United States v. Great Lakes Educ. Loan Servs.

UNITED STATES OF AMERICA ex rel. SHAUNA HLYWIAK, Plaintiff, v. GREAT LAKES EDUCATIONAL LOAN SERVICES, INC., et al., Defendants.

No. 1:20-cv-13590

United States District Court, D. New Jersey

March 15, 2022

APPEARANCES:

Noah Axler

Anderson Kill, P.C.

David M. Cedar

Williams Cedar, LLC

Gerald J. Williams

Williams Cedar, LLC

On behalf of Plaintiff/Relator Shauna Hlywiak.

Jonathan Spells Krause

Corinne Samler Brennan

Klehr Harrison Harvey Branzburg, LLP

On behalf of Defendants Great Lakes Educational Loan Services, Inc., Nelnet Diversified Solutions, LLC, Nelnet Servicing, LLC; and Nelnet, Inc.

David G. Murphy

Diane A. Bettino

Reed Smith LLP

On behalf of Defendants Navient Corporation and Navient Solutions LLC.

Stephen M. Orlofsky

Nicholas C. Harbist

Blank Rome LLP

Blair A. Gerold

Blank Rome LLP

On behalf of Defendant Pennsylvania Higher Education Assistance Agency a/k/a PHEAA d/b/a FedLoan Servicing.

David Edward Dauenheimer

U.S. Department of Justice

Office of the U.S. Attorney

On behalf of Interested Party United States.

OPINION

CHRISTINE P. O'HEARN, UNITED STATES DISTRICT JUDGE

INTRODUCTION

Plaintiff/Relator Shauna Hlywiak (“Relator”) brings this qui tam action against Defendants Great Lakes Educational Loan Services, Inc. (“Great Lakes”), Nelnet Diversified Solutions, LLC, Nelnet Servicing, LLC, and Nelnet, Inc. (collectively, “Nelnet”), Navient Corporation and Navient Solutions LLC (collectively “Navient”), and Pennsylvania Higher Education Assistance Agency a/k/a PHEAA d/b/a FedLoan Servicing (“PHEAA, ” and together with Great Lakes, Nelnet, and Navient, the “Defendants”), ^[1] alleging violations of the False Claims Act, 31 U.S.C. § 3729 et seq. (“FCA”). (Am. Compl., ECF No. 5, ¶ 1). In her Amended Complaint (ECF No. 5), Relator alleges that Defendants, which service federal student loans, are liable under the FCA for violating federal and state laws in breach of their servicing contracts (“Servicing Contracts”) with the U.S. Department of Education (“DOE”) by failing to apply student loan borrowers' payments to those borrowers' loans with the highest interest rate since the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)^[2] was passed in March 2020. (Am. Compl., ECF No. 5, ¶¶ 5-9). Now, this matter comes before the Court upon PHEAA's Motion to Dismiss the Amended Complaint, (ECF No. 71), which Navient, Great Lakes, and Nelnet join (ECF No. 72; ECF No. 73). For the reasons that follow, the Court GRANTS Defendants' Joint Motion to Dismiss (ECF No. 71; ECF No. 72; ECF No. 73) and DISMISSES the Amended Complaint (ECF No. 5).

I. BACKGROUND

A. Procedural History

Relator instituted this qui tam action on September 30, 2020. (ECF No. 1). After an investigation into Relator's claims, the United States filed a Notice of Election to Decline Intervention on January 5, 2021. (ECF No. 3). Relator filed an Amended Complaint against the Defendants on January 7, 2021. (ECF No. 5).^[3]

In their Joint Motion to Dismiss, Defendants argue that the Amended Complaint must be dismissed under Federal Rule of Civil Procedure 12(b)(6) because Relator fails to state a claim under the FCA as she fails to plausibly allege (i) that Defendants submitted false claims; (ii) that any alleged misrepresentations-which there were none-were material to DOE's decision to pay Defendants; (iii) that Defendants acted with the requisite scienter under the FCA; and (iv) that Defendants acted with the requisite particularity required by Rule 9(b). (ECF No. 71 at 1-4).

Having considered the parties' arguments, the Court agrees with Defendants that Relator fails to state a claim and concludes that the Amended Complaint must be dismissed.

B. Factual Background^[4]

1. Administration of the Federal Student Loan Program

Under the Higher Education Act (“HEA”), DOE has the authority to issue a variety of federal loans and grants to student borrowers. See 20 U.S.C. §§ 1071-1099c. In the 1990s, the federal government began originating loans under the William D. Ford Direct Loan Program, see 20 U.S.C. §§ 1087a-1087j, and in 2008, began purchasing student loans from non-federal entities through the Federal Family Education Loan Program, (ECF No. 5, ¶ 29). The Federal Student Aid (“FSA”) office, a part of DOE, is responsible for managing these federal loan programs authorized under the HEA. (ECF No. 5, ¶ 29).

Congress directed DOE to enter into contracts for the “servicing” of these federal loans and “such other aspects of the direct student loan program as the Secretary determines are necessary.” 20 U.S.C. § 1087f. In 2009, DOE awarded each Defendant a Servicing Contract with a five-year term, each of which has been extended numerous times. (ECF No. 5, ¶¶ 30, 32, 36). The Servicing Contracts require each Defendant to “‘be responsible for maintaining a full understanding of all federal and state laws and regulations and FSA requirements and ensuring that all aspects of the service continue to remain in compliance as changes occur.'” (ECF No. 5, ¶¶ 33, 44, 56).^[5] DOE pays each Defendant a dynamic monthly servicing fee calculated based on a number of factors including the number of borrower accounts serviced by each Defendant and the repayment status of each borrower account. (ECF No. 5, ¶¶ 48-51; Ex. A, § B.13). The Servicing Contracts guarantee a minimum annual revenue for each Defendant “provided that [they are] in compliance with the requirements for servicing federally held debt.” (ECF No. 5, ¶ 31; Ex. A, § B.13). The Servicing Contracts also state:

Borrowers whose loans are not being serviced in compliance with the Requirements, Policy and Procedures for servicing federally held debt due to the fault of the servicer[s] (i.e. correct interest calculations, correct balances, interest determination and calculations, notices sent properly, proper due diligence, etc.), will not be billable to the Government from the initial point of non-compliance. Any funds that have been invoiced for these borrowers and paid shall be returned to the Government via a credit on the next invoice.

(ECF No. 5, ¶ 46; Ex. A, § B.13).

Relator alleges that Defendants were not servicing loans in compliance with the Servicing Contracts because they violated federal and state law after the CARES Act was passed in March 2020.

2. The CARES Act Places Federal Student Loans in Administrative Forbearance

In March 2020, in response to the COVID-19 pandemic, Congress passed the CARES Act, which granted temporary relief to federal student loan borrowers by placing their loans in administrative forbearance^[6] until September 30, 2020, meaning that all payments due for certain student loans held by DOE were suspended, interest on these loans would not accrue after March 13, 2020, and the interest rates on the loans were temporarily reduced to 0% (the “CARES Act Forbearance Period”). Before the CARES Act Forbearance Period expired on September 30, 2020, former President Trump directed the Secretary of Education (“Secretary”) to extend the administrative forbearance until December 31, 2020, by Presidential Memorandum.^[7] Since that first extension, the CARES Act Forbearance Period has been extended several times-most recently until May 1, 2022.^[8]

Because federal student loan borrowers are not required to make loan payments during the CARES Act Forbearance Period, these payments are considered “prepayments” under federal regulation, and are to be applied to repay a borrowers' federal student loans in the following manner: “first to any accrued charges and collection costs, then to any outstanding interest, and then to outstanding principal.” 34 C.F.R. §§ 685.211(a)(1)-(2) (2014). Although this provision is clear about how a prepayment should be allocated on amounts due under a single federal loan, the regulation does not specify how a single prepayment should be allocated across student loans when a borrower has more than one loan.

3. Relator's Prepayments and Allegations against Defendants

Relator Shauna Hlywiak, whose federal student loans are serviced by Great Lakes, made prepayments between March and August 2020 during the CARES Act Forbearance Period, (ECF No. 5, ¶¶ 112-22). Relator alleges that Great Lakes wrongfully applied her prepayments proportionally across her various loans, instead of allocating her prepayments to the loans with the highest interest rate. (ECF No. 5, ¶¶ 123-26). Relator argues that this proportional allocation method violates federal and state law because Great Lakes was required to allocate each prepayment to her loans with the highest interest rate, and that Great Lakes' website stated that it would apply prepayments to a borrower's highest interest rate loans. (ECF No. 5, ¶¶ 123-26).

An example of Defendants' proportional allocation method is instructive. Relator made a $1, 300 prepayment toward her federal student loans during the CARES Act Forbearance Period on May 15, 2020. (ECF No. 5, ¶ 115). At the time of her prepayment, she had no outstanding interest that had accrued prior to March 13, 2020, and her $1, 300 prepayment was allocated proportionally among the principals of her federal student loans as follows:

Loan Number

Applied to Principal

Applied to Interest

Unpaid Principal

Interest Rate Prior to the COVID Forbearance Period

519

$0.00

$0.00

$3, 247.42

5.600%

520

$36.40

$0.00

$2, 406.49

6.800%

521

$0.00

$0.00

$4, 175.21

4.500%

522

$69.94

$0.00

$4, 601.54

6.800%

523

$34.97

$0.00

$2, 300.72

6.800%

524

$0.00

$0.00

$5, 103.01

3.400%

525

$32.37

$0.00

$2, 135.00

6.800%

526

$0.00

$0.00

$5, 190.38

3.400%

527

$5.33

$0.00

$348.33

6.800%

528

$172.64

$0.00

$11, 369.12

5.410%

529

$233.60

$0.00

$14, 723.05

6.210%

530

...