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September 4, 1997

BARBARA MORGAN, on behalf of herself and all others similarly situated, Plaintiff,

The opinion of the court was delivered by: DEBEVOISE

 DEBEVOISE, Senior District Judge.

 Plaintiff, Barbara Morgan, instituted this class action against defendants Computer Learning Center and two of its principals, Markerdowne Corporation, Chemical Bank, Citibank, certain state and private Guaranty Agencies *fn1" and the Secretary of the United States Department of Education.

 The Complaint alleges that Computer Learning Center ("CLC") and its two principals, Valerie Dorras and Graeme Dorras, induced plaintiff through false representations to enroll in CLC's computer training program and to take out a Guaranteed Student Loan and a Federal Supplemental Loan to finance her attendance. CLC dealt with plaintiff concerning the loans and provided all the paper work which it transmitted to Chemical Bank ("Chemical"). Chemical extended the loans. The New Jersey Higher Education Assistance Authority ("NJHEAA") guaranteed both loans. It is alleged that both Chemical and NJHEAA were aware that of the 1,460 loans which Chemical extended to CLC students, 38% were in default, and as a result Chemical and NJHEAA had constructive and/or actual notice that CLC and its agents were engaged in fraudulent and/or unconscionable practices.

 The Complaint alleges that the other defendant banks and guarantor agencies, including Illinois Student Assistance Commission ("ISAC"), American Student Assistance ("ASA") and United Student Aid Funds ("USAF"), made loans and extended guarantees under similar circumstances and thus had similar notice of the alleged fraudulent and/or unconscionable activities.

 The Complaint alleges that the lending banks and the guarantor agencies by continuing to lend to CLC students or by continuing to guaranty such loans furthered the fraudulent and unconscionable practices engaged in by CLC and its agents and are subject to all claims which student borrowers have against CLC, Markerdowne Corp. and their agents. This liability is predicated upon: 1) the Federal Trade Commission ("FTC") "Holder Rule," 16 C.F.R. § 433, 2) the fact that the loans were "originated" within the meaning of 34 C.F.R. § 682.200; 3) the fact that the notes were non-negotiable instruments and 4) New Jersey's common law of agency and pertaining to "close connections."

 The Complaint alleges that pursuant to the Higher Education Act, 20 U.S.C. § 1082, the Secretary of the United States Department of Education (the "Secretary") had the duty and authority to oversee the loan program involved in the case. By virtue of this duty and authority the Secretary had actual and/or constructive notice that CLC and its agents engaged in fraudulent and/or unconscionable practices, and therefore, like the lending agencies and guarantors is subject to all claims plaintiff has against CLC, Markerdowne Corp., and their agents.

 Count One charges that CLC, Valerie Dorras and Graeme Dorras made false representations to prospective students to induce them to enroll in the CLC program. She seeks relief on behalf of herself and others similarly situated against CLC, Valerie and Graeme Dorras, Chemical and Citibank consisting of treble damages and attorneys' fees pursuant to N.J.S.A. 58:8-19 and against NJHEAA declaring that no further payments are due and owing on any loan in issue.

 Count Two repeats the fraud charges contained in Count One and seeks actual and punitive damages against CLC and Valerie Dorras and Graeme Dorras, actual damages against Chemical and Citibank and against NJHEAA a declaration that no further payments are due and owing on any loan in issue.

 Count Three in addition to repeating the prior allegations of the Complaint charges that the price charged by CLC under its contract with plaintiff and class members was unconscionably high within the meaning of N.J.S.A. 56:8-19. Plaintiff seeks against CLC, Valerie and Graeme Dorras, Chemical and Citibank treble damages and attorney's fees pursuant to N.J.S.A. 56:8-19 and against NJHEAA declaratory relief.

 In Count Five, the Complaint realleges the misrepresentation and fraud allegations made against CLC and Valerie and Graeme Dorras in Count Two and seeks against the guarantor defendants actual damages and as against the Secretary declaratory relief as set forth above.

 In Count Six, the Complaint realleges the allegations of Count Three, that the price charged by CLC under its contracts with students was unreasonably high, and sought against the guarantor defendants treble damages and attorneys' fees pursuant to N.J.S.A. 56:8-19. As against the Secretary, Count Six seeks the declaratory relief referred to above.

 Defendants Chemical, Citibank, ASA, USAF and ISAC move to dismiss the Complaint for failure to state a cause of action, pursuant to Fed. R. Civ. P. 12(b)(6), or in the alternative, for summary judgment, pursuant to Fed. R. Civ. P. 56. *fn2" For the reasons set forth below, the defendants' motions will be granted in part and denied in part.


 NJHEAA filed an action on March 15, 1993 in the Superior Court of New Jersey against plaintiff to collect on a student loan. Plaintiff filed an answer pro se on April 6, 1993.

 On June 30, 1993, a complaint was filed in the Superior Court on plaintiff's behalf against the school, CLC, the principals of the school, and Chemical, the bank that provided her student loans.

 After conducting limited discovery, plaintiff moved to amend her Complaint to add as defendants Citibank and several "John Doe" banks, which also provided guaranteed student loans to students who attended CLC. Further, plaintiff sought to certify as a class all persons who attended CLC during the six and one half years preceding the filing of the amended Complaint.

 On February 1, 1996, the court conditionally certified a class consisting of "all persons who graduated from defendant Computer Learning Center on March 30, 1995 or within six and one half years prior to said date, or who otherwise stopped attending or withdrew from defendant Computer Learning Center on March 30, 1995 or within six years prior thereto." Defendants Chemical, Citibank, CLC and NJHEAA sought leave from the Appellate Division to appeal the order. The Appellate Division denied all applications.

 Citibank filed a Third Party Complaint in the state court against guarantor agencies ASA, USAF, ISAC and the Secretary. On April 22, 1996, plaintiff filed a Second Amended Complaint naming the third party defendants as direct defendants.

 The Secretary removed this action to this court. All third party claims and cross claims were stayed pending determination of motions to dismiss plaintiff's Second Amended Complaint.

 The Secretary's motion was granted and the Complaint as to him was dismissed. This opinion disposes of the remaining motions.


 In the fall of 1990, plaintiff, an unemployed mother of three children, executed an enrollment contract to attend CLC, a post-secondary vocational school located in Paramus, New Jersey. She claims that she, and every other student who attended CLC from approximately September 1988 to March 1996, were defrauded by agents and representatives of CLC into enrolling at the school. Plaintiff contends that CLC misrepresented the benefits of a CLC education and essentially guaranteed her employment as a computer operator if she completed the curriculum offered by CLC.

 Plaintiff financed her education at CLC with the proceeds of a loan under the Stafford Student Loan Program ("SSLP"), and a Federal Supplemental Loan("FSL"), which are governed by the provisions of the Higher Education Act, 20 U.S.C. § 1071, et. seq., and the regulations of the Secretary, 34 C.F.R. § 682.100, et. seq. These two loans were made by defendant Chemical Bank and guaranteed by defendant NJHEAA.

 Plaintiff alleges that CLC arranged for the financing of her education at CLC. Moreover, she asserts that CLC obtained all necessary financial papers and either completed or assisted her with all relevant paper work. Plaintiff also asserts that CLC chose the bank that provided the student loans.

 With regard to Chemical, Citibank, NJHEAA, ASA, USAF, and ISAC, (collectively referred to as the "non-school defendants"), plaintiff alleges that they are liable for CLC's misconduct under the legal theories previously referred to. Plaintiff asserts that despite having actual notice of the high default rates of CLC students, and thereby having actual and/or constructive notice that the school was engaged in fraudulent or unconscionable practices, Chemical and Citibank continued to finance students' attendance at CLC. As for the defendant guaranty agencies, plaintiff claims that they too furthered CLC's fraudulent and unconscionable practices as they allegedly had notice of the high default rates, but continued, nonetheless, to guarantee the loans.

 Plaintiff alleges that the financial defendants effectively delegated their normal student loan making functions to CLC. She asserts that: 1) CLC chose the bank from which each plaintiff would obtain financing; 2) CLC obtained all of the necessary financial papers *fn3" ; 3) CLC either completed the papers or assisted plaintiffs in completing the papers; and 4) CLC verified all applicant information and identification and had applicants sign the proper documents.


 Pursuant to Rule 12(b)(6), a plaintiff's complaint must be dismissed for failure to state a claim if a defendant demonstrates "beyond a doubt that plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957); Craftmatic Securities Litigation v. Kraftsow, 890 F.2d 628, 634 (3d Cir. 1989); Johnsrud v. Carter, 620 F.2d 29, 33 (3d Cir. 1980). All allegations set forth in the Complaint must be accepted as true, see Cruz v. Beto, 405 U.S. 319, 322, 31 L. Ed. 2d 263, 92 S. Ct. 1079 (1972), and all reasonable inferences must be drawn in the plaintiff's favor. Schrob v. Catterson, 948 F.2d 1402, 1405 (3d Cir. 1991). On a 12(b)(6) motion, the district court is limited to the facts alleged in the Complaint, not those raised for the first time by counsel in its legal memorandum. Hauptmann v. Wilentz, 570 F. Supp. 351, 364 (D.N.J. 1983), aff'd without opinion, 770 F.2d 1070 (3d Cir. 1985), cert. denied, 474 U.S. 1103 (1986); Seevers v. Arkenberg, 726 F. Supp. 1159, 1165 (S.D. Ind. 1989)("This court is not at liberty, however, to consider allegations which do not appear in the Complaint, but which are averred only in legal briefs."). The Third Circuit, however, has held that a "court may consider an undisputedly authentic document that a defendant attaches as an exhibit to a motion to dismiss," without converting the motion into a motion for summary judgment, "if the plaintiff's claims are based on the document." Pension Ben. Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir. 1993), cert. denied, 510 U.S. 1042, 114 S. Ct. 687, 126 L. Ed. 2d 655 (1994).

 Moreover, a plaintiff generally should be allowed to amend its complaint to cure any pleading deficiencies. "Even after a responsive pleading has been filed . . . great liberality in allowing amendment of an initial pleading is often appropriate, especially when amendment will further the ends of justice, effectuate presentation of a suit's merits and not prejudice the opposing party." Kiser v. General Electric Corp., 831 F.2d 423, 427 (3d Cir. 1987), cert. denied sub nom, Parker-Hannifin Corp. v. Kiser, 485 U.S. 906, 99 L. Ed. 2d 238, 108 S. Ct. 1078 (1988); see also Howze v. Jones & Laughlin Steel Corp., 750 F.2d 1208, 1212 (3d Cir. 1984). Generally, "a district court should give a plaintiff an opportunity to amend his complaint rather than dismiss it when it appears that a more carefully drafted complaint might state a claim upon which relief could be granted." Friedlander v. Nims, 755 F.2d 810, 813 (11th Cir. 1985). Indeed, "it is not only within the power, but is a duty, of a federal court to consider on the merits a proposed amendment of a defective allegation once the court's attention is called to the defect." Kiser, 831 F.2d at 427. A "plaintiff should be granted every opportunity to cure defects in its pleadings by amendment, no matter how unpromising its initial attempt." Sixth Camden Corp. v. Township of Evesham, 420 F. Supp. 709, 720 (D.N.J. 1976). See also 5A C. Wright & A. Miller, Federal Practice & Procedure § 1357, at 361-65 (1990). This is so because "courts must be cautious in assessing motions to dismiss, particularly where granting such a motion would terminate the litigation before the parties have had their day in court." Kiser, 831 F.2d at 428.



 Before examining the defendants' respective motions to dismiss, it is necessary to delineate the basic structure of the Federal Family Education Loan ("FFEL") Program in which plaintiff participated. *fn4" The FFEL Program is authorized under Title IV, Part B, of the Higher Education Act of 1965, as amended ("the HEA"), 20 U.S.C. §§ 1071-1087(2). Participating lending institutions, such as Defendant Chemical, use their own funds to make loans to qualified borrowers attending "eligible" postsecondary schools. These loans are guaranteed by state agencies, such as the NJHEAA, or non-profit organizations and are subsidized and reinsured by the United States Department of Education. 20 U.S.C. §§ 1078, 1087-1.

 The objective of the student loan program is to encourage lenders to make funds available to students of limited means throughout the country to attend the eligible schools of their choice. Private lenders are encouraged to loan money to students, secondary markets to purchase these loans, and guarantee agencies to guarantee these loans. As a practical matter, students are not required to travel long distances to lenders such as Chemical and Citibank to engage in a face-to-face processing of a loan application. Such a requirement would seriously impair the effectiveness of the program. Instead the statute and regulations contemplate that the school which the student seeks to attend will be responsible for handling many of the details leading to the presentation of the loan application to the lender.

 Lenders receive two types of federal subsidy payments on loans made to qualified borrowers. First, the Department of Education ("the Department") pays the holder of a qualifying loan the interest that accrues on the loan during specified periods. 20 U.S.C. § 1078(a). Second, the Department pays the holder, for the life of a qualifying loan, an additional subsidy, called a special allowance. 20 U.S.C. § 1087-1(b)(2). Pursuant to governing FFEL Program regulations, lenders must satisfy certain due diligence requirements with regard to the making, disbursing, servicing and collecting of student loans. See 34 C.F.R. §§ 682.206-208, 682.411. Loan-making duties, in particular, entail "processing the loan application and other required forms, approving the borrower for a loan, determining the loan amount, explaining to the borrower his or her rights and responsibilities under the loan, and completing and having the borrower sign the promissory note." 34 C.F.R. § 682.206(a).

 If a borrower defaults in repaying her loan, her guaranty agency pays the holder of the loan pursuant to its guaranty commitment. The holder may be either the original lender or another eligible financial institution to whom the loan has been properly assigned. 34 C.F.R. § 682.401(b)(9). Pursuant to § 428(c) of the HEA, the Department may enter into reinsurance agreements with qualifying guaranty agencies to reimburse them between 80% and 100% of losses incurred in honoring default claims on qualifying loans. 20 U.S.C. § 1078(c). Guaranty agencies have a continuing obligation to pursue collection activities even after the Secretary pays reinsurance claims. 34 C.F.R. § 682.410(b)(6).

 Federal benefits under the FFEL Program are available only on loans made to students attending "eligible institutions," as defined in 20 U.S.C. § 1085(a). Participating schools are required to perform a number of tasks before students attending such institutions may receive federally reinsured loans. As a preliminary matter, a school must provide a student with information regarding financial aid. 20 U.S.C. §§ 1092, 1094(a)(9); see also 34 C.F.R. § 668.41. For example, the school must describe and explain to the student the requisite procedures and forms for applying for federal financial assistance. 20 U.S.C. § 1092(a)(1)(A) - (C); see also 34 ...

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