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2nd Cir. Rejects Standing, Conflict of Interest, Service Award, and Other Objections to Class Settlement Against Student Loan Servicer

student loan debtThe U.S. Court of Appeals for the Second Circuit recently affirmed a trial court’s certification and approval of a class settlement involving claims by student loan borrowers against their loan servicer.

In so ruling, the Second Circuit rejected several arguments brought by the objectors who filed this appeal, including:

  • Challenges to standing for named plaintiffs and settlement class members who no longer have their loans serviced by the defendant
  • Challenges to the fairness of the class settlement
  • A First Amendment challenge relating to the cy pres award included in the settlement
  • A conflict of interest argument because a labor union was paying the plaintiffs’ counsel’s bills
  • Challenges to the $15,000 service awards granted to the named plaintiffs

A copy of opinion in Hyland v. Navient Corporation is available at:  Link to Opinion.

This appeal arose from the settlement of a putative class action lawsuit brought by individuals with active student loans (“borrowers” or “plaintiffs”) against their student loan servicing company. A group of public servants with active student loans serviced by the company contacted the company for assistance repaying their student loans. Unsatisfied with the response from the company, the plaintiffs alleged that the company had not “liv[ed] up to its obligation to help vulnerable borrowers get on the best possible repayment plan and qualify for [Public Service Loan Forgiveness] PSLF.”

The company moved to dismiss. The trial court granted the motion, dismissing all the plaintiffs’ claims except for a claim brought under New York’s General Business Law Section 349 which prohibits “deceptive acts or practices in the conduct of any business … or in the furnishing of any service” in the state.

The parties subsequently reached a class settlement resolution that, among other things, required the parties to seek certification of a mandatory nationwide settlement class in which the settlement class members agreed to release all claims in exchange for non-monetary relief. The settlement class members retained the right to file individual lawsuits for monetary relief on a non-class basis including “Aggregate Actions of five or more individuals.”

In exchange, the company agreed to implement the following reforms:

  • enhancing internal resources for call-center representatives by, among other things, “updating job aids to clarify that customer service representatives should discuss loan forgiveness including PSLF with borrowers prior to offering forbearance”;
  • updating written communications with borrowers by “creating forms that can be sent via email to borrowers who request additional information about PSLF”;
  • improving its website and chat communications with borrowers by “requiring customer service representatives to look for keywords or phrases that indicate borrowers’ possible eligibility for forgiveness programs”; and
  • training customer service representatives to follow the new practices, and regularly monitoring their calls to ensure compliance.

The company also agreed to contribute $2.25 million in cy pres relief to establish a non-profit that would “provide education and student loan counseling to borrowers employed in public service,” as well as $15,000 in service awards for the named plaintiffs.

The trial court found certification of the settlement class was proper and approved the settlement. At the settlement hearing, two members of the settlement class objected to the settlement on various grounds. The trial court overruled the objections and found the settlement to be “fair, adequate and reasonable.”

The two individuals who objected to the class settlement appealed, raising numerous issues.

First, the appellant’s objected to the fairness of the settlement under Fed. R. Civ. Pro. 23(e). To evaluate the fairness reasonableness of the settlement, the Second Circuit reviewed the nine factors set out in its prior ruling in City of Detroit v. Grinnell Corp., 495 F.2d 448 (2d Cir. 1974). The nine factors are:

“(1) the complexity, expense and likely duration of the litigation; (2) the reaction of the class to the settlement; (3) the stage of the proceedings and the amount of discovery completed; (4) the risks of establishing liability; (5) the risks of establishing damages; (6) the risks of maintaining the class action through the trial; (7) the ability of the defendants to withstand a greater judgment; (8) the range of reasonableness of the settlement fund in light of the best possible recovery; (9) the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation.”

On appeal the Second Circuit gives the “trial judge’s views” of these factors “great weight.” Grinnell, 495 F.2d at 454. The Second Circuit particularly noted the trial court’s “careful” analysis of the nine factors, specifically factors seven, eight, and nine. The Second Circuit held that although the company could have withstood a greater judgment, the settlement was within the range of reasonableness because there was a risk that there would have been no recovery at all if the case proceeded.

As a result, the Second Circuit found the trial court did not abuse its discretion in its application of the nine Grinnell factors in approving the settlement.

Appellants separately challenged a $2.5 million cy pres award included in the settlement terms. Appellants argued that the award to the non-profit entity was improper because it did not provide a “direct benefit” to the settlement class members.

The Second Circuit disagreed citing In re Google Inc. Street View Elec. Commc’ns Litig., 21 14 F.4th 1102, 1116 (9th Cir. 2021), under which ruling cy pres awards with a “direct and substantial nexus” to the interests of the class may be approved. The Second Circuit agreed with the trial court that the cy pres award contained a direct and substantial nexus to the interest of the class and should be approved. 

The appellants also brought a First Amendment challenge on the basis that the cy pres award was a state action that unlawfully compelled speech that violated the First Amendment. The Court of Appeals also denied this constitutional challenge and ruled the cy pres award was not a state action that implicated the First Amendment. Instead, the Court of Appeals held, the trial court merely reviewed the settlement agreement in order to determine whether it was fair, reasonable, and adequate under Fed. R. Civ. Pro 23(e). Additionally, the Second Circuit noted that the settlement agreement could be enforced by the parties without implicating the First Amendment.

Another issue raised by the appellants on appeal was the issue of standing. Some members of the class were no longer using the company to service their student loans. Therefore, the appellants argued that the class did not have standing, and the trial court could not certify the settlement class or approve the settlement.

The Second Circuit rejected this argument because at least six of the named plaintiffs continued to have a loan servicing relationship with the company and the plaintiffs’ complaint plausibly alleged that all named plaintiffs could suffer continued harm by relying on the company for information regarding the repayment of their loans. Based on Second Circuit precedent, the Court held that “[i]n a class action, once standing is established for a named plaintiff, standing is established for the entire class.” Amador v. Andrews, 655 F.3d 89, 99 (2d Cir. 2011). Therefore, the Appellate Court rejected the standing challenge.

The appellants also raised the issue that there was an improper conflict of interest between plaintiffs’ counsel and the American Federation of Teachers Union (AFT), which was paying the legal fees of the plaintiffs’ counsel. Appellants argued that this was a conflict of interest because AFT’s interest was not aligned with the members of the class. The Second Circuit disagreed, noting that AFT’s motive was “nothing but admirable” and due to AFT’s efforts the class achieved a significant benefit. 

Lastly, the appellants raised the issue that the $15,000 service awards granted to the named plaintiffs were prohibited. In support of this argument, appellants cited two Supreme Court of the United States rulings from the nineteenth century that prohibited service awards to named plaintiffs. Once again, the Court of Appeals disagreed with the appellants’ argument by concluding that the applicable case law does not per se prohibit service fee awards to named plaintiffs. See Melito v. Am. Eagle Outfitters, Inc., (S.D.N.Y. Sep. 8, 2017).

After a review of all the issues raised on appeal, the Second Circuit affirmed the judgment of the trial court.

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Jake VanAusdall is Senior Counsel in the Nashville office of Maurice Wutscher LLP. He practices in the firm’s Consumer Credit Litigation and Commercial Litigation groups predominantly representing financial institutions. Jake also has substantial litigation experience representing clients involved in intellectual property, construction, contract, and business disputes. Jake has been recognized as a “Mid-South Super Lawyers – Rising Star” in the area of Business Litigation (2018-2022), and is a former member of the Tennessee John Marshall American Inn of Court. For more information, see https://mauricewutscher.com/attorneys/jacob-vanausdall/

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