Witz v. Great Lakes Educational Loan Services, Inc.

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

JEFFREY W. WITZ, on behalf of

himself and others similarly situated,

Plaintiff,

No. 19-cv-06715

v.

Judge John F. Kness

GREAT LAKES EDUCATIONAL

LOAN SERVICES, INC.,

Defendant.

MEMORANDUM OPINION AND ORDER

Plaintiff Jeffrey Witz borrowed money from the federal government to pay for

his education. Defendant Great Lakes Educational Loan Services, Inc., manages

repayment of federally insured loans for millions of student borrowers, including

Plaintiff. Plaintiff sued Defendant on behalf of a purported class of similarly situated

borrowers1, alleging that Defendant breached the contract governing the loan by

engaging in misrepresentations and failing to administer the loans in accordance

with federal law. (See generally Dkt. 27.) Defendant now moves to dismiss, arguing

that Plaintiff fails to state a claim for relief and has no right to sue for the alleged

breach of contract. (Dkt. 29.) For the reasons stated below, Defendant’s motion to

1 The Court has subject matter jurisdiction under the Class Action Fairness Act, 28 U.S.C.

§ 1332(d)(2), because this suit has been brought on behalf of proposed classes, each in excess

of one hundred members; the aggregate claims of the Class members exceed $5 million

exclusive of interest and costs; and one or more of the members of each Class is a citizen of a

different state than one or more Defendants.

dismiss is granted. Count I and Count II are dismissed with prejudice. Count III,

Count IV, and Count V are dismissed without prejudice and with leave to replead.

I. BACKGROUND

In September 2010, Plaintiff Jeffrey Witz entered into a master promissory

note (“MPN”) with the Department of Education (the “Department”) to borrow money

for school tuition. (See Dkt. 27 ¶ 28; 27-4.)2 Plaintiff’s MPN with the Department

provides:

Payments made by me or on my behalf will be applied first to late

charges and collection costs that are due, then to interest that has not

been paid, and finally to the principal amount of the loan, except

during periods of repayment under an Income-Based Repayment

Plan, when payments will be applied first to interest that is due, then

to fees that are due, and then to the principal amount.

(Dkt. 27 at 4–5 (emphasis in original).) The MPN incorporated the Higher Education

Act (“HEA”), 20 U.S.C. § 1070, et seq., and the Department’s regulations. (See Dkt.

27-4 at 1.) The Department, in turn, contracted with Defendant Great Lakes

Educational Loan Services, Inc. (Defendant) to service Plaintiff’s loans. (Dkt. 27 ¶ 7;

Dkt. 27-1; Dkt. 27-2.) As part of its servicing contracts with the Department,

Defendant collects loan payments, administers repayment programs on behalf of the

2 Plaintiff attached four exhibits to his complaint: two servicing contracts between the

Department and Defendant (Dkt. 27-1; Dkt. 27-2), a monthly statement Plaintiff received

from Defendant (Dkt. 27-3), and the MPN (Dkt. 27-4). Plaintiff expressly cites to and

describes these documents in his complaint. (See generally Dkt. 27.) It is well settled that,

when ruling on a motion to dismiss, “a court may consider “documents . . . attached to the

complaint, documents . . . central to the complaint and . . . referred to in it, and information

that is properly subject to judicial notice.’ ” Amin Ijbara Equity Corp. v. Vill. of Oak Lawn,

860 F.3d 489, 493 n.2 (7th Cir. 2017) (quoting Williamson v. Curran, 714 F.3d 432, 436 (7th

Cir. 2013)).

Department, and agrees to comply with the HEA and the Department’s regulations.

(Dkt. 27 ¶ 11.)

On its website, Defendant states that it offers “more flexibility” to borrowers

by applying excess payments first to “accrued interest since your last payment” and

then to “principal of the loan with the highest interest rate.” (Id. ¶ 33.) Among various

repayment options, Defendant offers an income-driven repayment (“IDR”) plan,

which allows borrowers to make monthly payments to Defendant based on their

income, occupation, and family size. (Id. ¶ 11.) IDR plans also allow borrowers to

apply for loan forgiveness after a certain number of qualifying payments. (Id.) IDR

plans are, in relevant part, divided between income-contingent plans, known as Pay

As You Earn (“PAYE”) plans, and income-based repayment (“IBR”) plans. See 34

C.F.R. § 685.209 (PAYE plans); 34 C.F.R. § 685.221 (IBR plans).3

In May 2018, Plaintiff held five loans under an IBR plan serviced by

Defendant, numbered 721, 722, 723, 724, and 726. (Dkt. 27 ¶¶ 13–14.) Plaintiff’s

minimum required monthly payment under the plan was $394.41. (Id. ¶ 17; Dkt. 27-

3.) Plaintiff alleges that, before May 2018, Defendant applied Plaintiff’s minimum

monthly payments only to interest. (Dkt. 27 ¶ 18.) In May 2018, however, Plaintiff

alleges that the $394.41 payment represented “slightly more than the interest

accruing on the loans each month.” (Id. ¶ 19.) So, in an effort to pay off the loans as

3 Both PAYE and IBR plans allow prepayment “at any time without penalty, as provided

under § 685.211(a)(2).” Id. §§ 685.209(a)(3)(ii) (PAYE), 685.221(c)(2) (IBR). Section

685.211(a)(2) specifies that “[i]f a borrower pays any amount in excess of the amount due, the

excess amount is a prepayment.” Id. § 685.211(a)(2). Plaintiff uses various terms to refer to

loan prepayments, but the term Plaintiff uses most commonly is “excess payments.” (See, e.g.,

Dkt. 27 ¶¶ 1, 29, 30.)

quickly as possible and to minimize the amount of interest paid, Plaintiff began to

make monthly payments in excess of the required minimum. (Id. ¶ 20.) Starting in

May 2018, Plaintiff made $1,000 monthly payments to Defendant, approximately

$606.59 above the required minimum. (Id. ¶ 21.)

Plaintiff alleges that, between May 2018 and June 2019, out of each Plaintiff’s

$1,000 monthly payments, Defendant applied approximately $400 to interest and

$600 to principal. (Id. ¶ 22.) By regularly making such excess payments, Plaintiff was

able to pay off the 721 loan by July 2019. (Id. ¶ 23.) When Plaintiff made another

$1,000 monthly payment in July 2019, however, Defendant applied the full amount

towards interest only. (Id. ¶ 25.) Plaintiff alleges that, under the agreement with the

government, Defendant was required to apply Plaintiff’s excess payments “first to

any interest due since the last date of payment, then to fees that are due since the

last date of payment, and then to the principal amount.” (Id. ¶ 29.) Plaintiff alleges

that Defendants did not do this and instead “applied Plaintiff’s July 2019 excess

payment to interest that had previously accrued on the second ‘722’ student loan, but

was not ‘due’ under the income based repayment plan,” exceeding its authority under

federal law. (Id. ¶¶ 30–31, 36–37.) Plaintiff alleges that when he inquired as to why

none of his “excess payment amount” had been applied to the principal loan,

Defendant informed him that because Plaintiff had paid off one loan, and was

applying excess payments to another loan, he “had to pay off 100% of the interest on

723 before anything would be applied to principal or the note.” (Id. ¶ 38.)

Plaintiff filed suit on behalf of himself and others similarly situated, alleging

that: (1) Defendant breached its servicing agreement with the Department by failing

to administer Plaintiff’s loans in accordance with federal law; (2) Defendant breached

Plaintiff’s MPN with the Department, under which Defendant is an assignee of the

loan, by failing to administer Plaintiff’s loans in accordance with federal law;

(3) Defendant engaged in deceptive and unfair advertising practices on its website in

violation of the Illinois Consumer Fraud Act; (4) Defendant negligently

misrepresented its servicing contracts with the Department on its website; and

(5) Defendant committed fraud by knowingly providing information on prepayments

in a manner inconsistent with actual allocations. (See Dkt. 27 ¶¶ 49, 64, 77, 91, 103–

04.)

Defendant now moves to dismiss the entirety of Plaintiff’s complaint under

Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure. (See Dkt. 29 at 1.)

Defendant contends that: (1) Plaintiff, who is not a party to nor a third-party

beneficiary of Defendant’s servicing contracts with the Department, lacks standing

to bring claims as to those contracts; (2) even if Defendant is an assignee of Plaintiff’s

MPN with the Department, Defendant complied with the Higher Education Act

(“HEA”) and federal regulations in applying Plaintiff’s July 2019 excess payment to

interest only and is thus immune from suit under Yearsley v. W.A. Ross Construction

Company;4 (3) even if Yearsley does not apply, Defendant complied with applicable

regulations and its duties under its servicing contracts with the Department;

4 309 U.S. 18, 20–21 (1940) (there is no liability for federal contractors when authority is

validly conferred by executing the government’s will).

(4) Defendant did not engage in affirmative misrepresentations, and Plaintiff’s claims

impose requirements beyond federal or tort law; and (5) the class allegations are

facially deficient. (See id. at 6–38.)

II. LEGAL STANDARD

A motion to dismiss under Rule 12(b)(1) challenges the Court’s subject matter

jurisdiction over a case. Motions to dismiss for lack of subject matter jurisdiction

under Rule 12(b)(1) “are meant to test the sufficiency of the complaint, not to decide

the merits of the case.” Ctr. for Dermatology & Skin Cancer, Ltd. v. Burwell, 770 F.3d

586, 588 (7th Cir. 2014). When considering a Rule 12(b)(1) motion, the Court accepts

as true all well-pleaded factual allegations and draws all reasonable inferences in

favor of the plaintiff. Id. But the plaintiff bears the burden of proving that the

jurisdictional requirements have been met. Id.

A motion to dismiss under Rule 12(b)(6) “challenges the sufficiency of the

complaint to state a claim upon which relief may be granted.” Hallinan v. Fraternal

Ord. of Police of Chi. Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009). Each complaint

“must contain sufficient factual matter, accepted as true, to ‘state a claim to relief

that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell

Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). These allegations “must be enough

to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555. Put

another way, the complaint must present a “short, plain, and plausible factual

narrative that conveys a story that holds together.” Kaminski v. Elite Staffing, Inc.,

23 F.4th 774, 777 (7th Cir. 2022). In evaluating a motion to dismiss, the Court must

accept as true the complaint’s factual allegations and draw reasonable inferences in

the plaintiff’s favor. Iqbal, 556 U.S. at 678. But even though factual allegations are

entitled to the assumption of truth, mere legal conclusions are not. Id. at 678–79.

III. DISCUSSION

A. Breach of Servicing Contract

In Count I, Plaintiff contends that Defendant breached its servicing contract

between Defendant and the Department, and that Plaintiff can sue on that breach as

an intended third-party beneficiary of the servicing contract. (Dkt. 27 ¶¶ 45–51.)

Defendant argues that because Plaintiff “is neither a party to the contract nor a third-

party beneficiary, he cannot sue to enforce its terms.” (Dkt. 30 at 22–25.) In response,

Plaintiff contends that, as an intended third-party beneficiary of the servicing

contract, Plaintiff can enforce the servicing contract. (Dkt. 38 at 19–24.)

Federal common law governs interpretation of a federal contract. Funeral Fin.

Sys. v. United States, 234 F.3d 1015, 1018 (7th Cir. 2000). To sue as a third-party

beneficiary of a contract, the third party must show that the contract reflects the

express or implied intention of the parties to the contract to benefit the third party.

See Montana v. United States, 124 F.3d 1269, 1273 (Fed. Cir. 1997). In the case of

government contracts, “individual members of the public are treated as incidental

beneficiaries unless a different intention is manifested.” Restatement (Second) of

Contracts § 313 cmt. a (1981). Because third-party beneficiary status is an

“exceptional privilege,” the “privilege should not be granted liberally.” Flexfab, L.L.C.

v. United States, 424 F.3d 1254, 1259 (Fed. Cir. 2005).

Defendant contends that the Supreme Court’s decision in Astra USA, Inc. v.

Santa Clara County, 563 U.S. 110 (2011), among other decisions, forecloses Plaintiff’s

attempt to enforce as a third-party beneficiary the servicing contract between

Defendant and the Department. (Dkt. 30 at 23–25.) Astra involved the “Section 340B”

drug ceiling-price program. 563 U.S. at 113. Section 340B capped prices that drug

manufacturers could charge public hospitals and community health centers (“340B

entities”) for medications. Id. The Health Resources and Services Administration

(HRSA), a unit of the Department of Health and Human Services (HHS), and private

drug manufacturers entered into form agreements by which the drug manufacturers

opted into the statutory scheme of the Section 340B drug-ceiling price program. Id.

The 340B entities contended that the drug manufacturers were overcharging the

340B entities for medications, in violation of the form agreements between HRSA and

the drug manufacturers. Id. at 116. The 340B entities brought suit against the drug

manufacturers as third-party beneficiaries of the form agreements. Id.

The district court dismissed the complaint, holding that the form agreements

conferred no enforceable rights on 340B entities. See Cnty. of Santa Clara v. Astra

USA, Inc., No. C 05-03740, 2006 WL 1344572, at *7–9 (N.D. Cal. May 17, 2006). But

the Ninth Circuit reversed and held that covered entities, although lacking a right to

sue under the statute, could maintain the action as third-party beneficiaries of the

form agreements. See Cnty. of Santa Clara v. Astra USA, Inc., 588 F.3d 1237, 1252

(9th Cir. 2009). In turn, the Supreme Court reversed the Ninth Circuit, concluding

that the third-party beneficiary suits were “incompatible with the statutory regime.”

Astra, 563 U.S. at 113. Beginning with the point that the 340B entities lacked a

private right of action under the statute, the Supreme Court acknowledged the

principle that “recognition of any private right of action for violating a federal

statute . . . must ultimately rest on congressional intent to provide a private remedy.”

Id. at 117 (citations, internal quotation marks, and alterations omitted). Although

the 340B entities contended that they were intended third-party beneficiaries of the

agreements, that the agreements “specifically name covered entities [340B entities]

as the recipients of discounted drugs,” and that the “very object” of the agreements

was to benefit them by capping the price they would be charged (id. at 117–18

(internal quotation marks and alterations omitted)), the Supreme Court rejected that

and noted that the form agreements

simply incorporate statutory obligations and record the manufacturers’

agreement to abide by them. The form agreements, composed by HHS,

contain no negotiable terms. . . . [T]he 340B Program agreements serve

as the means by which drug manufacturers opt into the statutory

scheme. A third-party suit to enforce an HHS-drug manufacturer

agreement, therefore, is in essence a suit to enforce the statute itself.

The absence of a private right to enforce the statutory ceiling-price

obligations would be rendered meaningless if 340B entities could

overcome that obstacle by suing to enforce the contract’s ceiling-price

obligations instead. The statutory and contractual obligations, in short,

are one and the same.

Id. at 118. As the Supreme Court further explained, the County “based its suit on

allegations that the manufacturers charged more than the § 340B ceiling

price, . . . not that they violated any independent substantive obligation arising only

from the PPAs. Repeatedly, the County acknowledged that § 340B is the source of the

contractual term allegedly breached.” Id. at 118–19 (footnote omitted).

The Seventh Circuit has read Astra to hold that “a government contract that

involves no negotiable terms but merely brings the other party to the contract under

a statute (or, we can assume, a regulation) does not confer third-party beneficiary

status on anyone.” Thomas v. UBS AG, 706 F.3d 846, 852 (7th Cir. 2013) (citing Astra,

563 U.S. 110); see also Baginski v. JP Morgan Chase Bank N.A., No. 11 C 6999, 2012

WL 5989295, at *3 (N.D. Ill. Nov. 29, 2012) (rejecting third-party beneficiary theory

because the Seventh Circuit “clearly stated (albeit in dicta) that borrowers cannot sue

for breach of an SPA because Congress did not create a private right of action under

HAMP”).

As in Astra, the servicing contract here mirrors the statute; the agreement

“simply incorporates statutorily required terms and otherwise fails to demonstrate

any intent to allow beneficiaries to enforce those terms.” Astra, 563 U.S. at 119 n.4.

Permitting a third-party suit to enforce the servicing contract would render

“meaningless” the absence of a private right of action to enforce Defendant’s statutory

obligations under the servicing contract. Id. at 118. Plaintiff has failed to identify any

language in the servicing contract that clearly shows an intent to permit enforcement

by third parties. It is not enough that the borrowers benefit from Defendant’s

performance under the servicing contract, as such incidental benefit does not rise to

the level of an intent to permit enforcement. As a result, Plaintiff’s third-party

contract claim is an improper attempt to enforce the HEA where no private right of

action exists.

For these reasons, Count I is dismissed. See, e.g., Edelman v. United States

Gov’t, No. 18-CV-2143, 2020 WL 7123175, at *11 (E.D.N.Y. Dec. 4, 2020) (dismissing

breach of contract claim because plaintiff “fail[ed] to identify any language in the

servicing contract between the DOE and Navient evidencing an intent to permit

enforcement by borrowers . . . .”); Travis v. Navient Corp., 460 F. Supp. 3d 269, 284

(E.D.N.Y. 2020) (same); Winebarger v. Pa. Higher Educ. Assistance Agency, 411 F.

Supp. 3d 1070, 1092 (C.D. Cal. 2019) (same); Hyland v. Navient Corp., No. 18cv9031,

2019 WL 2918238, at *8 (S.D.N.Y. July 8, 2019) (same). Because the flaw in this count

cannot be cured by repleading, this dismissal is with prejudice. See Haywood v.

Massage Envy Franchising, LLC, 887 F.3d 329, 335 (7th Cir. 2018).

B. Breach of Promissory Note

In Count II, Plaintiff alleges that Defendant, as the assignee of the MPN’s

servicing rights, breached the MPN by failing to administer Plaintiff’s loans in

accordance with federal law. (Dkt. 27 ¶¶ 61–66.) Defendant argues that, even if they

are an assignee of Plaintiff’s MPN, Plaintiff cannot sue for a breach because the

Department, as assignor, is immune from liability based on sovereign immunity.

(Dkt. 30 at 25–28; Dkt. 54 at 22–23.) Plaintiff counters that the immunity is waived

based on the HEA, and Defendant cannot rely on the federal government’s sovereign

immunity. (Dkt. 38 at 26–27.)

Under the doctrine of sovereign immunity, the United States cannot be sued

unless it gives express consent to the jurisdiction of the court in which it is sued.

Hercules, Inc. v. United States, 516 U.S. 417, 422 (1996). Plaintiff has the burden to

demonstrate that the federal government has waived its sovereign immunity and

consented to suit. Macklin v. United States, 300 F.3d 814, 819 (7th Cir. 2002). To

carry that burden, a plaintiff must identify a federal statute in which “Congress has

expressly and unequivocally waived the government’s sovereign immunity.” Barmes

v. United States, 199 F.3d 386, 388 (7th Cir. 1999). All purported waivers of sovereign

immunity must be “strictly construed, in terms of [their] scope, in favor of the

sovereign.” Lane v. Pena, 518 U.S. 187, 192 (1996). If a plaintiff fails to meet its

burden of establishing that the federal government waived its sovereign immunity,

the case must be dismissed. Macklin, 300 F.3d at 819.

A partial assignee can be sued for a breach of the assigned contractual

obligations only if the assignor could also be sued for breach of contract. In re Ocwen

Loan Servicing, LLC Mortg. Servicing Litig., 491 F.3d 638, 645 (7th Cir. 2007).

Plaintiff contends nonetheless that the HEA waives the federal government’s

sovereign immunity and permits the government to be sued directly. (Dkt. 38 at 26.)

In relevant part, § 1082(a)(2) of the HEA provides that the Secretary of Education

may:

sue and be sued . . . in any district court of the United States, and such

district courts shall have jurisdiction of civil actions arising under this

part without regard to the amount in controversy . . . ; but no

attachment, injunction, garnishment, or other similar process, mesne or

final, shall be issued against the Secretary or property under the

Secretary’s control and nothing herein shall be construed to except

litigation arising out of activities under this part from the application of

sections 509, 517, 547, and 2679 of Title 28.

28 U.S.C. § 1082(a)(2). Although § 1082(a)(2) waives the federal government’s

sovereign immunity with respect to certain claims against the Secretary, the claims

here do not fall within the scope of that statute.

To begin, § 1082(a)(2) waives sovereign immunity only with respect to claims

“arising under” the HEA, but Plaintiff’s claim is based on an alleged breach of his

MPN (a breach of contract claim). In addition, the waiver set forth in § 1082(a)(2) was

crafted to expressly exclude claims seeking an “attachment, injunction, garnishment

or similar process” against the Secretary. Id. This exclusionary language bars

Plaintiff’s claims related to his student loans because Plaintiff is, in essence, seeking

injunctive relief that would: (1) require an adjustment of his current outstanding

loan balances; or (2) prohibit the federal government from collecting certain sums

from him. But this Court lacks the power to order that remedy against the federal

government. See 28 U.S.C. § 1082(a)(2) (“[N]o . . . injunction . . . shall be issued

against the Secretary or property under the Secretary’s control.”). As a result, because

the federal government would not have waived sovereign immunity under the HEA

if Plaintiff’s claims were asserted against it, Plaintiff cannot sue Defendant as a

partial assignee. Count II is thus dismissed. Because the flaw in this count cannot be

cured by repleading, the dismissal is with prejudice. See Haywood, 887 F.3d at 335.

C. Disclosure Claims under State Law

In Count III, Plaintiff alleges that Defendant engaged in deceptive and unfair

practices in violation of Illinois law by: “(1) failing to apply prepayments in

accordance with federal law; and (2) inducing prepayments through representations

on its website which do not in fact describe what it does with the money that is

prepaid.” (Dkt. 27 ¶¶ 76–79.) In Count IV, Plaintiff alleges that Defendant

“negligently provided information about prepayments that was inconsistent with the

manner in which it allocated prepayments.” (Id. ¶¶ 89–82.) And in Count V, Plaintiff

alleges that Defendant committed fraud by “knowingly provid[ing] information about

prepayments that was inconsistent with the manner in which it allocated

prepayments.” (Id. ¶¶ 102–05.)

Defendant contends that these claims are all preempted by the HEA, and the

Court should thus dismiss them. (Dkt. 30 at 28–31; Dkt. 54 at 24–26.) Defendant also

contends that these claims fail because Plaintiff has alleged no damages. (Dkt. 30 at

31–32.) Finally, Defendant contends that, to the extent it is not preempted, Count IV

specifically fails because Defendant does not owe Plaintiff a legal duty. (Dkt. 30 at

32–33; Dkt. 54 at 26.) Plaintiff counters that the claims are not preempted, and in

fact they bolster the federal scheme by providing an enforcement mechanism at the

state level. (Dkt. 38 at 27–32.) Plaintiff also argues that, as a third-party beneficiary,

Plaintiff was owed a duty by Defendant. (Id. at 30–32.) These arguments are

addressed in turn.

1. These Claims Are Not Preempted.

The HEA prohibits states from subjecting student loan servicers to liability for

failing to disclose to student loan borrowers information outside of what is required

under federal law. See 20 U.S.C. § 1098g (“Loans made, insured, or guaranteed

pursuant to a program authorized by title IV of the [HEA] shall not be subject to any

disclosure requirements of any State law.”). Defendant’s website stated that “there

are rules in your student loan agreement that all servicers are required to follow

when applying payments,” and “[t]he rules require that outstanding interest and late

fees (if applicable[]) must be paid first, prior to a payment being applied to the loan

principal.” (Dkt. 27 ¶ 33.) Defendant’s website also stated that any “excess” amount

is automatically applied to accrued interest since the last payment and then to the

principal of the loan with the highest interest rate. (Id.)

Plaintiff alleges that either: (1) Defendant should have applied all $606.59

Plaintiff paid above his monthly required payment in July 2019 to 723’s principal,

once interest accrued since his last payment had been paid, and none to the

outstanding previously accrued interest on 723, (see Dkt. 27 ¶¶ 36–42); or

(2) Defendant should be liable for not specifying in greater detail how it would apply

the payments (Id. ¶¶ 91, 104). Put another way, Plaintiff alleges that Defendant

should have applied Plaintiff’s payments in a manner contrary to the federal

requirements summarized on the website.

Defendant argues that “excess” refers to the amount remaining from a

payment after all previously accrued interest on a loan and fees have been paid off,

rather than the amount remaining on any payment made that is greater than his

required monthly payment. (Dkt. 30 at 29–31.) Defendant contends that Plaintiff’s

claim, if successful, would impermissibly require Defendant to disclose to borrowers

how it applies payments in greater detail than what is required under federal law,

and is thus preempted. (Dkt. 30 at 30–31 (quoting 20 U.S.C. § 1083(a)(10)); Dkt. 54

at 24–26.)

In support of this argument, Defendant relies heavily on Chae v. SLM Corp.,

593 F.3d 936 (9th Cir. 2010), in which a borrower sought to pursue state law claims

against a loan servicer for billing practices that were permitted under federal law. In

Chae, the plaintiffs brought claims under California’s consumer protection statute

and accused the defendant of both “misrepresent[ation]” and

“improper . . . disclosure” of information to borrowers about federal student loans. Id.

at 942–43. To be sure, the Ninth Circuit held that the plaintiffs’ attempt to assert

claims under California law regarding certain billing statements and coupon books

was expressly preempted by § 1098g of the HEA, but Chae also explained that the

plaintiffs were not barred from pursuing claims regarding other fraudulent and

deceptive practices. Id. at 943. In any event, however, the plaintiffs would not be

permitted simply to “relabel[ ]” their preempted disclosure claims as

misrepresentation claims. Id. at 943 (citation omitted).

In 2019, the Seventh Circuit construed Chae and explained that Section 1098g

preempts omission claims, not affirmative misrepresentation claims. Nelson v. Great

Lakes Educ. Loan Servs., Inc., 928 F.3d 639, 649 (7th Cir. 2019). In Nelson, a borrower

brought state-law consumer protection and tort claims, alleging that her federal

student loan servicer made affirmative misrepresentations while counseling her on

her repayment plan options. Id. at 642. Relying largely on Chae, the district court

granted the defendant’s motion to dismiss and held that the borrower’s claims alleged

in substance only that the defendant failed to disclose certain information. Nelson v.

Great Lakes Educ. Loan Servs., Inc., No. 17-CV-00183, 2017 WL 6501919 (S.D. Ill.

Dec. 19, 2017).

But the Seventh Circuit reversed that holding and concluded that the

borrower’s claims were not expressly preempted:

When a loan servicer holds itself out to a borrower as having experts

who work for her, tells her that she does not need to look elsewhere for

advice, and tells her that its experts know what options are in her best

interest, those statements, when untrue, cannot be treated by courts as

mere failures to disclose information. Those are affirmative

misrepresentations, not failures to disclose. . . . A borrower who

reasonably relied on them to her detriment is not barred by § 1098g from

bringing state-law consumer protection and tort claims against the loan

servicer.

Nelson, 928 F.3d at 642. Nelson also explained that “[t]he common law tort of fraud

ordinarily requires a deliberately false statement of material fact. . . . An omission or

failure to disclose, on the other hand, will not support a common law fraud claim but

may be actionable as constructive fraud or fraudulent concealment . . . .” Id. at 649

(internal citations omitted). As the Seventh Circuit explained, Chae “does not apply

to claims of affirmative misrepresentations in counseling borrowers in distress.” Id.

at 642. Indeed, Chae itself “limited the reach of some of its broader language by

holding that other state-law claims, focusing on the ‘use of fraudulent and deceptive

practices apart from the billing statements,’ are not preempted by § 1098g.” Id. at 650

(quoting Chae, 593 F.3d at 943). Because the borrower alleged that the servicer “said

something false that it was not required to say,” the Seventh Circuit concluded that

the claim did not implicate a disclosure requirement. Id.

Although the Seventh Circuit in Nelson did not adopt the reasoning of Chae,

even if the Court assumes that uniformity is a purpose of the HEA, Plaintiff’s

state-law claims do not threaten that uniformity because the claims are predicated

on misrepresentations of the requirements of the HEA, not an expansion of them.

Defendant argues that Chae is on point because Plaintiff’s remedy would require

Defendant “to disclose the nut-and-bolts of where money from a payment must first

be applied before money could be applied to principal.” (Dkt. 30 at 31.) But the

state-law issue in Chae imposed additional requirements on servicers regarding how

to calculate loan interest. Unlike the plaintiffs in Chae, Plaintiff is not trying to

supplant federal law, but only to obtain a civil remedy under state law for federal

violations. As a result, Plaintiff’s state law disclosure-based claims are not

preempted.

2. Plaintiff Failed to Allege he Suffered Any Damages.

Defendant contends that Plaintiff did not allege that Plaintiff suffered any

damages. (Dkt. 30 at 31–32.) Plaintiff failed to respond to this point (see generally

Dkt. 38), and the Court agrees that Plaintiff fails to sufficiently allege that he suffered

any actual damages. For Plaintiff to succeed on all of these claims, he would need to

show that he has suffered damages. See Avery v. State Farm Mut. Auto. Ins. Co., 835

N.E.2d 801, 850 (Ill. 2005) (ICFA requires that actual damages were proximately

caused by the deception); Doe v. Dilling, 888 N.E.2d 24, 35–36, 45 (Ill. 2008)

(negligent misrepresentation claim requires damage to the plaintiff resulting from

reliance on a statement); Miller v. William Chevrolet/GEO, Inc., 762 N.E.2d 1, 7 (Ill.

App. Ct. 2001) (a fraud claim requires damage to the plaintiff resulting from the

reliance). Although the First Amended Complaint does allege that Plaintiff suffered

“damages” at various points, these are no more than conclusory allegations that fail

to survive this motion to dismiss. More to the point, Plaintiff fails to address this

argument entirely in his briefing on Defendant’s motion to dismiss. (See generally

Dkt. 38.) Accordingly, Counts III, IV, and V are dismissed. But because the flaw in

some of these Counts can be cured by repleading, this dismissal is without prejudice.

3. Plaintiff Is Not Owed a General Duty of Care from Defendant.

Defendant contends that Count IV fails for an additional reason: Plaintiff is

owed no duty of care from Defendant. (Dkt. 30 at 32–33; Dkt. 54 at 26.) Plaintiff

appears to contend that its status as a third-party beneficiary of the servicing

contract entitles him to a duty of care (see Dkt. 38 at 30–32), but the Court agrees

with Defendant.

To state a claim for negligence in Illinois, a plaintiff “must establish the

existence of a duty of care owed by the defendant.” Calles v. Scripto-Tokai Corp., 864

N.E.2d 249, 263 (Ill. 2007).5 The mere existence of a relationship between a borrower

and lender does not, in itself, create such a duty. See Maxwell as Tr. for Est. of Garcia

5 To state a claim for negligent misrepresentation in Illinois, a plaintiff must allege:

(1) a false statement of material fact; (2) carelessness or

negligence in ascertaining the truth of the statement by the

party making it; (3) an intention to induce the other party to act;

(4) action by the other party in reliance on the truth of the

statement; (5) damage to the other party resulting from such

reliance; and (6) a duty on the party making the statement to

communicate accurate information.

Hartford Fire Ins. Co. v. Henry Bros. Const. Mgmt. Servs., LLC, 877 F. Supp. 2d 614, 618

(N.D. Ill. 2012) (citation omitted).

v. Wells Fargo Bank, N.A., 2021 WL 1209023, at *5 (N.D. Ill. Mar. 31, 2021) (“Illinois

does not, and would not, recognize a general duty of care owed by lenders to

borrowers’). Rather, under Illinois law, lenders do not owe fiduciary duties to

borrowers unless the borrower relies on a special relationship of trust and confidence

with the lender. See Pommier v. Peoples Bank, 967 F.2d 1115, 1119 (7th Cir. 1992).

Plaintiff fails to allege that Defendant owed him any duty, let alone that they were

in a “special relationship of trust and confidence.”

For this independent reason based on a lack of duty, Count IV must be

dismissed. Although the Court is doubtful that such a relationship could be

successfully alleged, cf Winebarger, 411 F. Supp. 3d at 1092 (dismissing similar

contentions with prejudice); Hyland, 2019 WL 2918238, at *11 (same), Plaintiff

should be afforded the opportunity to replead Count IV. Accordingly, the dismissal of

Count IV is without prejudice.

IV. CONCLUSION

Defendant’s motion to dismiss (Dkt. 29) is granted. Count I and Count II are

dismissed with prejudice. Count III, Count IV, and Count V are dismissed without

prejudice.

SO ORDERED in No. 19-cv-06715.

Date: September 30, 2024 Gere, Yorae.

JOHN F. KNESS

United States District Judge

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