Lender's Lawsuit Lives Again

February 1, 2005

A federal appeals court on Monday breathed new life into a long-running legal battle between two competing student loan companies.

The U.S. Court of Appeals for the Fourth Circuit overturned a lower court jury's 2003 ruling siding with Sallie Mae in a lawsuit brought by College Loan Corporation.

The three judge panel unanimously agreed that Judge James C. Cacheris erred in late 2002 when he interpreted federal law in a way that barred College Loan Corp. from pursuing some of its legal claims under state law in Virginia. The judge's erroneous pretrial rulings about College Loan's ability to pursue its claims in state court, the appeals court concluded, resulted in the jury's flawed decision.

"Because the district court erred in ruling that College Loan could not utilize violations of federal law to establish its state law claims against Sallie Mae, and in ruling that College Loan could rebut Sallie Mae's [Higher Education Act]-based defense ... only by demonstrating that the defense was interposed in bad faith, we vacate the judgment and remand for further proceedings," the appeals court ruled.

College Loan sued Sallie Mae in 2002, accusing it, in a series of claims, of breaching its contractual obligations to consolidate the loans of College Loan clients. In December 2002, Judge Cacheris ruled that the Higher Education Act, the law that governs the federal student loan programs, effectively preempted the state law claims that College Loan sought against Sallie Mae.

But "the HEA and its regulations do not preempt the state law claims which College Loan seeks to pursue in this proceeding," the appeals court ruled Monday.

The appeals court also found that the judge had erred in the instruction he gave to  jurors. "There is a reasonable probability," the three-judge panel concluded, "that this additional element affected the jury's verdict, 'seriously prejudicing' College Loan's case."

The appeals court's decision will send the case back to the lower court for reconsideration.

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