Court Denies PCAs' Motion to Prevent Account Recall by Department of Education

Last Tuesday the Court of Federal Claims (COFC or the Court) heard arguments in the case of FMS Investment Corp., (FMS) et al., v. United States (the Department of Education or ED). The plaintiffs are protesting ED’s re-cancellation of Solicitation No. ED-FSA-16-R-0009 for Large Business Debt Collection Services. They claim the Department of Education had no rational justification for cancelling the procurement.

The April 16^th hearing was related to a motion for preliminary injunction to prevent ED from recalling all remaining accounts from four large private collection agencies (PCAs) that still hold Award Term Extensions (ATEs) from a prior contract that ended in 2015.

The Solicitation to award new large PCA contracts has been under protest for nearly five years. For a condensed background on the case, read this article and then this article.

The recall of these accounts would, for practical purposes, be a nail in the coffin for these firms because it would mean the loss of their Authority to Operate (ATO), which can take up to a year to re-establish, even if they ultimately win their case.

The arguments articulated were essentially the same as those outlined in this article on April 8^th. In short, the plaintiffs argued:

• ED’s new “high-touch” plan to avoid loan delinquencies violates state law.
• Bundling servicing and default is illegal
• Calling under an inaccurate name is illegal under the Fair Debt Collection Practices Act.
• ED’s calculation of small business PCA capacity lacks rigor.
• ED’s calculation showing collection rate by “smalls” is as good as or better than “larges” is grossly misleading.
• Recall of the “in-repayment” accounts will cause harm to borrowers because of the confusion that will be caused by the transition.
• The Solicitation for large PCA services was cancelled in bad faith.

On behalf of ED, the Department of Justice argued:

• The PCAs want expiring contracts to not expire.
• They want to extend something that’s expiring while waiting for something else to happen.
• Nobody is protesting the terms of the (ATE) contract – so that contract should be allowed to play itself out.
• The PCAs’ complaints are predicated on getting new contracts. It’s unprecedented for the Court to order ED to give a contractor a contract.
• The Secretary of Education has said default collections are not working. The Senate has said default collections are not working. The Department is trying to do something. It’s hard. There will obviously be some bumps, but we’re trying to reconfigure how services are aligned and how people are paid to make it work better for borrowers and companies.
• It’s a 2015 procurement. We’re going in a different direction. The idea that the old way of operating is supposed to exist forever is irrational.

Both sides accused the other of manipulating numbers to suit their arguments.

Following a hearing of approximately three hours, the Court denied the motion. Although Judge Wheeler has signaled in the past that the plaintiffs may in fact succeed on the merits of their case, he felt it was outside the scope of his authority to essentially order ED to extend a contract.

So, now what?

The ATEs expired yesterday, so the Department will likely proceed with the recall immediately.

And, the case continues. Because the Court has not yet ruled on whether the Solicitation was illegally cancelled. In order to proceed, the parties have been waiting for a public version of the Administrative Record (AR) to be released by the Department. On Friday, following the denial of the preliminary injunction, the following briefing schedule was set:

By May 3, 2019 – ED to file public version of the AR

By May 20, 2019 – Plaintiffs to file Motions for Judgment on the AR (MJAR)

By June 6, 2019 – ED to file Opposition and/or Cross-MJAR

By June 20, 2019 – Plaintiffs to file Replies and/or Opposition to Cross-MJAR

By July 5, 2019 – ED to file Reply

insideARM Perspective

This is a tough blow to these large PCAs, who at one time had hundreds of employees working on the federal student loan contract. Upon completion of this recall, they will have zero. There is no doubt that the last five years have done irreparable harm to these firms.  Small PCAs will likely have to expand their use of subcontractors in order to take on additional volume, so some may be able to reconstitute a portion of their business in this way. Even if they ultimately prevail in court, it’s unclear what would happen next…another round of bids? Selection based on what criteria? More protests?