By Alex Wolf
Private student loan borrowers won a nationwide injunction barring Navient Corp. from trying to collect on certain loans that they believe should have been discharged in bankruptcy, but their quest for financial relief from the debt servicer is just heating up.
Courts have chipped away in recent years at the long-held notion that a debtor can’t wipe out any type of student loan debt in bankruptcy without a burdensome showing of “undue hardship.”
The plaintiffs, who sued Navient in a proposed class action in New York bankruptcy court, now want the class certified so they can seek further relief from privately issued student loans that exceeded college attendance costs. But getting any class certified is difficult in the first place, an ordeal that is exacerbated by certain precedents limiting a bankruptcy court’s jurisdictional authority.
Still, the case against the massive loan servicer is being closely monitored, as the outcome could dramatically affect tens of thousands of student loans.
“You’re talking about hundreds of millions of dollars still outstanding and hundreds of millions of dollars that have been paid back already,” said plaintiffs’ attorney Adam Shaw of Boies Schiller Flexner LLP.
The preliminary injunction, issued on Oct. 17 by Judge Elizabeth Stong of the US Bankruptcy Court for the Eastern District of New York, prevents Navient from trying to collect on so-called Tuition Answer loans from many former recipients across the country. Navient has appealed the injunction and is expected to challenge the case at every turn.
“Every step of this case will be appealed to the extent appeals will be allowed,” said John Rao, an attorney with the National Consumer Law Center.
If the plaintiffs, Hilal K. Homaidan and Reeham Youssef, are successful in getting their putative class certified, the borrowers will try to seek damages and claw back payments made on those beyond-college-expenses loans after they received a bankruptcy discharge, Shaw said.
Stong’s rulings so far are encouraging for the plaintiffs, but Navient believes a nationwide injunction is unlikely to withstand scrutiny on appeal.
Federal appeals courts in the past “have uniformly held that a bankruptcy court doesn’t have the authority to address the alleged violation of discharge injunctions issued outside of the district in which the bankruptcy court sits,” the company said in an October filing.
In a 2019 ruling in another case involving Navient, the US Court of Appeals for the Fifth Circuit said that some education loans can be summarily discharged in bankruptcy, but “a bankruptcy court does not have authority to enforce the discharge injunctions entered in other districts.”
Navient ultimately settled the underlying Fifth Circuit case by returning up to $2.5 million to a class of people who went through bankruptcy in Texas, Louisiana, or Mississippi—all within the circuit’s jurisdiction.
“The question is ‘can the court go beyond the main plaintiffs?’” Rao said. “The Fifth Circuit has already said ‘no’ to this.”
But Stong has been careful in Homaidan’s case, evidenced by her “very detailed” 111-page opinion granting the injunction, Rao said. The court also acknowledged plaintiffs’ evidence that Navient previously warned investors that certain loans might be subject to discharge.
“She’s really dealing with an amazing amount of jurisdictional bankruptcy questions on top of the student loan issues,” said Rao.
Discharging federal student loan debt in bankruptcy can be prohibitively difficult because it requires borrowers to litigate and show that repayment would be overly burdensome. For many years it was commonly believed that the same applied to private student loans.
But in the last five years, borrowers have had success convincing courts that certain private loans fall into the category of debt that can be more easily discharged.
The US Court of Appeals for the Second Circuit last year became the third federal appeals court to find that private education loans can potentially be discharged in a standard consumer bankruptcy case.
Homaidan and Youssef contend that the loans Navient continues to bill for were discharged in bankruptcy because those loans exceeded the cost of attendance at a Title IV college. Such loans don’t count as a “qualified education loan” exempt from discharge under the bankruptcy code, they argue.
Stong said the putative class has “shown a likelihood of irreparable injury in the absence of relief.”
But bankruptcy presents tricky legal questions with respect to broad class certification, said University of Utah law professor Jason Iuliano.
Getting a class certified in a bankruptcy court can be difficult because it may be hard to determine commonality of claims among debtors and address alleged violations of discharge orders from other courts.
“For an injunction to be applied nationwide, that’s pretty common,” Iuliano said. “But I wouldn’t read too many tea leaves that a nationwide class action is going to get off the ground.”
In an unsuccessful bid to freeze Stong’s decision, Navient said the court lacked authority to grant nationwide relief. The company also argues that the loans were taken out “to pay qualified education expenses.”
Navient declined to comment on the case, but noted that the loans at issue in the injunction make up a small portion of its portfolio.
However the Homaidan case proceeds, consumers and bankruptcy attorneys are increasingly coming to accept that some student loans can be discharged in bankruptcy even without proving that continued payment would be an undue hardship.
Until recently, “courts had not looked closely at the statute,” said Dalié Jiménez, a professor at University of California, Irvine School of Law. While Navient and others may have previously taken advantage of ambiguities in the law, “not all student loans are what’s included in the bankruptcy code,” she said.
Beyond efforts for broad class relief, more individuals are initiating bankruptcy court actions to challenge collection of private student loan debt that may have qualified for discharge, said Rao.
“There’s certainly a lot more questions of whether this is a loan that qualifies for that special treatment,” he said. “The big issue is how many of these loans are really out there.”
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