Education Corporation of America brazenly uses an Alabama court to delay lawsuits against it. Is this a great country or what?

Education Corporation of America (ECA), a for-profit college chain, brazenly filed a federal lawsuit in Alabama last month, asking Judge Abdul Kallon to put it into receivership and enjoin all litigation against it. ECA hopes to delay its creditors and other litigants while continuing to receive federal student-loan money.

What a cocky, shameless and impudent strategy!

Judge Kallon initially obliged ECA, ordering a halt to all litigation against ECA until October 29. Then, on October 29, the judge  extended the injunction until November 5. Parties opposing ECA's Alabama litigation must find lawyers to represent them in Alabama, which will be costly.

For example, Gleneagles Office, LLC, a Maryland corporation, filed a lawsuit in Maryland last month, seeking to collect almost $100,000 in back rent and late fees from Virginia College, which ECA owns. Judge Kallon's injunction, issued seven days after Gleneagles filed its lawsuit for back rent, halted that litigation.

Gleneagles hired an Alabama law firm to oppose ECA's attempt to enjoin lawsuits against it. Gleneagles pointed out that ECA guaranteed the Virginia College lease and agreed that any dispute about the lease would be litigated in Maryland. Gleneagles also argued that Judge Kallon does not have jurisdiction over it.

A Texas company also joined the Alabama lawsuit to oppose ECA's request for an injunction. The Texas company is landlord to a Brightwood College campus in Arlington, Texas. Brightwood is another college owned by ECA.

Perhaps ECA's various landlords and creditors have the financial resources to fight ECA in Alabama, but ECA's former students do not. ECA's list of litigation against it (or its subsidiary affiliates) include several suits by former students. ECA managed to force many of these suits into arbitration, probably because ECA required students to sign arbitration agreements as a condition of enrollment.

So what's going on?

ECA is in financial trouble. Enrollments have dropped, and it is in danger of losing its accreditation. Meanwhile it has been sued by landlords, former students, and former employees on a variety of grounds.  ECA managed--temporarily at least--to halt all the litigation against it based on the signature of one Alabama federal judge, who may not have jurisdiction over any of this litigation. Some creditors have joined the Alabama lawsuit to stop this charade, but most of ECA's former students and employees don't have the financial wherewithal to do that.

Essentially, ECA's Alabama lawsuit has given ECA  all the benefits of bankruptcy without the downside of losing federal student loan money.  And when it becomes advantageous to do so, ECA can stroll into bankruptcy court any time it likes.

Isn't it ironic that ECA can use the courts to its advantage while its students are barred from suing it based on arbitration agreements ECA or its subsidiaries required them to sign as a condition of enrollment?

And isn't ironic that ECA can file for bankruptcy whenever it chooses (which it will probably do eventually), while ECA's students face enormous obstacles to discharging their student loans in bankruptcy?

Is this a great country or what?

References

Joinder of  Pioneer Industrial LLC and Pioneer Parking Lot, LLC to National Retail Properties LP's Memorandum in Opposition to Emergency Motion for The Appointment of a Receiver and Entry of a Temporary Restraining Order and Injunctive Relief, filed October 29 2018 in Education Corporation of America v. U.S. Department of Education, Case No. 2:18-CV-01698-AKK.

Non-party Gleneagles Office, LCC's Opposition to Plaintiff's Motion for Preliminary Injunction, filed October 29, 2018 in Education Corporation of America v. U.S. Department of Education, Case No. 2:18-CV-01698-AKK.

Order Extending Temporary Injunctive Relief, signed on Octobe 29, 2018 in Education Corporation of America, et al. v. United States Department of Education, 2:18-CV-01698-AKK.

Arbitration clauses in student-loan documents:the sad case of Sierra Roach v. Navient Solutions, Inc.

In 2015, Sierra Roach sued Navient Solutions, Inc. for violations of the Telephone Consumer Protection Act and the Fair Credit Reporting Act.  Navient had been pursuing Roach to collect on five student loans totaling almost $69,000--money that had been disbursed to Bowie State University, not Roach.

Roach disputed the debt and claimed she was being repeatedly called by debt collectors. She also claimed that credit reporting bureaus were  issuing inaccurate credit reports about her.

Navient filed a motion asking a federal court to stay Roach's suit and compel her to arbitrate pursuant to an arbitration clause that was buried in the promissory notes she allegedly signed. (Roach claimed not to remember signing the notes.)

Roach's defense to Navient's arbitration demand was that she had signed the promissory note with another entity, not Navient.  But Navient presented evidence showing it had power to collect the debt, and a federal court granted Navient's arbitration demand in an order issued last December.

Roach had some other claims against Navient, but she apparently submitted them late and inartfully. After all, she had sued Navient without an attorney and was unfamiliar with the niceties of practicing law.

Some judges deal leniently with people who go to court without lawyers, but not Roach's judge. She had filed a "surreply memorandum," which the judge refused to consider, saying "sureplies are highly disfavored."

Although it is not entirely clear, she also apparently argued that the arbitration clause buried in the promissory notes had not come to her attention and that she did not realize that she had waived her right to sue when she signed the promissory notes.

The judge did not like this argument at all. In a footnote, he cited language from another decision that said: "[T]he fact that [plaintiff] may have chosen not not to access or read the  language of the Arbitration Agreement does not render it invalid or non-binding."

In short, the judge forced Roach to arbitrate her claims against  Navient.

Scholars and commentators largely agree that arbitration generally favors corporate parties. That's why banks, financial institutions, and student-loan lenders force people to sign arbitration clauses in routine documents. Like Ms. Roach, most people do not understand that they are signing away their right to sue for wrongdoing when they agree to arbitrate.

Two comments on the Roach case:

1) Many student-loan debtors are losing in the courts because they are not represented by competent lawyers. Roach's best argument for invalidating the arbitration clause was that it is an "adhesion contract" that she was forced to sign as a condition for getting federal loan money. Courts have ruled for fifty years or more that agreements waiving the right to sue can be nullified if the party signing the waiver is the weaker party with no opportunity to negotiate and no choice but to sign in order to receive a service. But Ms.Roach probably knew nothing about adhesion contracts.

Distressed student-loan debtors ought to have access to pro bono (free) legal services. There are literally hundreds of thousands of unemployed lawyers right now--and most of them have massive student-loan debt themselves. Their talents should be harnessed to help people like Ms. Roach.

2) The fact that student-loan lenders and for-profit colleges are allowed to put arbitration clauses in student-loan documents and college-enrollment forms is a scandal. Secretary of Education John B. King announced recently that he opposes this practice and will draft regulations that will put some limits on it.

But the regulation revision will go through a negotiations process, and any regulations DOE adopts are likely to be watered down. After all, the finance industry and the for-profit colleges have powerful lobbyists and sharp lawyers, and they make campaign contributions to powerful politicians.

For now at least, millions of people are jeopardizing their financial futures when they borrow money to attend college. Even if they are defrauded or get substandard educational experiences, they are barred from filing suit. And if they file for bankruptcy to get a fresh start, the creditors' attorneys are waiting for them to make sure these distressed debtors get booted out of bankruptcy court.

References

Roach v. Navient Solutions, Inc., 2015 WL 8479195 (D. Maryland, Dec. 10, 2015).

U.S. Department of Education. U.S. Department of Education Takes Further Steps to Protect Students from Predatory Higher Education Institutions. March 11, 2016. Accessible at http://www.ed.gov/news/press-releases/us-department-education-takes-further-steps-protect-students-predatory-higher-education-institutions?utm_content=&utm_medium=email&utm_name=&utm_source=govdelivery&utm_term=

Yet another injustice: For-profit colleges force ripped-off students to arbitrate their claims rather than seek relief in the courts

The federal student loan program is a metaphorical train wreck--the wreck of a passenger train crowded with hapless commuters. The injured are strewn all over the landscape waiting to be treated.

The federal student loan program is a metaphorical train wreck.

If President Obama were a compassionate man, he would introduce legislation to assist the people who have been hurt by their participation in the federal student loan program. But he's not doing that. To extend the train-wreck metaphor further, Obama wants to close his eyes to the carnage on the railroad tracks and focus all his attention on designing a safer railroad car.

The President has done nothing to ease the plight of millions of young people who are burdened by student-loan debt and can't find decent jobs. Instead, he is pushing a college rating system that supposedly will help students make better choices about where to attend college. And he also wants more students to sign up for long-term student-loan repayment plans.

 

Of course, everyone knows that the most egregious student-loan abuses involve the for-profit colleges, which have been accused of high-pressure recruiting tactics and misrepresentations about students' job prospects. From time to time former students have sued for-profit colleges under state consumer protection laws, seeking damages based on claims that they'd been ripped off.

 

But the for-profits have figured out a clever way to stop lawsuits against them. Many of them force students to sign arbitration agreements when they enroll. Under these agreements, students waive their right to sue the college, even if they later believe they were induced to enroll based on misrepresentations. Instead, students are forced to submit their claims to arbitration, which most often benefits the college, not the student. More on this later.

Ferguson v. Corinthian Colleges: Students at for-profit colleges are denied right to a jury trial

Here's a recent example. In Ferguson v. Corinthian Colleges, Inc., decided last August by the Ninth Circuit Court of Appeals, Kevin Ferguson and Sandra Muniz, former students at schools operated by Corinthian Colleges, Inc., sought to bring a class action law suit against Corinthian based on alleged misrepresentations. These were their claims, as outlined by the court:

The thrust of [the former students'] complaint was that Corinthian systematically misled prospective students in order to entice enrollment. Corinth allegedly misrepresented the quality of its education, its accreditation, the career prospects for its graduates, and the actual cost of education at one of its schools. Students were also allegedly misinformed about financial aid, which resulted in student loans that many could not repay. Corinthian also allegedly targeted veterans and military personnel specifically, so that it could receive funding through federal financial aid programs available to those people.

Unfortunately for Ferguson and Muniz, both had signed arbitration agreements with Corinthian or one of its subsidiaries as part of the admission process. Under these agreements, they waived the right to sue Corinthian and agreed to arbitrate any claims under the Federal Arbitration Act (FAA).

When Ferguson and Muniz sued in federal court, Corinthian moved to dismiss their case on the grounds that they were compelled to arbitrate. A federal judge granted Corinthian's motion in part but allowed the former students to seek an injunction against Corinthian in federal court.

On appeal, the Ninth Circuit reversed, ruling that all claims against Corinthian must be arbitrated, including any request for injunctive relief. The Federal Arbitration Act "reflects an 'emphatic federal policy' in favor of arbitration," the court said. Under the Supremacy Clause of the United States Constitution, "the FAA preempts contrary state law" and prevents the states from allowing a party to go to court to resolve claims that the party had previously agreed to submit to arbitration.

Why is Ferguson v. Corinthian Colleges, Inc. a bad decision for students?

Why do the for-profits require students to sign arbitration agreements as a condition of enrolling? Forcing dissatisfied students to arbitrate their claims is advantageous to the corporate universities because students must pay a part of the arbitrator's cost, something many students can't afford to do. In addition, the for-profits prefer to go before an arbitrator rather than a jury, which might be quite sympathetic to a student's claim that he or she was induced to enroll in a for-profit college based on false promises and misrepresentations.

 

Moreover, arbitrators generally do not award punitive damages, their power to grant injunctive relief is limited if not non-existent, and an arbitrator's decision is usually private and not subject to public inspection. No wonder the for-profits require their students to sign agreements promising to arbitrate their complaints and not file lawsuits.

Congress should pass a law barring for-profit colleges from forcing students to sign arbitration agreements

Under the Federal Arbitration Act, as interpreted by the U.S. Supreme Court, states do not have the authority to allow ripped-off students to sue for-profit colleges under state consumer-protection laws if those students signed arbitration agreements, which many of them are forced to do as a condition of enrolling in a for-profit college. This is wrong.

 

President Obama should introduce legislation that prohibits for-profit colleges from forcing students to sign arbitration agreements and specifically permits students to sue for-profit colleges for fraud or misrepresentation under appropriate state consumer-protection laws. The legislation should give students the right to a jury trial, and prevailing students should receive attorney fees and punitive damages when appropriate.

 

Of course, President Obama will never introduce such legislation, and Congress would never pass it if he did. The for-profits are too politically powerful for such a law ever to be adopted.
 

Rather than tackle the abuses in the for-profit college industry, President Obama prefers to introduce a complicated and toothless rating system for colleges--a rating system that will do nothing to reduce the harm so many students suffer when they borrow money to attend a for-profit college or university.

References
 

Ferguson v. Corinthian Colleges, Inc., 733 F.3d 928 (9th Cir. 2013).