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Olsen v. Nelnet, Inc.

United States District Court, D. Nebraska

May 21, 2019

JESSICA OLSEN, on behalf of herself and all others similarly situated, and TERI R. SMITH, on behalf of herself and all others similarly situated, Plaintiffs,
v.
NELNET, INC., a Nebraska Corporation, NELNET DIVERSIFIED SOLUTIONS, LLC, a Nebraska limited liability company, and NELNET SERVICING LLC, a Nebraska limited liability company, Defendants.

          MEMORANDUM AND ORDER

          John M. Gerrard Chief United States District Judge

         The plaintiffs' amended complaint alleges a class action claim for damages regarding the defendants' conduct in the servicing of their student loans. Filing 37. The defendants move for dismissal pursuant to Fed.R.Civ.P. 12(b)(6) arguing that the plaintiff failed to state a claim for relief. Filing 39. For the reasons that follow, the Court will grant the defendants' motion in part, and deny the motion in part.

         I. STANDARD OF REVIEW

         To survive a Rule 12(b)(6) motion to dismiss, a complaint must set forth a short and plain statement of the claim showing that the pleader is entitled to relief. Fed.R.Civ.P. 8(a)(2). This standard does not require detailed factual allegations, but it demands more than an unadorned accusation. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The complaint must provide more than labels and conclusions; and a formulaic recitation of the elements of a cause of action will not suffice. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).

         A complaint must also contain sufficient factual matter, accepted as true, to state a claim for relief that is plausible on its face. Iqbal, 556 U.S. at 678. A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Id. Where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not shown-that the pleader is entitled to relief. Id. at 679.

         In assessing a motion to dismiss, a court must take all the factual allegations in the complaint as true, but is not bound to accept as true a legal conclusion couched as a factual allegation. Twombly, 550 U.S. at 555. The facts alleged must raise a reasonable expectation that discovery will reveal evidence to substantiate the necessary elements of the plaintiff's claim. See Id. at 545. The court must assume the truth of the plaintiff's factual allegations, and a well-pleaded complaint may proceed, even if it strikes a savvy judge that actual proof of those facts is improbable, and that recovery is very remote and unlikely. Id. at 556.

         A motion to dismiss under Rule 12(b)(6) tests only the sufficiency of the allegations in the complaint, not the sufficiency of the evidence alleged in support of those allegations. Stamm v. Cty. of Cheyenne, Neb., 326 F.Supp.3d 832, 847 (D. Neb. 2018); Harrington v. Hall Cty. Bd. of Supervisors, No. 4:15-CV-3052, 2016 WL 1274534, at *4 (D. Neb. Mar. 31, 2016).

         II. BACKGROUND

         The defendants are Nebraska corporations. Filing 37 at 5. Defendant Nelnet Servicing, LLC is a wholly-owned subsidiary of defendant Nelnet Diversified Solutions LLC, which is a wholly-owned subsidiary of defendant Nelnet Inc. Id. The defendants administer, service and collect student loans throughout the United States. Additionally, Nelnet, Inc. owns over fifty other subsidiaries that also service and collect student loans. Filing 37 at 4. The defendants and three other private businesses contract with the federal Department of Education regarding the administration and collection of student loans owned by the Department. Filing 37 at 5. The two loan programs involved in this matter are the Federal Direct Loan Program, which are loans that originate directly with the Department of Education, and loans purchased by the Department pursuant to the Federal Family Education Loan Program. Id.

         Borrowers who cannot afford to repay their loan pursuant to the standard repayment plan may enroll in an income-based, or income-driven repayment plan. Those plans allow the borrower's monthly payment to be capped at fifteen percent of the borrower's discretionary income with discharge of the remaining debt after twenty-five years of qualifying payments. Filing 37 at 6-7. Income-driven plans are renewed annually, with the borrower filing an application that includes documentary proof of the borrower's income. Filing 37 at 7.The lender or loan servicer is required to notify the borrower when their annual renewal application is due. This notification must be in writing, and must be provided no sooner than 90 days, but no later than 60 days, prior to the borrower's deadline for renewal. Id. The notice must also inform the borrower of the consequences of failing to timely renew their repayment plan. Id. Two such consequences are an increase in the borrower's monthly payment to the amount that would be due pursuant to a standard repayment plan, and capitalization of the unpaid interest, which involves adding the current interest due and owing to the unpaid loan balance. Id.

         Timely submission of a renewal application and proof of income entitles the borrower to certain protections. The borrower's income-driven repayment plan may not be cancelled while a renewal application is pending, and the borrower's monthly payment must be maintained until the renewal request has been fully processed. Id. Further, loan servicers are directed to process income-driven repayment applications within ten business days, and to "promptly" determine new monthly payment amounts. Id. Borrowers who lose the protections of an income-driven repayment plan, and who can no longer afford to make monthly payments pursuant to the standard repayment plan, may ask to have their loan placed in forbearance. Filing 37 at 8. Forbearance allows the borrower to temporarily cease making payments during their period of hardship, but forbearance delays progress toward obtaining loan forgiveness, and any unpaid interest that accrues during forbearance is capitalized to the unpaid loan balance. Id.

         Plaintiff Jessica Olsen is a citizen and resident of Oregon. Filing 37 at 4. Olsen consolidated her several student loans into a single, federal direct consolidation loan pursuant to a promissory note with the Department of Education. Id. On March 7, 2014, Olsen enrolled in an income-driven repayment plan offered by the Department of Education. Filing 37 at 10. On December 5, 2014, the defendants sent Olsen their standard renewal notice advising her that her repayment plan would expire unless her renewal documents were submitted within ten days of January 31, 2015. Id. Olsen was advised that she could submit the required documents at the Department of Education's website. On February 10, Olsen submitted her complete renewal application via the Department's website. However, around February 16, the defendants canceled Olsen's income-driven repayment plan and imposed a standard repayment plan, billing her $968.10 per month. Id. The defendants also capitalized $8, 669.08 in accrued interest. Filing 37 at 11. Olsen's income-driven repayment plan was not renewed for several months. Because she could not afford the standard repayment amount, she was required to place her loan into forbearance. Id. At the end of forbearance, the defendants capitalized an additional $1, 061.90 of accrued interest to her loan balance. Id.

         Plaintiff Teri R. Smith is a citizen and resident of Florida. Filing 37 at 4. Smith first enrolled in an income-driven repayment plan in 2009 with loan servicer ACS Educational Services. Filing 37 at 12. In January 2017, Smith's loan servicer changed to Conduent Educational Services, and she again timely renewed her repayment plan with Conduent. Id. On April 7, 2018, Smith timely submitted her renewal application and proof of income to Conduent. Filing 37 at 13. Conduent received Smith's renewal documentation on April 9. On April 20, Smith's federal loan was reassigned to the defendants. On May 18, the defendants began billing Smith for the standard repayment amount of $903.34 and capitalized her accrued interest. Id. On July 20, 2018, the defendants notified Smith that her income-driven repayment plan would be approved, lowering her monthly payment to $77.52, but the lower monthly payment would not take effect until September 20. Being unable to afford the $903.34 monthly charge, Smith was forced into forbearance and the defendants again capitalized the interest that had accrued on her loan.

         A class action complaint was filed against the defendants on June 8, 2018, identifying only Olsen as the class representative. Filing 1. On September 25, an amended complaint was filed identifying both Olsen and Smith as class representatives. Filing 37. In summary, the plaintiffs allege the defendants; (1) breached their servicing contract with the Department of Education, (2) breached the promissory notes securing the plaintiffs' consolidated loans, (3) tortiously interfered with the promissory notes, (4) made negligent misrepresentations regarding the plaintiffs' promissory notes, and (5) unjustly enriched themselves at the plaintiffs' expense. Filing 37 at 1.

         III. DISCUSSION

         1. Breach of the Servicing Contract

         The plaintiffs allege that Nelnet Servicing entered into a servicing contract with the Department of Education on June 17, 2009, and that pursuant to the terms of that contract, the defendants agreed to comply with all federal statutes and regulations regarding the servicing of student loans. Filing 37 at 16-17. The plaintiffs allege that they are intended third-party beneficiaries of the servicing contract between the defendants and the Department of Education and that the defendants materially breached the servicing agreement by failing to administer their loans in accordance with the federal statutes and regulations referenced in the contract. Filing 37 at 17

         The defendants' argument for dismissal asserts that the plaintiffs failed to allege facts showing that they are intended third-party beneficiaries of the defendants' servicing contract with the Department of Education. But, even if the plaintiffs allege a plausible third-party beneficiary claim, the defendants argue that the Higher Education Act does not provide a private right of action, and the plaintiffs are attempting an "end-run" around the Act's enforcement regime. Filing 40 at 5-11.

         Under Nebraska law, a third-party beneficiary must be acknowledged by express stipulation or "by reasonable intendment that the rights and interests of such unnamed parties were contemplated and that provision was being made for them." Podraza v. New Century Physicians of Neb., 789 N.W.2d 260, 267 (Neb. 2010); BNSF Ry. Co. v. Seats, Inc., 361 F.Supp.3d 947, 954 (D. Neb. 2019). The party claiming ...


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