| To: | COHEAO Members |
| From: | Harrison Wadsworth, Executive Director |
May 18, 2004
Two court cases that involve collections of student loans were resolved
this week. We thought they might be of interest to COHEAO members. If you
would like a copy of either opinion, please reply to this email and we
will email it to you.
In a 7 to 2 opinion, the United States Supreme Court affirmed the US Court
of Appeals for the Sixth Circuit when it held that the Eleventh Amendment's
sovereign immunity clause does not bar a bankruptcy court from binding
a state to a decision without the state's permission because a bankruptcy
court's jurisdiction is over the petitioner's property, not a suit specifically
against the State. Sovereign immunity is a doctrine that prevents a lawsuit
from being brought against a State without the State's permission. In the
case, Tennessee Student Assistance Corporation v. Hood, Tennessee Student
Assistance Corporation (TSAC), the state guaranty agency, argued that the
process of determining "undue hardship" in a student loan bankruptcy
case was unconstitutional because it violated the State's sovereign immunity.
However, in an opinion written by Chief Justice Rehnquist, the Court stated
that a debtor appearing before a bankruptcy court is not seeking damages
or affirmative relief from the State, therefore sovereign immunity does
not apply here. Because the Court decided that sovereign immunity does
not apply to this situation, it did not reach the issue of whether the
Bankruptcy Clause granted Congress the authority to abrogate sovereign
immunity. In the past, lower courts had accepted arguments similar to that
of TSAC and permitted state guaranty agencies to assert the sovereign immunity
defense in a manner that allowed the agencies to avoid bankruptcy discharges
on student loans they held.
In two separate opinions, the US District Court for the Northern District
of Illinois found in favor of the plaintiff in a collections action. In
these cases, a student loan borrower who was making payments to a law firm
that was collecting his defaulted student loan brought a suit against the
law firm, which was collecting the payments on behalf of the Illinois Student
Assistance Corporation (ISAC). The firm collected payments from the borrower
but then did not post the payments to the borrower's account on the same
day that the payments were made. The account would not be credited until
the payment was deposited in the firm's trust account for ISAC. The court
held that the law firm violated the Fair Debt Collection Practices Act
by falsely representing the amount of the debt and thereby collected more
money than it was owed. The court also held that the firm also violated
Illinois state law governing how payments are tendered for purposes of
crediting accounts. The court did not set a specific liability amount but
will likely do so sometime in June.