American Student Financial Group, Inc. v. Dade Medical College, Inc.

Citations: 180 F. Supp. 3d 671; 2015 U.S. Dist. LEXIS 182956; 2015 WL 11988944Docket: Case No.: 15cv367 JLS (JLB)

Court: District Court, S.D. California; October 9, 2015; Federal District Court

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The Court has granted American Student Financial Group, Inc. (ASFG) summary judgment concerning its first and second causes of action against Dade Medical College, Inc. (Dade). ASFG, a Delaware corporation based in Solana Beach, is involved in purchasing student loans for investment and filed a breach of contract action on February 2, 2015, against Dade and other defendants including University of Southernmost Florida, Ernesto A. Perez, and Chris J. Gressett. Dade, a private post-secondary institution in Florida with over 1,600 students, has agreements with ASFG for student loan transactions.

The agreements include the Tuition Loan Program Agreement (TLPA) and the Educational Account Portfolio Purchase and Sale Agreement. Under the TLPA, effective December 2013, ASFG acquired loans issued to Dade students by the Bank of Lake Mills, requiring Dade to pay fees and repurchase loans more than 90 days delinquent. These loans are categorized as “gap loans,” helping cover the difference between tuition and federal loan limits. The TLPA was secured with collateral from Cottingham Apex Fund, LLC, which entered a promissory note to pay Dade interest and assigned the note to ASFG as security for the transaction.

Section 11 of the TLPA requires Dade to secure the Cottingham Note by granting ASFG a continuing security interest in the Collateral as consideration for obligations Dade acknowledges are valuable. Dade’s obligations encompass all debts and duties owed to ASFG under this agreement. Beginning in December 2014, Dade failed to pay required fees, including a $25,000 program fee due on several dates and a Minimum Volume Fee of $185,771. ASFG declared a “Program Default” and demanded that Dade purchase specific loans totaling $3,966,855.48, which Dade did not pay. As of September 15, 2015, Dade owed ASFG $4,270,682.58, plus 8% interest. ASFG argues that Dade's non-payment constitutes a material breach of the TLPA, justifying claims for the owed amount and attorneys' fees. Dade admits to the non-payments but contends that ASFG failed to meet its own obligations under the TLPA and acted in bad faith. Dade claims an implied covenant of good faith was breached due to ASFG’s alleged failure to ensure proper loan servicing, which Dade asserts was crucial for mitigating defaults. ASFG, however, maintains it initially believed that accommodations for borrowers were not permitted by the loan issuer but later adjusted its policy post-default to allow interest-only payments. Dade argues this change raises questions about ASFG’s intent and performance.

Dade alleges ASFG acted in bad faith by instructing UAS to cease due diligence communications with borrowers in February 2015, despite a prior agreement on the frequency of such communications aimed at managing late loan accounts. This instruction applied to ASFG’s entire loan portfolio and occurred months after ASFG had declared a Program Default. Dade contends there is a genuine dispute regarding the damages owed to ASFG, arguing that the Cottingham Note, valued at $1.9 million, could potentially satisfy Dade’s liability under the TLPA or provide an offset against damages. Although ASFG holds a lien on the Cottingham Note, Dade retains ownership and ASFG may foreclose on it through a UCC sale, with proceeds credited toward any judgment. 

In its second cause of action, ASFG claims Dade breached the Account Purchase Agreement, which was initially established with JLB Capital Management before ASFG became the successor. ASFG exercised its rights under this agreement to require Dade to repurchase defaulted accounts totaling $369,690.72. Dade challenges ASFG’s performance under the agreement, asserting that ASFG did not fulfill its obligations or acted in bad faith, particularly referencing the cessation of due diligence calls. Furthermore, Dade claims it has already met some obligations under the agreement, raising questions about the validity of ASFG's damage claims. The Account Purchase Agreement also stipulates a $375 fee per defaulted loan to cover ASFG's costs for enhanced servicing and default avoidance.

Damages related to the Cottingham Note are not linked to the Account Purchase Agreement. Dade claims a factual dispute exists regarding damages under the Account Purchase Agreement, asserting entitlement to an offset for the $500,000 already paid to ASFG. ASFG acknowledges Dade's payment, totaling $501,722.85, but contends its damages calculation already includes this amount. Dade conceded this point during a hearing.

ASFG's recent damages figures indicate Dade owes $4,270,682.58 under the TLPA and $459,461.13 under the Account Purchase Agreement, totaling $4,730,143.71. After adding $234,326.36 for accrued interest and subtracting $433,982.32 for mitigation, ASFG includes $73,137.39 for legal fees and $4,914.77 for servicing costs, leading to total alleged damages of $4,608,539.91 as of September 15, 2015.

Under Federal Rule of Civil Procedure 56(a), a party may seek summary judgment when there is no genuine dispute of material fact. The moving party must establish this absence of genuine dispute by presenting evidence from pleadings, depositions, and other records. If the moving party meets this burden, the nonmoving party must provide specific facts demonstrating a genuine dispute exists. Simple assertions of doubt are insufficient; concrete evidence must be presented to allow for a reasonable jury's verdict in favor of the nonmoving party.

The non-moving party in a summary judgment motion must provide evidence contradicting the movant's claims rather than relying solely on allegations or denials. Under California contract law, to prove a breach of contract, the plaintiff must demonstrate (1) the existence of a contract, (2) the plaintiff's performance or valid excuse for nonperformance, (3) the defendant's breach, and (4) resulting damages. ASFG seeks summary judgment against Dade for breaching the Tuition Loan Program Agreement (TLPA). ASFG has shown evidence supporting the existence and validity of the TLPA, which Dade does not dispute, and Dade admits to not adhering to the TLPA's terms, satisfying the first and third elements of breach.

However, Dade contends there is a genuine dispute regarding its good faith performance, questioning the second element, and challenges ASFG's proof of damages, which relates to the fourth element. Performance in good faith involves being faithful to a common purpose and aligning with the other party's justified expectations. California courts assess good faith performance on a case-by-case basis. Compliance with a contract's terms alone does not equate to bad faith. A breach is not established if a party fails to perform tasks not mandated by law or the contract's terms. Dade has not cited case law supporting a claim of bad faith as a defense against a breach of contract claim, which is typically relevant in insurance or employment contexts rather than as a standalone argument in breach of contract cases.

Breach of the covenant of good faith and fair dealing is fundamentally a breach of contract claim, as established in Careau Co. v. Sec. Pac. Bus. Credit, Inc. The case highlights the uncertainty of applying this concept in non-insurance contexts. In the context of ASFG's Motion for Summary Judgment, there is no valid claim of bad faith, leaving unclear whether Dade can argue bad faith to dispute ASFG's performance. Even if bad faith performance equates to inadequate contract performance, Dade has not presented sufficient evidence to create a genuine dispute. Dade cannot identify any contractual obligation in the TLPA requiring ASFG to service loans differently. Asserting subjective expectations as a basis to challenge summary judgment would undermine contract law, making it difficult for defendants to secure such judgments.

Dade's claim that ASFG's actions may have led to borrower defaults lacks merit, as no contract term mandated ASFG to provide loan "workouts." If such provisions were important, they should have been explicitly included in the contract. Dade relies on the declaration of CEO Chris Gressett, who expressed expectations for reasonable efforts from ASFG, but the contract governs obligations, not personal expectations. 

Regarding risk allocation in the TLPA, while proper servicing was critical for Dade, who could face purchasing non-performing loans, this does not imply an obligation for ASFG to offer workouts. Dade's realization of the risks associated with the contract, especially after defaults occurred, does not change the absence of contractual terms requiring ASFG to provide such accommodations. Lastly, Dade’s assertion regarding ASFG’s directive to its servicer, UAS, to halt due diligence calls does not support an inference of intent to encourage defaults, as a Program Default had already been declared prior to this instruction.

Dade's suggestion that undiscovered evidence could indicate bad faith is deemed insufficient to establish a genuine dispute of material fact. The Court finds no record evidence that counters ASFG’s claim of fulfilling its contractual obligations under the TLPA. Dade contends there is a dispute regarding damages, specifically that the value of the Cottingham Note should offset the damages owed. ASFG acknowledges this point but clarifies that the Cottingham Note has not yet been sold, meaning its value does not currently affect the damages owed. Instead, proceeds from the Cottingham Note's future sale and interest payments received will reduce Dade's total damages owed to ASFG. ASFG required this security due to concerns about Dade's liquidity to pay potential judgments.

Dade argues that ASFG failed to perform under the Account Purchase Agreement due to alleged bad faith. This assertion is supported by references to ASFG's instructions to its loan servicer and the requirement for Dade to pay for defaulted loans. However, ASFG asserts that it has met all its contractual obligations, with Dade acknowledging this in part. While Dade disputes ASFG’s claim of no obligations regarding account servicing, its arguments lack specificity regarding any deviations from the servicing requirements. A review of the cited sections shows that the servicing duties were transferred to ASFG’s predecessor, JLB, without specific collection efforts mandated in the Agreement. Thus, there remains no genuine dispute of material fact regarding ASFG's performance and entitlement to damages.

The instruction to UAS after the institutional default does not imply bad faith on ASFG's part, as Dade concedes that ASFG performed its obligations under the Account Purchase Agreement. Dade's vague references to payments for collection efforts lack specific evidence, failing to establish a genuine dispute regarding ASFG’s performance. 

Regarding damages, while ASFG’s entitlement to damages is undisputed, the precise amount Dade owes is unclear. Dade acknowledges having paid around $500,000, which ASFG has accounted for, thus reducing its overall claim. Dade's failure to present specific evidence to challenge ASFG’s calculation means there is no genuine factual dispute about damages related to ASFG’s breach of contract claim.

ASFG has demonstrated sufficient evidence for all elements of its breach of contract claims for the first and second causes of action. Dade's challenges concerning ASFG’s performance and damages lack evidentiary support. Consequently, ASFG's Motion for Summary Judgment is granted. ASFG is awarded damages totaling $4,270,682.58 for Dade’s breach of the TLPA, $459,461.13 for the Account Purchase Agreement breach, and additional fees and costs, subject to adjustments for collections and payments related to both agreements.

The Cottingham Note is clarified as a financial instrument with a value determined by third-party willingness to purchase it, and any payments made under it have been factored into ASFG's damage calculations. Dade's concerns about potential double recovery by ASFG via the Cottingham Note are addressed, affirming that ASFG is entitled only to contract damages, with any excess proceeds from the note remaining with Dade.