A District Court judge in California has denied a student loan servicer’s motion to dismiss claims that it violated the Rosenthal Fair Debt Collection Practices Act, the state’s Student Borrower Bill of Rights, and other consumer protection laws, while also denying the plaintiff’s motion to remand the case to state court.
The background: The plaintiff took out three private student loans to attend a for-profit art school that he alleges induced him to enroll through misrepresentations about the program and his employment prospects, conduct the Department of Justice has since deemed fraudulent.
- The defendants, the successors to the entity that originated the loans, created a process allowing borrowers to apply to have their loans discharged based on school misconduct. The plaintiff applied, submitting extensive documentation of the school’s fraud, but his applications were denied without explanation.
- While the applications were pending, the defendants allegedly placed more than 45 collection calls to the plaintiff in a single month, contacted his employer multiple times, left voicemails for third parties, and sent collection letters to his deceased mother.
- The defendants also allegedly reported the loans to the credit reporting agencies without any dispute notation, despite the plaintiff’s repeated written disputes challenging the enforceability of the loans.
- The plaintiff sued in state court, seeking damages, a declaration that the loans are unenforceable, and a “public injunction” against unfair servicing practices. The defendants removed the case to federal court and moved to dismiss most of the claims.
The ruling: Judge Stanley Blumenfeld Jr. of the District Court for the Central District of California denied both motions, keeping the case in federal court while allowing every challenged claim to proceed.
- The judge rejected the argument that the case had to be remanded because federal courts may lack power to issue a California public injunction, ruling that nothing in the remand statute authorizes sending back individual claims or remedies. The plaintiff’s request for a partial remand “seeks to create a parallel state proceeding that does not otherwise exist,” the judge wrote.
- On the declaratory judgment claims, the judge ruled the plaintiff could invoke the Federal Trade Commission’s Holder Rule to seek a ruling that the loans are unenforceable, noting the defendants had not shown the plaintiff “must stop making payments and subject himself to a lawsuit” to get an answer on his obligation to pay.
- The allegations of more than 45 calls in a month and disclosure of the debt to the plaintiff’s employer were sufficient to state a Rosenthal Act claim at the pleading stage.
- The defendants’ concession that claims based on their own servicing conduct, as opposed to the school’s fraud, were not time-barred was “largely dispositive” of the Student Borrower Bill of Rights claims.
- The judge expressed doubts about part of the credit reporting claim on federal preemption grounds, but let it proceed because the defendants never addressed the theory that reporting the loans without disclosing the alleged fraud made the reports inaccurate or incomplete.
- The judge also noted the defendants’ argument that the requested injunction was overbroad “implicitly recognizes that some more tailored relief may be appropriate.”
