Ninth Circuit Unlikely to Fault School Lender

(CN) — A Ninth Circuit panel questioned Friday whether Sallie Mae had actual knowledge that the culinary school for which it was issuing student loans was misrepresenting its graduation and job placement rates.

Lead plaintiff Andrew Bradshaw sued SLM Corp. and Sallie Mae in 2013, claiming they aided and abetted fraud at the California Culinary Academy (CCA), which was not named as a defendant.

Bradshaw and other students say they did not now that an education with the school held little or no value, nor did they understand that there was no job market for CCA graduates that would pay sufficient wages to enable graduates to pay back the high tuition fees.

Sallie Mae and SLM, acting as the preferred lenders for the school, are accused of issuing the students high-interest private education loans knowing that the education the students received was unlikely to allow them to ever repay the loans.

The students say that the lenders knew that students were unaware of the high likelihood of default and purposefully failed to inform them of the risk.

A federal judge dismissed the students' complaint without leave to amend, prompting them to appeal to the Ninth Circuit.

During oral arguments in front of a three-judge panel on Friday, the Ninth Circuit judges questioned whether Sallie Mae had actual knowledge of the for-profit school's alleged scheme to prey on vulnerable students and whether the lender perpetuated that lie to the students.

"I know you are saying that they shouldn't have done business with Culinary Academy, that they should have figured out that they were a lying outfit. What I want to know is, what was the lie that Sallie Mae was making to students?" Judge Andrew Kleinfeld asked the students' attorney, Chris Patterson.

Patterson argued that, even if Sallie Mae did not communicate directly with the students, the lender worked with the school on a daily basis and were intimately involved in the mechanism by which students were recruited to the school.

"They were partnering hand-in-hand in a deliberate fashion to target these poor students," Patterson said.

Under an aiding and abetting claim, there is no requirement that Sallie Mae make their own affirmative representations, the attorney added.

Judge Jeffrey Watford questioned what facts alleged in the complaint would lead to the plausible inference that the lender knew the school was lying about its educational value.

Patterson responded by saying that in addition to being part of the endeavor to recruit the students, Sallie Mae also had a "due diligence in terms of what they were doing in underwriting these loans, so they should have and would have studied the operations of these for-profit colleges. These facts are sufficient to give rise to plausibility."

Attorney Lisa Simonetti, arguing on behalf of Sallie Mae, told the panel that the students' complaint contains no specific allegations that there was actual knowledge of the tort fraud.

"There is a disconnect between misrepresentations made by the school to the students to the allegations that Sallie Mae is aware or knew or should have known or could have known about those misrepresentations. . .There's no explanation as to how Sallie Mae would have known that," she said.

Watford noted that the complaint alleges that misrepresentations made to the students were made both orally and in writing.

"Why is it not plausible to infer that if the school was making these misrepresentations in writing, that some form of that written material would make its way into lender hands, given their close working relationship?" the judge asked.

Simonetti said that all of the allegations about job placement rates and graduation rates were all directed by the school to the students, with no involvement from the lenders.

"There is no intersection with the Sallie Mae defendants," she said.

The panel did not indicate how or when it would rule.

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