Request By:
Hon. John C. Darsie, Jr.
General Counsel
University of Kentucky
Lexington, Kentucky 40506
Opinion
Opinion By: Robert F. Stephens, Attorney General; By: Robert L. Chenoweth, Assistant Attorney General
You have asked the Office of the Attorney General to consider a matter concerning a Student Loan Program at the University of Kentucky. As background to your request you provided us the following information:
"The National Direct/Defense Student Loan program has been in operation at the University since 1958. Under the program the Federal Government provides 90% of the funds to be loaned to students; the University provides the remaining 10%. In 1977, 14.7% of the loans made were declared delinquent; in 1978 the delinquency rate was 13%.
The Department of Health, Education and Welfare is proposing regulations which will prohibit further allocations of NDSL monies to institutions with a delinquency rate exceeding 10% unless the institution is able to demonstrate that it has reduced delinquencies by 25% in the current year. However, HEW has established procedures allowing the assignment of hard-to-collect loans to the Office of Education for collection. Notes assigned without recompense prior to July 1, 1979, will not be included in determining the University's delinquency rate.
The University's Board of Trustees has approved the assignment of not more than 792 loans in default for more than two years with an outstanding principal balance not exceeding $509,285 without recompense. These loans have been subject to a collection process involving (1) repeated billings by the University, (2) University attempts to locate debtors whose location has become unknown, (3) repeated billings by Wachovia Services, Inc., a nationwide billing service for NDSL notes, (4) at least two notices from the University that the account will be referred to a collection agency, (5) referral to and pursuit by Financial Collection Agency, a national collection firm and (6) a report from Financial Collection Agency to the effect that collection efforts have been unsuccessful.
The Board's approval of the assignment of the loans mentioned above, however, is conditioned upon receipt of an opinion from your office advising tha the assignment of these loans would not violate the Kentucky Constitution or state statutos. Accordingly, this letter is to officially request such an opinion from your office.
Accompanying this request are copies of pertinent documents from our National Direct/Defense Student Loan program and also from HEW. These may be helpful to you in considering this question."
Although you did not so mention, this same problem exists at the other state institutions of higher education in the Commonwealth.
The legal problem that is presented by the facts regarding this matter is whether the assignment by the University of Kentucky and the other state universities of a portion of the uncollected NDSL notes which have been in default for an excess of two years is prohibited by Section 52 of the Kentucky Constitution. It is the opinion of this office that such action would not violate the Kentucky Constitution.
Kentucky Constitution § 52 reads in full as follows:
Indebtedness to state or municipality not to be released. - The general assembly shall have no power to release, extinguish, or authorize the releasing or extinguishing, in whole or in part, the indebtedness or liability of any corporation or individual to this Commonwealth, or to any county or municipality thereof."
This section of our Constitution has been infrequently litigated and from our research never litigated on appeal wherein under consideration was an issue such as presented here. Also, we have found no prior advisory opinions of this office reflecting on Section 52.
Looking at what we do know about Section 52 from the cases, it has been said that this section "denies the power to compromise in every case where the liability is fixed and certain, but does not forbid the settlement of an unliquidated claim, or the compromise of pending litigation to recover on claims that to recover on claims tht are unliquidated and uncertain in amount at any time before final judgment. (Citations omitted)."
Steele v. Taylor, 272 Ky. 11, 113 S.W.2d 423, 424 (1938). The Court of Appeals also has said:
"One of the chief purposes of Section 52 of the Constitution is to prevent a city council or the fiscal court of a county from compromising a claim for taxes after assessment has been regularly made and the claim has come into the hands of the collecting officer, and most of the cases construing this section involve attempts on the part of city councils and fiscal courts to compromise tax claims after the amounts of the taxes had been finally determined and fixed."
Cole v. Burton, 313 Ky. 557, 232 S.W.2d 838, 840 (1950).
In the present situation it seems what is involved is a liquidated debt. That is, it is certain what amount is due on each student loan. If this is so, the Commonwealth, through the state universities' governing bodies, may not release or extinguish the indebtedness.
The question, then, becomes whether an assignment of the Commonwealth's interest (10%) in each of these bad debt defaulted loans to the federal government, specifically the Office of Education, will amount to a release or extinguishment of an indebtedness owing to the Commonwealth which is prohibited by Section 52. As we stated above, it is our conclusion that under the plan as outlined by you from information supplied to you by Secretary of Health, Education and Welfare, Mr. Joseph A. Califano, Jr., no unconstitutional act would result. Our reasoning in reaching this conclusion is that what would be done by the Commonwealth through the state universities would be the selling or the making of an assignment of the Commonwealth's interest in these loans to the federal government. The indebtedness would not be extinguished for the former student, and, although the assignment is without recompense, we do believe that the assignment is not a gratuitous one. The very valuable consideration is the ability to continue to receive further NDSL funds from the federal government. Certainly the federal government has no obligation to make federal loan money available to the Commonwealth's state universities loan programs. The Commonwealth, in the interest of a public purpose, does not desire to lose future student loan benefits. Cf. KRS 164A.010.
Therefore, it is our opinion that Section 52 of the Kentucky Constitution was not intended to prevent the assignment of a chose in action, here a right to collect money due and owing to the Commonwealth, if that assignment is for valuable consideration. We believe each of the state universities may legally proceed to make the assignments of the loans in default in accordance with the plan outlined by HEW.