Student Loan Opponents Eye Keybank Injunction

PASADENA, Calif. (CN) - KeyBank student loan recipients urged the full 9th Circuit to suspend payment obligations they deem fraudulent, but the bank says the matter must first go to arbitration.

Matthew Kilgore and William Fuller are leading a class who that Keybank gave them up to $60,000 in loans to pay for pilot training at Silver State Helicopters vocational school in Oakland.

But Silver State, which is not a party to the complaint, was a "sham," that siphoned tuition money for its executives and then closed shop before students could complete their training, according to the complaint.

The class said Keybank was liable for fraud and racketeering as the school's preferred lender, Though Keybank allegedly knew of the financial disaster awaiting students of aviation schools, it did not hesitate in granting the loans that the students would never be able to repay, according to the complaint.

U.S. District Judge Thelton Henderson refused Keybank's motion to compel arbitration, but a three-judge panel of the 9th Circuit reversed in March 2012 after finding that the loans contained enforceable arbitration agreements under the Supreme Court's ruling in AT&T v. Concepcion.

The court later vacated that decision in favor of an en banc hearing, which occurred Tuesday.

Though California law requires a court, not an arbitrator, to resolve demands for public injunctions, the U.S. Chamber of Commerce says that the Federal Arbitration Act (FAA) pre-empts such laws.

In an amicus brief on behalf of Keybank, the nonprofit told the full court decided as much in Concepcion.

"Even if there is a good policy reason for the state lower rule that tries to displace the principals of the FAA, that state policy has to give way," Mayer Brown attorney Andrew Pincus said.

Keybank's attorney, Scott O'Connell, told the judges that the plaintiffs had a "valid and binding" agreement, and that arbitration is the proper venue for them to seek relief.

"These are students who took loans out to attend school," said O'Connell, an attorney with Nixon Peabody in Manchester, N.H. "The two representative plaintiffs got everything they were entitled to under their bargain. More than 175 hours [of training]. It is the equivalent of any one of us going to law school, failing the bar exam, and then seeking to get money back or debt relief from the lender."

But San Francisco attorney James Sturdevant insisted that the plaintiffs need an injunction to stop Keybank from collecting on the loans and preserve their credit ratings.

He balked when the judges questioned whether the plaintiffs could return to court for a public injunction after arbitrating their claims individually.

"That's putting the cart before the horse because the first question that the court must determine in this case is whether or not this case should be litigated or arbitrated," Sturdevant said. "Whether or not the claims in this case, the relief sought by the plaintiffs, are subject to the FAA or not."

Unmoved, Chief Justice Alex Kozinski countered: "What's wrong with putting the cart before the horse."

"That's how it's normally done," he continued. "Why not do it differently in this case and avoid the whole question of a public injunction."

"It's an unusual cart," he added. "So what? We're in California."

Along with Kozinski, the en banc panel featured Judges Harry Pregerson, Margaret McKeown, William Fletcher, Richard Tallman, Consuelo María Callahan, Milan Smith, Mary Murguia, Morgan Christen, Paul Watford and Andrew Hurwitz.

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