Consumer Financial Protection Bureau v. National Collegiate Master Student Loan Trust et al

Filing 95

MEMORANDUM OPINION. Signed by Judge Maryellen Noreika on 10/16/2018. (dlw)

Case 1:17-cv-01323-MN Document 95 Filed 10/19/18 Page 1 of 14 PageID #: 1092

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
CONSUMER FINANCIAL PROTECTION
BUREAU,

)
)
)
Plaintiff,
)
)
v.
)
)
THE NATIONAL COLLEGIATE MASTER )
STUDENT TRUST, et al.,
)
)
Defendants.
)

C.A. No. 17-1323 (MN)

MEMORANDUM OPINION
Carolyn I. Hahn, Colin T. Reardon, Gabriel S.H. Hopkins, Consumer Financial Protection Bureau,
Washington, DC - Attorneys for Plaintiff
Defendants, The National Collegiate Master Student Trusts, currently unrepresented by counsel
Kurt M. Heyman, Melissa N. Brochwicz Donimirski, Heyman Enerio Gattuso & Hirzel LLP,
Wilmington, DE; Erik W. Haas, Peter W. Tomlinson, Patterson Belknap Webb & Tyler LLP, New
York, NY - Attorneys for Ambac Assurance Corporation
Jamie L. Edmonson, Venable LLP, Wilmington, DE, Allyson B. Baker, Meredith L. Boylan,
Sameer P. Sheikh, Katherine M. Wright, Venable LLP, Washington, DC - Attorneys for
Transworld Systems Inc.
Andrew D. Cordo, Ashby & Geddes, PA, Wilmington, DE; Michael Hanin, Uri Itkin, Kasowitz
Benson Torres LLP, New York, NY -Attorneys for Objecting Noteholders
Rebecca L. Butcher, Landis Rath & Cobb LLP, Wilmington, DE; John P. Doherty, William Hao,
Alston & Bird LLP, New York, NY -Attorneys for GSS Data Services, Inc.
Stacey A. Scrivani, Stevens & Lee, P.C., Wilmington, DE - Attorneys for The Pennsylvania
Higher Education Assistance Agency d/b/a American Education Services
Stephen B. Brauerman, Sara E. Bussiere, Bayard, P.A., Wilmington, DE - Attorneys for
Wilmington Trust Company

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John W. Shaw, David M. Fry, Shaw Keller LLP, Wilmington, DE; Stephen H. Meyer, Sullivan &
Cromwell, LLP, Washington, DC -Attorneys for U.S. Bank National Association in its capacity
as Successor Special Servicer
John W. Shaw, David M. Fry, Shaw Keller LLP, Wilmington, DE; Matthew A. Martel, Keith M.
Kollmeyer, Jones Day, Boston, MA-Attorneys for U.S. Bank in its capacity as Indenture Trustee

October 19, 2018
Wilmington, Delaware

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Before the Court are eight motions to intervene in the current litigation between the
Consumer Financial Protection Bureau ("CFPB") and fifteen Delaware statutory trusts, called the
National Collegiate Student Loan Trusts (collectively "the Trusts"). The motions have been filed
by Ambac Assurance Corporation ("Ambac") (D.I. 4); Transworld Systems Inc. ("TSI") (D.I. 9);
Objecting Noteholders ("Noteholders") (D.I. 11); GSS Data Services, Inc. ("GSS") (D.I. 12); the
Pennsylvania Higher Education Assistance Agency d/b/a American Education Services
("PHEAA") (D.I. 20); Wilmington Trust Company ("WTC") (D.I. 31); U.S. Bank National
Association ("U.S. Bank") in its capacity as Successor Special Servicer (D.I. 33); and U.S. Bank
in its capacity as Indenture Trustee (D.I. 35). For the reasons discussed below, the Court grants
each of the motions to intervene and places no limitation on the intervenors' participation in this
litigation.
I.

BACKGROUND
The Trusts were created between 2001 and 2007 pursuant to the Delaware Statutory Trust

Act, 12 Del. Code § 3801, et. seq., to acquire private student loans, collect payments from
borrowers, and distribute gains to the holders of notes. (D.I. 54 at 4). The Trusts have no
employees or internal management and rely on certain trust-related agreements to provide their
operating structure.

These agreements include trust agreements, administration agreements,

servicing agreements, and indentures (collectively "Trust Related Agreements") and provide a
structure that includes an Owner Trustee, Administrator, Indenture Trustee, Primary Servicer,
Special Servicer, and Sub-servicers. (D.I. 54, 4-5).
WTC is the Owner Trustee of the Trusts. (D.I. 21 at 1). In this role, WTC "acts pursuant
to the authority granted to it under Trust Related Agreements and can be directed by the equity
owners of the Trust or the Administrator." (Id. at 2). Should a conflict arise between a directive
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by the equity owners and the terms of the Trust Related Agreements, the Trust Related Agreements
control. (Id.).
GSS is the Administrator of the Trusts and is responsible for the administrative functions
set forth in the Trust Related Agreements. (D.I. 12 at 1-2).
U.S. Bank serves as both the Indenture Trustee and Special Servicer. As Indenture Trustee,
U.S. Bank is pledged all assets of the Trusts including, but not limited to, "the underlying student
loans held by the Trusts, the collections from such loans, and the contractual agreements governing
the Trusts' activities, including the servicing related agreements." (D.I. 36 at 4). As Special
Servicer, U.S. Bank's role is to engage Sub-servicers. (D.I. 24 at 6).
PHEAA is the Primary Servicer for the Trusts and responsible for "customer service and
correspondence, payment posting, and credit reporting duties" relating to student loans that are
current in making payments or are no more than 30 days delinquent. (D.I. 20 at 2-3). PHEAA
does not, however, file debt collection lawsuits against student loans on behalf of the Trusts. (Id.)
TSI is one of the Trusts' Sub-servicers and is responsible for the collection of delinquent
debts and oversight of collection lawsuits against borrowers. (D.I. 54 at 5).
The N oteholders are a group of entities that collectively own approximately $1.4 billion in
notes issued by the Trusts. (D.I. 11 at 1).
Lastly, Ambac is an insurance company that "has provided financial guarantee insurance
with respect to securities in nine of the fifteen trusts." (D.I. 4 at 5). At times, Ambac is required
to "pay policy beneficiaries the full among of unpaid interest" as well as "unpaid principal at final
maturity," which had accounted for payments of more than $350 million as of 2017. (Id.)
On September 18, 2017, following an investigation, the CFPB brought this action against
the Trusts "to obtain permanent injunctive relief, restitution, refunds, disgorgement, damages, civil

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money penalties, and other appropriate relief for Defendants' violations of Federal consumer
financial law in connection with Defendants' servicing and collection of private stt1;dent loan debt."
(D.I. 1 at 2). Despite alleging that the violations were the product of actions taken by Defendants'
Sub-servicers and their agents and broadly blaming "Defendants' Servicers" as those at fault, the
CFPB named only the Trusts as Defendants. (Id. at 2-6). The CFPB defined "Defendants'
Servicers" as "any Servicer, Primary Servicer, Subservicer, Special Servicer, Administrator, and
any other individual or entity acting on behalf of the Trusts with respect to the servicing and
collection of the student loans owned by the Trusts .... " (Id.).
On the same day it filed the Complaint, the CFPB filed a motion for approval of a Proposed
Consent Judgment ("PCJ'') creating obligations for the Trusts and their servicers. (D.I. 3-1). The
PCJ was signed by the CFPB and attorneys for the McCarter & English law firm, purportedly on
behalf of the Trusts. (Id.). Provisions of the PCJ include: the creation of a "Board" made up of a
majority of the beneficial interests of each Trust and provides it oversight power with respect to
all submissions and actions required by the Order, (Id. at 23); a requirement that the Trusts
undertake an audit of all loans and create a compliance plan to be submitted to the CFPB
Enforcement Director for review, (Id. at 15-23); and a requirement that the Trusts pay a fine,
suspend certain collection activities, and redirect all payments to an escrow account controlled by
Defendants. (Id. at 14, 24).
Running concun-ently with this litigation are a number of state-court actions relating to
whether the Trusts' equity owners could direct the WTC to sign the PCJ, whether the McCarter &
English law firm had authority to act on behalf of the Trusts when it signed the PCJ, and whether
Mccarter & English is entitled to payment from Trust funds. See e.g. The National Collegiate

Student Loan Master Trust, et al. v. Pennsylvania Higher Education Assistance Agency DIE/A

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American Educational Services, No. 12111-VCS (Del. Ch.); NCSLTv. PHEAA, C.A. No. 12111VCS (Del. Ch.); NCSLT, et al., v. US. Bank National Association, et al., C.A. No. 2018-0167VCS (Del. Ch.).
Movants filed their applications for intervention between September 20, 2017 and
October 10, 2017. In response to the motions, the CFPB filed an omnibus opposition to five of
the motions to intervene but did "not oppose the motions to intervene filed by Ambac, the insurer
for some of noteholders as well as an investor, and U.S. Bank in its capacity as indenture Trustee
and as Successor Special Servicer." (D.I. 54). The Trusts do not oppose the motions to intervene.
(D.I. 55). On July 10, 2018, the Trusts' counsel ofrecord, Mccarter & English moved to withdraw,
(D.I. 79). That motion was granted by the Court, (D.I. 80) and the Trusts remain unrepresented in
this matter.

II.

LEGALSTANDARD
Rule 24 of the Federal Rules of Civil Procedure provides that a court must permit a non-

party to intervene as of right where that nonparty "claims an interest relating to the property or
transaction that is the subject of the action, and is so situated that disposing of the action may as a
practical matter impair or impede the movant's ability to protect its interest." Fed. R. Civ. P.
24(a)(2). The Third Circuit has "interpreted Rule 24(a)(2) to require proof of four elements from
the applicant seeking intervention as of right: first, a timely application for leave to intervene;
second, a sufficient interest in the litigation; third, a threat that the interest will be impaired or
affected, as a practical matter, by the disposition of the action; and fourth, inadequate
representation of the prospective intervenor's interest by existing parties to the litigation."

Kleissler v. US. Forest Serv., 157 F.3d 964, 969 (3d Cir. 1998) (citing Mountain Top Condo.
Ass 'n. v. Dave Stabbert Master Builder, Inc., 72 F.3d 361, 365-66 (3d Cir. 1995); Development
Fin. Corp. v. Alpha Haus. & Health Care, Inc., 54 F.3d 156, 161-62 (3d Cir. 1995); United States
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v. Alcan Alum., Inc., 25 F.3d 1174, 1181 (3d Cir. 1994); Brody v. Spang, 957 F.2d 1108, 1115 (3d

Cir. 1992); Harris v. Pernsley, 820 F.2d 592, 596 (3d Cir. 1987)). The burden to establish a right
to intervene falls squarely on the movant. Delaware Valley Citizens' Council for Clean Air v.
Pennsylvania, 674 F.2d 970, 974 (3d Cir. 1982).

Alternatively, if a court does not find intervention proper as of right under Rule 24(a), Rule
24(b) provides the court discretion to permit intervention to any party that "has a claim or defense
that shares with the main action a common question of law or fact," Fed. R. Civ. P. Rule
24(b)(1 )(B), and where such an intervention will not "unduly delay or prejudice the adjudication
of the original parties' rights." Fed. R. Civ. P. Rule 24(b)(3).

III.

DISCUSSION
A.

The Parties Do Not Oppose the Motions to Intervene Filed By Ambac, U.S.
Bank as Indenture Trustee, and U.S. Bank as Successor Special Servicer.

The CFPB and the Trusts do not oppose the motions of Ambac (D.I. 4), U.S. Bank in its
capacity as Successor Special Servicer (D.I. 33), and U.S. Bank in its capacity as Indenture Trustee
(D.I. 35) to intervene in this action. In the absence of opposition, the Court will grant the motions
of these entities to intervene.
B.

The Remaining Entities, TSI, WTC, GSS, PHEAA, and Noteholders, Have A
Right to Intervene Pursuant to Rule 24(a)(2).
1.

Movants motions for intervention were timely.

Each of the remaining five movants ("Movants") has established that its application to
intervene was timely. 1 In determining whether an application is timely, the Court must consider
"(1) the stage of the proceeding; (2) the prejudice that delay may cause the parties; [and] (3) the
reason for the delay." Mountain Top Condo., 72 F.3d at 369. Here, the Complaint and motion for

The CFPB opposes the remaining motions to intervene, but it has not asserted that the
motions are untimely.
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approval of the PCJ were filed on September 18, 2017. (D.I. 1, D.I. 3). Each of the motions to
intervene was submitted within thirty (30) days thereafter and before any additional substantive
filings or actions in the case. The motions were filed at the earliest stages of this litigation. There
was no delay. The Court concludes that the Movants have established the first element of the
Kleissler test.
2.

Movants eaclt ltave a sufficient interest in tlte litigation, wlticlt may be
affected or impaired by tlte disposition of tlte action.

A potential intervenor's interest is sufficient if it "is specific to them, is capable of
definition, and will be directly affected in a substantially concrete fashion by the relief sought."
Mountain Top, 72 F.3d at 972. When interests are merely economic, indefinite, remote, or
attenuated, the interest is not sufficient. See Harris v. Pernsley, 820 F.2d 592, 601 (3d Cir. 1987);
also Kleissler, 157 F.3d at 972; Mountain Top, 72 F.3d at 366. Non-parties do, however, have a
sufficient interest in contesting the provisions of a consent order if the terms therein will impact
their prior contractual obligations. EEOC v. AT&T, 506 F.2d 735, 739 (3d Cir. 1974).2
Once a potential intervenor establishes a sufficient interest, it bears the burden of
establishing that that interest will be affected or impaired by disposition of the action. Brody, 957
F.2d at 1123. If a movant's interest will be impaired, the Court must consider "the practical
consequences of the litigation and also consider any significant legal affect." Id. The Supreme
Court has found that paiiies "may not impose duties or obligations on a third party, without that

2

In EEOC, a union sought to intervene as a plaintiff to challenge a consent decree negotiated
by the EEOC and AT&T, which would affect the union's contractual rights as established
in a collective bargaining agreement with AT&T. Id. at 741. Though the Court found that
intervention as a plaintiff under Rule 24(a) was not proper, it found the union would be
entitled to intervention as a party defendant because the movant "has an interest in the
provisions of its collective bargaining agreements . . . which may well be modified or
invalidated by the ... consent decree ... made in its absence and, equally clearly, its
continuing ability to protect and enforce those contract provisions will be impaired or
impeded by the consent decree." Id. at 741-42.
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party's agreement."

Local No. 93, Int'! Ass'n of Firefighters, AFL-CIO C.L.C. v. City of

Cleveland, 478 U.S. 501,529 (1986). And in cases involving consent orders, the Third Circuit has
found that "a consent decree affecting third paiiy rights should not be entered without affording
such parties an opportunity to be heard." Util. Contractors Ass 'n of New Jersey, Inc. v. Toops,
507 F.2d 83, 86 n.2 (3d Cir. 1974).
Here, each of the Movants has contractual obligations related to the Trusts that would be
impacted should this Court grant the PCJ. Moreover, each Movant has shown that it has interests
in the Trust Related Agreements that are likely to be modified or invalidated or otherwise impacted
by the PCJ.
As noted above, WTC, the Owner Trustee, is a party to certain Trust Related Agreements
that provide WTC with ministerial responsibilities as well as discretion to act when a directive
presented by the equity owners is contrary to those agreements. (D.I. 31 at 2-3). WTC argues that
it has interests in ensuring compliance with the Trust Related Agreements, and those interests will
be impaired if it is unable to intervene, because under the PCJ it will be forced to act contrary to
contractual obligations. (D.I. 64 at 3-4). It argues that the PCJ provides the equity owners with
the ability to act on behalf of the Trusts and engenders in the equity owners the authority to oversee
and control compliance with the PCJ. This, WTC asse1is, would impair its own contractual
obligations that require WTC to prevent the Trusts from taking actions in violation of the Trust
Related Agreements by the equity owners. (Id. at 5-6).
GSS, as the Administrator, is party to certain Trust Related Agreements with the Trusts
that govern ce1iain functions of the Trusts' day-to-day activities. (D.I. 11 at 1-2). GSS asserts that
the approval of the PCJ will create conflicting or unclear obligations for it as the PCJ conflicts
with its obligations under certain Trust Related Agreements with respect to payments to,

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collections by, and authority over the Trusts and its servicers. (Id. at 9-10). Specifically, GSS
argues that the PCJ will prevent it "from carrying out certain of its duties [including payments to
noteholders] under the Administration Agreements and other Trust Related Agreements" and take
instructions from an entity contrary to its requirements under Trust Related Agreements. (D.I. 66
at 2-3). Moreover, GSS asserts that it falls under the broad definition of "Defendants' Servicer"
in the PCJ and thus may improperly be forced to act or refrain from acting in accordance with the
PCJ. (Id. at 4).
PHEAA, as the Primary Servicer for the Trusts, has obligations under Trust Related
Agreements including "customer service and correspondence, payment posting, and credit
reporting" duties. (D.I. 20 at 2-3). It is not responsible for collecting delinquent debts or pursuing
related lawsuits. (Id. at 3). PHEAA asserts the PCJ would usurp its current contractual rights and
responsibilities with new "massive obligations ... that go well beyond PHEAA's duties under the
Servicing Agreement." (Id. at 5). For example, PHEAA argues that the PCJ "imposes additional
obligations that are beyond what PHEAA agreed in the Servicing Agreement," including
additional extensive audits. (D.I. 65 at 2). According to PHEAA, these new obligations will cause
increases in expenditures and employee time beyond what was contemplated and agreed to in the
Trust Related Agreements. (Id. at 4).
TSI, as one of the Trusts Sub-servicers, has entered into Trust Related Agreements
("Special Sub-Servicing Agreements") with the Trusts' Special Servicer, U.S. Bank, which govern
TSI's role in collections and collection lawsuits against borrowers. (D.I. 54 at 5). TSI asserts that
the PCJ will interfere with its contractual obligations with the Special Servicer, U.S. Bank. (D.I.
9 at 2). Additionally, TSI has already entered a consent judgment with the CFPB and points out

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that the approval of the PCJ may create conflicting obligations relating to reporting structures and
compliance programs. 3 (D.I. 72 at 7).
The Noteholders collectively own an aggregate of approximately $1.4 billion of notes
issued by the Trusts and are subject to Indentures. (D.I. 11 at 1, 3). Pursuant to the Indentures,
the Noteholders have rights to approve modifications oflndentures and to receive payments from
trust principal and interest. (D.I. 67 at 2). The Noteholders assert that the PCJ would replace these
rights in favor of the equity owners and thus Noteholders rights would be impacted. (Id. at 1-3).
Based upon the above, the Court finds that each ofMovants has shown a significant interest
in the litigation, in that each has shown that it is a party to certain Trust Related Agreements that
will be impacted if the PCJ is approved. The Court finds that Mo vants have each shown that their
interests are sufficiently specific and will be directly affected, and thus each has satisfied the
second and third Kleissler factors.
3.

Movants interests are not adequately represented by an existing party.

Movants have also shown that their interests in this litigation are not adequately represented
by any existing party. "Representation will be considered inadequate on any of the following three
grounds: (1) that although the applicant's interests are similar to those of a party, they diverge
sufficiently that the existing party cannot devote proper attention to the applicant's interests; (2)
that there is collusion between the representative party and the opposing party; or (3) that the
representative party is not diligently prosecuting the suit." Brody, 957 F.2d at 1123 (citation
omitted); Nat'l Collegiate Athletic Ass 'n v. Corbett, 296 F.R.D. 342, 349 (M.D. Pa. 2013).

3

TSI also has raised an issue of statutory interpretation questioning whether the Defendant
· Trusts properly fall under the "covered person" definition embodied in the Consumer
Financial Protection Act, a question that might require further briefing to determine the
Court's jurisdiction over this matter. (Id. at 2).
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Here, the Trusts do not claim to be representing the interest of the Movants, and do not
appear to be representing those interests.

The Trusts have no employees and no legal

representation. 4 This raises the question whether the Trusts interests are being represented - let
alone the Movant's interests.
Additionally, the CFPB appears to acknowledge that there is no adequate representation
for all but one of the Movants - the Noteholders. In addressing the fourth Kleissler factor, the
CFPB asserts "[t]he Noteholders do not and cannot credibly argue that there is any collusion
between U.S. Bank and either the Bureau or the Trusts, or that U.S. Bank would not diligently
oppose entry of the Proposed Consent Judgment should the Court grant its intervention motion as
Indenture Trustee." (D.I. 54 at 28). No rebuttal is offered with respect to the arguments raised by
the other Movants.
The Noteholders, in reply, identify divergent interests from U.S. Bank that may arise during
later negotiations or settlements. For example, the Noteholders assert that where the CFPB has
claimed that U.S. Bank is among the parties responsible for the allegedly improper collections
lawsuits filed on behalf of the Trusts, (D.I. 67 at 6), its misconduct creates a divergent interest that
could prevent U.S. Bank from adequately representing the interests of the Noteholders in terms of
a settlement. (Id.). The Court agrees that the interests of the Noteholders sufficiently diverge from
U.S. Bank and that U.S. Bank cannot fully represent the Noteholders interests.

C.

Intervention is Also Appropriate Under Rule 24(b)

Even if the Movants had failed to make the requisite showing under Rule 24(a), the Court
finds that Movant's motions should be granted pursuant to Rule 24(b). Rule 24(b) provides the
Court with broad discretion to allow intervention where a movant shows a "claim or defense that

4

The law firm representing the Defendants, McCarter & English, has recently withdrawn,
leaving the Trusts unrepresented in this litigation.
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shares with the main action a common question oflaw or fact," and that such an intervention would
not "unduly delay or prejudice the adjudication of the original parties' rights." See Brody, 957
F.2d at 1115-16 (describing the decision of whether to grant intervention under 24(b) as a "highly
discretionary decision").
As discussed above, each of the Movants has issues that share a common question of law
or fact with the underlying action - some have been blamed for the conduct underlying the lawsuit
and some have contractual obligations that will be impacted by approval of the PCJ. With regard
to prejudice and delay, the Court does not find that the participation of relevant parties in protecting
their contractual rights, beginning at the very inception of this litigation, would create any undue
delay or prejudice on the CFPB or the Trusts. Indeed, where, as here, the Trusts are unrepresented
and significant questions exist regarding the authority of prior counsel to sign the PCJ on behalf
of the Trusts, and over the objection of the Owner Trustee, WTC, the Court finds that allowing the
participation of parties who have an interest in the litigation to have a say would be judicially
expedient.

D.

The Court Will Not Limit the lntervenors' Participation.

The CFPB asks that, if the Court grants the motions to intervene, "it should limit
intervenors' participation in this lawsuit to objecting to entry of the Proposed Consent Judgment."
(D.I. 54 at 29). It asserts that "it can be appropriate to limit an intervenor's participation to a
'discrete phase[] of an action' - such as the 'remedial stage' - because the intervenor 'may have a
sufficient interest to intervene as to certain issues in an action without having an interest in the
litigation as a whole." (Id. at 30) (citing Harris v. Pernsley, 820 F.2d 592, 599 (3d Cir. 1987)).
The Court, however, is mindful of the Supreme Court's precedent that "of course, a court may not
enter a consent decree that imposes obligations on a party that did not consent to the decree."

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Local No. 93, 478 U.S. at 529 (emphasis added). Here, based on the evidence provided, and a
consideration of the PCJ in light of the Trust Related Agreements, the Court finds that a laterentered consent decree may well impose obligations on the intervenors that would require their
approval. Thus, the Court will not limit the intervenors' participation in this litigation.

IV.

CONCLUSION
For the foregoing reasons, the Motions to Intervene filed by Ambac (D.I. 4), TSI (D.I. 9),

the Noteholders (D.I. 11), GSS (D.I. 12), PHEAA (D.I. 20), WTC (D.I. 31), U.S. Bank (D.I. 33,
35) will be GRANTED and the Court will place no limitation on the Intervenors' right to
participate in this action. An appropriate order will follow.

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