Thursday, September 25, 2014

CFPB Sues Corinthian College On Predatory Student Loan Practices

In case there were any doubts, the federal government is still in the business of Truth-In-Lending.  Corinthian College is the target of an action of the Consumer Financial Protection Bureau “(CFPB”) for predatory student loan practices. This is not too surprising given the Massachusetts Attorney General action filed back in April against Corinthian.  Corinthian has a host of troubles now, including financial problems that have it seeking a buyer for the distressed educational institution.  (See, The For Profit College that's Too Big to Fail and Corinthian Victimized Students)   The CFPB's complaint alleges that Corinthian encouraged students to take out private loans, in addition to federal loans, too expensive to pay back. The CFPB points to inflated, misleading and sometimes false employment figures. Its a bit of a mystery as to whether the college was just encouraging students to take out these private loans or if the practices actually amounted to inducing students to take out these loans.

The cost of tuition for one of Corinthian Colleges degrees was at least five times higher for any degree that could be earned at a public or community college. The CFPB alleges that Corinthian raised the cost of tuition so that the federal loans would not cover the cost, and students would then take out "Genesis" loans, which Corinthian had an interest in and which require students to pay while attending classes. Many of the students defaulted and Corinthian employees would called students out of class numerous times to discuss the non-payment of the loan in order to get students to make good on their loans.

So, how might an aggrieved student with some education, but not fantastic job opportunities benefit from this action? The CFPB's complaint seeks relief from the court going as far as ordering the complete recision of all Genesis and Education Plus loans starting from as early as 2011. This is big, as the students would not have to repay these loans.  About 130,000 students took out a “Genesis” loan since July 2011. Apparently most of the students attending Corinthian Colleges which include Everest Institute and Everest College, are students that come from homes earning less than 45k per year. The College is however, still enrolling students with the same practices despite the suit although the CFPB is seeking to enjoin the colleges from performing the same tactics for new or prospective students.  In August, Corinthian sold over $500 million of these student loans to a third party for $19 million, surely reflecting collectability on several fronts.

With the federal government unable to tackle the issue of student loans on a broad basis, the CFPB at least seems to be carrying out there promise to crack down on predatory lending.  Earlier this year, it was ITT Tech that was in the spot light for these deceptive practices. (See, CFPB Takes on Predatory Student Loan Practices).   Student loan defaults on the whole, at least, are down. (See, Defaults on Student Loans Decline).  It should be interesting to keep an eye on who is next on the student loan front.  Those lenders and schools whose loans have a disparate impact on their students are next in line.  Not surprisingly, the ABA's Business Law Section's Annual Meeting included a well attended session on "All I Need to Know I Learned From the Government: A Look at the Regulatory and Enforcement Landscape for Student Lending."

- JSM (with Devon Locay, St. Thomas University J.D. expected 2016)

Can a Seller Collect More than Expectation Damages? Yes, Says the Oregon Supreme Court

Law students learn early in their study of Contracts that an aggrieved party is entitled to collect its expectation interest.  But, is that always true?  Well, the Supreme Court of Oregon recently held that an aggrieved seller under Article 2 might be able to claim more than its expectation interest.
The breadth of the remedies available to a seller who has resold goods after a buyer’s breach was at issue in the case of Peace River Seed Co-Operative, Limited v. Proseeds Marketing, Incorporated.  Proseeds Marketing (“Proseeds”) was to purchase seeds from Peace River Seed Co-Operative (“Peace River”) at a fixed price over a period of two years.  During the contract period, the price of grass seeds fell dramatically and Proseeds refused to provide shipping and delivery confirmation to Peace River for the shipment of the seeds.  Therefore, Peace River cancelled the contracts and brought suit, claiming market price damages even though it had resold some of the seed.

Ultimately at issue was whether an aggrieved seller who resold goods (section 2-706) can recover the difference between the unpaid contract price and the market price, even where the market price damages would exceed resale damages actually suffered by the seller.   If Peace River could collect market price damages even where it resold the goods at a profit, it would arguably receive a windfall on the transaction.  Conversely, the court could restrict Peace River to recovery of an amount of damages no greater than it recovered in its resale.   Somewhat surprisingly, the Supreme Court of Oregon held that owing to the lack of clarity in the Code itself, “the text, context, and legislative history of the sellers’ remedies provisions support a seller’s right to recover either market price damages or resale price damages, even if market price damages lead to a larger recovery.”    The court reasoned that the index of remedies provided by section 2-703, coupled with the comments rejecting election of remedies, indicated that a seller could resell at a higher price and still collect a larger market-based remedy where available. 
Despite the decision in Peace River, a seller who attempts to claim the higher remedy under 2-708 after resale should expect a challenge from the buyer.  While the decision in Peace River is based on the Code’s rejection of an election of remedies and the “liberal” administration of remedies,  it does not necessarily follow that an aggrieved seller should be able to collect more than its expectation interest.   In such a case, it seems the seller should not have been able to obtain more than the benefit of the bargain.   One must also question whether the Court might have concluded that the resale price and market were equivalent.  But this may not be the case in a rapidly changing market.  Moreover, while the Code rejects election of remedies, it also provides that “[w]hether the pursuit of one remedy bars another depends entirely on the facts of the individual case.”   It might be argued that the pursuit of the market-based remedy when it exceeds the benefit-of-the-bargain, would entirely be the appropriate circumstance in which to bar the election of the higher remedy.

Friday, September 12, 2014

Nebraska Court Reminds that 9-625 Applies to Grant Remedies Against Secured Parties

I am at the ABA Business Law Section's first stand-alone meetings in Chicago, Illinois and attended the filing office task force this morning.  Among other news about states encouraging electronic filings of financing statements, the case of Fjellin v. Penning was on the agenda.  In this case, a trust was a perfected secured party relative to assets of several Dairy Queen stores that were later sold to a buyer.  After the closing, the debtors' attorney, Kaplan, filed a termination statement relative to the assets sold to the buyer (who had bought the assets free and clear of the liens).  Penning, a secured creditor of the Trust himself, as well as a director and shareholder of the debtor, allegedly retained most of the closing funds and only paid part of them over to the Trust.  In the action against Kaplan, the court concluded that there was no claim under section 9-625, which only creates a cause of against secured parties.  Kaplan, being the attorney of the debtor, was not a secured party.  Moreover, the court declined to find in favor of the Trust on a claim of negligence against Kaplan, finding: (i) causation lacking where Penning's action in taking the funds caused the problem, (ii) that the termination statement did not extinguish the security interest in the assets under 9-315; and the Trust had an interest in proceeds under section 9-203.

Hmmm, next time make sure the funds are paid on the loan at closing.


Wednesday, September 10, 2014

Save the Date International Conference on Contracts 2015

The Tenth International Conference on Contracts will be held February 27-28th, 2015 at the University of Nevada, Las Vegas.  The Chair is Professor Keith Rowley.  More will be coming soon on this, but going to Vegas for the Conference has been a big hit in the past (UNLV has hosted before).