Former Flight Students Can’t Enjoin Bad Credit

     (CN) – Former students of a shuttered flight school must arbitrate claims against KeyBank, the full 9th Circuit ruled Thursday, saying their credit issues do not require an injunction.
     Matthew Kilgore and William Fuller had hoped to snare a public injunction for a class of approximately 120 students whom Silver State Helicopters trained in flight before the school went bankrupt in 2008. The former students sued KeyBank, Key Education Resources and Great Lakes Education Loan Services.
     Calling Silver State a “sham” that siphoned tuition money for its executives, Kilgore and Fuller said the Oakland, Calif.-based school had closed shop before they could complete the training for which they had taken up to $60,000 in loans.
     The class said KeyBank was liable for fraud and racketeering as the school’s preferred lender. They said Keybank knew of the financial disaster awaiting students of aviation schools, but approved loans it knew could never be repaid.
     U.S. District Judge Thelton Henderson refused the companies’ motion to compel arbitration and ultimately dismissed the case for failure to state a claim.
     A three-judge panel of the 9th Circuit reversed in March 2012, saying the trial court should never have reached the merits of the case since the loans contained enforceable arbitration agreements under the Supreme Court’s ruling in AT&T v. Concepcion .
     After vacating that decision in favor of a December 2012 en banc hearing , a 10-judge majority reached the same conclusion Thursday.
     “We hold that this case does not fall under the narrow ‘public injunction’ exception to the Federal Arbitration Act we recognized in Davis v. O’Melveny & Myers, and remand with instructions to compel arbitration,” Judge Andrew Hurwitz wrote for the majority.
     Kilgore and Fuller do not meet the requirements for public injunctive relief because it “plainly would benefit only the approximately 120 putative class members,” the ruling states.
     Looking for a silver lining, counsel for Kilgore and Fuller noted that the opinion vacated Judge Henderson’s ruling on the merits.
     “It gives us a clean slate to arbitrate this,” Pinnacle Law Group attorney Andrew August said. “Although initiating arbitration is expensive, Keybank said they would pay filing fee.”
     He noted the offer was likely made “to avoid any adverse ruling in the trial court,” but he strongly believes it will hold at least with respect to Kilgore and Fuller.
     “This isn’t like Concepcion case or one of the consumer cases where there’s 50 cents at stake,” August said. “A lot of these students owe in excess of six figures.”
     KeyBank’s attorney, W. Scott O’Connell with Nixon Peabody, said the ruling marks the death knell for the public injunction exception.
     “I personally believe that the doctrine is not long for this world,” O’Connell said.
     “When the right case comes along, the court will be hard pressed to reconcile it with Concepcion.”
     The ruling notes that Concepcion foreclosed the plaintiffs from taking issue with the ban in the promissory notes on class arbitration.
     “Nothing else in the arbitration clause in the note suggests substantive unconscionability,” Hurwitz wrote.
     In finding that the note is also not procedurally unconscionable, the court pointed out that the note gives students 60 days from the signing date to reject arbitration. This is “more forgiving” than another that passed scrutiny with a 30-day window, according to the ruling.
     “Nor was the arbitration clause buried in fine print in the note, but was instead in its own section, clearly labeled, in boldface,” Hurwitz added.
     This finding failed to impress the students’ lawyer.
     “That assumes that you know you have an arbitration clause that gives you 60 days,” August said, emphasizing his contention “that nobody knows you have an arbitration clause because of the way it’s presented.”
     O’Connell, the KeyBank lawyer, said the court’s finding upholds the promissory notes as “very user friendly and consumer friendly.”
     “And largely on that basis, the contract wasn’t an onerous,” O’Connell added. “It was appropriate.”
     August, the students’ lawyer called the decision “disturbing.”
     “The record that we have about unconscionability was beyond anything I’ve ever seen, and I’ve been doing this 30 years,” he said.
     Judge Harry Pregerson echoed this sentiment in the lone dissent from the 11-judge panel, which begins under the heading “Hustled by the school; hustled by the bank.”
     Ultimately the contracts fail to comply with the Federal Trade Commission’s so-called Holder Rule, according to the dissent.
     Created in 1975, the Holder Rule requires consumer credit contracts to include the following language: “any holder of this consumer credit contract is subject to all claims and defenses which the debtor could assert against the seller of goods or services obtained pursuant hereto or with the proceeds hereof.”
     “Silver State knew it was headed for a crash landing,” Pregerson wrote. “By 2008, Silver State had racked up ten million dollars in debt against fifty thousand dollars in assets. Moreover, despite Silver State’s alluring promises, there was no significant demand for helicopter pilots with a Silver State degree. And it wasn’t just the school that knew it. Defendant KeyBank knew it, too.”
     He noted that the Holder Rule would have informed students that “KeyBank was subject to the same claims and defenses as Silver State.”
     “By omitting that notice from its printed loan contracts, KeyBank may have sought to insulate itself from liability for Silver State’s misleading promises,” Pregerson wrote. “Silver State then presented those faulty loan contracts to prospective students and ‘pressure[d] the students to sign the [master promissory notes] as soon as possible,’ according to an affidavit of Silver State’s former student finance manager Jody Pidruzny. And sign up they did.”
     Pregerson insisted in another section titled “Ignored by the courts,” that the arbitration clause was unconscionable.
     “KeyBank foisted loans on students who staked their financial well-being on the shaky promises of Silver State Helicopter school,” he concluded. “When Silver State went down, so did the students. The students deserve, and I submit the law requires, that their claims be heard and adjudicated by a court. The provision in the promissory note relegating students to arbitration is unconscionable and thus unenforceable. Therefore, I dissent.”
     O’Connell, the KeyBank attorney, declined to address the dissent beyond calling it “anomalous.”
     Pregerson’s words had more of an impact on August, the lawyer for the students.
     “Very rarely do you see a dissent of this magnitude where the majority opinion doesn’t even address it,” August said.
     “I don’t believe there’s a single reference to Pregerson’s opinion from the majority,” he added. “You just don’t see that. I don’t think there’s an intellectually honest response to Pregerson’s points.”
     “I probably would have been more sanguine if Pregerson had not written that dissent,” the lawyer continued. “If I’m losing a baseball game 20-nothing or a football game 100-nothing, that’s almost better than have it be a close one.”
     O’Connell focused his statements on the impending doom he believes awaits the public injunction exception.
     “With all the efforts to get out of arbitration, there have been lots of claims to get a public injunction,” O’Connell said. “What the 9th Circuit made clear here is that you can’t just call it a public injunction issue and make it be so. That’s pretty significant.”
     The California Supreme Court emphasized the public benefit as an exception to arbitration in the 1999 decision Broughton v. Cigna Healthplans of California and the 2003 decision, Cruz v. PacifiCare Health Systems Inc.
     The 9th Circuit’s first applied the Broughton-Cruz framework in 2007, and that Davis decision likewise forecloses an injunction for the Silver State students, according to the ruling.
     “That [public benefit] concern is absent here, where defendants’ alleged statutory violations have, by plaintiffs’ own admission, already ceased, where the class affected by the alleged practices is small, and where there is no real prospective benefit to the public at large from the relief sought,” Hurwitz wrote.

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