Ubaldi v. SLM Corporation

Filing 187

ORDER by Judge Elizabeth D Laporte denying 157 Motion to Certify Class (knm, COURT STAFF) (Filed on 3/24/2014)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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TINA M. UBALDI and CHANEE THURSTON,
Plaintiffs,

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United States District Court
For the Northern District of California

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No. 11-01320 EDL

v.

ORDER DENYING MOTION FOR
CLASS CERTIFICATION

SLM CORPORATION, SALLIE MAE, INC.,
and SLM PC STUDENT LOAN TRUST 2004A,
Defendants.
/

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This is a putative class action asserting that Defendants Sallie Mae, Inc., SLM Corporation,
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and SLM PC Student Loan Trust 2004-A (collectively “Sallie Mae” or “Defendants”) included
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unenforceable choice of law provisions in student loan promissory notes and imposed improper late
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charges and usurious interest. Plaintiffs move to certify a Choice of Law class, a Late Charge
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subclass, and a Usury subclass. The Court denies Plaintiffs’ motion. The proposed class definitions
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are circular and render the classes unascertainable. Further, the Court cannot certify the Choice of
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Law class under 23(b)(3) on the current record, and Plaintiffs have not established that a 23(b)(2)
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class is appropriate. Plaintiffs have also not established that common issues predominate with
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respect to the Late Charge and Usury subclasses as proposed because the Sallie Mae-bank
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agreements that form the basis of Plaintiffs’ de facto lender theory are insufficiently similar.
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Plaintiffs have failed to establish typicality as to the Usury subclass or that a Rule 23(b)(3) class
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action is appropriate as to that subclass. The denial of Plaintiffs’ motion is without prejudice, as
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Plaintiff may be able to propose ascertainable classes of narrower scope that are certifiable.
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I.

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Background
A.

Factual Background
1.

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Plaintiffs’ Loans and Payments

Plaintiff Chanee Thurston, a California citizen and resident, took out Private Education Loans

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known as CEC Signature Loans on October 10, 2001, and October 16, 2002, in the amounts of

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$10,600 and $6,240, respectively, to help pay for her education at Brooks College in Long Beach,

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California. (Third Amended Complaint (“TAC”) ¶¶ 21, 94, Exs. 12, 14.) She also took out two

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additional loans that were disbursed in April and May 2004, which are referred to as loans four and

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five. (1/30/14 Genego Decl. ¶¶ 4, 5, Ex. LL.) Plaintiff Tina Ubaldi is also a California citizen and

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United States District Court
For the Northern District of California

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resident. She took out a Private Education Loan known as a CEC Signature Loan in the amount of

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$22,765, on June 24, 2003, to finance her education at the Culinary Academy in San Francisco. (Id.

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¶¶ 20, 88, Ex. 8.) Plaintiffs’ loan applications listed Stillwater National Bank (“Stillwater”) in

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Oklahoma as the “lender.” (Id. ¶¶ 63, 86, Ex. 10.) The name “Sallie Mae” was printed on the top

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of the applications as was Sallie Mae’s phone number, and the applications directed the borrowers to

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mail the applications to Sallie Mae Servicing in Panama City, Florida. (Id. ¶ 92, Ex 10.) The

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promissory notes for Plaintiffs’ loans contained choice of law provisions stating that the notes would

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be governed by the laws of the state listed on the front of the note, which was Oklahoma in all of

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Plaintiffs’ loans. (Id. ¶ 101, Exs. 1 at 1-2 L.3, 2 at 1-2 L.3.)

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Plaintiffs learned that they were approved for their loans by way of letters sent from Panama

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City, Florida that had “Stillwater National” printed on the top but notified Plaintiffs that they could

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check their disbursements at www.salliemae.com. (Id. ¶¶ 93, 97, Exs. 11, 12, 14.) The loans were

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serviced by Sallie Mae and were assigned to Sallie Mae shortly after disbursement. (Id. ¶¶ 88, 95,

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96.) Plaintiffs paid late charges on their loans based on a clause in the promissory notes providing

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for a late charge of the greater of 5% of the late installment payment or $5.00. (Id. ¶ 103; Exs. 3, 8,

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14.) The interest rates on Plaintiff Thurston’s October 2001 and October 2002 loans, at the time of

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disbursement, were the prime rate plus 8% and the prime rate plus 1.5%, respectively. (Id. ¶¶ 97,

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104.)

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2.

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Sallie Mae-Stillwater ExportSS Agreement

The relationship between Stillwater, the designated lender on Plaintiffs’ promissory notes, and

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Sallie Mae1 was governed by a July 1, 2002 ExportSS agreement, which set forth the terms under

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which Sallie Mae will originate and service Stillwater student loans and the conditions under which

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Sallie Mae will purchase them. (Id. Ex. 7.) The ExportSS Agreement provided that only Sallie Mae

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or its affiliates would originate and process Private Education Loans on Stillwater’s behalf. (Id. ¶

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77, Ex. 7 at 3.). The ExportSS agreement also defined Sallie Mae as an independent contractor

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acting as Stillwater’s agent for the services described in the agreement. (Id. Ex. 7 at 16.) Under the

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ExportSS agreement, Stillwater was required to sell Sallie Mae 80% of its eligible loans, subject to

United States District Court
For the Northern District of California

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certain limitations, within 90 days of disbursement. (Id. Ex. 7 at 17-18.) The agreement also

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provided that Stillwater could offer additional eligible loans for purchase. (Id.) Sallie Mae also

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agreed to service eligible loans that Stillwater chose not to sell. (Id. at 9.) Stillwater granted Sallie

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Mae a power of attorney to debit Stillwater’s account for all loan disbursements, and Stillwater was

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responsible for ensuring that its account held sufficient funds for the disbursements and other fees.

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The ExportSS agreement further required Stillwater to, among other things: (1) prepare, review, and

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distribute loan application materials to assure compliance with all state laws and regulations; (2)

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repurchase unenforceable loans that violated state law; and (3) indemnify Sallie Mae for violations

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of applicable state laws. (Id. at 11, 26, and 15.) Sallie Mae provided the design template for the

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application materials, and Stillwater agreed not to alter their content of the application materials

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without Sallie Mae’s consent. (Id.)
3.

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De Facto Lender Allegations

Plaintiffs’ primary theory is that despite Stillwater’s status as the official designation as the

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lender on loan documents, Sallie Mae is the de facto lender of the student loans at issue, and banks

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such as Stillwater simply rent their charters to Sallie Mae so that it can avoid California’s more

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stringent protection of borrowers. (TAC ¶¶ 2, 17, 19, 61.) Whether Sallie Mae or Stillwater is the

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The ExportSS agreement is between Stillwater and “Student Loan Marketing Association,”
which was located at “Sallie Mae Drive.” (10/22/13 Genego Decl. Ex. F.) The parties refer to this
agreement, however, as being between Stillwater and Sallie Mae. Further, the parties refer to the other
agreements between banks and Sallie-Mae affiliated entities as being between the banks and Sallie Mae.
The Court will therefore follow suit.
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true lender affects, among other things, preemption under the National Bank Act and whether the

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choice of law provisions in the promissory notes are enforceable.

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According to Plaintiffs, Sallie Mae enters into forward purchase agreements with lender banks

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such as Stillwater. (Id. ¶ 62.) Under agreements such as the ExportSS agreement, the bank purports

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to act as the lender, but Sallie Mae actually makes the loans via standing credit and purchase

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agreements with the bank. (Id.) Because of these credit arrangements and pre-arranged purchases,

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Plaintiffs allege, the banks never undertake any risk of loss. (Id. 64.) Plaintiffs’ also point out that

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the Private Education Loans at issue use Sallie Mae’s “underwriting, copyrighted forms, promissory

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notes, brands and/or proprietary platforms to initiate the loans.” (Id. ¶ 62.) Additionally, Plaintiffs

United States District Court
For the Northern District of California

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allege that Sallie Mae carries out all interactions with the borrowers, controls the terms and

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conditions of the loans, approves or denies the loans, and keeps the majority of the fees and interest

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on the loans. (Id. ¶¶ 65, 66.) Plaintiffs allege that Sallie Mae’s de facto lender status is confirmed

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by the Department of the Treasury, which determined that Sallie Mae’s predecessor was originating

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loans and incorrectly attributing the loans to its banking partners. (Id. ¶ 70.)

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4.

Agreements between Sallie Mae and Other Banks

In addition to asserting that Salle Mae, not Stillwater, is the de facto lender for Plaintiffs’

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loans, Plaintiffs assert that Sallie Mae is the de facto lender for thousands of other private student

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loans issued to borrowers in California. Plaintiffs contend that Sallie Mae has made 158,211 private

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student loans to California borrowers between approximately 2003 and 2012 via fourteen banks

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(including Stillwater) identified in the Table of Agreements attached to the October 22, 2013,

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Genego Declaration. Plaintiffs state that the banks identified in the table have all entered into

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agreements with Sallie Mae that are similar in relevant respects to the Stillwater ExportSS

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agreement. Plaintiffs maintain that these agreements all contain provisions relevant to their de facto

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lender allegations, including: (1) Sallie Mae’s forward purchase commitment; (2) Sallie Mae’s

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origination of the loans; (3) use of Sallie Mae application materials; (4) Sallie Mae’s loan approval

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authority; (5) Sallie Mae’s role in funding and disbursing loan proceeds, such as disbursing proceeds

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directly to schools; and (6) Sallie Mae’s loan servicing responsibilities.

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5.

Class Evidence

In support of their motion for class certification, Plaintiffs submitted evidence purporting to

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show that the putative class members in this case were subject to similar choice of law provisions,

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late fees, and interest. Exhibit I is a document produced by Sallie Mae as an “application and

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promissory note.” (10/22/13 Genego Decl. ¶18, Ex. I.) This exemplar promissory note provided

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that the borrower will pay interest at a rate equal to an index plus or minus the percentage listed on

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the borrower’s Disclosure. (10/22/13 Genego Decl. Ex. I at SM04253; H-1 at SM00200 (Ubaldi);

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H-2 at SM06500 (Thurston).) It also provided for a late charge to be imposed if a payment was

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untimely. (Id. at SM04254; H-1 at SM00200 (Ubaldi); H-2 at SM06500 (Thurston).) The late

United States District Court
For the Northern District of California

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charge was $5.00 or 5% of the late installment payment that was due, whichever was greater.

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(10/2214 Genego Decl. Ex. I, J-1 (Ubaldi); J-2 (Thurston).) The exemplar promissory note also

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contained a choice of law provision like those in the promissory notes signed by Plaintiffs. (Id. at

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SM04257, Ex. H-1 at SM00201 (Ubaldi); H-2 at SM06501.)

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According to Plaintiffs, Sallie Mae charged Plaintiff Thurston an interest rate in excess of 10%

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per annum throughout the course of her loan. It is undisputed that Sallie Mae assessed 75,166

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borrowers interest in excess of 10% on at least one occasion. (10/22/13 Genego Decl. Ex. U. at 6.)

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It is also undisputed that Plaintiffs were assessed late charges, and that during each year of the Late

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Charge class period, between 26,111 to 41,441 class members were assessed a late fee. (Am. Ans.

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¶¶ 108, 109, Dkt.176; 10/22/13 Genego Decl. Ex. S at 6.)

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B.

Procedural History

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Plaintiff Ubaldi filed a putative class action against Defendant SLM Corporation on March 18,

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2011 on behalf of class members who incurred late charges on or after March 17, 2007. Plaintiff

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Ubaldi filed a first amended complaint regarding late charges on August 29, 2011. After the Court

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granted in part and denied in part Defendant SLM’s motion to dismiss the first amended complaint,

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Plaintiff Ubaldi filed a second amended complaint adding Sallie Mae and SLM Student Loan Trust

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2004-A as defendants. On March 26, 2013, Plaintiff Ubaldi moved for leave to file a third amended

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complaint (“TAC”) that: (1) added Plaintiff Thurston, who asserted class claims that Sallie Mae

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charged usurious interest on student loans; (2) alleged a claim for declaratory relief that the choice
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of law provisions in the promissory notes were unenforceable; (3) added allegations based on facts

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learned during discovery; and (4) “modif[ied] the class definition and extend[ed] the class period for

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the current late charge class back prior to March 17, 2007.” (Dkt. 126.) Defendants opposed

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Plaintiff Ubaldi’s motion to amend, and the Court granted in part and denied in part the motion in

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May 2013. The Court permitted Plaintiff Ubaldi to add Plaintiff Thurston, usury claims, a choice of

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law class, and allegations based on facts learned in discovery. The Court denied leave to amend as

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to tolling and did not permit extending the late charge class period.

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The Court subsequently denied Defendants’ motion to dismiss the TAC on August 5, 2013. In
October 2013, Plaintiffs moved for clarification of the Court’s order regarding leave to amend. On

United States District Court
For the Northern District of California

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November 15, 2013, the Court clarified that its order denied Plaintiffs’ tolling allegations in their

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entirety. Plaintiffs filed a modified TAC reflecting the Court’s clarification on December 2, 2013,

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which is the operative complaint.

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In the TAC, Plaintiffs allege seven claims against Defendants on behalf of themselves, and

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propose one class and two subclasses. Plaintiffs allege that the choice of law provisions in the

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promissory notes are unenforceable. Plaintiffs also allege that the late charges that they were

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assessed are unlawful under California Unfair Competition Law (“UCL”), California Business &

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Professions Code section 17200 because they constitute unlawful liquidated damages under

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California Civil Code section 1671. Plaintiffs also claim that the late charges are an unfair business

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practice under the UCL. Plaintiff Thurston alleges that by charging interest on student loans that

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often exceeds 10% per annum, Sallie Mae violates the California Usury Law, California Civil Code

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sections 1916-1 to 1916-3, the unlawful and unfair prongs of the UCL, and the California

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Constitution. (Id. ¶¶ 154-165, 173-179, 180-189, 190-198.)
On October 22, 2013, Plaintiffs moved to certify one class and two subclasses. The Court

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held a hearing on the motion on March 4, 2014.

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II.

Discussion

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A.

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Plaintiffs seek certification of a Choice-of-Law Class defined as:

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Proposed Class and Subclasses

All persons who on or after March 17, 2007, obtained a Sallie Mae Private Education
Loan for which Sallie Mae was the de facto actual lender as described in the Third
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Amended Complaint which included a choice-of-law provision, based upon a loan
application that listed California as the permanent residence of the borrower if no
temporary residence was identified, or based upon a loan application that listed
California as the temporary residence of the borrower (the “Choice of Law Class”).

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(TAC ¶ 116.) Plaintiffs also seek to certify a Late Charge subclass defined as:
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All persons who at any time obtained a Sallie Mae Private Education Loan for which
Sallie Mae was the de facto actual lender as described in the Third Amended
Complaint, based upon a loan application that listed California as the permanent
residence of the borrower if no temporary residence was identified, or based upon a
loan application that listed California as the temporary residence of the borrower, and
who on or after March 17, 2007 incurred a Late Charge from Sallie Mae (the “Late
Charge Subclass”).

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(TAC ¶ 117.) Plaintiff Thurston seeks certification of a Usury subclass defined as:
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United States District Court
For the Northern District of California

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All persons who at any time obtained a Sallie Mae Private Education Loan for which
Sallie Mae was the de facto actual lender as described in the Third Amended
Complaint, based upon a loan application that listed California as the permanent
residence of the borrower if no temporary residence was identified, or based upon a
loan application that listed California as the temporary residence of the borrower, and
who on or after March 26, 2009, were charged interest at an annual rate of more than
10% (the “Usury Subclass”).

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(TAC ¶ 118.)
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The proposed classes exclude certain Sallie Mae employees and their family members, certain
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loans made by Sallie Mae Bank since 2005, and “all Sallie Mae Private Education Loans with a
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promissory note for the loan at issue that includes an arbitration clause or class action waiver.”
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(TAC ¶ 119.)
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B.

Legal Standard

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Plaintiffs seeking to represent a class must establish that the class is ascertainable, that it meets
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the requirements of Rule 23(a), and that it satisfies one of the subsections of Rule 23(b). Plaintiffs
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bear the burden of demonstrating that each element of Rule 23 is satisfied. See General Tel. Co. of
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Sw. v. Falcon, 457 U.S. 147, 158-61 (1982); Doninger v. Pac. Nw. Bell, Inc., 564 F.2d 1304, 1308
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(9th Cir.1977); In re Autozone, Inc. Wage & Hour Employment Practices Litig., 289 F.R.D. 526,
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530 (N.D. Cal. 2012). Rule 23 is not a “mere pleading standard.” Wal-Mart Stores, Inc. v. Dukes,
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__ U.S. __, 131 S.Ct. 2541, 2551 (2011). Rather, a party seeking class certification must be
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prepared to prove the existence of the Rule 23(a) criteria. Id. “Sometimes it may be necessary for
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the court to probe behind the pleadings before coming to rest on the certification question.’” Id.
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(quoting Gen. Telephone Co. of Sw. v. Falcon, 457 U.S. 147, 160 (1982)).
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C.

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Defendants argue that Plaintiffs lack standing to assert claims as to any loans involving any

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bank other than Stillwater. According to Defendants, “[a]lthough Plaintiffs may have standing to

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assert claims against Sallie Mae on claims arising from their Stillwater loans, they have no stake in

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establishing liability, and no Article III standing, as to loans made by banks other than Stillwater or

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on claims against Sallie Mae with respect to those loans. “ (Defs.’ Opp. at 19-20.) As support for

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this argument, Defendants rely on cases involving mortgage backed securities class actions.

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Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 632 F.3d 762 (1st

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Cir. 2011); In re Wells Fargo Mortgage Backed Certificates Litigation, 712 F. Supp.2d 958, 963-64

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United States District Court
For the Northern District of California

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(N.D. Cal. 2010); FDIC v. Countrywide Financial Corp., Case No. 12-4354, 2012 WL 5900973, at

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*10 (C.D. Cal. 2012); and In re Washington Mutual Mortgage-Backed Securities Litigation, 276

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F.R.D. 658, 662 (W.D. Wash. 2011).

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Standing

Plaintiffs do not lack standing. “In a class action, standing is satisfied if at least one named

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plaintiff meets the requirements.” Bates v. UPS, 511 F.3d 974, 985 (9th Cir. 2007). Standing

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requires that: (1) the plaintiff suffered an injury in fact, i.e., one that is sufficiently “concrete and

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particularized” and “actual or imminent, not conjectural or hypothetical;” (2) the injury is “fairly

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traceable” to the challenged conduct; and (3) the injury is “likely” to be “redressed by a favorable

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decision.” Id. (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992)). There is no

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dispute that Plaintiff satisfy these criteria as to Defendants. Defendants’ focus on Stillwater and the

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other banks ignores that Sallie Mae and affiliated entities’ status are the defendants here, not the

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banks.

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The mortgage-backed securities cases on which Defendants rely are not on point. Moreover,

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the courts distinguished those cases from typical class actions. The court in Countrywide noted that

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it differed from “mass tort or simple securities case where each plaintiff in the class complains of the

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same behavior by the defendant.” 2012 WL 5900973, at *1. Similarly, in Wells Fargo, Judge

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Illston distinguished cases where the lead plaintiffs undisputedly had individual standing and the

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dispute concerned whether they could sue on behalf of a class of persons who suffered different

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injuries stemming from the same conduct by the defendants, because those cases “did not address
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whether plaintiffs in a class action may bring suit on behalf of persons who have purchased

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securities through different offerings stemming from distinct offering documents.” 712 F. Supp. 2d

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at 965. This case is more like Munoz v. PHH Corp., Case No. 08-759, 2013 WL 2146925, at *19

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(E.D. Cal. May 15, 2013), where the court found that the plaintiffs had standing to challenge the

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actions of a lender and its affiliated reinsurer even though there were some intermediary insurers

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with whom none of the plaintiffs had dealt, because the intermediary insurers were not defendants.

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The court reasoned that “”[s]tanding concerns the relationship between the plaintiff and defendant;

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not the relationship between a plaintiff and a third party that is not before the court.” Id. at *19.

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D.

Ascertainability

United States District Court
For the Northern District of California

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Defendants also argue that the proposed class and subclasses cannot be certified because they

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are not ascertainable. Defendants point out that each class covers “[a]ll persons who . . . obtained a

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Sallie Mae Private Education Loan for which Sallie Mae was the de facto actual lender as described

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in the Third Amended Complaint.” (TAC ¶¶ 116-118.) Defendants argue that “de facto actual

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lender” is a legal conclusion based on disputed factual allegations that would need to be resolved to

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ascertain the classes’ compositions. Defendants further argue that the definition is improperly

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failsafe because “if Sallie Mae establishes that it was not the de facto actual lender as alleged in the

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Complaint (e.g., by demonstrating that it did not control the loan terms or fund the loans through

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credit facilities, as Plaintiffs allege), there will be no members of the class to be bound by a

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judgment.” (Defs.’ Opp. at 23.) Plaintiffs counter that the trier of fact’s findings as to Sallie Mae’s

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de facto lender status will not impact class membership and will not unfairly burden Sallie Mae.

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According to Plaintiffs, if the trier of fact concludes that the Sallie Mae was not the de facto lender

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to Plaintiffs and the certified class members, Defendants will be protected against liability.

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The class definitions are circular and thus the proposed classes are not ascertainable. Plaintiffs

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must demonstrate that an identifiable and ascertainable class exists. “A class definition should be

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precise, objective, and presently ascertainable”, though it “need not be so ascertainable that every

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potential member can be identified at the commencement of the action.” O’Connor v. Boeing N.

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Am., Inc., 184 F.R.D. 311, 319 (C.D. Cal.1998) (internal quotations omitted). A “failsafe class” is a

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“a way of labeling the obvious problems that exist when the class itself is defined in a way that
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precludes membership unless the liability of the defendant is established.” Kamar v. Radio Shack

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Corp., 375 Fed. Appx. 734, 736 (9th Cir. 2010). The problem with such a class is that “once it is

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determined that a person, who is a possible class member, cannot prevail against the defendant, that

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member drops out of the class.” Id. That is not only “palpably unfair to the defendant,” but it is also

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unmanageable because it is unclear in such cases to whom class notice should be sent. Id.

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The proposed classes here may not be true failsafe classes insofar as even if Sallie Mae is

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determined to be the de facto lender, Plaintiffs would still need to prove that the choice of law

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provisions are unenforceable, that the late charges are unlawful, and that the interest charged is

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usurious, among other things. If the class members lose on these liability issues, they would still be

United States District Court
For the Northern District of California

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bound by the judgment. Nevertheless, the class definitions turn on a key legal issue in this case --

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whether Sallie Mae is the de facto lender. If the trier of fact were to find that Sallie Mae was not a

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de facto lender, then there would be no class members. The class definitions are therefore

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improperly circular. Plaintiffs do not explain how they intend to send class notice to those who

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obtained a loan for which Sallie Mae was the de facto lender when the trier of fact has not decided

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whether Sallie Mae was a de facto lender. The Court therefore denies Plaintiffs’ motion for class

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certification. Because it appears that Plaintiffs may be able to redefine the classes in terms of

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attributes of class members or loans rather than legal conclusions, Plaintiffs have leave to amend the

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class definitions. Heffelfinger v. Elec. Data Sys. Corp., Case No. 07-101, 2008 U.S. Dist. LEXIS

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5296, at *46 (C.D. Cal. Jan. 7, 2008) (“Given the difficulties with the proposed class definition set

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forth in plaintiffs’ motion, the court has discretion either to redefine the class or to afford plaintiffs

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an opportunity to do so.”).

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D.

Arbitrability

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Defendants assert that because Sallie Mae included binding arbitration clauses and class action

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waivers in its private loan promissory notes beginning in 2005, the Court should deny class

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certification because a substantial number of the class members would likely be required to arbitrate

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their claims on an individual, non-class basis. The existence of arbitration clauses and class action

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waivers does not preclude class certification, however, because the classes expressly exclude loans

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with promissory notes including arbitration clauses or class action waivers. Defendants do not argue
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that arbitration affects numerosity or the superiority of the class form.

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E.

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Rule 23(a) sets forth four prerequisites for class certification: numerosity, commonality,

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Rule 23(a) Requirements

typicality, and adequacy of representation.
1.

Numerosity

Rule 23(a) requires that a class be “so numerous that joinder of all members is impracticable.”
Defendants do not dispute that Plaintiffs’ proposed classes meet this requirement. For each of the

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years of the Late Charge subclass period (March 2007 through 2012), between 26,111 and 41,441

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class members were assessed a late charge. (10/22/13 Genego Decl. Ex. S at 6.) Moreover, the

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United States District Court
For the Northern District of California

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Usury subclass contained 75,168 members as of the date motion for class certification was filed.

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(10/22/13 Genego Decl. Ex. U at 6.) The Choice of Law class has at least as many members as its

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subclasses. Accordingly, Plaintiffs have met the numerosity requirement.

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2.

Commonality

Rule 23(a)(2) requires the existence of “questions of law or fact common to the class.” “All

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questions of fact and law need not be common to satisfy the rule.” Hanlon v. Chrysler, 150 F.3d

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1011, 1019 (9th Cir. 1998); see also Staton v. Boeing, 327 F.3d 938, 953 (9th Cir. 2003). While a

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single common question will suffice, the class members have suffered the same injury, and the class

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claims must depend on a common contention that is “of such a nature that it is capable of classwide

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resolution -- which means that determination of its truth or falsity will resolve an issue that is central

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to the validity of each one of the claims in one stroke.” Dukes, 131 S.Ct. at 2551, 2556.

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matters is the “’capacity of a classwide proceeding to generate common answers apt to drive the

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resolution of the litigation.” Id. (quoting Nagareda, Class Certification in the Age of Aggregate

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Proof, 84 N.Y.U. L. Rev. 97, 131-32 (2009)) (emphasis in original). “Dissimilarities within the

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proposed class are what have the potential to impede the generation of common answer.” Id.

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What

Defendants do not dispute that Plaintiffs have established commonality, and Plaintiffs have met

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this threshold. Plaintiffs point out that issues common to the Choice of Law class include: “(1)

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whether designating the state of the nominal lender is not reasonable given Sallie Mae’s role as the

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de facto lender; (2) whether enforcement of the choice of law provisions would violate a
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fundamental policy of California as to which it has a greater interest; and (3) whether enforcement of

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the choice of law provisions would result in a substantial injustice in light of Sallie Mae’s role as the

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de facto lender.” (Pl.’s Mot. at 15.) See Nedlloyd Lines B.V. v. Sup. Ct. of San Mateo Cnty.,3

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Cal.4th 459, 464-66 (Cal.1992) (holding that to determine whether a choice of law provision is

5

enforceable, the court may need to determine “whether the chosen state’s law is contrary to a

6

fundamental policy of California” or “whether California “has a materially greater interest than the

7

chosen state in the determination of the particular issue.”). Issues common to the Late Charge

8

subclass include whether California Civil Code section 1671(b) or (c) applies to the promissory

9

notes, whether the costs of servicing a late payment vary according to the amount of the payment,

United States District Court
For the Northern District of California

10

and whether assessing a late fee based on the amount of the late payment is per se unreasonable.

11

Issues common to the Usury subclass include whether the supplemental fees charged by Sallie Mae

12

constitute interest and whether the same interest accrual method applies to the class members’ loans.

13

Moreover, both the Late Charge and Usury subclasses depend on the whether Sallie Mae is a de

14

facto lender. Commonality may also exist where, as here, claims turn on standard documents.

15

Lymburner v. U.S. Fin. Funds, Inc., 263 F.R.D. 534, 539-40 (N.D. Cal. 2010) (finding commonality

16

satisfied and noting that the Court was “asked to focus on the loan documents, not representations

17

made to each individual class member”).

18
19

3.

Typicality

Rule 23(a) also requires that “the claims or defenses of the representative parties are typical of

20

the claims or defenses of the class.” “Under the rule’s permissive standards, representative claims

21

are ‘typical’ if they are reasonably coextensive with those of absent class members; they need not be

22

substantially identical.” Hanlon, 150 F.3d at 1020; see also Staton, 327 F.3d at 957. Although the

23

claims of the purported class representative need not be identical to the claims of other class

24

members, the class representative “must be part of the class and possess the same interest and suffer

25

the same injury as the class members.” General Tel. Co. of Southwest v. Falcon, 457 U.S. 147, 156

26

(1982). That injuries may differ in amount does not defeat typicality. See William W. Schwarzer, et

27

al., Federal Civil Procedure Before Trial, § 10:293 (Rutter Group 2009) (a plaintiff’s claims may be

28

typical although other members of the class suffered less or more injury). “[T]he commonality and
12

1
2

typicality requirements of Rule 23(a) tend to merge.” Dukes, 131 S. Ct. at 2541.
It is undisputed that Plaintiffs’ claims are typical with respect to the Choice of Law class and

3

the Late Charge subclass. There is no question that Plaintiffs are members of these classes

4

(assuming Stillwater is a de facto lender) and that their claims are coextensive with those of the

5

classes.

6

The parties dispute, however, whether Plaintiff Thurston’s usury claims are typical of the

7

Usury subclass claims. Defendants argue that Thurston was not charged usurious interest and thus

8

cannot be a member of the Usury subclass. To fall within the Usury subclass, the borrower must

9

have been charged annual interest exceeding 10%. (TAC ¶ 118.) Defendants point out that

United States District Court
For the Northern District of California

10

Thurston cannot rely on her first loan, the October 28, 2001 loan, because it contained an arbitration

11

clause and thus falls outside the scope of the class. (TAC ¶ 119.) Moreover, Defendants provide

12

unchallenged evidence that the interest rate on Thurston’s second loan, dated October 16, 2002, did

13

not exceed 10% during the Usury subclass period, even if the late charges and supplemental fee

14

Thurston paid constituted interest. (Potomis Decl. ¶¶ 5, 8, 10; Defs.’ Opp. at 17 n.6.) In any event,

15

late charges cannot make a loan usurious. Sw. Concrete Prods. v. Gost Constr. Corp., 51 Cal. 3d

16

701, 708-709 (Cal. 1990) (finding that a late charge in a contract was not subject to the usury law in

17

light of the “rule that a transaction that was not usurious at its inception cannot become usurious by

18

virtue of the debtor’s voluntary default”); Fox v. Federated Dep’t Stores, Inc., 94 Cal. App. 3d 867,

19

884 (Cal. Ct. App. 1979) (noting that a finance charge assessed when a credit card holder fails

20

timely to make a payment is not usurious as it is only because of the customer’s voluntary act in

21

failing to make the payment when due that a finance charge is levied).

22

Plaintiffs do not dispute that Thurston’s first loan is irrelevant and that she has not been

23

charged usurious interest on her second loan. Instead, Plaintiffs assert that she was charged interest

24

in excess of 10% on her fourth and fifth loans. (1/30/14 Genego Decl. 4, 5, Ex. KK.) However,

25

Plaintiffs do not assert that Thurston actually paid usurious interest on these loans and would be

26

entitled to money damages. Bistro Exec., Inc. v. Rewards Network, Inc., Case No. 04-4640, 2006

27

U.S. Dist. LEXIS 100770, at *45 (C.D. Cal. July 20, 2006) (noting that under California law those

28

who did not pay usurious interest are entitled only to declaratory relief). Rather, Plaintiffs contend
13

1

that because the interests rates on loans four and five were above 10% at various times during the

2

class period, Thurston was charged interest and thus has a claim for declaratory relief. (1/30/14

3

Genego Decl. Ex. KK at 3, 5, 15, 16.)

4

Plaintiffs are correct that Thurston was charged interest above 10% on loans four and five and

5

thus falls within the definition of the Usury subclass. This does not, however, end the typicality

6

inquiry. Not only must Thurston be a member of the Usury subclass to satisfy the typicality

7

requirement, but her claims must be “reasonably coextensive” with those of absent class members.

8

Because Thurston only has a claim for declaratory relief for usury, her claim is not reasonably

9

coextensive with any class members who paid usurious interest and would have damages. This is

United States District Court
For the Northern District of California

10

important because, as discussed in greater detail below, Plaintiffs did not move to certify their

11

classes under 23(b)(2), and it is unclear whether Plaintiffs are seeking certification only under Rule

12

23(b)(3) or whether they are proposing a hybrid class action. Plaintiffs have not established that

13

Thurston claims are typical, and this precludes certification of the Usury subclass in its present form.

14
15
16

4.

Adequacy of Representation

Rule 23(a)(4) permits the certification of a class action only if “the representative parties will

17

fairly and adequately protect the interests of the class.” “The adequacy inquiry under Rule 23(a)(4)

18

serves to uncover conflicts of interest between named parties and the class they seek to represent.”

19

Amchem Prods. v. Windsor, 521 U.S. 591, 625-26 (1997). Representation is adequate if: (1) the

20

class representative and counsel do not have any conflicts of interest with other class members; and

21

(2) the representative plaintiff and counsel will prosecute the action vigorously on behalf of the

22

class. See Staton v. Boeing, 327 F.3d 938, 957 (9th Cir. 2003). A class representative must also

23

suffer the same injury as the class members and be part of the class. Amchem, 521 U.S. at 626

24

(quoting East Tex. motor Freight Sys., Inc. v. Rodriquez, 431 U.S. 395, 403 (1977)).

25

There is no dispute that Plaintiffs’ counsel would adequately represent the class. Counsel are

26

experienced class action attorneys, and they have actively litigated this case by, among other things,

27

opposing several motions to dismiss and engaging in discovery. (10/22/13 Genego Decl. Ex. BB,

28

CC, DD, EE (resumes of Plaintiffs’ counsels’ firms).) Plaintiff Thurston, as noted above, does not
14

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adequately represent the Usury subclass. Plaintiffs are otherwise adequate representatives for the

2

Choice of Law and Late Charge subclasses. Although Plaintiffs did not provide declarations, they

3

testified at their depositions that they reviewed the documents filed in this case, understood the

4

nature of the their claims, and understood that they were representing a class of individuals based on

5

choice of law provisions, usurious interests, and late fees. (1/30/13 Genego Decl. Ex. NN (excerpts

6

of Thurston Dep.); Ex. OO (excerpts of Ubaldi Dep.).) Plaintiff Ubaldi testified that she was not

7

expecting something for herself out of the lawsuit but that she wanted the class of people she was

8

representing to get the money they allegedly overpaid back. (10/22/13 Genego Decl. Ex. OO.)

9

F.

Rule 23(b) Criteria

United States District Court
For the Northern District of California

10

Although Plaintiffs alleged class actions under all three subsections of Rule 23(b) in the TAC,

11

their motion for class certification only addresses Rule 23(b)(3). Nevertheless, Plaintiffs seek only

12

declaratory relief for the Choice of Law class, and, as noted above, the Usury subclass includes at

13

least one member whose claim is solely for declaratory relief. Plaintiffs do not distinguish between

14

the different kinds of Rule 23(b) classes in their motion, and it is unclear whether Plaintiff is seeking

15

“to shift the entire case to (b)(3) certification because of the presence of money damages” or is

16

requesting certification of a hybrid class action such that the Court would certify a (b)(2) class for

17

the portion of the case concerning declaratory relief and a (b)(3) class for the portion of the case

18

requesting monetary damages. See Lemon v. Int’l Union of Operating Eng’rs, 216 F.3d 577, 581

19

(7th Cir. 2000); William B. Rubenstein, Newberg on Class Actions § 4:38 (5th ed.). Plaintiffs do

20

not specify their intent and instead only address Rule 23(b)(3). The Court therefore follows suit.

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A class action may be maintained under this subsection if “the court finds that questions of law

22

or fact common to class members predominate over any questions affecting only individual

23

members, and that a class action is superior to other available methods for fairly and efficiently

24

adjudicating the controversy.” Certification under Rule 23(b)(3) is appropriate “whenever the actual

25

interests of the parties can be served best by settling their differences in a single action.” Hanlon,

26

150 F.3d at 1022 (quoting 7A Wright & Miller, Federal Practice and Procedure, § 1777 (2d ed.

27

1986)). Specifically, “when common questions present a significant aspect of the case and they can

28

be resolved for all members of the class in a single adjudication, there is clear justification for
15

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handling the dispute on a representative rather than on an individual basis.” Hanlon, 150 F.3d at

2

1022 (quoting 7A Wright & Miller, Federal Practice and Procedure, § 1778 (2d ed. 1986)).

3

The test for predominance asks “whether proposed classes are sufficiently cohesive to warrant

4

adjudication by representation.” Hanlon, 150 F.3d at 1022 (quoting Amchem, 117 S. Ct. at 2249).

5

In contrast to the commonality requirement of Rule 23(a), Rule 23(b)(3) “focuses on the relationship

6

between the common and individual issues.” Hanlon, 150 F.3d at 1022. Claims need not be

7

identical for common issues of law and fact to predominate, they need only be reasonably

8

coextensive with those of absent class members. Hanlon, 150 F.3d at 1020. The predominance

9

standard is similar to and more stringent than the commonality standard. Newburg § 3.27.

United States District Court
For the Northern District of California

10

In determining whether a class action is superior to other adjudicatory methods, courts must

11

consider the four factors set forth in Rule 23(b)(3): “(A) the class members’ interest in individually

12

controlling the prosecution or defense of separate actions; (B) the extent and nature of any litigation

13

concerning the controversy already begun by or against class members; (c) the desirability or

14

undesirability of concentrating the litigation of the claims in the particular forum; and (D) the likely

15

difficulties in managing a class action.” Fed. R. Civ. P. 23(b)(3). Courts addressing superiority

16

focus on the efficiency and economy elements of the class action. Zinser v. Accufix Res. Institute,

17

Inc., 253 F.3d 1180, 1190 (9th Cir. 2001).

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19

1.

De facto Lender Allegations

Plaintiffs argue that common issues predominate because whether Sallie Mae is a de facto

20

lender is common to all class members. Plaintiffs assert that the de facto lender inquiry does not

21

involve any individual issues: “If Salle Mae’s de facto lender status is proved as to any one member

22

of the putative classes, it will be proved to all of them.” (Pls.’ Mot. at 21.) Defendants counter that

23

“Plaintiffs’ theory of the case requires that a de facto lender analysis be made for each lender based

24

on the particular terms of the agreement with each bank.” (Defs.’ Opp. at 20.) According to

25

Defendants, the terms of the agreements between Sallie Mae and the banks listed in the Table of

26

Agreements attached to the October 22, 2014, Genego Declaration (the “Sallie Mae-bank

27

agreements”) are not uniform and vary in important respects. Namely, unlike the ExportSS

28

agreement between Sallie Mae and Stillwater, three of the fourteen Sallie Mae-bank agreements do
16

not include a provision allowing Sallie Mae to advance funds on the lender’s behalf, thereby directly

2

funding the loans. (10/22/13 Genego Decl. Exs. GG (Sallie Mae-Sterling Bank agreement), HH

3

(Sallie Mae-First Penn Bank agreement), II (Sallie Mae - Independent Banks Bank agreement).)

4

These same three agreements differ from the other Sallie Mae-bank agreements because they allow

5

the bank to decide whether to have Sallie Mae disburse the funds to the schools or to do so itself.

6

Defendants also point out that the length of time from disbursement of the loan to purchase by Sallie

7

Mae varied from bank to bank: four banks have no express timeframe (10/22/13 Genego Decl. Exs.

8

A-2, A-3, A-4, G); one bank required purchase within 330-365 days after disbursement (Ex. A-1);

9

one bank required purchase between 90 to 120 days after disbursement (Ex. D); one bank required

10
United States District Court
For the Northern District of California

1

purchase within 60 to 95 days after disbursement (Ex. JJ); one bank required purchase within 60 to

11

90 days before repayment (Ex. B.); one bank required purchase within 90 days before repayment

12

(Ex. E); one bank required payment within 90 days of disbursement (Ex. F); one bank required

13

payment not later than 60 days after disbursement (Ex. C); and three banks required purchase one

14

business day after disbursement (Exs. GG, HH, II). Defendants further argue that the Court would

15

also need to look at the banks’ and Sallie Mae’s actual course of practice to determine whether Sallie

16

Mae was a de facto lender with respect to a particular bank.

17

Plaintiff argues that these differences pale in comparison to the common features of the Sallie

18

Mae-bank agreements that are relevant to de facto lender status. According to Plaintiffs, the

19

variation between banks regarding when Sallie Mae was obligated to purchase their loans is

20

irrelevant; the key fact is that Sallie Mae was obligated to purchase the loans. Plaintiffs also assert

21

that Sallie Mae and the banks’ actual practices are irrelevant because the Sallie Mae-bank

22

agreements govern their actual practices.

23

The Court finds that Plaintiffs have not established that common issues predominate with

24

respect to all fourteen Sallie Mae-bank agreements. For example, the agreements between Sallie

25

Mae and Sterling Bank, First Penn Bank, and Independent Bankers Bank different significantly from

26

the agreements between Sallie Mae and other banks in relevant respects. The former do not permit

27

Sallie Mae to advance funds on the banks’ behalf as does the Stillwater agreement, they provide for

28

a different method of loan disbursement than the other eleven agreements, and they provide that
17

1

Sallie Mae will purchase loans within one business day of disbursement, a much shorter time than in

2

the other agreements. The amount of time between disbursement and Sallie Mae’s purchase of loans

3

is not irrelevant; the longer the delay in Sallie Mae’s purchase, the greater a bank’s exposure to risk

4

from the loans. Moreover, contrary to Plaintiffs’ assertion, the actual practices of Sallie Mae and the

5

banks are relevant to de facto lender status because the Sallie Mae-bank agreements do not govern

6

every detail. It may be, however, that Plaintiffs could seek to certify a class involving multiple

7

banks upon a proper showing.

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2.

Choice of Law Class

Plaintiffs have not established that common issues predominate with respect to the Choice of

United States District Court
For the Northern District of California

10

Law Class. Other than noting that their promissory notes select Oklahoma law, Plaintiffs do not

11

identify which states’ laws are implicated by the choice of law provisions. It is important to know

12

which states’ laws are at issue. To determine whether a choice of law provision is enforceable, a

13

court must “determine either: (1) whether the chosen state has a substantial relationship to the parties

14

or their transaction, or (2) whether there is any other reasonable basis for the parties’ choice of law.”

15

Nedlloyd Lines B.V. v. Superior Court of San Mateo Cnty.,3 Cal.4th 459, 464-66 (Cal.1992). If

16

neither test is met, the analysis stops, and the court will not enforce the choice-of-law provision. Id.

17

If either test is met, “the court must next determine whether the chosen state’s law is contrary to a

18

fundamental policy of California.” Id. (emphasis in original). If there is a fundamental conflict with

19

California law, the court must determine whether California “has a materially greater interest than

20

the chosen state in the determination of the particular issue.” Id.

21

Applying this test requires knowing the identity of the chosen state and the contours of its

22

relevant law. Plaintiffs have not provided the Court with sufficient information regarding which state

23

laws are at issue and have thus failed to meet their burden to show predominance. Plaintiffs may be

24

able to show that the class members’ promissory notes all select the same or substantially the same

25

state law, and the Court is not precluding a choice of law subclass limited, for instance, to

26

promissory notes with choice of law clauses selecting Oklahoma law. On the current record,

27

however, there is no evidence upon which the Court can certify the Choice of Law class under Rule

28

23(b)(3), and Plaintiffs make no arguments regarding Rule 23(b)(2).
18

1
2

3.

Late Charge Subclass Claims

In addition to arguing that the Late Charge subclass should not be certified because of lack of

3

ascertainability and because the common issues do not predominate as to the de facto lender

4

allegations, Defendants argue that individual issues predominate because: (1) any recovery based on

5

a violation of California Civil Code section 1671 must be reduced by administrative and other costs

6

incurred by Sallie Mae, which will vary from borrower to borrower; and (2) the voluntary payment

7

doctrine is a defense to the class members’ late charge claims and to avoid that defense each class

8

members would have to show fraud, duress, or coercion, which are necessarily individual inquiries.
Plaintiffs have established that common issues predominate with respect to the Late Charge

10
United States District Court
For the Northern District of California

9

subclass. Under California Civil Code section 1671(b), a liquidated damages provision is “valid

11

unless the party seeking to invalidate the provision establishes that the provision was unreasonable

12

under the circumstances existing at the time the contract was made.” A more stringent standard

13

applies to contracts that fall under section 1671(c), which applies to retail purchase or rental

14

contracts for personal property or services under certain circumstances. Under those circumstances,

15

a liquidated damages provision is void unless it would be “impracticable or extremely difficult to fix

16

the actual damage.” § 1671(d). Under section 1671(d), unlike section 1671(b), “the proponent of the

17

liquidated damages clause has the burden of proof.” In re DirectTV Early Cancellation Litig., 738 F.

18

Supp. 2d 1062, 1087 (C.D. Cal. 2010). As noted above, there are numerous questions common to

19

the Late Charge subclass, including the whether section 1671(b) or (c) applies to the late charges,

20

what costs Sallie Mae actually incurs when a payment is late, whether the late charge exceeds these

21

costs, and whether Sallie Mae’s late charge of the greater of $5.00 or 5% of the missed payment is

22

an unlawful liquidated damages provision. A class action is also a superior form of action with

23

respect to the Late Charge subclass because there is no other class litigation regarding late charges,

24

the damages for each class member are comparatively small (e.g., Plaintiff Ubaldi’s late charges

25

total $106.5 (TAC Exs. 15, 17-21)), and this is an appropriate forum because Sallie Mae’s conduct

26

occurred in this district and elsewhere in California.

27

Defendants’ argument that their right to an offset against unlawful late charges presents

28

individual issues that defeat class certification is also unpersuasive. Even if Defendants would have
19

1

varying offsets against the class members’ damages claims, this is an aspect of damages, and

2

damages calculations alone cannot defeat certification. Leyva v. Medline Indus. Inc., 716 F.3d 510,

3

513 (9th Cir. 2013); see also Dukes, 131 S.Ct. at 2558 (noting that “individualized monetary claims

4

belong in Rule 23(b)(3)”). Here, any offset against class members’ recoveries appears readily

5

calculable. Defendants admittedly track and maintains records of servicing, collection and IT

6

operations expenses for student loans. (Hinko Decl. ¶ 2.)

7

Defendants’ argument that the application of the voluntary payment doctrine necessarily

8

involves individual issues that defeat class certification is also unpersuasive. “The voluntary

9

payment doctrine bars the recovery of money that was voluntarily paid will full knowledge of the

United States District Court
For the Northern District of California

10

facts.” Parino v. BidRack, Inc., 838 F. Supp. 2d 900, 908 (N.D. Cal. 2011). In some circumstances,

11

the applicability of the doctrine could require an individualized analysis as to each class member.

12

Endres v. Wells Fargo Bank, Case No. 06-7019, PJH, 2008 WL 344204, at *12 (N.D. Cal. Feb. 6,

13

2008). Here, however, Plaintiffs’ argue that the class members could not have had full knowledge of

14

the facts associated with paying late charges because Sallie Mae hid the fact that it was the actual

15

lender by partnering with banks. Determining whether Sallie Mae is a de facto lender does not

16

require an class member-by-class member inquiry, though it may involve a bank-by-bank inquiry.

17

4.

Usury Subclass Claims

18

Defendants argue that individual issues predominate with respect to the Usury subclass

19

because Plaintiffs and the other class members would have to show that they paid usurious interest,

20

not merely that they were charged such amounts. According to Defendants, determining whether a

21

class member paid interest will require an examination, for each class member, of the interest rate,

22

payment, and capitalization history of the loan, which will vary from borrower to borrower.

23

(Potomis Decl. ¶¶ 7, 9.)

24

An individual need not have paid usurious interest, however, to have been charged it. “The

25

usurious character of the contract is not determined by the amount of interest the borrower has paid

26

thereon, but by the amount of interest he has agreed to pay on his said indebtedness. Westman v.

27

Dye, 214 Cal. 28, 39 (Cal. 1931). “He may not have paid a dollar of interest on his indebtedness,

28

yet, if the contract calls for a greater rate of interest than that permitted by the statute, the transaction
20

1

is usurious, and no interest can be collected thereon.” Id. Although Defendants rely on the

2

statement in Domarad v. Fisher & Burke, Inc., 270 Cal. App. 2d 543, 560 (Cal. Ct. App. 1969), that

3

“[a] transaction is not usurious, so as to require the lender to refund usurious interest received by

4

him until there has been an actual payment of usurious interest,” later courts have made clear that

5

this means that one cannot recover monetary relief for usury unless one has paid interest, not that a

6

usury claim requires payment as a prerequisite. See, e.g., Bistro Exec., Inc. v. Rewards Network,

7

Inc., Case No. 04-4640, 2006 U.S. Dist. LEXIS 100770, at *45 (C.D. Cal. July 20, 2006) (noting

8

that under California law, transactions can be usurious on execution, and those who paid no interest

9

on their usurious loans would have a claim for a declaratory judgment canceling any outstanding

United States District Court
For the Northern District of California

10

interest obligations, even though they could not recover monetarily).

11

Although the difference between being charged usurious interest and having paid usurious

12

interest does not necessarily affect the predominance of common issues as to the Usury subclass, the

13

difference raises a host of other issues. The Usury subclass covers both those who were only

14

charged usurious interest and those who were charged and paid usurious interest. Because those

15

who are only charged interest are entitled only to declaratory relief, the Court would have to

16

distinguish between those who had paid usurious interest and those who had not. Additionally,

17

declaratory relief is forward looking, so the Court would also need to distinguish between class

18

members whose loans are active and whose loans had terminated. Although declaratory relief can

19

be sought under Rule 23(b)(3), Newberg § 4:38, it is more typically and appropriately sought under

20

rule 23(b)(2), which Plaintiffs do not address. As structured, the Usury subclass does not appear

21

superior to other available methods for fairly and efficiently adjudicating the controversy. Although

22

some sort of Usury class might be appropriate, the Court cannot certify the present one.

23
24
25

III. Conclusion
The Court denies Plaintiffs’ motion for class certification with leave to amend.

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27

IT IS SO ORDERED.

28

Dated: March 24, 2014
21

1

ELIZABETH D. LAPORTE
United States Chief Magistrate Judge

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United States District Court
For the Northern District of California

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