14 Civ. 1230 (S.D.N.Y.)

On February 24, 2014, The Special Litigation Unit filed a Class Action Complaint in the United States District Court in Manhattan against Arne Duncan, in his official capacity as the Secretary of the United States Department of Education (USED), on behalf of thousands of students who were victimized by the Wilfred American Education Corporation (Wilfred), a national chain of for-profit trade schools that engaged in widespread fraud and went out of business in the early 1990s. The complaint in the case, Salazar v. Duncan, alleges that USED is violating federal law by actively enforcing the loan obligations of former Wilfred students without taking reasonable steps to ascertain whether the students’ eligibility for loans was falsely certified by Wilfred and by failing to discharge the loans of eligible borrowers.

Wilfred schools were the subject of several federal investigations in the 1980s and 1990s, and its principals were subsequently convicted of federal financial aid fraud.  In 1992, the U.S. Higher Education Act was amended in response to widespread fraud on the part of Wilfred and other for-profit schools hungry for federal student loan dollars. The amendment permits a false certification discharge that forgives and reimburses student loans disbursed after January 1, 1986, when it is proven that a school falsely certified a student’s eligibility for loans.  This includes what is known as the ability-to-benefit (ATB) discharge for students who did not have a high school diploma or G.E.D. and were not given or did not pass an approved ATB test, but were still certified by a school as eligible for federal student loans.

The complaint alleges that since the early-1980s, USED has known that Wilfred was engaged in widespread fraudulent activity, which included falsely certifying thousands of students as eligible to obtain federal financial aid.  The USED Office of Inspector General (OIG) investigated the practices of approximately 50 Wilfred schools across the country and found a consistent pattern of gross violations. A 1996 report cited a pattern of systemic fraud over many years and recommended that all Wilfred ATB discharges should be granted because of the widespread violations by Wilfred schools.  Despite this finding, thousands of individuals eligible for and entitled to a discharge carry the burden of their Wilfred debts to this day.

On January 16, 2015, Judge Robert W. Sweet granted Defendant’s motion to dismiss the complaint and denied as moot Plaintiffs’ motion for class certification.  NYLAG filed an appeal, and on May 12, 2016, the Second Circuit vacated the District Court’s order, handing a significant victory to Plaintiffs.  In its decision, the Second Circuit held that Plaintiffs are entitled to their day in court, to try to get the Department to meet its obligations to students.  In doing so, the Court rejected the Department’s claims that its “discretion” insulated it from having to justify its actions.  This decision opens the courthouse doors to Wilfred students seeking the protections that the Department is obligated to provide them, and the decision’s legal foundation may also open those doors to countless other students who attended predatory schools and who are entitled to the Department’s protection.  The Second Circuit remanded the case for further proceedings in the district court.

NYLAG attorneys:  Jane Greengold Stevens, Jason Glick, Danielle Tarantolo, Thalia Julme

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