Rhode Island Student Loan Authority v. NELS, Inc.

550 A.2d 624, 1988 R.I. LEXIS 141, 1988 WL 126939

• Court: Supreme Court of Rhode Island
• Decided: December 2, 1988
• Docket: 88-55-Appeal
• Status: Published

Opinions

OPINION

KELLEHER, Justice.

This controversy was submitted to a Superior Court justice on an agreed statement of facts. The plaintiff is the Rhode Island Student Loan Authority, a governmental entity that was created by the General Assembly at its January 1981 session. P.L. 1981, ch. 44, § 1. This legislation is now known as G.L. 1956 (1988 Reenactment) chapter 62 of title 16. The defendant, NELS, Inc., is a Rhode Island corporation whose principal office at the time in question was situated in the city of Providence. Hereafter we shall refer to the plaintiff as RISLA and to the defendant as NELS.

Since its inception, one of RISLA s paramount functions has been the purchasing of federal and state-guaranteed student loans from Rhode Island banks. These acquisitions provide the lenders with added funds with which to make additional student loans. The 1981 legislation vested RISLA’s management in a board of directors that is composed of five individuals who also serve concurrent staggered terms as directors of the Rhode Island Higher Education Assistance Authority (RIHEAA). Each director is appointed by the Governor to serve a five-year term.

RISLA’s initial purchase of student loans was funded by its issuance of revenue bonds in the amount of $107,970,000. The bonds, issued on December 1, 1981, were due and payable on January 1, 1985. During this period RISLA entered into contracts with the United States Secretary of Education that would guarantee the entitlement to federal payments for those student loans that met the eligibility criteria.

The 1981 revenue bonds were retired with funds advanced to RISLA by a “federally chartered corporation” known as the Student Loan Marketing Association (SLMA) pursuant to a May 1984 financing agreement in which SLMA agreed to lend and advance to RISLA up to $200 million for the specific purposes of both retiring the 1981 revenue bonds and purchasing, additional student loans from Rhode Island lenders.

RISLA first hired NELS to service its student loans in December 1981. One of the primary functions of NELS was to monitor the students’ progress in paying back their loans. The term of the initial 1981 servicing agreement was for thirty-seven months or as long as any portion of the eligible loans required servicing. The thirty-seven-month period coincided with the term of the 1981 revenue bonds. When RISLA entered into the 1984 financing agreement with SLMA, it also entered into a new “Servicing Agreement” with NELS whereby NELS agreed to service student loans acquired by RISLA from various Rhode Island lenders during the fifteen-year term of the May 1984 agreement.

The litigants in this controversy agree that the usual time span from a student’s initial, receipt of a loan to the loan’s final repayment is fifteen years. Many factors contribute to this delay. A student borrower is not required to commence payments until the student has graduated or ceased to be at least a half-time student at a participating educational institution. Upon leaving school, the student is given a grace period during which repayment can be delayed for a period of time from six months to one year. Again, after the grace period has expired, payments may be deferred for a number of reasons, such as the borrower’s graduate or professional studies, resumption of undergraduate study, internships, active duty in the armed forces, service in the Peace Corps, full-time volunteer service for a tax-exempt organization, unemployment, rehabilitation training, or temporary disability or the temporary disability of the borrower’s spouse.

At the time of the execution of the 1984 servicing agreement the terms of the five directors who executed the agreement would expire within five years. Consequently in February 1986 RISLA, through its counsel, filed this declaratory-judgment action in the Superior Court seeking a declaration that the May 1984 agreement was invalid and void because its fifteen-year term extended beyond the terms of the directors who authorized its execution.

The May 1984 agreement consists of a twenty-eight-page document. NELS’s duties, obligations, and functions are set forth in section 5 of the agreement. NELS agreed that each loan would be serviced in “substantial compliance” with procedures set forth in its 1982 operating procedures manual. NELS also agreed to perform a series of duties that are to be found beginning with section 5(a) and ending with section 5(v) of the agreement.

In seeking to nullify the service agreement, RISLA relies upon the common-law principle that holds that any contract made by a governmental authority involving the performance of a governmental function that extends beyond the unexpired terms of the governmental officials executing the contract is void because such an agreement improperly ties the hands of subsequent officials. In contrast, if the contract merely involves a proprietary function of a governmental body, its validity is upheld and may bind successors for as long a period as is necessary to accomplish the contract’s goal. Bair v. Layton City Corp., 6 Utah 2d 138, 148, 307 P.2d 895, 902 (1957).

Throughout this litigation NELS has claimed that the servicing of student loans is a proprietary function. RISLA, on the other hand, directs our attention to § 16-62-4(b), which in its pertinent parts provides that “[t]he exercise by the authority of the powers conferred by this chapter shall be deemed and held to be the performance of an essential governmental function of the state for public purposes.” The trial justice ruled in NELS’s favor and also declared that the 1984 servicing agreement applied only to student loans acquired by RISLA with funds generated by the 1984 financing agreement.’

In faulting the trial justice, RISLA places great reliance on the past pronouncements of this court in Vieira v. Jamestown Bridge Commission, 91 R.I. 350, 163 A.2d 18 (1960), and Parent v. Woonsocket Housing Authority, 87 R.I. 444, 143 A.2d 146 (1958). In these controversies Vieira and Parent were both employed by municipal agencies for terms that exceeded the unexpired terms of the governmental officials who had executed the respective contracts. Vieira had been hired as the bridge commission’s general manager for a ten-year term. Parent, an attorney, was engaged as the housing authority’s “legal advisor” for a five-year term. Sometime after the contracts were executed, changes in membership occurred in both the bridge commission and the housing authority. Neither Vieira nor Parent was successful in his efforts to nullify his discharge. On each occasion this court relied upon the common-law principle to which we have previously alluded.

We acknowledge the legislative declaration set forth in § 16-62-4(b) and the Legislature’s description of the powers conferred upon RISLA as “[a] performance of an essential governmental function of the state for public purposes.” Although courts should give due consideration to a legislative declaration that certain legislation shall be deemed and held to be the performance of a governmental function, such a “self-serving declaration,” although it is to be given great deference, is not conclusive as far as the existence of such a “function” is concerned since such a determination is reserved by our State Constitution for the judicial, rather than the legislative, branch of government. See Advisory Opinion to the Governor, 113 R.I. 586, 593, 324 A.2d 641, 645-46 (1974); People ex rel. Scott v. Chicago Park District, 66 Ill.2d 65, 80, 4 Ill.Dec. 660, 668, 360 N.E.2d 773, 781 (1976). The sole issue before us is whether RISLA should prevail in this dispute because NELS was engaged in a governmental function.

This court, in Parent v. Woonsocket Housing Authority, 87 R.I. at 448, 143 A.2d at 148, recognized that a governmental entity can exercise both governmental and proprietary functions. Even though RISLA serves a public purpose and, in doing so, may perform a number of governmental functions, the issue in this dispute is whether NELS’s segment of RISLA’s operation is governmental or proprietary in nature.¹ The last pronouncement by this court on the distinction between a governmental and proprietary function was Lepore v. Rhode Island Public Transit Authority, 524 A.2d 574, 575 (R.I.1987), wherein this court held that in Rhode Island a proprietary function is one “ ‘not so intertwined with governing that the government is obligated to perform it only by its own agents or employees.’ ”

After an examination of NELS’s duties as set forth in the 1984 servicing agreement, we believe that the particular facet of RISLA’s operations that NELS covers is clearly proprietary. NELS was contracted to serve as a rather “sophisticated” collection agency and could neither exercise discretion nor set policy in the performance of its duties. NELS’s essential function was to collect the principal and interest on outstanding student loans and to maintain records on all transactions.² These functions are proprietary in nature. See Telford v. Clackamas County Housing Authority, 710 F.2d 567, 571 (9th Cir. 1983), cert. denied, 464 U.S. 1070, 104 S.Ct. 977, 79 L. Ed. 2d 214 (1984). We are of the opinion that that portion of RISLA’s operations serviced by NELS is “not so intertwined with governing that the government is obligated to perform it only by its own agents or employees.”

Having found that the nature of the services provided by NELS are proprietary, we have only one question remaining, whether the contract binds RISLA for a period of time longer than necessary to accomplish its purposes. See Bair v. Layton City Corp., 6 Utah 2d at 148, 307 P.2d at 902. The servicing agreement with NELS extends no longer than the usual time span for which a student loan is outstanding, and we conclude, therefore, that the contract’s duration is no longer than necessary to accomplish its purposes.

It should be noted that provisions have been made for terminating NELS’s tenure as the loan servicer. Section 10 of the 1984 servicing agreement calls for the termination of NELS’s services by RISLA in the event that (1) NELS’s solvency or ability to service the loans is seriously threatened; (2) NELS commits a “material breach” of any of its obligations, representations, or warranties and fails to cure any deficiency within ninety days of receiving notice by RISLA of the deficiency; or (3) provisions are activated calling for the replacement of the servicer pursuant to section 7 B(2) of the May 1984 financing agreement between SLMA and RISLA or paragraph g of the custodian agreement.

Section 7 B(2) of the financing agreement appears to speak to the replacement of NELS by SLMA for a failure to service the loans with the due diligence required by the Secretary of Education and RIHEAA. The section contains no provision that authorizes the replacement of NELS by RISLA. At best, section 7 B(2) might be read as requiring RISLA to obtain prior written approval of SLMA before it could replace NELS as servicer.

The signatories to the custodial agreement were SLMA, RISLA, and NELS. NELS was designated to serve as the custodian for certain documents, all of which relate to students’ loans. The documents that were to be entrusted to NELS’s care included the students’ applications, the original promissory notes, a certificate indicating that the loans were insured, and any further documentation that might be required by the “eligible insured,” RIHEAA.

The agreement clearly indicates that NELS’s services as custodian be terminated by SLMA for NELS’s failure to perform its obligations as custodian. However, if the default was one that did not pose an immediate threat to SLMA’s interest in the promissory notes executed in connection with the guaranteed loans, NELS was to be given a reasonable period (no more than sixty days) to cure such a failure. However, the custodial agreement makes it clear that before NELS could be replaced as the loan servicer, any dispute about whether NELS was meeting its obligations as servicer was to be settled by arbitration in accordance with certain provisions of the financing agreement.

For the reasons stated above, the Superi- or Court judgment declaring the May 1984 servicing agreement to be valid is affirmed and RISLA’s appeal is denied and dismissed.

WEISBERGER, J. did not participate.

1 . It should be noted that there are some jurisdictions wherein the governmental-proprietary dichotomy has been rejected. In Mariano & Assoc. v. Bd. of County Comm’rs of Sublette, 737 P.2d 323, 327 (Wyo. 1987), the Wyoming Supreme Court found that "no reasoned justification for the governmental-proprietary differential as the dispositive test.” In its place, the Wyoming court has adopted the principle that, subject to any applicable statutory prohibition, "any contract with a unit of government of the state of Wyoming which extends beyond the term of office of the governmental decisionmak-ers * * * can be subject to challenge if, in consideration of the facts and circumstances, the necessity and benefit to the governmental unit did not justify the extended term when the agreement was made.” Id. at 329.

2 . See appendix.