The opinion
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
CONSUMER FINANCIAL : Civil No. 1:24-CV-756
PROTECTION BUREAU, :
:
Plaintiff, :
:
v. :
:
PENNSYLVANIA HIGHER :
EDUCATION ASSISTANCE :
AGENCY, et al.,
Defendants. Judge Jennifer P. Wilson
MEMORANDUM
Before the court is the joint motion for judgment and entry of stipulated
orders, Doc. 3, filed by Plaintiff Consumer Financial Protection Bureau (“CFPB”)
and Defendants Pennsylvania Higher Education Assistance Agency (“PHEAA”)
and National Collegiate Student Loan Trusts (“ the Trusts”)1, as well as objections,
Doc. 33, filed by intervenor Pacific Investment Management Company LLC
1 For brevity, the court will refer to these fifteen Defendants as Defendant Trusts. Defendant
Trusts are fifteen trusts that “acquire and hold pools of private student loans, collect on and
provide for the servicing of those loans, and issue interest-bearing securities to investors backed
by proceeds from student loan payments.” (Doc. 1, ¶ 17.) The fifteen trusts are the National
Collegiate Master Student Loan Trust I, the National Collegiate Student Loan Trust 2003-1, the
National Collegiate Student Loan Trust 2004-1, the National Collegiate Student Loan Trust,
2004-2, the National Collegiate Student Loan Trust 2005-1, the National Collegiate Student
Loan Trust 2005-2, the National Collegiate Student Loan Trust 2005-3, the National Collegiate
Student Loan Trust 2006-1, the National Collegiate Student Loan Trust 2006-2, the National
Collegiate Student Loan Trust 2006-3, the National Collegiate Student Loan Trust 2006-4, the
National Collegiate Student Loan Trust 2007-1, the National Collegiate Student Loan Trust
2007-2, the National Collegiate Student Loan Trust 2007-3, and the National Collegiate Student
Loan Trust 2007-4
(“PIMCO”).2 The joint motion for judgment asks the court to enter two proposed
judgments, one as to and PHEAA and the other as to the Trusts, that would
generally require PHEAA and the Trusts to implement adequate servicing policies,
pay monetary redress to affected borrowers and civil monetary penalties, and
submit to oversight by the CFPB. (Docs. 3-1, 3-2.) PIMCO, who manages funds
held by noteholders of the Trusts, argues that the proposed judgment relating to the
Trusts was agreed to without the proper authority, violates the noteholders’
contractual rights, and is not fair and reasonable. (Doc. 33.) For the reasons that
follow, PIMCO’s objections will be overruled and the joint motion for judgment
will be granted.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
Defendant Trusts are “business entities that acquire and hold pools of private
student loans, collect on and provide for the servicing of those loans, and issue
interest-bearing securities to investors backed by proceeds from student loan
payments.” (Doc. 1, ¶ 2.) Defendant PHEAA is a student loan servicer and has
been the primary servicer for the Trusts since 2006. (Id. ¶ 3.) “PHEAA interacts
with the borrowers on the Trusts’ behalf[, including] accepting loan payments and
accepting and responding to borrower requests, such as requests for reduced
2 The court granted PIMCO’s motion to intervene by separate order, allowing PIMCO to
intervene for the purpose of raising objections to the joint motion for judgment. (Doc. 46.)
payment amounts, forbearance, or deferment.” (Id.) The Trusts’ governance and
relationship to Noteholders (like PIMCO) and servicers (like PHEAA) are
governed by various documents, collectively referred to as the Trust Related
Agreements. (Doc. 33, p. 9.)3 These agreements are: the Trust Agreement, the
Indenture, the Administration Agreement, and the Servicing Agreement.4 (Id.)
The organizational structure of the Trusts has been the subject of prior
litigation and has been helpfully explained by the Court of Chancery of Delaware
in In re National Collegiate Student Loan Trusts Litigation, 251 A.3d 116 (Del.
Ch. 2020) (“NCSLT Governance Dispute”). As explained by the Chancery Court,
the Trusts’ purpose is to “(i) acquir[e] Student Loans by issuing certain Notes, (ii)
execut[e] the Indenture and (iii) fulfill[] loan servicing obligations[.]” Id. at 131.
The Trusts have no officers or employees, and therefore, act through the Owner
Trustee. Id. This structure is established by the Trust Agreement. Id. at 132.
The Trusts executed the Indenture, which grants to the Indenture Trustee
“the Trusts’ interest in a list of assets and related contractual rights, defined as the
‘Collateral[.]’” Id. at 134. The grant of the Collateral “‘is made in trust to secure
3 For ease of reference, the court will use the page numbers contained in the CM/ECF header.
4 These agreements are located in various locations on the docket. Because PIMCO is the
objecting party, the court will use the docket numbers that PIMCO uses, which are as exhibits
attached to Attorney Rodman’s declaration. The Trust Agreement is Doc. 34-1, the Indenture is
Doc. 34-2, the Administration Agreement is Doc. 34-3, and the Servicing Agreement is Doc. 34-
4.
the payment of principal of and/or interest on . . . Notes’ and ‘to secure compliance
with the provisions of this Indenture.’” Id. (quoting the Indenture, Doc. 34-2, p. 8.)
Until the Indenture is discharged, “the Trusts are prohibited from ‘engaging in any
business’ other than the acquisition, collection and transfer of student loans, and
‘all [of] the [Trusts’] right, title and interest in’ the Student Loans remains in the
Indenture Trust Estate . . . subject to the control of the Indenture Trustee.” Id. at
136. As previously stated, PIMCO manages funds which hold Class A notes
issued by five of the Trusts, with “an original balance of approximately
$212,227,000.” (Doc. 33, p. 14.) Under the agreements, noteholders are third-
party beneficiaries of the Trust Related Agreements. (Id.; see also NCSLT
Governance Dispute, 251 A.3d at 196–97.)
There are a few key players that are involved in the governance of the Trusts
and a brief description of each of their functions will be helpful. As previously
mentioned, the Trusts can take direct action only through the Owner Trustee.
(Doc. 34-2, pp. 8, 11–12; Trust Agreement §§ 1.01, 2.01.) The Owner Trustee is
Wilmington Trust Company, and, largely, the Trust Agreement governs the Owner
Trustee’s behavior. (Id.) There is also an Administrator, who “perform[s] . . . its
duties and obligations and the duties and obligations of the Owner Trustee on
behalf of the Issuer under the Indenture and the Trust Agreement[.]” (Doc. 34-3,
p. 3; Administration Agreement § 1(a)(c)(i).) The administrator is GSS Data
Services, Inc., and its behavior is largely governed by the Administration
Agreement.5 The Administrator entered into Servicing Agreements with Servicers,
such as Defendant PHEAA, in order for PHEAA to do the day-to-day servicing of
the student loans in accordance with the Servicing Agreement. (Doc. 34-4, p. 2;
Servicing Agreement Section 2.)
The Indenture Trustee is the trustee of the Indenture Estate,6 and holds for
the benefit of the noteholders the “right, title and interest in . . . the Financed
Student Loans[.]” (Doc. 34-2, p. 8; Indenture Granting Clause.) The Indenture
outlines the Indenture Trustee’s duties and obligations. The Indenture Trustee is
U.S. National Bank Association. (Doc. 34-2, p. 67; Indenture Appendix A.) The
noteholders hold notes issued by the Trusts. (Doc. 34-2, p. 69; Indenture Appendix
A.)
With this background in mind, the court now turns to the allegations in the
complaint. The CFPB filed the instant complaint on May 6, 2024, alleging,
generally, that “[f]or years, the Trusts failed to respond to borrowers’ requests for
payment relief, and PHEAA failed to give accurate and useable information to
5 The first Administrator was First Marblehead Data Services, Inc. (Doc. 34-2, p. 2;
Administration Agreement Preamble.) GSS Data Services, Inc. is the current Administrator.
6 More specifically, the “‘Indenture Trust Estate’ means all money, instruments, rights and other
property that are subject or intended to be subject to the lien and security interest of the Indenture
for the benefit of the Noteholders (including all property and interests granted to the Indenture
Trustee), including all proceeds thereof.” (Doc. 34-2, p. 67; Indenture Appendix A.)
borrowers seeking help.” (Doc. 1, ¶ 1.) These requests “generally involve[d] some
form of borrower payment relief such as requests for a co-signer release, extension
of forbearance or deferment beyond the time permitted in the Servicing Guidelines,
settlement, loan forgiveness, Servicemember Civil Relief Act (“SCRA”) benefits”
and others. (Id. ¶ 31.) Per the complaint, prior to 2015, PHEAA and the Trusts
had a system for resolving “exception requests” such as “requests to release co-
signers from loans, extend forbearances, or compromise or settle outstanding loan
balances” in which “PHEAA forwarded such requests to certain other NCSLT-
related entities for decision[.]” (Id. ¶¶ 5, 6.) However, around 2015, stakeholders
of the Trusts began disputing the Trusts’ governance and management, leading to a
total breakdown in the process for deciding exception requests and, as a result,
“[f]rom 2015 to 2021, thousands of borrower Exception Requests for various
forms of payment relief went unanswered.” (Id. ¶ 7.) During this time period,
while the process for deciding exception requests was not functioning, “PHEAA
gave borrowers the misleading impression that their Exception requests would
receive a substantive response from the NCSLTs, despite knowing they would
not.” (Id. ¶ 8.)
An illustrative example of the acts and practices alleged by the CFPB is
PHEAA and the Trusts’ handling of forbearance requests during the COVID-19
pandemic. In March 2020, “PHEAA sought guidance from Wilmington [Owner
Trustee] as to whether COVID-19 could be considered a natural disaster under the
Servicing Guidelines, such that borrowers impacted by COVID-19 could be
provided up to three months of natural disaster forbearance.” (Id. ¶ 83.)
Wilmington responded that “it had no authority to provide guidance on PHEAA’s
interpretation of the Servicing Guidelines.” (Id. ¶ 84.) During the period when
PHEAA was awaiting Wilmington’s response, it “denied at least 323 requests for
COVID-related natural disaster forbearance” and “did not timely respond to an
additional at least 216 borrower requests for COVID-related natural disaster
forbearance.” (Id. ¶ 86.) In late March 2020, PHEAA decided that COVID-19 did
qualify as a natural disaster, but upon beginning to approve such requests, PHEAA
“did not undertake a lookback review that systematically corrected any injury to
borrowers whose requests for forbearance might have been denied[.]” (Id. ¶¶ 85,
87.)
Similarly, although the Servicing Guidelines do not provide for natural
disaster forbearance extensions, PHEAA told borrowers who requested this option
that “it would ask the owners of their loans (the NCSLTs) for an extension of their
natural disaster forbearance through an Exception Request, and they should expect
a response within 7-10 business days.” (Id. ¶ 89.) PHEAA failed to “inform these
borrowers that the NCSLTs had not responded to Exception Requests since 2015.”
(Id.) PHEAA requested guidance on COVID-related forbearance extension
requests in the spring of 2020, but did not receive any response until July 2020, at
which time the Administrator responded that it could not provide any direction to
PHEAA on the legal interpretation of the Servicing Guidelines. (Id. ¶¶ 92, 93.)
Thereafter, in August 2020, “PHEAA decided to deny all NCSLT borrowers’
COVID-related forbearance extension requests. [And] it took PHEAA an
additional two to four months to convey this decision to most borrowers who were
waiting for responses to their forbearance extension requests.” (Id. ¶ 94.)
In its complaint, the CFPB alleges one count of deceptive acts or practices
against PHEAA for misrepresenting that requests would be answered, one count of
deceptive acts or practices against the Trusts based on vicarious liability for
PHEAA’s misrepresentations to borrowers, one count of unfair acts or practices
against the Trusts for failing to have a functioning process for deciding exception
requests, one count of unfair acts or practices against PHEAA for failing to grant
natural disaster forbearance for COVID-19, and one count of unfair acts or
practices against PHEA for failing to inform borrowers seeking COVID-19
forbearance of their payment options and for not having a functioning process for
exception requests. (Id. ¶¶ 103–131.)
The same day that the CFPB filed its complaint, the parties also filed the
instant joint motion for judgment along with two proposed stipulated final
judgments and orders, one for PHEAA and one for the Trusts, that would resolve
this case. (Docs. 3, 3-1, 3-2.)7 The proposed judgment relating to the Trusts
requires four broad categories of actions from the Trusts. First, the Trusts must
take steps to implement the servicing guidelines agreed to as part of the settlement,
which generally institute processes and timelines for deciding exception requests.
(Doc. 3-2, ¶¶7–12.) Second, the proposed judgment requires the Trusts and
PHEAA to set aside $2,886,817, in accordance with a separate cost allocation plan,
in order to pay redress to affected borrowers, as well as a statutory monetary
penalty of $400,000 to the CFPB, split between all Defendants. (Id. ¶¶ 16, 44.)
Third, the proposed judgment requires that Defendants formulate a plan for
reviewing and identifying potentially affected borrowers that may deserve redress.
(Id. ¶¶ 18–43.) Fourth and finally, the Trusts must submit their plans to modify
servicing guidelines and the redress plan to the CFPB for review as well as report
to the CFPB for five years after the implementation of the proposed judgment. (Id.
¶¶9, 13, 54–68.)
Also on May 6, 2024, the Trusts filed a response to the joint motion for
judgment requesting that the court “not decide the [joint motion for judgment] until
after noteholders in the Trusts’ debt securities have an opportunity to present to the
Court any objection to the Proposed Stipulated Judgment.” (Doc. 7, p. 2.) The
response was accompanied by a proposed notice to noteholders as well as a
7 The court will refer to these documents as the “proposed judgments” throughout this order.
proposed order establishing a timeline for when objections must be submitted to
the court. (Docs. 7-1, 7-2.) The court entered the proposed order the same day,
establishing the following deadlines: objections to the proposed judgment must be
filed by May 24, 2024, and responses to any objections must be filed by May 29,
2024. (Doc. 13.)
On May 24, 2024, PIMCO filed a motion for extension of time to file
objections, and other non-party noteholders8 filed a motion to join PIMCO’s
motion. (Docs. 21, 22). The court granted these motions on June 3, 2024,
extending the deadline for objections to June 21, 2024, and the deadline for
response to June 28, 2024. (Doc. 28.) On June 21, 2024, only PIMCO filed
objections to the proposed judgment as it relates to the Trusts.9 (Doc. 33.) On
June 28, 2024, both the Trusts and the CFPB responded to the objections. (Docs.
36, 37.) On July 19, 2024, with leave of court, PIMCO filed a reply brief in
support of its objections. (Doc. 41.) As of July 19, 2024, the motion was ripe and
ready for review.
8 The non-party noteholder group consists of Waterfall Eden Master Fund, Ltd., Waterfall Delta
Offshore Master Fund, LP., Waterfall Sandstone Fund, LP., Baldr Sherwood Fund, Inc., One
William Street Capital Master Fund, Ltc., OWS ABS Master Fund II, L.P., OWS COF I Master,
L.P., OWS Credit Opportunity I, LLC, OWS Fixed Income Fund (USD-Hedged), Ltd.,
LibreMax Master Fund, Ltd., LibreMax Value Master Fund, Ltd., LibreMax MSW Fund, Ltd.,
AG Mortgage Value Partners Master Fund, L.P., AG Pisgah, L.P., and AG Super RMBS LLC.
(Doc. 22, pp. 1, 2.)
9 There have been no objections regarding the proposed consent judgment relating to PHEAA.
On September 13, 2024, the Trusts filed a motion for leave to file the
Owners’ views on the proposed settlement. (Doc. 43.) On September 16, 2024,
the court granted the motion and allowed PIMCO to respond by September 23,
2024. (Doc. 44.) PIMCO responded on September 23, 2024. (Doc. 47.)
Accordingly, because PIMCO has had the opportunity to respond to this filing, the
court will consider it in reviewing the objections and the motion for proposed
judgment.
JURISDICTION AND VENUE
This court has jurisdiction under 28 U.S.C. § 1331 because this action is
brought under federal law, specifically the Consumer Financial Protection Act, 12
U.S.C. § 5565(a)(1). Venue is appropriate under 12 U.S.C. § 5564(f) because
PHEAA has a principal place of business within the Middle District of
Pennsylvania and the Trusts do business within the Middle District.
STANDARD OF REVIEW
A consent decree has the attributes of both a contract and a judgment.
Phoenix Resources, Inc. v. Duncan Twp., 155 F.R.D 507, 509 (M.D. Pa. 1994).
First, “[i]t is an agreement between the parties reached through mutual consent,
and so has the attributes of a contract.” Id. Second, it is also a judgment, serving
“as res judicata, barring either party from bringing a separate lawsuit[.]” Id. Thus,
it is essentially “a settlement agreement subject to continued judicial policing.” Id.
In reviewing a consent decree, “the district court must be satisfied that it is fair,
adequate, and reasonable.” Id. at 509–10. In undertaking this review, the court is
afforded “considerable discretion.” Id. at 510.
Because a consent decree has attributes of a judgment, “a consent decree
must spring from and serve to resolve a dispute within the court’s subject-matter
jurisdiction.” Local No. 93, Int’l Ass’n of Firefighters, AFL-CIO C.L.C. v. City of
Cleveland, 478 U.S. 501, 525 (1986). Additionally, “ the consent decree must
‘com[e] within the general scope of the case made by the pleadings,’ and must
further the objectives of the law upon which the complaint was based.” Id.
(quoting Pacific R. Co. v. Ketchum, 101 U.S. 289, 297 (1880)).
Further, because a consent decree also has attributes of a contract, “the
parties’ consent animates the legal force of a consent decree. Therefore, a federal
court is not necessarily barred from entering a consent decree merely because the
decree provides broader relief than the court could have awarded after a trial.”
City of Cleveland, 478 U.S. at 525. However, “[t]his is not to say that the parties
may agree to take action that conflicts with or violates the statute upon which the
complaint was based.” Id. at 526.
Overall, “a consent decree is primarily a means by which parties settle their
disputes without having to bear the financial and other costs of litigating.” Id. at
528. Because a consent decree is, essentially, a contract between two parties, the
role of a third party or intervenor is limited, such that a third party or intervenor
“does not have power to block the decree merely by withholding its consent.” Id.
at 529. However, “an intervenor is entitled to present evidence and have its
objections heard[.]” Id. at 528. The parties to the consent decree “may not dispose
of the claims of a third party, and a fortiori may not impose duties or obligations
on a third party, without that party’s agreement.” Id. at 529. Thus, “a court’s
approval of a consent decree between some of the parties therefore cannot dispose
of the valid claims of nonconsenting intervenors; if properly raised, these claims
remain and may be litigated by the intervenor.” Id. Finally, “a court may not enter
a consent decree that imposes obligations on a party that did not consent to the
decree.” Id.
DISCUSSION
The court must review this proposed judgment and be satisfied that it is fair
and reasonable. Further, the court also notes that PIMCO, on behalf of
noteholders, is a third party to the instant proposed judgment. Accordingly, the
fact that PIMCO objects to this judgment, in and of itself, does not preclude the
court’s approval of the judgment. City of Cleveland, 478 U.S. at 529. Rather, the
court will analyze each objection on the merits, and determine whether the consent
decree disposes of any claims the noteholders may have or imposes obligations on
the noteholders, as well as whether the objection shows that the consent decree is
not fair or reasonable. Id. The court now turns to each objection and the parties’
arguments.
A. Authority to Enter into Proposed Judgment
PIMCO has two theories supporting their objection based on the Trusts’
authority to enter into the proposed judgment. First, PIMCO argues “there is no
evidence that WilmerHale is authorized to enter into the proposed consent
judgment on behalf of the Trusts.” (Doc. 33, p. 18.) According to PIMCO, “‘the
business affairs of a statutory trust shall be managed by or under the direction of its
Trustee[,]’” and here, that is the Owner Trustee. (Id.) (quoting NCSLT
Governance Dispute, 251 A.3d 116, 170 (Del. Ch. 2020)). However, “there is no
indication that the Owner Trustee is acting on behalf of the Trusts here” because it
is not a party, it did not ask the court for entry of the proposed judgment, and
“there does not appear to be written authorization from the Owner Trustee
instructing Trust counsel to execute the Proposed Consent Judgment.” (Id. at 18,
19.)
In support of the first theory, PIMCO points to Consumer Fin. Protection
Bureau v. Nat’l Collegiate Student Loan Master Trust, No. 17-1323, 2020 WL
2915759 (D. Del. May 31, 2020) (“CFPB I”), wherein the District of Delaware
rejected a proposed consent judgment after discovery “established that the Owners
had directed Trust counsel to execute the settlement without authority from the
Owner Trustee.” Id. at *3, *5. PIMCO argues the same is true here where it has
not been established who engaged the law firm of WilmerHale, “who directs
WilmerHale . . . ; what responsibilities of the Owner Trustee were delegated to
WilmerHale and under what authority; and how WilmerHale is authorized under
the Trust Related Agreements to bind the Trusts to a federal consent judgment.”
(Doc. 33, p. 20.)
Second, PIMCO argues that even if the Owner Trustee properly authorized
the instant proposed judgment, it did not do so in accordance with the Trust
Related Agreements, which, according to PIMCO, require the Owner Trustee to
receive written approval from all owners prior to compromising a lawsuit brought
against the Trusts. (Id.) (citing Trust Agreement § 4.01; Doc. 34-1, p. 15.)
PIMCO argues that the Owner Trustee did not obtain the Owners’ written approval
because none has been provided to PIMCO, but rather, “the Owner Trustee merely
requested ‘instructions’ from the Owners . . . on whether to execute certain
documents relating to the Proposed Consent Judgment–not whether to enter into
the Proposed Consent Judgment itself.” (Id. at 21.)
The Trusts respond that the Trusts have been authorized to enter into the
settlement because “the Administrator retained WilmerHale on behalf of the Trusts
at the Owner Trustee’s and Indenture Trustee’s direction.” (Doc. 36, p. 18.) The
Trusts agree that the Owner Trustee is the only entity that can act on behalf of the
Trusts, but also notes that the Owner Trustee can delegate that authority. (Id.)
(citing NCSLT Governance Dispute, 251 A.3d at 169–71.) The Trusts argue that
the Owner Trustee can delegate its authority to the Administrator, but with the
limitation that the “the Administrator ‘shall not’ take any action as to non-
ministerial matters, including the settlement of actions brought against the Trusts,
‘unless the Administrator shall have received instructions from the Indenture
Trustee, in accordance with the Indenture, from the Owner Trustee or the Owners,
in accordance with the Trust Agreement.” (Id.) (citing Administration Agreement
§ 1(d)(i); Doc. 34-3, p. 4.) Here, the Owner Trustee directed the Administrator to
retain WilmerHale to represent the Trusts in this action. (Id. at 18, 19; Doc. 36-
1.)10
The Trusts also argue that every entity required to approve the proposed
settlement under the Trust Agreements has done so. (Id. at 19.) The Trusts
recognize that the Owner Trustee is the only entity able to act directly on behalf of
the Trusts and may not settle non-ministerial matters without written approval from
the Owners. (Id.) However, the Trusts point to a separate section of the Trust
Agreement, which provides that:
10 The instructions direct the Administrator to retain WilmerHale to represent each yearly Trust
and the Master Trust “in related discussions with, and written submissions to, the CFPB with
respect to this matter, and in any resulting proceeding(s) brought by the CFPB against the
[Trusts.]” (Doc. 36-1.)
In the event that the Owner Trustee is unable to decide between
alternative courses of action . . . , the Owner Trustee may give
notice . . . to the Owners requesting instructions[.] If the Owner Trustee
shall not have received appropriate instructions . . . the Owner Trustee
may, but shall be under no duty to, take or refrain from taking such
action, not inconsistent with this Agreement or the Trust Related
Agreements, as the Owner Trustee shall deem to be in the best interests
of the Owners[.]
(Trust Agreement, § 8.06; Doc. 34-1, p. 22.) The Trusts then point to an email
exchange attached to its brief in which “the Owner Trustee emailed the Owners,
requesting that the Owners issue any instruction regarding entry into the proposed
Settlement by 5:00 pm ET on May 3, 2024. The Owners’ counsel stated that the
Owners would not be issuing instructions prior to the deadline[,]” and the Note
Insurer consented as to the master Trust. (Docs. 36, p. 20; 36-1.) Further, on
September 16, 2024, the Trusts filed a letter from the Owners specifically stating
that the Owners do not object to the entry of the proposed judgment. (Doc. 45, p.
5.) In addition, the Trusts argue “the Owner Trustee is not the only party who can
direct the Trusts or parties’ in the Trusts’ governance structure to settle claims
against the Trusts” because the Trust Agreements also provide authority to the
Administrator and the Indenture Trustee to “negotiate and settle [lawsuits] at the
expense of the Trusts.” (Doc. 36, p. 21) (citing NCSLT Governance Dispute, 251
A.3d at 140, 146–47, 168; see also Administration Agreement §§ 1(a); Indenture
Granting Clause.) Finally, the Trusts argue that “[t]here is no requirement in the
Trust Related Agreements or elsewhere that those parties themselves be named in
this action, and PIMCO does not point to any authority suggesting otherwise.”
(Id.)
The CFPB adds that the Owner Trustee, the Indenture Trustee, and the
Administrator executed signatures on copies of the cost allocation agreement and
the May 1, 2024 Servicing Guidelines Amendment, which “demonstrate[s] those
entities’ consent for the NCSLT Proposed Order.” (Doc. 37, pp. 9, 10; Docs. 37-1,
37-2.) The CFPB reiterates the arguments made by the Trusts regarding the Owner
Trustee obtaining consent through Trust Agreement § 8.06 and the authority of the
Indenture Trustee and Administrator to compromise claims against the Trusts.
(Doc. 37. pp. 10, 11.) The CFPB further notes that the Chancery Court held that
“if the claims asserted against the Trusts relate to the Collateral, the Indenture
Trustee may settle the legal action directly on behalf of the Trusts.” (Id. at 12)
(quoting NCSLT Governance Dispute, 251 A.3d at 146.) Thus, the CFPB contends
the Trusts were authorized to enter into the settlement agreement because the
Indenture Trustee, Administrator, and Owner Trustee with consent of the Owners
signed off on it.
In reply, PIMCO argues that the Trusts read § 8.06 to require “the Owners to
take action to stop the Owner Trustee from compromising a claim” rather than
requiring prior written approval. (Doc. 41, p. 4.) Further, PIMCO argues that
§ 8.06 authorizes the Owner Trustee to take actions in the absence of approval
from the Owners, but those actions must be consistent with the Trust Related
Agreements. (Id.) PIMCO does not explain how the proposed consent judgment is
inconsistent with the Trust Related Agreements, but presumably relies upon its
arguments that the proposed judgment violates the provisions of the Trust
Agreements. PIMCO argues that “even if the Indenture Trustee could authorize
the Trusts to compromise claims,” its authority would mirror the authority
delegated to it from the Owner Trustee and would require written approval by the
Owners, which did not occur here. (Id. at 5.)
Finally, PIMCO argues that the Trusts have provided no evidence that they
were authorized to enter into the proposed judgment because neither the Owner
Trustee nor Administrator entered into the judgment on behalf of the Trusts, and
there are no instructions to enter into a settlement other than the instructions to
retain WilmerHale to represent the Trusts during this litigation. (Id. at 6, 7.)
Two different provisions of the Trust Related Agreements are at issue here.
First, PIMCO points to § 4.01(b) of the Trust Agreement, which provides:
Without limiting the generality of the foregoing, in connection with the
following nonministerial matters, the Owner Trustee will take no
action, and will not have authority to take any such action, unless it
receives prior written approval from all the Owners for so long as any
of the Notes are outstanding: (i) Initiate any claim or lawsuit by the
Trust and compromise any claim or lawsuit brought by or against the
Trust[.]
(Doc. 34-1, p. 15; Trust Agreement § 4.01(b)). This provision lays out the
requirements necessary for the Owner Trustee to compromise lawsuits brought
against the Trust: the Owner Trustee must receive “prior written approval” from all
of the Owners.
On the other hand, Trusts and the CFPB point to Administration Agreement
§ 1(d)(i), which provides:
With respect to matters that in the reasonable judgment of the
Administrator are non-ministerial, the Administrator shall not be under
any obligation to take any action, and in any event shall not take any
action unless the Administrator shall have received instructions from
the Indenture Trustee, in accordance with the Indenture, from the
Owner Trustee or the Owners, in accordance with the Trust Agreement.
For the purpose of the preceding sentence, “non-ministerial matters”
shall include, without limitation: (A) The amendment of or any
supplement to the Trust Related Agreements; (B) The initiation of any
claim or lawsuit by the Issuer and the compromise of any action, claim
or lawsuit brought by or against the Issuer, except for claims or lawsuits
initiated in the ordinary course of business by the Issuer or their
respective agents or nominees for the collection of the Student Loans
owned by the Issuer [.]
(Doc. 34-3, p. 4; Administration Agreement § 1(d)(i) (emphasis added).) Although
no party mentions this, at first blush, this provision is unclear as to who is required
to instruct the Administrator when the Administrator seeks to settle nonministerial
claims: is it the Indenture Trustee or the Owner Trustee or the Owners who must
direct the Administrator to settle claims? And, may it be just one of those parties,
or must it be all? There appears to be a missing conjunction in the highlighted text.
However, the Court of Chancery of Delaware interpreted these two
provisions and noted that “non-ordinary course claims would trigger the
sometimes-confusing reality that both the Indenture Trustee and the Owners may
direct the Administrator and the Trusts–setting up the potential for conflicting
instructions.” NCSLT Governance Dispute, 251 A.3d at 146. In that case, the
court, in interpreting the same provision, held that the “[a]dministrator can receive
non-ministerial direction from either ‘the Indenture Trustee, in accordance with the
Indenture, or from the Owner Trustee or the Owners, in accordance with the Trust
Agreement[.]” Id. at 146 n.133. As that court noted:
On the one hand, the Indenture Trustee would have two options when
the Administrator is confronted with non-ministerial claims. First, if
the claims asserted against the Trusts relate to the Collateral, the
Indenture Trustee may settle the legal action directly on behalf of the
Trusts. This right allows the Indenture Trustee to protect the
Noteholders’ and AMBAC’s beneficial interest. Alternatively (and
consistent with its passive role), the Indenture Trustee could direct the
Administrator to negotiate and settle the lawsuit at the expense of the
Trusts. If the Administrator received this direction from the Indenture
Trustee, it would be authorized to act accordingly.
Id. at 146–47. Moreover, the Chancery Court noted that “the Owners lack
authority to direct the Owner Trustee to act on behalf of the Trusts unless the
Owner direction arises out of a Trust obligation. The Owners, therefore, could not
direct the Owner Trustee to settle non-ordinary course litigation unless the Trusts
had a contractual obligation to do so.” Id. at 147. Consistent with the above
interpretation by the Delaware Chancery Court, the Administration Agreement
requires the Administrator to receive instruction either from the Indenture Trustee,
in accordance with the Indenture, or from the Owner Trustee or Owners, in
accordance with the Trust Agreement.
Here, the Trusts and the CFPB have shown that the Owner Trustee and
Indenture Trustee instructed the Administrator to retain the law firm of
WilmerHale to represent each yearly Trust and the Master Trust “in related
discussions with, and written submissions to, the CFPB with respect to this matter,
and in any resulting proceeding(s) brought by the CFPB against the [Trusts.]”
(Doc. 36-1.) The administrator followed the instructions and retained WilmerHale
on October 31, 2022. (Id. at 3.) WilmerHale then began negotiating with the
CFPB and “regularly sought the input of various of the parties to the Trust Related
Agreements, including the Owner Trustee, Indenture Trustee, Administrator, and
Note Insurer.” (Id. at 4.) Finally, WilmerHale “received express consent from
representatives of each of the Owner Trustee, Indenture Trustee, Administrator,
and Note Insurer to execute the Proposed Settlement on behalf of the Trusts.” (Id.)
This is sufficient to satisfy the Administration Agreement’s requirement that the
Indenture Trustee instruct the Administrator to settle the instant lawsuit.
While it is correct that the Owner Trustee did not have prior written approval
from the Owners, PIMCO has not pointed to any authority stating that the path laid
out in the Trust Agreement must be followed to the exclusion of the path laid out
in the Administration Agreement. In fact, the Delaware Court expressly noted that
there are two paths laid out in the Trust Related Agreements for settling non-
ministerial litigation against the Trusts and that these two paths may even end in
discordant results. No party has provided any explanation of whether or how one
path trumps the other. Additionally, PIMCO has not argued that the form of
consents given here are not proper under the Indenture.
PIMCO’s argument that the “Indenture does not expressly state that the
Indenture Trustee may resolve claims against the Trusts” is contradicted by the
definition of “grant” in the Indenture including the right “to make waivers or other
agreements, to exercise all rights and options, to bring Proceedings in the name of
the Granting party or otherwise and generally to do and receive anything that the
Granting party is or may be entitled to do or receive thereunder or with respect
thereto[,]” as well as the Delaware Chancery Court’s findings that the Indenture
Trustee may settle claims “directly on behalf of the Trusts[,]” if they relate to the
Collateral, and that the Indenture Trustee may also “direct the Administrator to
negotiate and settle the lawsuit at the expense of the Trusts.” NCSLT Governance
Dispute, 251 A.3d at 147–46.
Further, PICMO’s comparison to the District of Delaware’s decision in
CFPB I is not persuasive because that case arose in completely different factual
circumstances. There, the Owners were attempting to settle a lawsuit against the
Trusts contrary to what the Owner Trustee thought was in the best interest of the
Trusts. Consumer Fin. Protection Bureau v. National Collegiate Master Student
Trust, No. 17-1323, 2020 WL 2915759, at * 2 (D. Del. May 31, 2020). In that
case, the court noted that § 4.01(b) set limits on the Owner Trustee’s ability to
compromise litigation, but “does not empower the Owners or other agent of the
Trusts to execute such instructions, i.e., to assume the powers and responsibilities
of the Owner Trustee to manage and direct the Trusts.” Id. at * 4. This is factually
different than here, where the Owner Trustee has given its consent to the proposed
judgment and signed the documents required to execute the judgment. (Doc. 36, p.
4.)
Accordingly, because the path laid out in the Administration Agreement has
been satisfied, the Trusts had authority to enter into the proposed settlement.11
Thus, PIMCO’s first objection is overruled.
B. Noteholders’ Contractual Rights
PIMCO objects to the proposed consent judgment because it allegedly
violates the noteholders’ contractual rights in the Trust Related Agreements. (Doc.
33, p. 22.) According to PIMCO, the noteholders’ contractual rights are violated
by the proposed judgment because it causes the Trusts to act inconsistently with
11 Because the court finds that the Trusts had authority to enter into the proposed judgment due
to the Administrator Agreement § 1(b)(i), the court will not address the arguments advanced by
Trusts and the CFPB regarding § 8.06 of the Trust Agreement.
their purposes, the judgment impermissibly amends Basic Documents,12 and the
proposed judgment was not entered into in the manner laid out by the Trust
Related Agreements. The Trusts respond that “the Court does not need PIMCO’s
consent to approve the Proposed Settlement [because] [t]he Proposed Settlement
does not impose affirmative obligations on noteholders.” (Doc. 36, p. 13) (citing
Local No. 93, Int’l Ass’n of Firefighters, AFL-CIO C.L.C. v. City of Cleveland, 478
U.S. 501, 529 (1986)). The CFPB argues that the proposed order does not violate
the terms of any Trust Related Agreement or amend the Servicing Guidelines, and
the May 1, 2024 Servicing Guidelines amendment did not require PIMCO’s
consent. (Doc. 37, p. 13.) In its reply brief, PIMCO asks the court to “permit a
period of targeted discovery followed by additional briefing to resolve the
questions of contractual interpretation raised in the Objection on a complete
record.” (Doc. 41, p. 13.) The court will address each argument in turn.
1. Whether the Proposed Judgment Violates Terms of the Trust
Related Agreements
PIMCO’s first argument relating to noteholders’ contractual rights is that the
proposed judgment violates the narrow purpose of the Trusts by “impos[ing] new
12 The “Basic Documents” are “the Trust Agreement, the Indenture, all Student Loan Purchase
Agreements, the Deposit and Sale Agreement, the Servicing Agreements, the Administration
Agreement, the Back-up Administration Agreement, the Custodial Agreements, the Note
Depository Agreement, the Guarantee Agreements, the TERI Deposit and Security Agreement,
any Program Manual and other documents and certificates delivered in connection with any
thereof. “ (Indenture, Appendix A; Doc. 34-2, p. 60; see also In re NCSLT Litigation, 251 A.3d
at 162.)
obligations on the Trusts, which are both extensive and costly, and transform[ing]
the Trusts’ Role across the Trust Related Agreements.” (Doc. 33, pp. 22, 23.)
According to PIMCO, the Trusts have a narrowly defined purpose of “separat[ing]
the Student Loans from the balance sheets of the financial institutions that first
extended credit to the borrowers” and a limited set of activities designed to achieve
that purpose. (Id. at 22) (quoting NCSLT Governance Dispute, 251 A.3d at 128);
see also Trust Agreement § 2.03, Doc. 34-1, p. 12; Indenture § 3.12, Doc. 34-2, p.
19.)
According to PIMCO, the proposed judgment would require the Trusts to do
activities not authorized by the Trust Related Agreements, namely, bears costs not
contemplated by the Trust Related Agreements, bear “debts” that are not
permissible under the Agreements, breach agreements to enforce the Basic
Documents and uphold Collateral, and submit to the continuing jurisdiction of the
court and supervision by the CFPB. (Id. at 23–25.) Further, PIMCO argues that
“the Trusts are not authorized to ‘sell, transfer, exchange or otherwise dispose of’
their ‘properties or assets,’ except as permitted by the Trust Related
Agreements[,]” and that the payments required by the proposed judgment are not
authorized under the Indenture’s payment priority provision. (Id. at 23.)
According to PIMCO, the noteholders bear the consequences of these violations of
the Trust Related Agreements, although it does not explain what those
consequences may be. (Id. at 26.) In summary, PIMCO argues the proposed
consent judgment impacts the noteholders’ contractual rights without their consent.
(Id. at 26, 27) (citing United States v. City of Hialeah, 140 F.3d 968, 971 (11th Cir.
1998); Bass v. Fed. Sav. & Loan Ins. Corp., 698 F.2d 328, 330-31 (7th Cir. 1938);
United States v. City of Los Angeles, 288 F.3d 391, 400–02 (9th Cir. 2002).)
Trusts respond that the proposed judgment “does not bind noteholders to do
or refrain from doing anything. It does not create any legal duty or obligation on
noteholders. And it does not release any legal claims noteholders might have.”
(Doc. 36, pp. 13, 14.) Further, the Trusts contend that the payment of the
settlement is “an appropriate use of the Trusts’ funds under the payment priority
provisions of the Trust Related Agreements.” 13 (Id. at 14.) Specifically, the Trusts
believe that payment of the monetary redress and civil penalty can be paid as an
“Administrator Expense,” which has “priority over distributions to noteholders[,]”
or a servicer expense, “because they are costs relating to the servicing of student
loans[.]” (Id. at 14, 15) Per the Trusts, “Defendant PHEAA[] will be primarily
responsible for providing [Exception Request related] redress to consumers and
administering the Redress Plans under the Proposed Settlement.” (Id.)
13 The “payment priority provisions” referenced by the Trusts are also referred to by the parties
as the “Indenture Waterfall.” This provision of the Indenture, § 8.02(d), lays out the order of
distributions to be made. (Doc. 34-2, p. 40; Indenture § 8.02(d).)
The Trusts also argue that the costs imposed by the proposed judgment are
not impermissible debts because “[t]he Trust Related Agreements contemplate
settling claims against the Trusts.” (Id. at 15) (citing Administration Agreement, §
1(d)(i)(B), Doc. 34-3, p. 4; Trust Agreement, § 4.01(b)(i), Doc. 34-1, p. 15).) The
Trusts argue that “the Indenture cannot plausibly be read to mean that the Trusts
are both precluded from settling claims brought against them and simultaneously
immunized from the costs of litigation and potential judgment.” (Id.)
Finally, the Trusts contend that the “non-monetary terms of the Proposed
Settlement are all directed to the purpose of servicing the student loans and
ensuring that the Trusts adhere to the terms of the Proposed Settlement[,]” and
thus, do not violate the purposes delineated in the Trusts Related Agreements. (Id.
at 17.)
The CFPB joins the Trusts’ argument regarding the allocation of costs under
the payment priority provisions in the Indenture. (Doc. 37, p. 14.) The CFPB adds
that “[t]he Administration Agreement includes an expense cap of up to $400,000
per year for each of the named Trusts[,]” which would be approximately $6 million
per year across all 15 Trusts, while the monetary requirements of the proposed
judgment do not give any “indication that any payments would need to fall
outside” this cap. (Id. at 15.) The CFPB also joins the Trusts’ arguments
regarding the non-monetary terms of the proposed judgment being within the scope
of the purposes and activities set out in the Trust Related Agreements. (Id. at 17,
18.)
PIMCO replies by faulting the Trusts and the CFPB for not explaining each
obligation imposed by the proposed judgment, but rather sweeping them all
together as necessary and suitable or incidental to the Trusts permitted activities.
(Doc. 41, pp. 8, 9.) PIMCO then points to Trust Agreement § 2.03(a) as
delineating the narrow activities the Trusts may engage in. (Id. at 8.) PIMCO
again questions the propriety of the Trusts agreeing to pay for PHEAA’s
misconduct when there is “a broad indemnity right under the Servicing
Agreement[.]” (Id. at 10.) PIMCO notes that the provisions allowing for payment
of “fees and expenses” of service providers does not include “recoupment of
settlement costs[.]” (Id. at 11.) The court will discuss each category raised by
PIMCO in turn.
a. Activities and Costs
In order to determine whether the proposed judgment requires the Trusts to
undertake activities they are not permitted to under the Trust Related Agreements,
the court first turns to Trust Agreement § 2.03(a), which provides:
(a) The purpose of the Trust is to engage in the following activities and
only these activities:
(i) To acquire a pool of Student Loans, to execute the Indenture and to
issue the Notes;
(ii) To enter into the Trust Related Agreements and to provide for the
administration of the Trust and the servicing of the Student Loans;
(iii) To engage in those activities and to enter into such agreements that
are necessary, suitable or convenient to accomplish the foregoing or are
incidental thereto or connected therewith; and
(iv) To engage in such other activities as may be required in connection
with conservation of the Trust Property and Distributions to Owners.
Until the Indenture is discharged, the Trust shall not engage in any
business or activities other than in connection with, or relating to, the
foregoing and other than as required or authorized by the terms of this
Agreement and the Indenture, except as are incidental to and necessary
to accomplish such activities, unless the Interested Noteholders consent
to the Trust engaging in other activities.
(Doc. 34-1, p. 12; Trust Agreement § 2.03(a).) Further, according to the Indenture,
“[t]he Issuer shall not engage in any business other than financing, purchasing,
owning, selling and servicing the Financed Student Loans in the manner
contemplated by this Indenture and the other Basic Documents and activities
incidental thereto[,]” and “[s]o long as any of the Notes are Outstanding: (a) the
Issuer [Trusts] shall not engage in any business or activity other than in connection
with the activities contemplated hereby and in the Basic Documents, and in
connected with the issuance of the Notes.” (Doc. 34-2, pp. 19, 23; Indenture §§
3.12, 3.23(a).) Thus, it is clear that the Trusts may not engage in any activity or
business other than “in connection with the activities contemplated” by the Trust
Related Agreements, such as “financing, purchasing, owning, selling and servicing
the Financed Student Loans in the manner contemplated by this Indenture and the
other Basic Documents and activities incidental thereto[.]” (Doc. 34-2, pp. 19, 23;
Indenture §§ 3.12, 3.23(a).)
As noted above, the proposed judgment against the Trusts requires four
broad categories of actions from the Trusts. First, the Trusts must take steps to
implement servicing guidelines agreed to as part of the settlement, which
generally, institute processes and timelines for deciding exception requests. (Doc.
3-2, ¶¶7–12.) Second, the proposed judgment requires the Trusts and PHEAA to
set aside $2,886,817, in accordance with a separate cost allocation plan, in order to
pay redress to affected borrowers, as well as a statutory monetary penalty of
$400,000 to the CFPB, split between all Defendants. (Id. ¶¶ 16, 44.) Third, the
proposed judgment requires that Defendants formulate a plan for reviewing and
identifying potentially affected borrowers that may deserve redress. (Id. ¶¶ 18–
43.) Fourth and finally, the Trusts must submit their plans to modify servicing
guidelines and the redress plan to the CFPB for review as well as report to the
CFPB for five years after the implementation of the proposed judgment. (Id. ¶¶ 9,
13, 54–68.)
It is clear that these actions are connected to servicing the student loans,
which is expressly contemplated by the Trust Agreement and the Indenture. With
respect to the issue of the proposed judgment imposing costs, the Trusts and the
CFPB have explained why the monetary requirements of the proposed judgment
would be considered Administrator or Servicer expenses under the payment
priority provisions. The court concludes that the monetary requirements of the
judgment do not deprive noteholders of any funds to which they were entitled.
Perhaps more money will be allocated to the Administrator or Servicer than
originally anticipated by the noteholders, but these allocations are still proper
under the payment priority provisions if they do not exceed the cap established by
the Agreements. Accordingly, the court finds that the proposed judgment does not
require the Trusts to perform any action or impose any costs contrary to the Trust
Related Agreements.
b. Debt
Next, the court turns to PIMCO’s argument that the proposed judgment
requires the Trusts to undertake an impermissible “debt.” (Doc. 33, p. 23.) The
Indenture prohibits the Trusts from permitting “the validity or effectiveness of
[the] Indenture to be impaired, or permit[ting] the lien of [the] Indenture to be
amended, . . . or permit[ting] any Person to be released from any covenants or
obligations with respect to the Notes under [the] Indenture except as may be
expressly permitted[.]” (Indenture § 3.08(iii)(A); Doc. 34-2, p. 17.) Further, the
Indenture also provides “[t]he Issuer shall not issue, incur, assume, guarantee or
otherwise become liable, directly or indirectly, for any indebtedness except for the
Notes.” (Doc. 34-2, p. 19; Indenture § 3.13.)
PIMCO does not explain how the costs under the proposed judgment are
“debts” or create any claim against the Indenture Trust Estate. Further, as the
Trusts explain in response, the Trust Related Agreements expressly contemplate
that the Trusts will need to settle claims against them at some point. (Doc. 36, p.
15.) Therefore, it cannot be that the Trust Related Agreements would both allow
the Trusts to enter into settlements, but also consider settlement payments as
“debts” which are not permitted. Accordingly, the proposed judgment does not
require the Trusts to submit to impermissible debts.
c. Promise to Enforce Basic Documents and Uphold
Collateral
The final contractual right that PIMCO claims the proposed consent
judgment affects is the promise made by the Trusts to enforce the Basic
Documents and uphold the Collateral. (Doc. 33, p. 24.) Indenture § 3.07(c)
provides that “[t]he Issuer [Trusts] will enforce all of its rights under this
Indenture and the Basic Documents[,]” and “except as otherwise expressly stated
therein, the Issuer shall not waive, amend, modify, supplement or terminate any
Basic Document or any provision thereof without the consent of the Indenture
Trustee and the Interested Noteholders holding a majority of the Outstanding
Amount of the related Classes of Notes.” (Doc. 34-2, pp. 16, 17; Indenture §
3.07(c).) Further, in the Indenture, the Trusts agreed “that it will not, without the
prior written consent of the Indenture Trustee and the Interested Noteholders
holding a majority of the Outstanding Amount of the Related Classes of Notes,
amend, modify, waive, supplement, terminate or surrender, or agree to any
amendment, modification, supplement, termination, waiver or surrender of, the
terms of any Collateral or the Basic Documents, except to the extent otherwise
provided therein[.]” (Indenture § 3.07(f); Doc. 34-2, p. 17.)
PIMCO’s argument in support of this objection is that the proposed
judgment requires the Trusts to pay for a liability that PHEAA agreed to pay for in
the Servicing Agreement, because the misconduct alleged in the complaint arises
out of PHEAA’s conduct. (Doc. 34-4, p. 24.) Servicing Agreement § 9 provides:
The Servicer [PHEAA] agrees to pay for any claim, loss, liability or
expense, including reasonable attorney’s fees, which arises out of or
relates to the Servicer’s acts or omissions with respect to the Services
provided under This Agreement . . . where the final determination of
liability on the part of the Servicer is established by an arbitrator, by a
court of law with competent jurisdiction over the Service or by way of
settlement agreed to by the Servicer.
(Doc. 34-4, p. 24; Servicing Agreement § 9.)
These arguments from PIMCO misconstrue the proposed judgment because
both the Trusts and PHEAA expressly do not admit or deny any sections of the
complaint, and the CFPB releases both Defendants from liability for their actions.
(Doc. 3-1, ¶¶ 2, 73.) Thus, there has not been a final determination of liability
either by a court, arbitrator, or settlement agreement.
Having considered whether the proposed judgment requires the Trusts to
take actions or bear costs or debts contrary to the Trust Related Agreements, the
court concludes that the proposed consent judgment does not contravene the Trust
Related Agreements in these ways, and thus, noteholders’ contractual rights are not
breached in this manner. PIMCO’s objection is overruled.
2. Whether the Proposed Judgment Improperly Amends Basic
Documents
Next, PIMCO argues that the proposed judgment amends the Servicing
Guidelines, which, per the Indenture, must be done with the consent of the
Indenture Trustee and the Interested Noteholders. (Doc. 33, p. 27) (citing
Indenture § 3.07(c), Doc. 34-2, p. 17.) Section 3.07(c) of the Indenture provides,
in relevant part, “[e]xcept as otherwise expressly provided therein, the Issuer shall
not waive, amend, modify, supplement or terminate any Basic Document or any
provision thereof without the consent of the Indenture Trustee and the Interested
Noteholders holding a majority of the Outstanding Amount of the related Classes
of Notes.” (Indenture § 3.07(c), Doc. 34-2, p. 17.) PIMCO contends that the
proposed judgment violates this provision because it requires the Trusts to amend
their Servicing Guidelines “to establish a process through which PHEAA may
escalate certain borrower requests to a Trust-related entity . . . who must
communicate a decision back to PHEAA within a set period of time” and also
requires the Trusts to direct the Indenture Trustee, Owner Trustee, and
Administrator to modify their own policies in compliance with the proposed order
without prior consent from the noteholders. (Doc. 33, p. 28.) PIMCO points to a
recent Third Circuit decision interpreting the instant Indenture, in which the Third
Circuit decided that a new servicing agreement including terms which did not
appear in the Basic Documents could not be entered into without noteholder
consent, according to the Indenture. (Id. at 29) (citing In re National Collegiate
Student Loan Trusts 2003-1, 2004-1, 2004-2, 2005-1, 2005-2, 2005-3, 971 F.3d
433, 449–50 (3d Cir. 2020) (“NCSLT Servicer Dispute”).) PIMCO concludes that
“[b]y requiring the implementation of new servicing guidelines . . . the Proposed
Consent Judgment has modified the Servicing Agreement without Noteholder
consent.” (Id.)
The Trusts argue that “the Servicing Guidelines have been repeatedly
amended from time to time without any noteholder consent.” (Doc. 36, p. 16.)
The Trusts argue that the Indenture provides for this by allowing amendment of
“the student loan program guidelines of each of the Sellers” to be amended without
noteholder consent, as well as the “Servicing Guidelines themselves provid[ing]
that amendments may be agreed to by . . . the Trusts, and the Servicer” but not
mentioning noteholders. (Id. at 16, 17.)
The CFPB argues that PIMCO’s reliance on CFPB Servicer Dispute is
inapposite because “there, unlike here, the Trusts had executed an entirely new
servicing agreement rather than following the procedures to amend the existing
agreement.” (Doc. 37, pp. 20, 21.) The CFPB argues that “[t]he May 1, 2024,
Servicing Guidelines Amendment is an agreement signed or acknowledged by all
of the entities with any current role in NCSLT governance . . . and therefore
properly amends the Servicing Guidelines.” (Id. at 21.) The CFPB further argues
the only new obligations imposed by the proposed judgment are requirements for
new policies to implement the May 1, 2024, amendment and the right of review
retained by the CFPB. (Id. at 21, 22.) Neither of these obligations alter the May 1,
2024, Servicing Guidelines. (Id. at 22.)
In reply, PIMCO argues that the section the Trusts rely on as “permitting
amendment of servicing guidelines without noteholder consent” “does not
expressly supplant the requirement for Noteholder consent found in the Indenture;
it merely adds an additional consent requirement to ensure that the parties to the
Servicing Agreement agree to its amendment.” (Doc. 41, p. 12.) PIMCO
reiterates its reliance on NCSLT Servicer Dispute. (Id.)
The relevant portion of the Trust Related Agreements for this argument is
Indenture § 3.07(c), which provides: “[e]xcept as otherwise expressly provided
therein, the Issuer shall not waive, amend, modify, supplement or terminate any
Basic Document or any provision thereof without the consent of the Indenture
Trustee and the Interested Noteholders holding a majority of the Outstanding
Amount of the related Classes of Notes.” (Doc. 34-2, p. 17; Indenture § 3.07(c).)
Additionally, Indenture § 3.07(f) provides:
the Issuer agrees that it will not, without the prior written consent of the
Indenture Trustee and the Interested Noteholders holding a majority of
the Outstanding Amount of the Related Classes of Notes, amend,
modify, waive, supplement, terminate or surrender, or agree to any
amendment, modification, supplement, termination, waiver or
surrender of, the terms of any Collateral or the Basic Documents, except
to the extent otherwise provided therein[.]
(Doc. 34-2, p. 17; Indenture § 3.07(f).)
The important language that appears in both of these provisions is
“otherwise provided therein.” Both of these provisions apply to the proposed
judgment, but there is an exception which carves out conduct expressly provided in
the relevant Basic Document. The relevant Basic Document at issue here is the
Servicing Agreement. The Servicing Agreement has a section regarding
amendments to its terms, which provides:
This Agreement, Exhibits or Schedules (a) may be amended,
supplemented, or modified only by written instrument duly executed by
FMC and the Servicer; (b) shall be incorporated into this Agreement;
and (c) shall be binding upon and shall insure to the benefit of the
parties hereto and their respective successors and assigns.
(Doc. 34-4, p. 39; Servicing Agreement § 15.09.) Here, the Administrator and the
Servicer agreed by written instrument to amend the servicing guideline on May 1,
2024. (Doc. 37-1, ¶ 6.) Thus, the Servicing Guidelines have been amended as
expressly provided in the Servicing Agreement.
PIMCO analogizes this case to NSCLT Servicer Dispute, but that case is
again factually inapposite. NSCLT Servicer Dispute dealt with a Special Servicing
Agreement “for the purpose of servicing two categories of non-performing loans,
‘Defaulted Loans’ and ‘Delinquent Loans.’” NSCLT Servicer Dispute, 971 F.3d at
440. The Agreement “prohibited any amendment without the consent of ‘the
parties [thereto]’ and ‘the Administrator;’ any amendment must also satisfy the
Rating Agency Condition; and any successor servicer must be approved by the
Indenture Trustee and be affirmatively approved by the Rating Agencies.” Id. at
449 (alternations in original). Reviewing the Special Servicing Agreement, the
court held that “the Trusts cannot circumvent Section 3.07(c) by entering a ‘new’
agreement for the servicing of Defaulted Loans that achieves the same result as an
amendment without obtaining the required consents.” Id. This holding is based on
the incorporation of the consent requirements in the Special Servicing Agreement.
In the Servicing Agreement with PHEAA that is before this court, the only
requirements are that the Administrator and PHEAA implement the amendments
“by a written instrument.”
Thus, the May 1, 2024, servicing guidelines were implemented by written
instrument signed by all of the necessary parties. Accordingly, the servicing
guidelines were amended as expressly provided in the Servicing Agreement, as
authorized by Indenture § 3.07(c). For this reason, PIMCO’s objection is
overruled.
3. Trust Related Agreements Provisions for Entering into
Settlements
PIMCO argues that, under the Trust Related Agreements, there are three
ways in which the Trusts can settle a lawsuit against them, and none of those paths
were followed here. (Doc. 33, p. 30.) First, PIMCO argues the Trusts could have
amended or supplemented the Indenture by “provid[ing] prior notice to certain
ratings agencies and obtain[ing] the consent of relevant Noteholders.” (Id.)
Second, PIMCO argues the Trusts could have instituted a “Trust Instruction
Proceeding” under New York law because the Indenture is governed by New York
law. (Id. at 31.) Finally, PIMCO argues the Owner Trustee should have obtained
“the written approval of all Owners in compliance with the Trust Related
Agreements.” (Id.)
In response to PIMCO’s argument regarding the appropriate methods of
compromising a lawsuit under the Trust Related Agreements, the Trusts argue that
the court is the appropriate forum in which to settle this lawsuit. (Doc. 36, p. 10.)
The Trusts argue that, according to statute, the “CFPB may compromise or settle
claims brought in a civil enforcement action only if the settlement is approved by
the Court.” (Id.) (citing 12 U.S.C. § 5564(c).) The Trusts argue this method is not
contrary to the Trust Related Agreements, and further, that a Trustee Instruction
Proceeding is not required by the Trust Related Agreements. (Id.)
The CFPB argues that the Trust Related Agreements do not expressly set out
“any required mechanism for a compromise of claims, besides authorization
requirements[.]” (Doc. 37, p. 18.)
As explained above, the proposed judgment does not require Trusts to
undertake activities not anticipated by the Trust Related Agreements. Thus,
amending the Indenture is not required. Additionally, as explained by Trusts,
nothing in the Trust Related Agreements requires a Trustee Instruction Proceeding
prior to entering into a proposed judgment. As explained above, the Trust Related
Agreements have mechanisms for settling non-ministerial claims against the
Trusts. One of them is outlined in the Trust Agreement, spearheaded by Owner
Trustee. The other is outlined in the Administration Agreement, led by the
Administrator (with approvals by the Owner Trustee or the Indenture Trustee).
Here, the Administrator, as well as the other Trust entities, engaged in the
settlement discussions and the Administrator entered into this agreement after
receiving instruction from the Indenture Trustee. Accordingly, no other process
was required.
In conclusion, after evaluating every argument advanced by PIMCO that the
proposed judgment violates noteholder’s contractual rights, the court finds that the
proposed judgment does not violate the noteholder’s contractual rights, nor does it
impose any obligation on the noteholders. Therefore, PIMCO’s objections are
overruled.
C. Fair and Reasonable
Finally, PIMCO argues the proposed judgment is not fair or reasonable
because it “depend[s] upon a novel theory of vicarious liability: that the Trusts are
vicariously liable for PHEAA’s alleged violations of Section 1036[.]” (Doc. 33, p.
32.) PIMCO contends that “[i]t is neither fair nor reasonable for the Proposed
Consent Judgment to assume the viability of this claim, particularly given its
impact on the securitization industry.” (Id.) PIMCO then proceeds to argue the
merits of whether vicarious liability is a permissible theory of liability under the
CFPA, pointing to one case that held it was a viable theory, but also noting that the
Third Circuit has expressly not decided this issue. (Id. at 33, 34.) (citing Consumer
Fin. Protection Bureau v. Manseth, No. 22-CV-39, 2023 WL 5400235 (W.D.N.Y
Aug, 22, 2023; Consumer Fin. Protection Bureau v. National Collegiate Master
Student Loan Trust, 96 F.4th 599, 609 n.81 (3d Cir. 2024).) Then, PIMCO argues
that, in its complaint, the CFPB did not establish that PHEAA is an agent of the
Trusts in order to establish vicarious liability. (Id. at 35, 36.)
The Trusts argue that the proposed judgment is fair and reasonable because
negotiation “took place at arm’s length, over the course of nearly a year[,]” and
moreover, those negotiations were undertaken with “substantive input from entities
within the Trusts’ governance structure.” (Doc. 36, p. 12.) Further, the Trusts
argue that the specifics of the proposed judgment are “narrowly tailored to address
the CFPB’s allegations, are informed by data regarding the ‘Exception Requests’ at
issue, and reflect careful consideration of the relief the CFPB would have sought in
contested litigation . . . as well as the practical limitations on the Trusts’ ability to
pay such amounts.” (Id.)
Regarding PIMCO’s argument about vicarious liability, the Trusts contend
that they have not conceded liability under the proposed judgment, and note that
the complaint also alleges counts against the Trusts directly, which are not reliant
upon a theory of vicarious liability. (Id.) Thus, “there remains a meaningful risk
that the Trusts could be found liable either directly or vicariously.” (Id.)
Accordingly, the Trusts argue the proposed judgment limits those risks by capping
the Trusts’ liability, as opposed to the prospect of protracted litigation. (Id. at 13.)
The CFPB argues the proposed judgment is fair and reasonable because it is
“supported by the Trusts . . . , PHEAA, Administrator, Owner Trustee, Special
Subservicer, Note Insurer, Indenture Trustee, and counsel for the Trusts.” (Doc.
37, p. 23.) Further, the CFPB points out that no other noteholder group or any
other entity objected to the proposed judgment. (Id.) Finally, the CFPB discounts
PIMCO’s “attempt to raise what are essentially Rule 12(b)(6) arguments” as an
objection and notes that the merits of the underlying lawsuit are not the driving
concern, but rather “whether the parties have negotiated a reasonable resolution of
the claims in the case.” (Id. at 24.)
Turning first to the argument that the proposed judgment should not be
entered because it is “contingent in part on such a broad and novel claim” of the
Trusts being vicariously liable for PHEAA’s actions, the court notes that neither
the Trusts nor PHEAA admit any allegations in the complaint. Further, the
proposed judgment does not state that Trusts are vicariously liable for PHEAA’s
action. Because the court can approve a consent judgment that provide broader
relief than what may be proved at trial, and because PIMCO challenges only one of
five counts, the court does not find the proposed consent judgment to be
unreasonable. This settlement is not injecting a novel theory into the world of
securitization because the proposed judgment reflects the consent of the parties to
resolve the instant action, not precedential law that vicarious liability is now an
approved theory of liability under the CFPA. Moreover, the case provided by
PIMCO is not persuasive because the court in the Western District of New York
points out that the CFPA has provisions for holding “related persons” liable, and
this theory is similar, and perhaps coextensive, with vicarious liability. Manseth,
2023 WL 5400235 at *10-11
Finally, the court views this proposed judgment as fair and reasonable in
these circumstances. This agreement was negotiated between the CFPB and the
various Trust entities at arm’s length for almost one year. (Doc. 36-1, pp. 3, 4.)
As argued by the Trusts and the CFPB, this resolution was reached with
acknowledgment of what the Trusts could pay in redress in consideration of the
Trusts’ own financial state. (Doc. 36, pp. 12, 13.) The proposed judgment also
appears to narrowly address the problem that the CFPB was investigating: the
alleged failures of PHEAA and the Trusts to address borrower requests for
exception. The judgment requires the Trusts and PHEAA to fix this problem and
to provide monetary redress to those affected. This is fair and reasonable under the
circumstances. Moreover, because the proposed judgment does not impose any
obligation or requirement on the noteholders or affect any of their bargained-for
contractual rights, the proposed judgment is also fair and reasonable. For these
reasons, the joint motion for judgment will be granted.
CONCLUSION
For the foregoing reasons, PIMCO’s objections to the proposed judgment
are overruled and the joint motion for judgment will be granted. The court will
enter the proposed orders. (Docs. 3-1, 3-2.)
s/Jennifer P. Wilson
JENNIFER P. WILSON
United States District Court Judge
Dated: October 1, 2024 Middle District of Pennsylvania