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Ninth Circuit:
Colleges Lack Standing to Block Student Loan Settlement
Majority Says Three for-Profit Schools Lack Authority to Object to Final Resolution of Class Action Which Identifies Them by Name as Being Associated With Misconduct, Drawing Dissent by Collins
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals held yesterday, in a 2-1 decision, that three for-profit colleges lack standing to challenge the final approval of a class action settlement between the Department of Education and a class of more than 500,000 student-loan borrowers who objected to the agency’s backlog in processing applications under a law providing for the discharge of federal debts if a pupil’s school engaged in wrongdoing.
Two judges concluded that although the educational institutions adequately alleged reputational injury concrete enough to support Article III standing, they could not show the legal prejudice required to sustain “prudential standing” to challenge the proposed settlement.
Everglades College Inc., American National University, and Lincoln Educational Services Corp. object to the proposed resolution which grants automatic federal student loan debt forgiveness to borrowers who attended one of their colleges or any of the other 148 institutions listed in Exhibit C of the settlement. The joint motion for preliminary approval of the settlement says that the department has determined that attendance at one of those schools “justifies presumptive relief, for purposes of this settlement, based on strong indicia regarding substantial misconduct by [the] listed schools, whether credibly alleged or in some instances proven, and the high rate of class members with applications related to the listed schools.”
Intervention Sought
Citing reputational harm, the schools sought to intervene in the class action, filed in June 2019 by seven student loan recipients which asserts that the department’s failure to timely adjudicate so-called borrower defense applications (“BD applications”) violated federal law.
BD applications were submitted under the Student Loan Reform Act of 1993 (“SLRA”), codified at 20 U.S.C. §1070 et seq., which authorizes the department to discharge federal educational loan debts based on wrongful acts or omissions by a school.
During the first 20 years after the program was created, BD applications were few. That changed in May 2015 when Corinthian Colleges Inc.—one of the nation’s largest for-profit college chains—filed for bankruptcy.
Allegations of illegal recruiting tactics, shoddy educational programs, and false promises to students led to a string of investigations against Corinthian—including a lawsuit against the school in 2013 by then-California Attorney General Kamala Harris—and the school eventually collapsed.
Following the fall of Corinthian, the department was flooded with BD applications by students from a variety of schools, and a backlog of 210,000 unprocessed applications had amassed by the time the plaintiffs filed suit.
Motion to Intervene
Three weeks after the parties moved for preliminary approval of the settlement, the schools moved to intervene. Senior District Court Judge William Alsup of the Northern District of California denied their motions to intervene as a matter of right but allowed them to permissively intervene for the purpose of objecting to the class action at the final approval fairness hearing.
After the schools were heard, Alsup rejected their objections and granted final approval of the settlement.
Circuit Judge Jennifer Sung authored yesterday’s opinion dismissing the appeal for lack of standing and affirming the denial of intervention as a matter of right. Circuit Judge Danielle J. Forrest joined in the opinion,
Dissenting, Circuit Judge Daniel P. Collins disagreed that the schools lack prudential standing and argued that Alsup erred in approving the settlement due to two legal defects in the agreement.
Standing Principles
Sung noted that standing analysis involves consideration of the restrictions to federal-court authority found in Article III of the U.S. Constitution as well as additional “prudential limitations” recognized by governing jurisprudence. She explained, quoting from the 1987 Ninth Circuit opinion in Waller v. Financial Corporation of America:
“One of these additional limits prevents an entity who is not a party to a settlement from objecting to court approval of the settlement, either before the district court or on appeal….There is only one exception to this general rule: A non-settling entity may challenge a settlement when it ‘demonstrate[s] that it will sustain some formal legal prejudice as a result of the settlement.’ ”
Turning to the settlement and the department’s accompanying statement, she wrote:
“We agree with the Schools that the Department’s statement could cause reputational injury that supports Article III standing, even if the statement is not false, misleading, or defamatory….[A]n individual who reads the Department’s statement about Exhibit C might come away with the impression that schools listed in Exhibit C have engaged in unlawful conduct. Consequently, the Schools’ alleged reputational harm is concrete enough to support Article III standing.”
Formal Legal Prejudice
Addressing the schools’ argument that the settlement will cause them formal legal prejudice, Sung remarked:
“The Schools do not identify any provision in the settlement agreement or settlement approval order that formally strips them of any legal claim or defense, or any contractual right. The settlement does not compromise any of the Schools’ rights or impose any obligations or liabilities on them. For class members’ BD applications associated with Exhibit C schools, the settlement only requires the Department to fully discharge the amount that those borrowers owe the federal government. The settlement does not entitle the Department to recoup any funds from the schools.”
Under these circumstances, she concluded that “[a]lthough the alleged reputational harm to the Schools is concrete enough to support Article III standing, it does ‘not rise to the level of plain legal prejudice’ ” and “[b]ecause the Schools do not have prudential standing to object to the settlement, ‘we cannot review the settlement approved by the district court.’ ” Turning to the order denying the schools intervention as a matter of right, she declared that “even if we agreed that the district court erred by denying the Schools intervention as of right, we would decline to reverse because any error was harmless” in light of the fact that Alsup allowed them to intervene permissively and “carefully considered their objections.”
Collins’ View
Collins wrote:
“I disagree with the majority’s…conclusion that the Schools lack so-called ‘prudential standing’ to challenge the settlement. And although the majority thus does not directly address the merits of the Schools’ objections, I would do so and would reverse the district court’s approval of the settlement.”
He explained:
“In holding that the Schools lack prudential standing to object to the settlement, the majority relies on Waller…which held that ‘a non-settling defendant, in general, lacks standing to object to a partial settlement,’ unless ‘it can demonstrate that it will sustain some formal legal prejudice as a result of the settlement.’….Because Waller is not a special rule about appellate standing, but is instead a rule that governs the ability to make objections to a settlement both in the district court and on appeal,…the majority’s Waller-based ruling necessarily rests on the premise that the district court should not have allowed the Schools to be heard in objection to the settlement and should not have addressed those objections on the merits.”
Continuing, he opined:
“In effect, then, the majority holds that the district court erred when it granted permissive intervention to the Schools ‘for the sole and express purpose of objecting to and opposing the class action settlement.’ In my view, the district court did not abuse its discretion in allowing the Schools to permissively intervene….And because the district court thus properly reached the merits of the intervenor Schools’ objections, the Schools have a right to appeal that adverse ruling, and we must resolve those merits.”
Turning to the objections, the judge agreed with the schools that “the Government lacks the necessary statutory authority to grant the relief contained in the settlement,” saying that “the settlement here presumably eschewed reliance on the borrower-defense provisions…because invoking them would have implicated the procedural and substantive rights of the Schools in a way that would likely have allowed them to establish formal legal prejudice and a basis for intervention as of right.”
Adding that “the settlement unlawfully grants individualized monetary relief in a class action that was certified only as an injunctive-relief class,” he argued:
“Because these key features of the settlement were invalid, the district court erred in approving the settlement. I would therefore vacate the approval of the settlement and remand for further proceedings.”
The case is Sweet v. Everglades College Inc., 23-15049.
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