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March 05, 2018 Articles

Student Loan Class Actions Take Aim at “a Massive Effort to Defraud Student Debtors”

Many courts are finding that student lenders have misused the U.S. Bankruptcy Code.

By Lynn E. Swanson

In 2014, Austin Smith was a law student at the University of Maine, looking for a topic to research for his law review note. He was also a regular at a local coffee shop, where another customer, a retired litigator, kept suggesting that he write about student loans in bankruptcy. It sounded boring, Mr. Smith thought. But he decided to take a look, just in case there was “something there to dig into.”

As it turned out, there was indeed something there. What Mr. Smith discovered in his law school research has become the basis for dozens of lawsuits, a new understanding of the Bankruptcy Code in courts around the country, and a nationwide class action alleging that the nation’s biggest student loan servicer, Navient, “has engaged in a massive effort to defraud student debtors and subvert the orderly working of the bankruptcy courts.”

The class action, Evan Brian Haas, Michael Shahbazi et al. v. Navient Solutions, LLC & Navient Credit Finance Corp., was filed in the U.S. Bankruptcy Court in Houston. Representing plaintiffs as counsel in the case are Mr. Smith, now based in New York; Jones, Swanson, Huddell & Garrison, based in New Orleans; Fishman Haygood, also based in New Orleans; Joshua Kons in Chicago; Adam Corral in Houston; and Boies, Schiller & Flexner out of its Albany, New York, office.

Misuse of 11 U.S.C. § 523(a)(8)
The first thing Mr. Smith found in his research was that commercial student loan providers commonly misuse 11 U.S.C. § 523(a)(8), a statutory provision regulating the discharge of private educational loans in bankruptcy. The text of the provision, when combined with other applicable laws, provides that private educational loans are non-dischargeable only if they meet certain criteria:

  • The loans must be made to eligible, full-time students.
  • The students must be attending Title IV–accredited schools.
  • The loans must be made for tuition, room, board, and educational materials.

Commercial lenders, however, often ignore these criteria and treat all educational loans as non-dischargeable. Over the years, these lenders have misled thousands of student borrowers into thinking that they were legally barred from discharging such student debt in bankruptcy, when in fact they could have done so. Even worse, commercial lenders have made tens of thousands of student borrowers pay back loans that were already discharged in bankruptcy—loans that, according to the Bankruptcy Code, they need not have repaid.

In March 2016, a federal judge in New York agreed with Mr. Smith’s reading of the Bankruptcy Code and ruled in favor of a law student seeking to cancel a $15,000 bar exam loan she had taken out from Citibank. Since then, judges in California, Maine, Maryland, Michigan, Minnesota, Ohio, Oregon, and Wisconsin have also ruled in favor of Mr. Smith’s clients and other student debtors in student loan bankruptcy cases.

The Navient Class Actions
In late 2016, five firms from around the country joined as co-counsel with Mr. Smith in a class action lawsuit against the student loan giant, Navient. Navient handles roughly $300 billion in student loans—one in every four student loans in the nation.

The facts of the case, Evan Brian Haas, Michael Shahbazi et al. v. Navient Solutions, LLC & Navient Credit Finance Corp., are typical of a student loan bankruptcy case. Both Mr. Haas and Mr. Shahbazi took out private loans for non–Title IV schools. Both fell behind in their debt payments and eventually declared bankruptcy and obtained a discharge of their debts. In both cases, according to plaintiffs’ counsel, their private student loans were discharged in bankruptcy courts by operation of law. Nevertheless, Navient subsequently continued to attempt to collect or induce payment on these otherwise discharged debts in violation of court orders and the Bankruptcy Code. See Plaintiffs’ Second Amended Complaint at 9–10, Haas, Shahbazi v. Navient Sols., LLC et al., No. 16-03175 (S.D. Tex. Jan. 26, 2017), ECF No. 95.

Navient also hired debt collectors who contacted Mr. Haas and Mr. Shahbazi regularly for repayments. In Mr. Shahbazi’s case, collectors called him multiple times a day and also called his mother-in-law, his brother, and his wife’s employer. This was standard collection procedure for Navient. In June 2017, six nonprofit groups complained to the Federal Communications Commission that “Navient has deliberately engaged in a campaign of harassing and abusing consumers through the use of repeated, unconsented-to robocalls, calling consumers’ cell phones hundreds, and—in some cases—thousands of times after being asked to stop.” Letter to Michael Carowitz, Chief of the Enforcement Bureau, Federal Communications Commission, from the National Consumer Law Center; Public Citizen; Center for Responsible Lending; Public Knowledge; Higher Ed, Not Debt; and Consumer Federation of America (June 12, 2017).

Navient represented to Mr. Haas and Mr. Shahbazi that their loans were non-dischargeable. Navient’s own corporate documents and policies, however, contradict what the company has told Mr. Haas, Mr. Shahbazi, and potentially thousands of other student borrowers over the years. Further, Navient regularly advises investors that these loans are dischargeable. In a 2014 offering memorandum, for example, Navient advised potential investors that career training loans, the type of loan taken out by Mr. Shahbazi, are in fact “generally dischargeable by a borrower in bankruptcy.” Navient Offering Memorandum at S-29 (July 4, 2014).

Navient’s illegal practices extended to many types of loans it provided. In fact, some of its loans were made directly to students without the school financial aid offices involved so that the loans could exceed the costs of attendance. The lawyers have now also sued Navient in a class action in the U.S. Bankruptcy Court in the Eastern District of New York, Hilal K. Homaidan et al. v. Navient Solutions, LLC et al., to stop these illegal practices and to get redress for the scores of additional students it harmed.

Navient’s History of Fraud Complaints
This is not the first time that Navient has been accused of defrauding student borrowers. Over the past year, three states’ attorneys general have sued the company, claiming that it systematically used “unfair or deceptive practices” to make its loans more difficult for student borrowers to pay off. People of the State of Illinois v. Navient Corp. et al.; State of Washington v. Navient Corp. et al.; Commonwealth of Pennsylvania by Attorney General Josh Shapiro v. Navient Corp. et al.

Over the past three years, the U.S. Department of Justice, the Federal Deposit Insurance Corporation (FDIC), and the Consumer Financial Protection Bureau have all found that Navient was cheating borrowers, including active-duty service members and disabled veterans. Danielle Douglas, “Sallie Mae to Pay $97 Million for Unlawfully Charging Troops on Student Loans,” Wash. Post, May 13, 2014; Press Release, FDIC, FDIC Announces Settlement with Sallie Mae for Unfair and Deceptive Practices and Violations of the Servicemembers Civil Relief Act (May 13, 2014); Consumer Fin. Prot. Bureau v. Navient Corp. et al., No. 3:2017-cv-00101 (M.D. Pa. filed Jan. 18, 2017).

The Consumer Financial Protection Bureau also alleged that the company “systematically and illegally failed borrowers at every stage of repayment” and that it used “deception to illegally cheat struggling borrowers out of their rights to lower payments.” Consumer Fin. Prot. Bureau v. Navient Corp. et al., No. 3:2017-cv-00101.

Navient’s blunt response to these allegations has surprised even its critics.

Although the company’s marketing materials make extravagant claims about “guiding customers along the path to financial success” and “customer-centricity,” its legal filings argue that “[t]here is no expectation that the servicer will ‘act in the interest of the consumer.’” Memorandum of Law in Support of Defendant’s Motion to Dismiss Plaintiff’s Complaint, Consumer Fin. Prot. Bureau v. Navient Corp. et al., No. 3:2017-cv-00101 (filed Mar. 24, 2017).

A Case Update
In March 2017, the plaintiffs in the Haas case received some good news when, in response to class arguments, Navient agreed to cease contacting potential plaintiffs about loan repayments, except by sending them monthly statements. Agreed Order Regarding Temporary Suspension of Collection Efforts, Haas, Shahbazi v. Navient Sols., LLC et al. (S.D. Tex. Apr. 13, 2017), ECF No. 123. As a result, at least 16,000 student debtors have stopped receiving harassing phone calls from Navient.

Plaintiffs in the Haas case are proceeding with class discovery and will argue for class certification in the spring of 2018.

Lynn E. Swanson – March 5, 2018