The change does not impact the governing regulation and MPN in this case.


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action for fraudulent misrepresentation under California law, a “plaintiff must

prove that the defendant caused actual harm.” Howe Investments Ltd. v. Quarles &

Brady, LLP, No. 17-55483, 2019 WL 581370 at *1 (9th Cir. Feb. 13, 2019); see

also Graham v. Bank of Am., N.A., 226 Cal. App. 4th 594, 605-06 (2014); but see

Gonzales v. Cal. Dep’t of Corr., 739 F.3d 1226, 1232-33 (9th Cir. 2014) (utilizing

“primary right” language). Similarly, a plaintiff who seeks specific performance

on a breach of contract claim must “plead facts that establish a right to recover for

breach as well as the right to receive the equitable remedy.” 12 Harry D. Miller &

Marvin B. Starr, Cal. Real Estate § 40:17 (4th ed. 2017). A plaintiff’s remedy is

inexorably tied to the cause of action she asserts.

Notably, the Department has agreed with this interpretation for over twenty

years. There is no dispute that the Department has, without fail, used state law to

decide every borrower defense claim (including remedy) before January 20, 2017.

See (Supp ER 4) (using Massachusetts law); (Supp ER 8) (instructions for

determining borrower defense relief); (Supp ER 84) (utilizing North Dakota law);

(Supp ER 131) (referencing the relevant state statute of limitation for the remedy for

Corinthian transferability of credit claims). Nor do the parties dispute that the


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Average Earnings Rule is detached from state law.17 The Department’s shift is an

impermissible “unexplained inconsistency in agency policy” and a “reason for

holding [the] interpretation to be an arbitrary and capricious change.” Encino

Motorcars, LLC v. Navarro, 136 S.Ct. 2117, 2126 (2016); Am. Wild Horse Pres.

Campaign v. Perdue, 873 F.3d 914 (D.C. Cir. 2014) (finding arbitrary and capricious

an unexplained change of a non-binding policy).

CONCLUSION

Corinthian defrauded hundreds of thousands of students who were simply

seeking the promise of higher education. The Department of Education, after

failing to provide proper oversight of Corinthian on the front end, has now adopted

an irrational borrower defense policy that compounds the harm Corinthian caused.

The Court should affirm the District Court’s preliminary injunction because the

Department’s actions were arbitrary and capricious.

Date: March 5, 2019

/s Joshua D. Rovenger

Noah Zinner Megumi Tsutsui HOUSING & ECONOMIC RIGHTS ADVOCATES PO Box 29435

17 Under the Department’s new interpretation—one that severs substance and remedy into two separate questions—an individual could bizarrely establish a “successful borrower defense claim,” but be entitled to no relief.


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Oakland, CA 94604 Tel.: (510) 271-8443 Fax: (510) 280-2448 Eileen M. Connor Toby R. Merrill Joshua D. Rovenger LEGAL SERVICES CENTER OF HARVARD LAW SCHOOL 122 Boylston Street Jamaica Plain, MA 02130 Tel.: (617) 390-3003 Fax: (617) 522-0715 Attorneys for Plaintiffs-Appellees


CERTIFICATE OF COMPLIANCE

I certify that this brief complies with the requirements of the Court’s Order

requesting supplemental briefing and the requirements of Federal Rules of

Appellate Procedure 32(a)(5) and 32(a)(6), because it has been prepared in a

proportionately spaced typeface using Microsoft Word in Times New Roman 14-

point font, and does not exceed 20 double-spaced pages.

Date: March 5, 2019

/s Joshua D. Rovenger___ Joshua D. Rovenger


CERTIFICATE OF SERVICE

I hereby certify that on March 5, 2019, I electronically filed the foregoing

with the Clerk of the Court for the United States Court of Appeals for the Ninth

Circuit by using the appellate CM/ECF system.

Participants in the case who are registered CM/ECF users will be served by

the appellate CM/ECF system.

Date: March 5, 2019

/s Joshua D. Rovenger Joshua D. Rovenger
