Key test in Fourth Circuit for sovereign immunity of state-affiliated loan entities

Today, Public Citizen filed the opening brief in Pele v. Pennsylvania Higher Education Assistance Agency, a Fourth Circuit appeal testing whether and in what circumstances state-affiliated loan entities can qualify as "arms of the state" and so partake of a state's sovereign immunity from suit.

The appeal arises out of the case of Lee Pele, a Fairfax County, Va., resident who sued PHEAA under the federal Fair Credit Reporting Act, alleging that PHEAA had failed to correct inaccurate reports stating that Pele had defaulted on tens of thousands of dollars in student loans – loans that were not, in fact, his. PHEAA sent those erroneous reports to credit agencies, threatening to hamper Pele’s plans to finish graduate school. Pele was denied a home loan and had his credit damaged for approximately two years.

PHEAA, one of the largest student-loan servicers in the nation, sought and won summary judgment against Pele on based on sovereign immunity. Representing Pele, Public Citizen is now appealing that ruling, pointing out that:

• PHEAA’s operations are financially independent of state funding;

• The state is not legally or functionally liable for a judgment against PHEAA;

• More than two-thirds of PHEAA’s loan guarantee and loan servicing businesses (which together account for more than 90 percent of PHEAA’s business) consist of non-Pennsylvania loans;

• PHEAA’s own legal filings in 2010 and 2011 identified it as a “citizen of Pennsylvania,” a status that is legally incompatible with being an arm of the state;

• The Fourth Circuit in United States ex. rel. Oberg v. PHEAA held earlier this year that PHEAA was not an arm of the state.

The outcome of the case could affect the legal remedies available to thousands of student borrowers and their families, and in fact any individual wronged by state-affiliated loan servicing entities like PHEAA. Little case law exists addressing the question of whether most state loan guarantee agencies have sovereign immunity. Meanwhile, in addition to Pele’s lawsuit, PHEAA is defending a separate case claiming that it defrauded the federal government and another case claiming that it violated its employees’ rights under federal and state wage-and-hour laws. In each of these cases, PHEAA has asserted that sovereign immunity requires dismissal or judgment in its favor.

PHEAA was created in 1963 by the Pennsylvania Legislature. In 2008, it stopped lending directly to students; now it primarily services and guarantees loans for students nationwide. It also operates under the names American Education Services and FedLoan Servicing, and in fiscal year 2013 its portfolio of loans it held, guaranteed or serviced was worth more than $100 billion.

You can read our press release here, and our opening brief here.