Educational Financial Services (EFS), a division of Wells Fargo Bank, was sued in the Southern District of Texas alleging EFS should have known some of their student loans were dischargeable in bankruptcy.
The suit filed raises some very interesting issues that have a direct impact on the rightful discharge of these private student loans in bankruptcy.
While some loans are protected, others are not. The lawsuit claims EFS knew the difference and misrepresented their loans could not be discharged in bankruptcy.
The court documents say, “At the same time that student lenders were representing to student debtors that the Bankruptcy Code prohibited discharge of any loan made to any person for any educational purpose, those same lenders were securitizing these debts for sale on the secondary market. Lenders were rightfully concerned that if they represented to investors that all private student loans were non-dischargeable in bankruptcy, sophisticated investors would easily enough discover the misrepresentation (based on a plain reading of the statute), and issuers would be liable for securities violations. Major lenders and underwriters, including EFS’s affiliates, therefore, included in student loan asset-backed securities’ prospectuses language warning investors that, pursuant to section 523(a)(8), only private loans made for qualified expenses were excepted from discharge.”
In this case filed, the named class action defendant is Stephanie Henry. Henry attended a vocational school that was not a Title IV accredited institution under the Higher Education Act. The loans were thus not protected in bankruptcy and should have been discharged in the Chapter 13 bankruptcy Henry filed in 2013. Wells Fargo is said to have filed a claim and was paid through the Chapter 13 confirmed plan. The Defendant’s remaining debt was then fully discharged on May 28, 2018. Shortly thereafter Wells Fargo was advised to cease communications with the debtor since the non-protected student loan had been discharged in the bankruptcy.
However, it is said, “On or about May 30, 2018, Defendant sent both Henry and Austin Smith letters acknowledging the request to cease direct with Henry. Defendant further asked that Austin Smith inform it when it could resume with Henry. On the face of the letters themselves, Defendant acknowledged that the letters were “an attempt to collect a debt.” This collection effort, made by Defendant after Plaintiff’s bankruptcy discharge and after Defendant having been advised by Plaintiff’s attorney that the Wells Fargo Loan had been discharged in Plaintiff’s bankruptcy, was made knowingly and willfully in violation of the statutory injunction.”
Wells Fargo should have known, as a sophisticated financial services company, that consumer bankruptcy extinguishes all education-related debt that was not excepted from discharge by 11 U.S.C. § 523(a)(8).
The lawsuit claims, “Notwithstanding the discharge of these debts, Defendant employed processes, practices, and acts designed to mislead Class Members into believing that their debts were not discharged and inducing them to make payments on extinguished debts.
Defendant has misled Class Members and sought to collect on discharged debts by use of dunning letters, emails, text messages, and telephone calls demanding repayment. In addition, to attempt to compel payment on these discharged debts, Defendant has continued to report these debts as delinquent to the major credit bureaus, and has failed to update these credit reports.
Defendant has also commenced or continued legal actions against Class Members to induce payment on their discharged debts.”
This suit was filed by a number of attorneys so if you’d like any additonal advice on the case, please one of the attorneys below.
SBN (TX) 24080404
CORRAL TRAN SINGH, LLP
1010 Lamar St., Ste., 1160
Houston, TX 77002
(832) 975-7300; (832) 975-7301 fax
Jason W. Burge (pro hac vice)
SBN (LA) 30420
Kathryn J. Johnson
SBN (LA) 36513
FISHMAN HAYGOOD L.L.P.
201 St. Charles Avenue, 46th Floor
New Orleans, Louisiana 70170-4600
(504) 586-5252; (504) 586-5250 fax
SBN (NY) 5377254
SMITH LAW GROUP
3 Mitchell Place
New York, New York 10017
Lynn E. Swanson (pro hac vice)
SBN (LA) 22650
JONES, SWANSON, HUDDELL & GARRISON, L.L.C.
601 Poydras Street, Suite 2655
New Orleans, Louisiana 70130
(504) 523-2500; (504) 523-2508
Joshua B. Kons (pro hac vice)
SBN (IL) 6304853
LAW OFFICE OF JOSHUA B. KONS, LLC
939 West North Avenue, Suite 750
Chicago, IL 60642
George F. Carpinello
SBN (NY) 1652684
Adam R. Shaw
SBN (NY) 2587467
Robert C. Tietjen
SBN (NY) 4113700
BOIES SCHILLER FLEXNER LLP
30 South Pearl St., 11th Floor
Albany, NY 12207