By Matthew Meyers

Oberg v. Pennsylvania Higher Education Assistance Agency

Jon Oberg sued three student loan corporations on the grounds that they defrauded the Department of Education – and therefore violated the False Claims Act, 31 U.S.C. § 3729– in connection with claims for Special Allowance Payments.  These payments are generous student loan subsidies. The False Claims Act imposes liability on “any person who knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” to an agent of the United States.

The three student loan corporations, the Pennsylvania Higher Education Assistance Agency, the Vermont Student Assistance Corporation, and Arkansas Student Loan Authority, moved to dismiss the action under Rule 12(b)(6).  They argued, both to the district court and on appeal, that they were not “persons” within the meaning of the Act.  The Supreme Court had held in Vermont Agency of Natural Resources v. United States that a state or state agency is not a “person.”  But, corporations, even municipal corporations, are persons subject to suit under the Act.

To determine whether a given entity is a corporation is a “state agency” such that it is not a person under the Act, the Fourth Circuit employs the “arm-of-the-state” analysis used in Eleventh Amendment jurisprudence.  A corporation is a part of the state when four factors militate in favor of such a finding:  (1) whether any judgment paid by the corporation will be paid by the state, (2) the degree of autonomy the corporation has from the State, (3) whether the corporation is involved with state, in contrast to non-state or local, control, and (4) whether the treatment of the corporation under State law makes it an arm of the State.

The district court had held that all three agencies were arms of the State.

Applying the four factors, a Fourth Circuit panel found that the Pennsylvania Agency is not an arm of the state.  The State is not bound by any judgment for which the agency is liable, and the agency receives no operational funding from the State (though state officials are appointed to the board of directors and the state has some veto power over its operations) .  The third and fourth factors weighed in favor of a finding that the agency was a state, as the agency primarily directs its operations towards providing financial aid to students within the state.  And a state statute states that the agency performs an essential government function. Construing the facts in favor of Oberg, the panel concluded that the first two factors outweighed the latter two.

The panel found that the Vermont Agency is not an arm of the state as well.  The first factor was inconclusive. The state is required to maintain the agency, but a state statute expressly disavowed any obligation to repay debts resulting from student loans the agency issued.  The second factor was not dispositive either.  While the agency exercises corporate powers and is not funded by the State, it is subject to a state laws that allow the State to alter, amend, or change the agency, and appoint eight of the agency’s eleven directors for the board.  The third and fourth factors weighed in favor of finding that the agency is an arm of the State, as it is involved with statewide concerns and is considered an instrumentality of the state under State law.  Because it was a close call, the panel vacated the district court’s judgment and permitted limited discovery to decide the question.

Finally, the panel affirmed the trial court’s judgment as to the Arkansas agency.  The factors weighed in favor of a finding that the agency is an instrumentality of the state.  There is no law dealing with the state’s obligation to pay the agency’s judgments, but the money earned by the agency becomes state funds.  The state has substantial control of the agency’s operations.  Furthermore, Oberg alleged no facts that the agency was not not involved primarily in state concerns.  Arkansas law treats the agency as an instrumentality of the state.

The Fourth Circuit affirmed in part, vacated in part, and remanded the case to the district court,