A Sudden Christmas Present for Defaulted Student Loan Borrowers?

Today the U.S. Court of Federal Claims held a status conference in the matter of Continental Service Group, Inc., et al., Plaintiffs, and Collection Technology, Inc., et al., Plaintiff-Intervenors v. The United States, Defendant, and CBE Group, Inc., et al., Defendant-Intervenors (case nos. 17-449, 17-499, 17-493, 17-517, 17-578, 17-588, 17-633 consolidated).

Just before Thanksgiving, the case was taken over by Judge Thomas C. Wheeler. He called for this session in order to gain clarity (if that’s possible), as he works to jump onto this moving train. Today’s conference was a study in who’s on first, with all trying to keep things straight. There were approximately 50 people in attendance; mostly attorneys for the many parties involved.

But... before we write about that, we need to fill you in on lots of activity that has taken place in just the last three days. 

It’s important to know that there are actually two separate, but intertwining cases here.

1. One is the complaint over the December 2016 Unrestricted Contract which was awarded to 7 companies
2. The other is the complaint over an Award Term Extension (ATE) that was previously issued to 5 companies on February 21, 2016

Many say that the ATE complaint would be moot if only ED would complete its corrective action for the December 2016 Unrestricted Contract, which has been ongoing now for seven months. This March 2017 insideARM article provides an excellent detailed account of the background of these two cases.

Another important piece of background is that in May 2017, Chief Judge Braden (who was hearing the case prior to Judge Wheeler) issued a temporary injunction (then soon extended it indefinitely) preventing any accounts from being placed with anyone, in order to preserve the status quo of the situation while things could be sorted out. We’ve written on multiple occasions about how this (now) extended injunction has harmed parties on all sides of the equation, including borrowers.

Just this weekend there were new developments in the ATE litigation

Today, the Department of Education (ED) began a process to recall “in-repayment” accounts from multiple contractors, including CBE and Progressive. [Note: An earlier version of this article said it had begun last Friday, December 8. The attorney for ED said as much at today's conference called by Judge Wheeler. This was indeed a point of confusion for some/many who were present.]

[Editor’s note: In-repayment accounts are those which are “performing” (or actively paying). A provision in the original 2009 Private Collection Contract says that once the contract expires, contractors have a 2-year period during which to continue to service in-repayment accounts. That two-year period actually ended in April 2017.]

Progressive filed a Motion, also on Friday, seeking a TRO preventing that recall. The complaint states,

Despite the discussion at oral argument and ruling from the bench, the written Order issued by the States Court of Appeals for the Federal Circuit (CAFC) failed to distinguish between the recall of Progressive’s “in-repayment” accounts, and the potential dilution of the protesters’ awards and transfer of work to other contracting vehicles. Progressive does not believe the CAFC’s Order applies to the issue of recall of Progressive’s “in-repayment” accounts. Progressive believes, however, based on previous conversations with ED and the long history of Progressive’s pending protest, that ED will interpret the CAFC’s Order as granting carte blanche authority to immediately recall Progressive’s “in-repayment” accounts, which would irreparably harm Progressive by effectively mooting its entire protest against the recall of those accounts.

Accordingly, Progressive has filed an Emergency Motion to Clarify/Amend The Court’s December 8, 2017 Order to confirm that the CAFC’s Order does not apply to that part of the injunction prohibiting the recall of Progressive’s “in-repayment” accounts prior to resolution of its protest. Exhibit B, Emergency Motion to Clarify/Amend The Court’s December 8, 2017 Order.

Then, over the weekend, ED sent 325,000 accounts to Alltran and Pioneer, as well as hundreds of thousands of accounts to firms on the small company contract.

Alltran and Pioneer did not receive new awards in the contested 2016 Unrestricted Contract, but did receive an ATE.

The CBE Group, Inc. (CBE) filed a Motion yesterday seeking clarification of a written order issued by the U.S. Court of Federal Claims on December 8 (last Friday), which granted “Appellants’ requests insofar as the preliminary injunction enjoined “transferring work to be performed under the contract at issue in this case to other contracting vehicles to circumvent or moot this bid protest.” CBE claimed,

The Federal Circuit was right to lift the injunction in place over the small business contractors. The Federal Circuit created a new injunction, however, which causes discrete and substantial harm to CBE. This altered injunction creates an improper windfall for Alltran and Pioneer, two companies whose contracts ED ended early in 2015, recalling each of their accounts based upon adverse audit findings. …Both Alltran and Pioneer were disappointed offerors in this procurement. Every other offeror, whether it submitted a winning proposal or not, must wait for ED to complete its corrective action. Allowing two disappointed offerors who have not collected defaulted loans for ED for over two-and-half years to jump to the head of the line based upon awards that did not exist when this protest began or before the injunction was in place, works a fundamental injustice.

Today, December 12, 2017, CBE filed an emergency motion for TRO to enjoin ED from proceeding with the intended recall and redistributing them to other collection agencies. CBE says in this complaint, 

ED seems dead set on proving what it can do, without any regard for undue harm inflicted on long-suffering awardees like CBE and in direct contradiction to the best interests of defaulted student borrowers, the public fisc and ED itself.

ED first announced its recall during today’s status hearing. ED (and its Department of Justice attorneys) unquestionably knew that Progressive had filed an emergency motion for TRO to stop the recall of its accounts over the weekend and that CBE had filed a Motion for Reconsideration, Clarification and Amendment of the Federal Circuit’s December 8 Order modifying the preliminary injunction in this case. ED’s race to push the button and initiate a process that has only negative impacts for every party involved, including itself, is the very definition of arbitrary, capricious and unreasonable conduct.

We learn from the CBE filing today (and other insideARM sources) that ED has placed 930,000 new defaulted loan accounts with small business and ATE contractors who – because of the May Injunction – have not been working accounts for months. Per the CBE pleadings, Alltran and Pioneer together received 325,000 of those accounts. All parties are now scrambling to ramp up to effectively service these accounts. 

CBE says,

Setting aside the unnecessary upheaval for thousands of borrowers across the country, the specially-trained employees who do this work will have no work to do. CBE will have no work for its dedicated ED-trained workforce and if corrective action is not imminent, will be forced to lay off workers who earn good wages, especially in Iowa, where CBE, employees work. Thus, as set forth in Mr. Benson’s Declaration, CBE will suffer a direct harm of approximately $7.1 million in 2017 and 2018 for lost revenue and carrying costs.

insideARM Perspective

Also worth noting is the timing of these placements just before Christmas. After months of not hearing about their defaulted student loans, borrowers may well be getting reminders just in time for the holidays. Timing notwithstanding, it is a positive outcome that servicing of these loans will begin again. Borrowers who have recently defaulted have been in a bit of a no-man's land, so this was an important development.

And, notwithstanding the ramp-up challenge, account flow is also a positive outcome for (some of) the private collection agencies, who can put people back to work. However based on discussion at yesterday's conference with the judge, some (those who aren't in a position to receive these accounts) will feel that this was a pre-mature action.

See this second article today covering the conference at the Federal Court of Claims, ostensibly on the matter of the fight over the December Unrestricted Contract award (but a lot of it was about the drama above).