Nelson v. Great Lakes Educational Loan Services, Inc., et al.
Filing
54
ORDER GRANTING 29 Motion to Dismiss filed by Defendants. The Motion to Strike is DENIED as moot. The First Amended Class Action Complaint is DISMISSED without prejudice. Plaintiff is GRANTED leave to file a Second Amended Class Action Complaint on or before January 19, 2018. Defendants' first Motion to Dismiss (Doc. 17 ), which was directed at the original complaint, is also DENIED as moot. Signed by Judge Nancy J. Rosenstengel on 12/19/2017. (mlp)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ILLINOIS
NICOLE DENISE NELSON,
individually and on behalf of all others
similarly situated,
)
)
)
)
Plaintiff,
)
)
vs.
)
)
GREAT LAKES EDUCATIONAL LOAN )
SERVICES, INC., and DOES, 1-10,
)
)
Defendants.
Case No. 3:17-CV-00183-NJR-SCW
MEMORANDUM AND ORDER
ROSENSTENGEL, District Judge:
This matter comes before the Court on the Motion to Strike and to Dismiss
Plaintiff’s First Amended Class Action Complaint filed by Defendant Great Lakes
Educational Loan Services, Inc. (“Great Lakes”) (Doc. 29). For the reasons set forth
below, the motion is granted.
BACKGROUND
Plaintiff Nicole Nelson is an Illinois resident who began repaying her student
loans on December 14, 2009 (Doc. 24, ¶¶ 1, 79). Defendant Great Lakes is Nelson’s
student loan servicer (Id. at ¶ 149). As a loan servicer, Great Lakes is responsible for
managing borrowers’ accounts, processing payments, assisting borrowers, and
communicating with borrowers about the repayment of their loans (Id. at ¶ 1).
Federal student loan borrowers have a number of repayment plans available to
them. Nelson alleges that federal student loan borrowers who are unable to afford their
current payment can change to another repayment plan at any time, including an
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“income-driven” repayment plan. These income-driven plans set the borrower’s
monthly student loan payment at only a percentage of his or her “discretionary” income
(Id. at ¶ 16). Income-driven repayment plans can offer borrowers extended payment
relief, as well as other benefits such as a $0 monthly payment that still counts as a
qualifying payment toward loan forgiveness (Id. at ¶ 18-19).
The United States Department of Education has advised borrowers to contact its
student loan servicer before applying for any alternative repayment plan or forbearance
(Id. at ¶ 32). Likewise, Great Lakes repeatedly encouraged borrowers experiencing
financial hardship to contact it for assistance in evaluating the various alternative
repayment options and not to contact others for student loan advice (Id. at ¶ 33). For
example, Great Lakes’ website states: “You don’t have to pay for student loan services or
advice. Our expert representatives have access to your latest student loan information
and understand all of your options.” (Id. at ¶ 34). Nevertheless, Nelson claims, despite
attempting to publicly assure borrowers that Great Lakes will help them enroll in an
appropriate, affordable repayment plan, it systematically and routinely disregarded that
commitment and used its “expert” call center employees to steer student loan borrowers
experiencing long-term financial distress or hardship into forbearance and deferment.
Nelson claims this practice delayed borrowers’ entry into alternative or income-driven
repayment plans.
Nelson asserts that Great Lakes took these actions to save money in two ways.
First, it had to pay fewer employees to be on the phone with student loan borrowers
processing a forbearance or deferment than it would if employees had to explain
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enrollment in income-driven repayment options, as those options take significantly
longer to explore (Id. at ¶ 51, 70). Likewise, Great Lakes would have to pay more
employees to review and process income-driven repayment plan applications and
yearly renewals, thereby increasing operating costs (Id. at ¶¶ 51, 72). Nelson further
avers that Great Lakes incentivized its employees to push borrowers into forbearance
without exploring income-driven repayment plans (Id. at ¶ 52). Specifically, Great Lakes
tracked, evaluated, and compensated its customer service personnel, in part, based on
average call time (Id. at ¶ 53). The shorter the call, the more compensation employees
received (Id.).
In the process of paying her own student loans, Nelson experienced financial
hardship and called Great Lakes on multiple occasions to obtain information regarding
repayment options (Id. at ¶¶ 79-87). Each time, Nelson was routed to a call center
employee who, she alleges, followed a script that was designed to steer her into
forbearance (Id. at ¶ 93). As a result, Nelson was enrolled in forbearance four times by
Great Lakes’ “expert” call center employees who led her to believe that was her best
option (Id. at ¶¶ 92, 96, 99). She also entered unemployment deferment once as a result of
her call to Great Lakes. Nelson claims Great Lakes’ “expert” employees did not inform
her of other alternative repayment options that likely would have allowed her to make
much lower monthly payments (Id. at ¶ 109).
On May 15, 2017, Nelson filed the First Amended Class Action Complaint,
alleging Great Lakes and certain John Does deceptively and systematically deterred her
from obtaining access to income-driven repayment plans and instead steered her and
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other student loan borrowers into forbearance (Id. at ¶¶ 6, 130(g)). Nelson alleges Great
Lakes and the John Doe Defendants engaged in “numerous unfair acts and practices,”
including holding themselves out to be experts, recommending forbearance to
borrowers, and failing to inform borrowers of all options—all in an effort to save Great
Lakes significant amounts of money (Id. at ¶¶ 51, 130). Nelson claims she relied upon the
information provided by Great Lakes, which caused her to go into forbearance rather
than enter a repayment plan better suited for her circumstances (Id. at ¶¶ 135-36, 139).
Nelson seeks to represent two classes of persons made up of student loan
borrowers who have been similarly placed in forbearance without being adequately
informed of alternative repayment options (Id. at ¶ 113). Specifically, Nelson has
identified these two classes as:
Illinois Consumer Fraud Class
All individuals who reside in Illinois or who entered into student loan contracts
in Illinois, who since February 21, 2014, were subjected to Defendants’ unfair and
deceptive conduct, as further described in Count I, and were placed in
forbearance without being advised of alternate repayment options.
Illinois Constructive Fraud Class
All individuals who reside in Illinois or who entered into student loan contracts
in Illinois, who since February 21, 2012, were subjected to Defendants’ unfair,
misleading, and/or deceptive conduct, as further described in Count II, who were
placed in forbearance without being advised of alternate repayment options.
Nelson, individually and on behalf of the class mentioned above, asserts two
claims under Illinois law. 1 In Count I, she alleges a violation of the Illinois Consumer
Fraud and Deceptive Business Practices Act on behalf of the Illinois Consumer Fraud
Class. In Count II, Nelson alleges constructive fraud on behalf of the Illinois
1
Nelson does not allege that Great Lakes violated any federal disclosure requirements, as there is no
private right of action under the Higher Education Act.
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Constructive Fraud Class. Nelson also alleges a third count, negligent misrepresentation,
regarding statements made specifically to her.
LEGAL STANDARD
A motion to dismiss under Rule 12(b)(6) challenges the sufficiency of the
complaint for failure to state a claim upon which relief may be granted. FED. R. CIV. P.
12(b)(6). To survive a Rule 12(b)(6) motion, a complaint must “state a claim to relief that
is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). While a
complaint need not include detailed factual allegations, there “must be enough to raise a
right to relief above the speculative level.” Twombly, 550 U.S. at 555. The plaintiff must
“plead [] factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” McReynolds v. Merrill Lynch & Co., 694
F.3d 873, 885 (7th Cir. 2012) (quoting Ashcroft v. Iqbal, 556 U.S. 662 (2009)). “In reviewing
the sufficiency of a complaint under the plausibility standard, [a court must] accept the
well-pleaded facts in the complaint as true, but [it] ‘need not accept as true legal
conclusions, or threadbare recitals of the elements of a cause of action, supported by
mere conclusory statements.’” Alam v. Miller Brewing Co., 709 F.3d 662, 665-66 (7th Cir.
2013) (quoting Brooks v. Ross, 578 F.3d 574, 581 (7th Cir. 2009)).
Federal Rule of Civil Procedure 12(f) governs whether to strike matters from a
pleading. Under Rule 12(f), upon a motion or upon its own initiative, “[t]he court may
strike from a pleading an insufficient defense or any redundant, immaterial,
impertinent, or scandalous matter.” Motions to strike are generally disfavored. See Heller
Fin., Inc. v. Midwhey Powder Co., 883 F.2d 1286, 1294 (7th Cir. 1989). For this reason, this
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Court and others have held that a party must show prejudice to succeed on a motion to
strike. See, e.g., Anderson v. Bd. of Educ. of Chi., 169 F. Supp. 2d 864, 867 (N.D. Ill. 2001); see
also Talbot v. Robert Matthews Distrib. Co., 961 F.2d 654, 664 (7th Cir. 1992). Prejudice exists
where the allegation confuses the issues or is so lengthy and complex that it puts an
undue burden on the opposing party. Cumis Ins. Soc., Inc. v. Peters, 983 F. Supp. 787, 798
(N.D. Ill. 1997). The Court should not strike matter from a pleading pursuant to Rule
12(f) “unless the challenged allegations have no possible relation or logical connection to
the subject matter of the controversy and may cause some form of significant prejudice
to one or more of the parties to the action.” See 5C Charles A. Wright & Arthur R. Miller,
Federal Practice and Procedure § 1382 (3d ed.); accord Anderson, 169 F. Supp. 2d at 867-68.
The burden on a motion to strike is upon the moving party. See Vakharia v. Little Co. of
Mary Hosp. & Health Care Ctrs., 2 F. Supp. 2d 1028 (N.D. Ill. 1998).
DISCUSSION
Great Lakes has moved to strike twenty eight factual allegations cited in the
complaint that are allegedly copied, verbatim, from another lawsuit, as well as twelve
factual allegations derived from anonymous internet postings on www.glassdoor.com.
Great Lakes further moves to dismiss Nelson’s claims because they are preempted by
federal law and because she fails to state a claim under Rule 12(b)(6) of the Federal Rules
of Civil Procedure (Doc. 29). Because the Court finds Defendants’ express preemption
argument most persuasive, the Court first addresses that issue.
Preemption
As an initial matter, Nelson has asserted that Defendants’ preemption argument
is not properly raised on a motion to dismiss, as preemption is an affirmative defense
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(Doc. 33, p. 14). That proposition is not, however, uniformly true. “Preemption may be
[a] proper ground for a dismissal pursuant to Rule 12(b)(6).” French v. STL Distribution
Services, LLC, No. 10-511-GPM, 2010 WL 4684016, at *1 (S.D. Ill. Nov. 10, 2010). “A
complaint that, on its face, establishes federal preemption is properly dismissed
pursuant to Rule 12(b)(6).” Green v. Charter One Bank, N.A., No. 08 C 1684, 2010 WL
1031907, at *1 (N.D. Ill. Mar. 16, 2010); see also Currie v. Diamond Mortgage Corp. of Ill., 859
F.2d 1538, 1542 (7th Cir. 1988). Thus, if the complaint on its face establishes that Nelson’s
claims are preempted, then dismissal is appropriate.
Great Lakes asserts that Nelson’s state law claims are barred under the
Supremacy Clause of the United States Constitution because the manner in which Great
Lakes interacts with borrowers—including how it provides information on alternative
payment options—is regulated by the federal government pursuant to statute,
regulations, and its federal-contracting authority. Specifically, the Department of
Education, which administers the Higher Education Act (“HEA”) and procures the
services of federal contractors like Great Lakes, has promulgated comprehensive
regulations prescribing the disclosures for repayment options provided to borrowers. In
addition, the Department of Education exercises extensive oversight over contractors
like Great Lakes that service student loans on its behalf. Great Lakes argues Nelson’s
state law claims are an attempt to impose additional disclosure requirements—that is, to
require more of Great Lakes than is required by the HEA. As a result, Great Lakes
asserts, Nelson’s claims are preempted.
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Federal law is considered “the supreme Law of the Land.” U.S. Cont. art. VI, cl. 2.
As a result, when federal and state laws conflict, “the conflicting state law provisions
[are] without effect.” Maryland v. Louisiana, 451 U.S. 725, 746 (1981). Federal preemption
of a state statute occurs when: “(1) Congress enacts a statute that explicitly pre-empts
state law; (2) state law actually conflicts with federal law; or (3) federal law occupies a
legislative field to such an extent that it is reasonable to conclude that Congress left no
room for state regulation in that field.” Chae v. SLM Corp., 593 F.3d 936, 941 (9th Cir.
2010) (citing Tocher v. City of Santa Ana, 219 F.3d 1040, 1045 (9th Cir. 2000); Crosby v. Nat’l
Foreign Trade Council, 530 U.S. 363, 372-73 (2000); Cipollone v. Liggett Group, Inc., 505 U.S.
504, 516 (1992)).
“The Supreme Court has made clear that Congress may indicate its intent to
displace state law through express language.” Chae, 593 F.3d at 942 (citing Altria Group,
Inc. v. Good, 555 U.S. 70, 129 S.Ct. 538, 543 (2008)). When Congress enacts an express
preemption provision, the Court must interpret the provision and “identify the domain
expressly pre-empted by that language.” Id. (quoting Medtronic, Inc. v. Lohr, 518 U.S. 470,
484 (1996)). To do so, the Court must examine the text of the provision, the surrounding
statutory framework, and Congress’ stated purpose in enacting the statute. Id. “If the
statute contains an express preemption clause, the task of statutory construction must in
the first instance focus on the plain wording of the clause, which necessarily contains the
best evidence of Congress’ preemptive intent.” CSX Transp., Inc. v. Easterwood, 507 U.S.
658, 664 (1993).
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In this case, the relevant statute provides: “Loans made, insured, or guaranteed
pursuant to a program authorized by title IV of the Higher Education Act of 1965 shall
not be subject to any disclosure requirements of any State law.” 20 U.S.C. § 1098g.
34 C.F.R. § 682.205, titled “Disclosure requirements for lenders,” then regulates the
specific disclosures that lenders must make at specific times. Thus, to determine whether
Nelson’s claims are preempted, the Court must examine whether her claims involve
“disclosures.”
The parties agree that the word “disclosure” is undefined by the HEA. Therefore,
Defendants argue, the Court must construe it in accordance with its ordinary dictionary
definition: “The act or process of making known something that was previously
unknown; a revelation of facts.” BLACK’S LAW DICTIONARY (10th ed. 2014). Nelson asserts
that the regulations themselves, as well as supporting case law, provide a “working
definition” of disclosure. She argues that § 682.205 provides for “disclosures” as well as
“contacts” and “other communications” a lender/loan servicer may have with a
borrower. See 34 C.F.R. § 682.205 (a)(4)(ii) (certain disclosures are not required “if the
borrower’s difficulty has been resolved through contact with the borrower resulting
from an earlier disclosure or other communication between the lender and the
borrower”) (emphasis added). Thus, not every contact a lender has with a borrower is a
“disclosure.” And if the contact is not a “disclosure,” she argues, then there can be no
preemption.
The Court finds aspects of both parties’ definitions persuasive. Defendants’
dictionary definition of disclosure is the ordinary meaning of the word. The Court also
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agrees that a lender can probably communicate with a borrower without triggering any
disclosure requirements as provided in § 682.205. The question, however, is not whether
every contact or communication is a disclosure under federal law. Rather, the question
before the Court is whether Nelson is trying to force any state law disclosure
requirements onto Great Lakes. Construing the statutory framework in conjunction with
the plain meaning of the word “disclosure,” it appears Congress intended § 1098g to
preempt any state law requiring lenders to reveal facts or information not required by
federal law.
While the Seventh Circuit has not addressed § 1098g and preemption, the Ninth
Circuit has examined the statute and found it to expressly preempt state disclosure
requirements under California’s Unfair Competition Law and Consumer Remedies Act.
Chae, 593 F.3d at 942. In Chae, the plaintiffs claimed that Sallie Mae employed “unfair”
and “fraudulent” business practices related to the first repayment date and its interest
calculation. Id. The plaintiffs alleged the practices constituted an unfair or deceptive
practice
under
California’s
Consumer
Legal
Remedies
Act
because
they
“misrepresent[ed]” that the student loans “confer rights, remedies, and obligations” that
do not exist. Id. The Ninth Circuit interpreted the plaintiffs’ misrepresentation claims as,
“at bottom,” improper-disclosure claims. Id. Because the plaintiffs did not contend that
California law prevented Sallie Mae from employing the loan-servicing practices at
issue, the court considered the allegations, in substance, to be “a challenge to the
allegedly-misleading method Sallie Mae used to communicate with the plaintiffs about
its practices. In this context, the state-law prohibition on misrepresenting a business
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practice ‘is merely the converse’ of a state-law requirement that alternate disclosures be
made.” Id. at 942-43 (quoting Cipollone v. Liggett Group, Inc., 505 U.S. 504, 527 (1992)).
Other courts reviewing the express preemption clause in § 1098g have held that
where a state law claim is “rooted in a failure to disclose information required by the
HEA,” such claim would likely be expressly preempted. Linsley v. FMS Inv. Corp., No.
3:11cv961, 2012 WL 1309840, *4 (D. Conn. Apr. 17, 2012). In Brooks v. Salle Mae, Inc., a
state court case cited by Nelson, the plaintiff alleged that Sallie Mae misrepresented the
documentation required to determine eligibility for economic deferment and
misrepresented that she had to pay all late fees before she could enter economic
deferment. Brooks v. Sallie Mae, Inc., No. FSTCV096002530S, 2011 WL 6989888, at *6
(Conn. Super. Ct. Dec. 20, 2011). Citing Chae as authority, the court held that the
plaintiff’s misrepresentation claims were, in fact, disguised improper disclosure claims
and were therefore preempted. Id.
While none of these cases are binding on this Court, the Court nonetheless finds
them persuasive in determining whether the claims made by Nelson involve
“disclosures” and are therefore preempted by federal law. Great Lakes argues that
Nelson’s claims involve “disclosures” because she alleges Great Lakes made various
omissions and misrepresentations by failing to inform borrowers of their right to enter
an income-driven repayment plan. Great Lakes contends that saying it “failed to inform”
is just another way of saying it “failed to disclose” information. Because what Great
Lakes is required to disclose is regulated by federal law, see 34 C.F.R. § 682.205, Nelson’s
state law claims are preempted.
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Nelson admits that 20 U.S.C. § 1098g preempts state law from governing
disclosure requirements and that the regulations contained in 34 C.F.R. § 682.205 govern
the disclosures required of lenders. She argues, however, that she does not seek to
impose any additional “disclosure” requirements because the alleged wrongful activity
occurred during Great Lakes’ “contacts” or “other communication” with borrowers. In
other words, Nelson asserts her claims are not preempted because she’s alleging Great
Lakes failed to disclose information at times not specified by § 682.205. But what Nelson is
essentially saying is: under Illinois state law, Great Lakes should have disclosed
additional information to me and other borrowers. Nelson is attempting to require more
of Great Lakes than is required by the HEA.
As a result, Nelson’s allegations in Count I that Great Lakes “failed to provide” or
“failed to offer” borrowers all of their options, “failed to discuss” income-driven
repayment plans prior to enrolling borrowers in forbearance, and “failed to follow up or
alert” student loan borrowers to more advantageous repayment options after a first
forbearance are preempted, as they are no different than a claim that Great Lakes failed
to make proper disclosures. See Chae, 593 F.3d at 942. Likewise, Nelson’s claims in Count
I that Great Lakes’ employees held themselves out to be experts working on a borrower’s
behalf, held themselves out as understanding and offering all student loan options, and
offered forbearance as a “best option” to struggling borrowers who could have enrolled
in a much better plan are also disguised failure-to-disclose claims. Id. The converse of
these allegations is that Great Lakes’ employees should have disclosed (or revealed) they
were not “experts” and were working on behalf of Great Lakes, should have disclosed
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all options to borrowers, and should have disclosed that forbearance may not be the
“best option” for all borrowers. Finally, Nelson’s allegation that Great Lakes provided
employees with scripts to steer struggling student loan borrowers into forbearance
without explaining, or even identifying other, better repayment options is merely an
allegation that Great Lakes should have disclosed alternative repayment options.
The conclusion that Nelson’s claims in Count I involve disclosures is supported
by the elements of the cause of action itself. As in Chae, Nelson has pointed to no Illinois
state law prohibition against the underlying practice at issue, i.e., “steering” a customer
toward a plan that is more favorable to the business. Rather, she brings her claim under
the Illinois Consumer Fraud and Deceptive Business Practices Act, which requires an
intent that the consumer rely on the concealment or omission of a material fact. See 815
ILCS 505/2 (stating it is unlawful, in the conduct of any trade or commerce, to
misrepresent, suppress, conceal, or omit any material fact, with the intent that others rely
on the concealment, suppression, or omission of such material fact).
In Count II, Nelson alleges constructive fraud on behalf of the Illinois
Constructive Fraud Class (Id. at ¶¶ 148-168). In this claim, Nelson asserts Great Lakes
and the Doe Defendants breached an alleged confidential or fiduciary relationship by
misrepresenting, concealing, or omitting the detrimental effects of entering or
continuing in forbearance, omitting other alternative repayment options, holding
themselves out as “experts,” holding themselves out as having all student loan
borrowers’ information, and holding themselves out as working in the best interest of
student loan borrowers (Id. at ¶ 154). Nelson alleges Defendants intended for student
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loan borrowers to rely on these omissions and misrepresentations in determining how to
proceed with paying (or forbearing) their student loan payments (Id. at ¶ 157). As a
result, Defendants delayed Nelson’s and the putative class members’ enrollment in
alternate or income-driven repayment plans, causing them actual damages.
Count II is also preempted, as it is, “at bottom,” a claim that Great Lakes failed to
disclose additional information in its correspondence and on its website. Nelson
essentially claims Great Lakes breached an alleged fiduciary duty by failing to disclose
information relevant to choosing a repayment plan, disclosures that are expressly
regulated by § 682.205.
Finally, in Count III, Nelson alleges negligent misrepresentation as to statements
made specifically to her (Id. at ¶¶ 169-85). Nelson claims Defendants misrepresented or
omitted the same material information alleged in Counts I and II, that Great Lakes had a
policy of steering borrowers such as herself into forbearance, and that she relied on these
misrepresentations and omissions in determining whether to enter forbearance (Id. at ¶
172). Again, this claim involves information that Nelson asserts Great Lakes should have
disclosed to her and, as such, it is expressly preempted.
Having found Nelson’s claims as pleaded to be expressly preempted, the Court
need not determine whether conflict preemption also applies or whether Nelson has
stated a claim pursuant to Rule 12(b)(6). Defendants’ Motion to Strike is also denied as
moot.
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CONCLUSION
Because Nelson’s claims are expressly preempted, the Motion to Dismiss filed by
Great Lakes Educational Loan Services, Inc., and the John Doe Defendants (Doc. 29) is
GRANTED, and the Motion to Strike is DENIED as moot. The First Amended Class
Action Complaint is DISMISSED without prejudice.
In an abundance of caution, the Court will grant Nelson leave to file a Second
Amended Class Action Complaint, on or before January 19, 2018. Failure to file a Second
Amended Class Action Complaint as ordered will result in the dismissal of this action
with prejudice.
IT IS SO ORDERED.
DATED: December 19, 2017
___________________________
NANCY J. ROSENSTENGEL
United States District Judge
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