Judge Rules in Favor of PCAs; ED Permanently Enjoined from Cancelling Debt Collection Solicitation

On Friday afternoon, the judge in the case of FMS Investment Corp. (FMS) et al., vs. United States of America (ED) ruled in favor of the plaintiffs, granting their motion to permanently enjoin ED from cancelling its solicitation for unrestricted debt collection services.

Last week, insideARM published a lengthy article detailing the August 30th final oral arguments. In a nutshell, the plaintiffs argued that - based on the information in the Administrative Record (AR) - ED's decision to cancel the contract was irrational. ED's argument, in a nutshell, was that they've changed their strategy (they are planning to use pre-default servicers manage defaulted accounts), they will no longer need the services of large debt collectors, the 11 small contractors they do have are sufficient to get them from here to there, and so, they cancelled the solicitation for large agencies. In a ruling based solely on the contents of the AR, Judge Thomas Wheeler sided with the plaintiffs.

A quick recap

Every few articles on this saga it seems that a review of the case would be helpful for those who may have lost track.

Chapter One of this (so far) four chapter book began in 2014 when the five-year 2009 ED contract for debt collectors ended. New small business contracts were awarded on schedule, but the large-firm contracts were delayed. More than 40 large collection agencies entered the two-phase process. After ED made its initial cut, formal protests were launched by some of the companies not making it to phase two. Generally, the protests challenged the selection criteria.

Finally, in December 2016 contracts were awarded to seven large companies (down from 17 on the previous contract). This led to dozens of protests by firms that believed the process was flawed and unfair.

So began Chapter Two of the matter, with a VERY LENGTHY "re-do" of the solicitation, which resulted in awards to just two large companies, in January 2018.

This led to Chapter Three, with more protests, more litigation, and finally... nothing. No large company awards at all. On May 3, 2018 ED cancelled the whole solicitation, rescinded the contract awards from the two companies, and re-called the accounts still being worked by the firms that had an Award Term Extention from the previous contract. There were more protests, and a temporary injunction of the recall, but ultimately, the protests were dismissed, and the accounts were returned to ED, thus ending Chapter Three. 

Which gave rise to Chapter Four, with eight companies now protesting the cancellation of the solicitation, arguing that it was irrational. 

Now, back to Friday's ruling

Judge Wheeler cited several cases in his discussion of whether ED's decision to cancel its solicitation was a rational one.

• From Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co. ("MVMA" - 1983), he noted that "an agency must articulate a 'rational connection between the facts found and the [policy] choice made."
• From Gulf Gr. Inc. v. United States (2004) and AshBritt v. United States (2009), he noted, "Where an agency fails to undertake a review of relevant data, or fails to document that review, and articulate a satisfactory explanation for its conclusions, the Court must conclude that the agency has acted irrationally.'
• From Bannum, Inc. v. United States (2009), he noted that the "Court's review is 'highly deferential' to the agency as long as the agency has rationally explained its decision...[and from MVMA], But the Court will 'not supply a reasoned basis for the agency's action that the agency itself has not given."

The following sums up the Court's opinion about ED's defense:

"If ED anticipates loan volume growth, it failed to account for it in the AR. If ED anticipates loan volumes levelling off or falling, it failed to explain the basis for this conclusion. If ED assumes that current capacity will be sufficient until the enhanced servicer program is implemented -- a goal for which ED apparently has no plan and no timeline -- the AR provides no support for this assumption. ED 'entirely failed to consider,' (MVMA, 463 U.S. at 43) the interactions between future loan volumes, future small business capacity, and future enhanced servicer capacity over any timeline for implementing the enhanced servicer program.

The cancellation notice and the AR purport to outline a significant policy change. ED had clearly planned for PCAs to continue to administer defaulted student loans as recently as January 2018 because the agency awarded two PCA contracts that month. Yet not four months later, in a procurement cancellation notice, ED declared a new direction and an end to contracting for PCA services. ED needs to provide a 'reasoned analyisis' for the policy change. For all the reasons above, it has failed to do so. The AR before the court is not enough to show that ED's decision to cancel the solicitation was rational."

And, as to the reasoning for granting an injunction...

For the reasons stated above, the Court determined that the plaintiffs indeed succeeded on the merits, that they would suffer irreparable harm without an injunction, that the balance of the hardships favors an injunction, and that an injunction is in the public interest.

There was discussion during the August 30th oral arguments of the potential remedy of awarding attorneys' fees and proposal costs to the plaintiffs, however the PCAs said this would be inadequate; what they want is to be able to fairly compete for the contract.

Judge Wheeler noted that resurrecting the solicitation and returning the procurement to the May 2, 2018 status quo will not prevent ED from continuing to develop its enhanced servicer program; on the other hand, plaintiffs depend on ED debt collection contracts to survive.

Finally, from a case cited by the plaintiffs (Starry Assoc.'s v. United States), he stated that "the public interest always favors inegrity in the federal government procurement process."

So. We are back at May 2, 2018. No costs have been awarded to either side. The Court has not told ED what to do, except that it has permanently enjoined the agency from canceling Solicitation No. ED-FSA-16-R-0009.

insideARM Perspective

What's next? Well, there will most certainly be a Chapter Five here. What can happen? A few thoughts:

• ED could re-offer the contracts to Windham and Performant -- the two companies that had the contracts as of May 2, 2018.
• ED could re-award to the original 7 who got the contract in December 2016, plus maybe a few more.
• ED could take a 3rd shot at a revised RFP based on new criteria that the PCAs might possibly find reasonable.
• As these are IDIQ (indefinite delivery/indefinite quantity) contracts, ED could make awards, but then just delay giving the awardees any work.
• ED could make awards, but delay certification of the contractors' readiness to receive accounts.
• ED could make awards, and determine that they DO need the services of large contractors, and send them accounts.
• ED could make awards, send accounts, proceed with their enhanced servicing program, and eventually pull back the accounts (as they've said would happen with the small PCAs).
• ED could make awards, send accounts, proceed with their enhanced servicing program, find that it will not be effective, and in the end, make full utilization of both large and small PCAs throughout the life of the contract.
• No doubt there are other possibilities. 

The bottom line at this point is that there are human beings involved. Things can't possibly move forward in the best interests of borrowers, taxpayers, industry, or ED unless people can talk to each other. But how do you re-build a relationship that has become so acrimonious over the last few years?

Sources tell insideARM that, since December 2014 when Patty Queen Harper took over as administrator of the debt collection contracts (she has since left that position), nobody has spoken with a contracting officer, but all communication has been through email and memo. Contractors were told, "please don't send responses to our audit findings. When we want it, we'll ask for it." There has never been a discussion about best practices, and it has been management by threat since early 2015 when the five contractors were suddenly fired.

In my humble opinion, perhaps a mediated meeting among the parties would be a place to start. Now that there is no pending litigation, why not take the opportunity to bring in the experts, bring in the contractors, and create a public-private partnership to figure out the best way to manage the millions of loans currently in default, plus the inevitable future defaults that will occur. 

Meanwhile, the whiplash and uncertainty has got to be killing the employees of the PCAs, both large and small.