Ford et al v. Pennsylvania Higher Education Assistance Agency

Filing 28

Memorandum Opinion and Order: For all of the foregoing reasons, Pennsylvania Higher Education Assistance Agency's 22 motion to dismiss is granted. Count I of the Second Amended Complaint is dismissed in its entirety, and Count III is dismissed as against Pennsylvania Higher Education Assistance Agency. Judge Sara Lioi on 3/19/2018. (T,Je)

Case: 5:17-cv-00049-SL Doc #: 28 Filed: 03/19/18 1 of 19. PageID #: 602

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF OHIO
EASTERN DIVISION

ASHLEY FORD, et al.,

PLAINTIFFS,
vs.

PENNSYLVANIA HIGHER EDUCATION
ASSISTANCE AGENCY, et al.,
DEFENDANTS.

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CASE NO. 5:17-cv-49

JUDGE SARA LIOI

MEMORANDUM OPINION AND
ORDER

Before the Court is the motion of defendant Pennsylvania Higher Education Assistance
Agency (“PHEAA”) to dismiss Counts I and III of the Second Amended Complaint (“SAC”).
(Doc. No. 22 [“Mot.”].) Plaintiffs oppose the motion (Doc. No. 26 [“Opp’n”]), and PHEAA has
filed a reply. (Doc. No. 27 [“Reply”].) For the reasons that follow, the motion to dismiss is
granted.
I. BACKGROUND
All facts are taken from plaintiffs’ SAC (Doc. No. 17) and the two contracts at issue in
this case, which the Court may properly consider without converting PHEAA’s motion to
dismiss to one for summary judgment as they are referenced in the pleadings and integral to the
complaint allegations.
A.

The TEACH Grant Program and the Agreement to Serve

“Recognizing the need for teachers in high-need subject areas at low-income schools,”
Congress established the Teacher Education Assistance for College and Higher Education

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(“TEACH”) Grant Program. (SAC ¶ 2.) The program is part of the College Cost Reduction and
Access Act, and awards grants to college students who agree to pursue a career teaching certain
subjects in underserved areas. (Id. n.1 at 3801, citing 20 U.S.C. § 1070g-2.) The program
provides grants of up to $4,000 per year to students completing course work needed to begin
teaching careers in high-need subject areas, such as “bilingual education and English language
acquisition, foreign language, mathematics, reading [assistance], science, and special
education[.]” (Id. ¶¶ 173-74.) Undergraduate students are eligible for up to $16,000 in grants,
while students in graduate study programs may receive up to $8,000 toward their tuition. (Id. ¶
173.)
Students who wish to participate in this program must enter into an agreement, referred to
in the pleadings as the “Agreement to Serve,” with defendant Department of Education (“DOE”).
(Id. ¶¶ 4, 175, Ex. A, B.) It is undisputed that PHEAA is not a party to these agreements.
Pursuant to the Agreement to Serve, students are obligated to teach in a high-need field at an
elementary school, secondary school, or educational service agency that serves students from
low-income families, for at least four complete academic years within the first eight years after
graduation. (See id. ¶¶ 17, 175-76.) Students are also required to “submit evidence of such
employment in the form of a certification by the chief administrative officer of the school upon
completion of each year of such service[.]” (Id. ¶¶ 18, 177, quoting 20 U.S.C. § 1070g2(b)(1)(D).) If, for any reason, a student participating in the TEACH Grant Program fails to
fulfill his or her obligations under the Agreement to Serve, the grant is converted to an
unsubsidized loan that the student/graduate must repay. (Id. ¶¶ 2, 178.)

1

All page numbers are to the page identification number generated by the Court’s electronic docketing system.
2

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B.

Administration Agreement

The DOE contracted with PHEAA to be the exclusive servicer of the TEACH Grants
beginning July 2013.2 (Id. ¶ 3.) As of June 30, 2015, PHEAA was responsible for servicing
approximately $444,500,000 in TEACH Grants. (Id.) PHEAA’s duties and obligations as the
servicer of these grants are governed by the agreement entered into between PHEAA and DOE.
(Mot., Ex. 1 [“Administration Agreement”].) PHEAA’s duties consist of tracking the TEACH
participant’s fulfillment of their obligations under the Agreement to Serve, including receiving
and processing paperwork, handling billing and payments, and communicating with the
participants. (SAC ¶¶ 179-80.) Pertinent to the present action, it was PHEAA’s responsibility to
convert a TEACH Grant to a loan if the student participant failed to carry out his or her
contractual obligations under the Agreement to Serve. (See id. ¶ 181.)
C.

Plaintiffs’ Class Lawsuit, Claims, and Allegations

According to the SAC, plaintiffs were all participants in the TEACH Grant Program who
graduated from undergraduate or graduate study programs in education, and began teaching
high-demand subjects in low-income schools. (Id. 154-66.) Despite the fact that plaintiffs have
fulfilled, or are in the process of fulfilling, their service obligations, they allege that PHEAA
illegally converted their TEACH Grants to loans. (Id. ¶¶ 11-13, 154-66, 204.) They seek to
represent a class of people who have received a TEACH Grant serviced by PHEAA between
July 2013 and the present, and who produced documentation demonstrating that they have or are

PHEAA “established FedLoan Servicing . . . to support the [DOE’s] ability to service these loans[.]” (SAC ¶ 168.)
The SAC uses “PHEAA” and “FedLoan” interchangeably when referring to the moving defendant. The distinction
makes no difference to the Court’s consideration of the pending dispositive motion.
2

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in the process of fulfilling their service obligations yet had their grant converted to an interestbearing loan. (Id. ¶ 206.)
Plaintiffs filed the present action against DOE and PHEAA in federal court on January 6,
2017. The SAC contains three claims. Count I raises a claim of racketeering against PHEAA
under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961(4).
Count II is a breach of contract claim brought solely against DOE, and Count III is brought
against both defendants and sounds in the tort of common law unjust enrichment.
According to the SAC, DOE and PHEAA engaged in two types of unlawful conversion
of plaintiffs’ property. The first type of conversion
deals with the annual certifications that the teachers are to submit to [PHEAA].
The requirements of the “annual certification” require the TEACH Grant recipient
to “provide my TEACH Grant servicer with documentation of that service on a
form that will be available from my TEACH Grant servicer. This documentation
must be completed “every year.” However, the terms “year” and “annual” are not
defined. The annual certification language in the Agreement to Serve does not
require the TEACH Grant recipient to submit “annual” certification within the
“school year” as defined by the Agreement to Serve, but simply requires the
“annual” certification to be completed “every year” after the completion of each
school year. Defendants arbitrarily created deadlines for these certifications and
unscrupulously converted teacher’s Grants because of a missed arbitrary deadline,
despite the teachers continuing to teach in the targeted districts.
(Id. ¶ 12.) The second type of conversion alleged occurs when PHEAA
switches [TEACH Grant recipients] to a “paperless” option without their
knowledge. In certain cases, [PHEAA] would send correspondence by regular
mail or personal email, but only send reminders about the yearly certification
through this “paperless portal” without the teacher’s knowledge and without
notifying them. The Agreement to Serve (examples are attached as Exhibit A and
B) states that these certification forms are to be available through the [DOE]. In
some cases, without the Teacher’s knowledge, [PHEAA] would switch from
regular mailing or sending them to teachers via their personal emails of these
forms to paperless mailing through [PHEAA’s] “paperless portal.” Thus, certain
plaintiffs would receive no notification of the certification forms until after the
form was already deemed late by Defendants, resulting in the Grant being
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converted to a loan while the teachers continued to teach in the targeted districts.
(Id. ¶ 13.)
The SAC sets forth examples of each type of conversion. As to the second type, the SAC
recounts that plaintiff Lindsey Jones (“Jones”) received $8,000 in TEACH Grants. During the
third year of her required service, PHEAA switched Jones to paperless billing “without her
permission.” (Id. ¶¶ 123, 126.) “Because she was switched from paper billing to paperless
billing, Ms. Jones missed Defendants’ arbitrary deadline to send certification forms.” (Id. ¶ 127.)
Her grant was subsequently converted to a loan.
The circumstances of plaintiff Ashley Ford (“Ford”) are representative of the first type of
claimed conversion. Ford received $7,000 in TEACH Grants over a three year period. In her
second to last year of service, PHEAA “fraudulently converted her grants into loans for allegedly
failing to submit her certification paperwork.” (Id. ¶¶ 16, 25.) Ford received the certification
paperwork while on maternity leave, and admits that she “inadvertently left a single signature
from the paperwork.” (Id. ¶¶ 26, 27.) She eventually sent in a second set of paperwork, but, due
to what she describes as a “minute inadvertence” in her first set of paperwork, PHEAA converted
her grant to a loan.3 (Id. ¶ 31.) She attempted to resolve the matter with PHEAA through this
appeal process but was unsuccessful in getting the loan converted back into a grant. (Id. ¶¶ 30-6.)
According to the SAC, Ford’s experience is a
quintessential example of PHEAA’s scheme to defraud teachers—wait for any
minute mistake, then convert the Grant into a Loan—charging years of accrued
interest, and then make it absolutely impossible to resolve the dispute, despite
actual knowledge that a teacher is continuing to fulfill their obligations.
Some plaintiffs simply sent in properly completed paperwork beyond the “arbitrary deadline” set by PHEAA, and
had their grants converted into loans because their paperwork was submitted in an untimely fashion. (See, e.g., SAC
¶¶ 71-73.)
5
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(Id. ¶ 39.)
The SAC represents the second time plaintiffs have attempted to amend their complaint
allegations. The filing of each complaint has been immediately met by a motion to dismiss filed
by PHEAA. (See Doc. Nos. 6, 12, 22.) The motion presently before the Court seeks to dismiss
Count I in its entirety and Count III as against PHEAA.
II. STANDARD OF REVIEW
PHEAA brings its motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil
Procedure. In reviewing a complaint in the context of a motion to dismiss under Rule 12(b)(6),
the Court must construe the complaint in the light most favorable to plaintiffs and accept all
well-pleaded material allegations in the complaint as true. Bell Atl. Corp. v. Twombly, 550 U.S.
544, 555-56, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007).
The sufficiency of the complaint is tested against the notice pleading requirements of
Fed. R. Civ. P. 8(a)(2), which provides that a complaint must contain “a short and plain
statement of the claim showing that the pleader is entitled to relief[.]” Although this standard is
liberal, Rule 8 still requires a complaint to provide the defendant with “enough facts to state a
claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570. Thus, “[t]o survive a
motion to dismiss, a complaint must contain sufficient factual matter, accepted as true,” to state a
plausible claim. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009)
(quoting Twombly, 550 U.S. at 570). A claim is facially plausible “when the plaintiff pleads
factual content that allows the court to draw the reasonable inference that the defendant is liable
for the misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556). Plausibility “is not akin to a
‘probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted
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unlawfully.’” Id. “[W]here the well-pleaded facts do not permit the court to infer more than the
mere possibility of misconduct, the complaint has alleged—but it has not ‘show[n]’—‘that the
pleader is entitled to relief[.]’” Id. at 679 (quoting Fed. R. Civ. P. 8(a)(2)). In such a case, the
plaintiff has not “nudged [his] claims across the line from conceivable to plausible, [and the]
complaint must be dismissed.” Twombly, 550 U.S. at 570; see Iqbal, 556 U.S. at 683 (citation
omitted).
A complaint need not set down in detail all the particulars of a plaintiff’s claim.
However, “Rule 8 . . . does not unlock the doors of discovery for a plaintiff armed with nothing
more than conclusions.” Iqbal, 556 U.S. at 678-79 (This standard requires “more than an
unadorned, the-defendant-unlawfully-harmed-me accusation.”). “Threadbare recitals of the
elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. at
678 (citing Twombly, 550 U.S. at 555); see Gregory v. Shelby Cty., 220 F.3d 433, 446 (6th Cir.
2000) (the court should not accept conclusions of law or unwarranted inferences couched in the
form of factual allegations). The complaint “must contain either direct or inferential allegations
respecting all the material elements to sustain a recovery under some viable legal theory.” Scheid
v. Fanny Farmer Candy Shops, Inc., 859 F.2d 434, 436 (6th Cir. 1988) (emphasis in original)
(internal quotations marks, citation, and additional citations omitted), abrogated on other
grounds by Buckhannon Bd. & Care Home, Inc. v. W. Va. Dep’t of Health & Human Res., 532
U.S. 598, 121 S. Ct. 1835, 149 L. Ed. 2d 855 (2001).
Because plaintiffs’ federal RICO claim requires proof of mail or wire fraud as an
element, the plaintiffs must also satisfy the heightened particularity requirements of Federal Rule
of Civil Procedure 9(b) with respect to the elements of fraud. Therefore, the plaintiffs must, at a
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minimum, “‘state with particularity the circumstances constituting fraud or mistake.’” Heinrich
v. Waiting Angels Adoption Servs., Inc., 668 F.3d 393, 403 (6th Cir. 2012) (quoting Fed. R. Civ.
P. 9(b)). This includes alleging the “time, place, and content” of the fraudulent acts, the existence
of a fraudulent scheme, the intent of the participants in the scheme, and “the injury resulting
from the fraud.” Id. (quotation marks and citations omitted); see Bender v. Southland Corp., 749
F.2d 1205, 1216 (6th Cir. 1984) (upholding the district court’s dismissal of RICO claims where
the complaint failed to plead fraud with adequate particularity).
Rule 9’s pleading requirement of particularity must be read in harmony with Rule 8’s
“policy of simplicity in pleading[.]” Michaels Bldg. Co. v. Ameritrust Co., N.A., 848 F.2d 674,
679 (6th Cir. 1988) (citing Fed. R. Civ. P. 8). Accordingly, courts should not be “too exacting”
or “demand clairvoyance from pleaders” in determining whether the requirements of Rule 9(b)
have been met. Id. at 681. Rather, “if the defendant has fair notice of the charges against him,
[Rule 9(b)] is satisfied.” Shapiro v. Merrill Lynch & Co., 634 F. Supp. 587, 594 (S.D. Ohio
1986); see Williams v. Duke Energy Int’l, Inc., 681 F.3d 788, 803 (6th Cir. 2012) (“‘Rule [9]
requires that the circumstances of the fraud be pled with enough specificity to put defendants on
notice as to the nature of the claim.’”) (quoting Michaels Bldg., 848 F.2d at 680).
In entertaining a Rule 12(b)(6) motion, a court may consider documents that are referred
to in the pleadings and are integral to the claims without converting the motion into one for
summary judgment. See Bassett v. Nat’l Collegiate Athletic Ass’n, 528 F.3d 426, 430 (6th Cir.
2008) (citing Amini v. Oberlin Coll., 259 F.3d 493, 502 (6th Cir. 2001)); Commercial Money
Ctr., Inc. v. Ill. Union Ins. Co., 508 F.3d 327, 335-36 (6th Cir. 2007) (citation omitted); see also
Weiner v. Klais & Co., Inc., 108 F.3d 86, 89 (6th Cir. 1997) (court may consider documents that
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govern a party’s rights and are necessarily incorporated by reference in the complaint on a
motion to dismiss) (citations omitted).
III. DISCUSSION
In its dispositive motion, PHEAA argues that plaintiffs’ RICO and unjust enrichment
claims fail because they are each grounded in the Agreement to Serve, and the allegations
supporting these claims are inseparable from the allegations giving rise to plaintiffs’ breach of
contract claim. PHEAA argues further that plaintiffs’ RICO claim fails to meet the heightened
pleading requirements for fraud.
A.

RICO § 1962(c)

In order to demonstrate a RICO violation under 18 U.S.C. § 1962(c), a plaintiff must
establish the following elements: (1) the existence of two or more predicate offenses, (2) the
existence of an “enterprise,” (3) a nexus between the pattern of racketeering and the enterprise,
and (4) an injury to business or property occurring as a result of the racketeering activity.
VanDenBroeck v. CommonPoint Mortg. Co., 210 F.3d 696, 699 (6th Cir. 2000) (citing Frank v.
D’Ambrosi, 4 F.3d 1378, 1385 (6th Cir. 1993)), abrogated on other grounds by Bridge v.
Phoenix Bond & Indem. Co., 533 U.S. 639, 128 S. Ct. 2131, 170 L. Ed. 2d 1012 (2008); see
Sivak v. United Parcel Serv. Co., 28 F. Supp. 3d 701, 719 (E.D. Mich. 2014) (setting forth the
elements as “‘(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering
activity[]’”) (quoting Moon v. Harrison Piping Supply, 465 F.3d 719, 723 (6th Cir. 2006)
(further citations omitted)), abrogated on other grounds by Solo v. United Parcel Serv. Co., 819
F.3d 788 (6th Cir. 2016).
Plaintiffs plead the existence of traditional mail and wire fraud as the predicate acts for
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their RICO claim. “Mail fraud consists of (1) a scheme to defraud, and (2) use of the mails in
furtherance of the scheme.” United States v. Jamieson, 427 F.3d 394, 402 (6th Cir. 2005)
(citation omitted). “The elements of wire fraud are essentially the same except that one must use
the wires in furtherance of the scheme to defraud.” Heinrich, 668 F.3d at 404 (citation omitted).
“A plaintiff must demonstrate scienter to establish a scheme to defraud, which is satisfied by
showing the defendant acted either with a specific intent to defraud or with recklessness with
respect to potentially misleading information.” Sivak, 28 F. Supp. 3d at 720 (emphasis in the
original) (citing United States v. DeSantis, 134 F.3d 760, 764 (6th Cir. 1998)).
1.

Scheme to Defraud

Among many arguments offered as to why plaintiffs’ RICO claim should be dismissed,
PHEAA asserts that the claim is fatally flawed because it fails to properly allege a scheme to
defraud, a necessary element of mail and wire fraud. “A scheme to defraud includes any plan or
course of action by which someone uses false, deceptive, or fraudulent pretenses,
representations, or promises to deprive someone else of money.” Jamieson, 427 F.3d at 402
(citation omitted). With respect to the alleged misrepresentations, Rule 9(b)’s heightened
pleading requirements are met where the plaintiff is able to “(1) specify the statements that the
plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the
statements were made, and (4) explain why the statements were fraudulent.” Frank v. Dana
Corp., 547 F.3d 564, 570 (6th Cir. 2008) (further quotation marks and citation omitted).
According to PHEAA, the SAC fails to set forth a scheme to defraud, as a matter of law,
because it does not allege any fraudulent statements made by it, let alone any deceptive
statements that are pleaded with the requisite heightened pleading requirement of Rule 9(b). It
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maintains that plaintiffs merely allege that PHEAA “fraudulently converted” their grants into
loan, and argues that a “mere breach of contract can never provide the basis for the predicate acts
of mail or wire fraud.” (Mot. at 512.)
In Blount Fin. Servs., Inc. v. Walter E. Heller & Co., the Sixth Circuit dismissed a RICO
claim “arising from a financing contract” where the plaintiff alleged that the defendant “charged
a rate of interest which was illegal under the contract between the parties.” 819 F.2d 151, 152-53
(6th Cir. 1987). The court observed that:
The fact that the parties take different positions under the contract as to the
appropriate prime rate, or the fact that the defendant charged too high a “prime
rate” and thereby concealed or refused to disclose what the plaintiff considers the
true prime rate called for under the contract, does not give rise to a valid claim for
fraud. Fraud alleged in a RICO civil complaint for mail fraud must state with
particularity the false statement of fact made by the defendant which the plaintiff
relied on and the facts showing the plaintiff’s reliance on defendant’s false
statement of fact. The plaintiff has not alleged with particularity any such false
statement of fact and therefore the District Court was correct in dismissing the
complaint. Sending a financial statement which misconstrues the prime rate
provided by the terms of the contract may breach the contract but it does not
amount to a RICO mail fraud cause of action.
Id. (emphasis added).
In a later decision, the Sixth Circuit clarified that “Blount does not stand for a blanket
prohibition of RICO claims related to contract disputes.” Dana Corp. v. Blue Cross & Blue
Shield Mut. of N. Ohio, 900 F.2d 882, 885 (6th Cir. 1990). In Dana, plaintiff entered into a
contract with Blue Cross whereby Blue Cross was to administer Dana Corp.’s benefits plan.
Under the terms of the contract, Blue Cross was to issue a refund to Dana if it exceeded certain
cost limitations. Dana alleged that Blue Cross never adjusted its charges but represented in
meetings that Dana was receiving the benefit of such cost adjustments. Id. Distinguishing Blount,
the court observed “the reason for dismissal in Blount was that the plaintiff failed to make
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sufficient allegations of misrepresentations or omissions which were reasonably calculated to
deceive persons of ordinary prudence and comprehension.” Id. at 885 (internal quotation marks
and citation to Blount, supra omitted). “In contrast, Dana has made such allegations of
misrepresentations and omissions by Blue Cross.” Id.
Plaintiffs posit that the SAC “clearly spells out the scheme to defraud in paragraph 233
stating ‘PHEAA’s scheme to defraud consists of knowingly converting TEACH Grants into
loans despite actual knowledge that the Plaintiffs continue to fulfill their Qualifying Teaching
requirements.’” (Opp’n at 574, quoting SAC ¶ 233.) This complaint allegation merely serves to
underscore the deficiency in this claim, as “knowingly converting” grants to loans, without some
fraudulent misrepresentation or omission, fails to state a scheme to defraud.4
Plaintiffs also point to paragraph 226 that alleges that PHEAA “‘illegally and
intentionally later converted Plaintiffs’ Grants to interest bearing loans due to minute and hyper
technical reasons, arbitrary annual deadlines, and underhanded tactics like sending certification
information via the [PHEAA] website so that Teachers would miss PHEAA’s arbitrary
deadlines.’” (Opp’n at 574, quoting SAC ¶ 226.) The fact that plaintiffs take issue with
PHEAA’s interpretation of the contract deadlines may give rise to a contract disputes, but it does
not give rise to a fraud claim, nor does a dispute over the legal significance of the delays by

4

With respect to the first type of conversion, there are vague references to communications sprinkled throughout the
SAC, but none are plead with any particularity. For example, the only representations identified in the SAC relating
to plaintiff Ford are several representations made by unknown employees or representatives of PHEAA, on
unidentified dates, after plaintiff Ford submitted her initial set of paperwork with the missing signature. (See SAC ¶¶
30-35.) Also, it is alleged that plaintiff Samantha Binnie (“Binnie”) performed her required service at an orphanage
in Colombia and was advised by an unknown representative of PHEAA that she could fill out the required
paperwork when she returned to the United States, “like taxes.” (SAC ¶ 110.) These representations are not pled
with particularity under Rule 9(b) as they do not identify the speaker or where and (with respect to Ford) when the
statements were made. Further, these statements are not alleged to have been fraudulent, nor was it alleged that these
plaintiffs relied upon the representations to their detriment. See Bender, 749 F.2d at 1216.
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plaintiffs in submitting certification paperwork.
At best, plaintiffs have alleged that the DOE, through PHEAA, breached the Agreement
to Serve by converting the grants to loans despite plaintiffs’ substantial compliance with the
terms of the agreement.5 Breaches of contract, even if they are part of “some illegal schemes
perpetrated using the mails and wires are not violations of the federal wire and mail fraud
statutes.” Hilton Sea, Inc. v. DMR Yachts, Inc., 750 F. Supp. 35, 39 (D. Me. 1990) (citation
omitted); see, e.g., C & L Ward Bros., Co. v. Outsource Solutions, Inc., No. 11-cv-14773, 2012
WL 3157005 (E.D. Mich. Aug. 3, 2012) (dismissing RICO mail fraud claim based on the
submission of improper billings that violated the parties’ contract); Kevelighan v. Trott & Trott,
P.C., 771 F. Supp. 2d 763, 777 (E.D. Mich. 2010) (dismissing RICO mail fraud claims, noting
that a plaintiff cannot “transmute claims sounding in contract into RICO claims by simply adding
the terms ‘false’ and ‘fraudulent’”) (quotation marks and citations omitted). For this reason
alone, plaintiffs’ RICO claim is subject to dismissal.6
2.

The RICO Enterprise

The SAC identifies the DOE and PHEAA as the “RICO enterprise[.]” (SAC ¶ 220,
bolding omitted.) With respect to this “enterprise” element, the SAC further alleges that

5

The Court makes no determination, at this time, as to whether plaintiffs have established a breach of the
Agreement to Serve. Such a determination is better left for summary judgment or trial.
6

While the first type of conversion does not involve any material misrepresentations, the second type comes closer
to alleging a scheme to defraud. It would be fair to read the SAC as alleging that PHEAA made a material omission
when it switched from paper notification to the paperless portal “without notifying [plaintiffs].” (SAC ¶ 13; see also
¶ 226 [PHEAA engaged in “underhanded tactics like sending certification information via the [PHEAA] website so
that Teachers would miss PHEAA’s arbitrary deadlines.”].) Nonetheless, as discussed infra, even this second theory
of conversion fails to set forth a federal RICO claim because it does not identify racketeering activity prohibited by
RICO.

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“PHEAA did conduct and participate in the conduct of the Enterprise through a pattern of
racketeering activity for the unlawful purpose of intentionally defrauding Plaintiffs by illegally
converting their loans despite actual knowledge of substantial compliance.” (Id. ¶ 225.)
According to the SAC, “[t]he acts of fraudulently converting Plaintiffs’ and thousands of other
teacher[s’] TEACH Grants into loans constitutes collection of an unlawful debt pursuant to 18
U.S.C. § 1962(c).” (Id. ¶ 237.)
PHEAA disagrees and argues that the SAC has not set forth a type of activity that is
prohibited under RICO. Sections 1961(6) defines just two types of unlawful debt that are
actionable under RICO. The first category is debt incurred or contracted in a gambling activity
illegal under state or federal law, or those debts unenforceable under federal or state usury law.
18 U.S.C. § 1961(6)(A). The second category are those debts incurred in connection with the
business of gambling in violation of federal or state law or the business of lending money of a
thing of value at usurious rates, where those rates are at least double the enforceable rate. 18
U.S.C. § 1961(6)(B). The fact pattern set forth in the SAC does not support a finding that either
type of unlawful debt was being collected. Accordingly, the RICO claim is improperly pled for
this additional reason.
B.

Unjust Enrichment7

In Count III, plaintiffs allege that defendants “have been unjustly enriched by receiving
increased profits based on increased outstanding loan balances at the expense of Plaintiffs and

7

Though they do not discuss choice of law in the briefing, both plaintiffs and PHEAA rely on Ohio law to support
their respective positions as to plaintiffs’ unjust enrichment claim. The Court will also assume that, for purposes of
the present motion, Ohio law applies to plaintiffs’ state law claims.

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Class members.” (SAC ¶ 255.) PHEAA argues that plaintiffs’ unjust enrichment claim fails
because Ohio law precludes recovery under the theory of unjust enrichment or quasi-contract
when an express contract covers the same subject. Plaintiffs counter that, at this stage in the
proceedings, they have a right to pursue both a contract and unjust enrichment claim as
alternative forms of relief.
Unjust enrichment arises out of a contract implied in law. Hummel v. Hummel, 14 N.E.2d
923, 925-26 (Ohio 1938). A “contract implied in law” is not a true contract, but is a quasicontract implied by a court when a party “retains money or benefits which in justice and equity
belong to another.” Id. at 926-27. Ohio law does not allow parties to seek damages under quasicontractual theories of recovery, such as a claim of unjust enrichment, when a contract governs
the relationship. Wolfer Enter., Inc. v. Overbrook Dev. Corp., 724 N.E.2d 1251, 1253 (Ohio Ct.
App. 1992) (citations omitted); see Ullmann v. May, 72 N.E.2d 63, syllabus ¶ 4 (Ohio 1947). A
claim for unjust enrichment may be pled in the alternative, however, when the existence of an
express contract is in dispute and may also be maintained despite the existence of an express
contract where there is evidence of fraud, bad faith, or illegality. Res. Title Agency, Inc. v.
Morreale Real Estate Servs., Inc., 314 F. Supp. 2d 763, 772 (N.D. Ohio 2004) (citations
omitted).
As set forth above, plaintiffs have failed to allege a scheme to defraud. Moreover,
PHEAA notes that plaintiffs do not allege that the Agreement to Serve is invalid and, in fact, rely
on its enforceability to support their breach of contract claim against the DOE. Further, PHEAA
does not challenge the enforceability of either contract, and, indeed, relies on the related
Administration Agreement to defend its actions. Still, plaintiffs underscore the fact that PHEAA
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is not a party to the Agreement to Serve. “While such claims are generally precluded,
‘[c]ircumstances may exist to support an unjust enrichment claim against a non-contracting party
who benefits from the uncompensated work of one of the parties to the contract.’” Id. at 772
(quoting Nationwide Heating & Cooling, Inc. v. K & Constr., No. 87AP-129, 1987 WL 16802, at
*2 (Ohio Ct. App. Sept. 10, 1987)). For example, “in the construction context, Ohio Courts have
held that, when a subcontractor is not paid by the contractor and the owner has not paid the
contractor for the aspect of the job at issue, the subcontractor can recover from the owner on a
theory of unjust enrichment.” Id. at 772-73 (collecting cases).
Here, however, plaintiffs are not alleging that PHEAA was a mere third party beneficiary
of the contract between the DOE and plaintiffs. Instead, plaintiffs maintain that PHEAA was the
conduit through which the DOE breached the terms of the express contract. (SAC ¶ 252
[“Despite Plaintiffs and Class members substantially complying with the contract the [DOE],
through PHEAA, breached its contractual obligations by improperly converting the grants to
interest-bearing loans.”], emphasis added.) In fact, plaintiffs make clear that their injury flows
from “PHEAA’s improper conduct in breaching the contract . . . due to the improper conversion
of the TEACH Grant[.]” (Id. ¶ 253.) Plaintiffs’ breach of contract and unjust enrichment claims
both rely on the same conduct: namely, PHEAA’s conversion of the federal grants to loans. Both
claims are also dependent on the existence and validity of the Agreement to Serve. Therefore,
plaintiffs have failed to allege sufficient facts to support an unjust enrichment claim to be pled in
the alternative. See Bihn v. Fifth Third Mortg. Co., 980 F. Supp. 2d 892, 905 (S.D. Ohio 2013)
(unjust enrichment claim could not be pled in the alternative where the parties did not dispute the
existence of the contract).
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Moreover, plaintiffs have failed to properly allege that they have conferred a benefit upon
PHEAA. It is well settled that the elements of unjust enrichment include: “(1) a benefit conferred
by a plaintiff upon a defendant; (2) knowledge by the defendant of the benefit; and (3) retention
of the benefit by the defendant under circumstances where it would be unjust to do so without
payment[.]” Hambleton v. R.G Barry Corp., 465 N.E.2d 1298, 1302 (Ohio Ct. App. 1984)
(quoting Hummel, 14 N.E.2d at 927 (1938)). “As ordinarily defined, the concept of unjust
enrichment includes not only gain on one side but loss on the other, with a tie of causation
between them.” Shonac Corp. v. AMKO Int’l, Inc., 763 F. Supp. 919, 945 (S.D. Ohio 1991)
(quoting 18 O. Jur. 3d Contracts § 343, p. 271). “As a result, in order to assert an unjust
enrichment claim, a plaintiff must establish that a benefit has been conferred upon that defendant
by that particular plaintiff.” Bihn, 980 F. Supp. 2d at 904 (citing Johnson v. Microsoft Corp., 834
N.E.2d 791 (Ohio 2005) (further citation omitted) (emphasis added)); see also Gaier v.
Midwestern Grp., 601 N.E.2d 624, 628 (Ohio Ct. App. 1991) (“It is the existence of a substantial
detriment to the plaintiff, causally connected to a substantial benefit to the defendant, that makes
it inequitable for the defendant to retain the benefit at the plaintiff’s expense”).
The only benefit PHEAA is alleged to have received from its perceived misconduct
clearly did not come from plaintiffs. Specifically, the SAC explains that PHEAA is paid $1.05 by
DOE to service each borrower in TEACH Grant “status[,]” but receives $3.85 for grants that
have been converted into loans. (SAC ¶ 186.) According to the SAC, it is this increased fee that
has “incentivized [PHEAA] to deny Certification Forms and wrongly convert the” grants into
loans. (Id. ¶ 187.)
Plaintiffs argue that they are really the ones conferring the benefit upon PHEAA
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“because they are . . . bridled with the repayment of an interest bearing loan[.]” (Opp’n at 578.)
In reality, however, any benefit PHEAA received in the form of additional fees was dictated by
Administration Agreement and came from the DOE, and plaintiffs do not suggest otherwise.
“The purpose of recovery under a theory of unjust enrichment is not to compensate the aggrieved
party for any loss or damage suffered by him, but to compensate him for the benefit he has
conferred on the other party.” Budai v. Euclid Spiral Paper Tube Corp., No. 96CA0046, 1997
WL 28111, at *7 (Ohio Ct. App. Jan. 22, 1997) (citing Hughes v. Oberholtzer, 123 N.E.2d 393,
397 (Ohio 1954)); see Gerboc v. ContextLogic, Inc., 867 F.3d 675, 678 (6th Cir. 2017) (“Unjust
enrichment is ‘designed to compensate [a] plaintiff for the benefit he has conferred upon another,
not to compensate him for a loss suffered.’”) (quoting Wuliger v. Mfrs. Life Ins. Co. 567 F.3d
787, 799 (6th Cir. 2009) (further quotation marks and citation omitted)).
In Bihn, the court was faced with a somewhat analogous situation. There, plaintiff alleged
that a mortgage company was unjustly enriched when it received fees and costs associated with
improperly instituting foreclosure of the plaintiff’s property. The court dismissed the claim, in
part, because plaintiff failed to allege that the fees and expenses the mortgage company received
for the foreclosure were paid by the plaintiff property owner. Bihn, 980 F. Supp. 2d at 906
(noting that “[n]owhere in the Complaint . . . does [plaintiff] allege that she actually paid these
fees and expenses”). Similarly here, the only factual allegation that supports the unjust
enrichment claim is plaintiffs’ allegation that PHEAA received additional compensation when it
converted a grant to a loan. Nowhere in the SAC do plaintiffs allege that they paid these
additional fees. Accordingly, plaintiffs have failed to satisfy a necessary element of a prima facie
case of unjust enrichment, and that claim must be dismissed as against PHEAA.
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IV. CONCLUSION
For all of the foregoing reasons, PHEAA’s motion to dismiss is granted. Count I of the
SAC is dismissed in its entirety, and Count III is dismissed as against PHEAA.

Dated: March 19, 2018
HONORABLE SARA LIOI
UNITED STATES DISTRICT JUDGE

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