Thursday, April 22, 2010


The House Judiciary Subcommittee on Commercial and Administrative Law today weighed a bill to amend the Bankruptcy Code to allow private student loans to be discharged. Witnesses at the hearing today on H.R. 5043, the "Private Student Loan Bankruptcy Fairness Act of 2010," included Deanne Loonin of the National Consumer Law Center, John A. Hupalo of the investment firm Samuel A. Ramirez & Co., Inc., consumer Valisha Cooks and Adrian M. Lapas representing the National Association of Consumer Bankruptcy Attorneys. This proposed change in the law, if enacted by Congress, would make the private student loans that my clients obtained from Student Loan Xpress and KeyBank to attend SSH dischargeable in bankruptcy.

Monday, April 12, 2010

Bad News

United States District Court Judge Thelton E Henderson signed a 23 page Order today Granting KeyBank's Motion to Dismiss Third Amended Complaint in the Northern District of California case entitled Matthew C. Kilgore et al. v KeyBank National Association, et al., Case No. C08-2958 TEH today. The judge dismissed the case with prejudice. This means that the case is lost, unless an appeal later reverses the judge. This is the same lawsuit in which Pinnacle Law Group sued Student Loan Xpress and AES and then later dismissed SLX after entering into the proposed class action settlement that is now awaiting approval or rejection by Judge Merryday in Florida.

Plaintiffs and their counsel sought to stop KeyBank and its loan services provider Great Lakes Educational Loan Services ("Great Lakes") from collecting the loans or reporting the loan balances to credit reporting agencies. Plaintiffs had 6 claims for relief, all of which were thrown out by Judge Henderson.

A full explanation of the judge's ruling will be posted later. For now, I quote the judge's conclusion: "Defendants' motion to dismiss is GRANTED. Plaintiffs first, second and sixth causes of action are dismissed for failure to state a claim, and their third, fourth and fifth claims are dismissed on federal preemption. The TAC (third amended complaint) is DISMISSED without leave to amend. The clerk shall enter judgment and close the file. IT IS SO ORDERED."

I spoke to Andy August of Pinnacle Law Group about this loss tonight and he described this loss as "the greatest disappointment" of his career.

For my clients throughout the country with KeyBank loans, this is not the end. I will continue my efforts on your behalf. For my clients with SLX loans, this loss for students with KeyBank loans underlines one of the reasons for the proposed settlement with SLX: the fact that when you do not settle, you risk a total loss in court.

Friday, April 02, 2010

A False Claim

Someone opposed to the proposed class action settlement has asserted that the SLX SSH loans are no longer collectible because CIT Group (SLX’s parent company) has “written off” the SSH loans. This assertion is a false claim. I spoke with class counsel Andy August about this today. Here are his thoughts:

"This assertion is not true and is dangerously misleading. The person who made the accusation is neither a lawyer nor accountant and clearly lacks an understanding of the requirements for Securities and Exchange Commission filings, accounting, tax or federal securities laws. Regrettably, this assertion was made without prior consultation with Class Counsel (or any other lawyer, apparently).

From the very beginning of Class Counsels’ involvement in the case Class Counsel closely monitored CIT’s SEC filings regarding its SSH loan portfolio. Class Counsel has also been in touch with the lawyers who have filed securities class actions on behalf of investors in CIT. For example, everyone who attended and participated in the initial mediation in August 2008 knew that CIT had established a loss reserve for the SSH loans in excess of $120 million. In fact, this amount was one of the factual bases for the negotiations that followed. Class Counsel has monitored every subsequent SEC filing and nothing in any of the filings or the fact that CIT filed bankruptcy (SLX did not file bankruptcy) alters SLX’s ability to attempt to collect every dollar owed to it under the loans.

Class counsel has consulted with securities, accounting, bankruptcy and tax experts who have unanimously advised that CIT’s most recent filings, which treat the loans as “non-accrual” loans, have no effect whatsoever on SLX’s ability to collect from you the full amount of the loans if they prevail. The following is a lay explanation obtained by Mr. August of why a lender, under the circumstances present here, may make a change in how a loan is accounted on its books. It explains that “non-accrual” is not the same as walking away from a loan and that characterizing a loan portfolio as in “non-accrual”, has no impact on a lender’s ability to collect in any way:

Normally, the lender will treat itself as receiving income as interest comes due—accrues—on the loan. Under normal circumstances, the lender can expect to actually receive the cash in a very short period of time afterward. When a borrower defaults and does not pay its interest, and the default continues for several months, the lender will reach the point where it begins to doubt if it will ever receive the cash for the interest that is accruing. At that point, it does not make business sense and, in fact, is in many cases against federal securities laws, to keep acting as if the lender were receiving income. As a result, the lender places the loan on “nonaccrual”, and stops posting income from the loan. This is a bookkeeping and accounting action only. It does not mean the lender will not attempt to collect every nickel of money due to it.

Because there has been no collection activity on the SSH loans for more than two years, CIT is obligated to treat the loans as “non-accrual” loans in its SEC filings. However, CIT’s compliance with federal “Fresh Start Accounting” rules does nothing to change the realities of SLX’s ability to collect the SSH loans. Please do not think or believe otherwise."

I agree with Andy August's analysis. In my own bankruptcy practice, I have seen many instances of banks collecting on or selling old debts that others described as having been "written off."

As of today, Judge Merryday has neither approved of nor rejected the proposed settlement, nor has he given any indication of when he will issue his ruling. I will post complete information about his ruling as soon as the ruling is made.