An appeals court panel has questioned whether Sallie Mae and SLM Corp. had actual knowledge of for-profit California Culinary Academy’s alleged scheme to prey on students and whether the lender perpetuated that lie to students.
Sallie Mae was issuing student loans for the school, which is accused of misrepresenting its graduation and job placement rates.
Lead plaintiff Andrew Bradshaw sued SLM Corp. and Sallie Mae in 2013, claiming they "aided and abetted fraud" at the culinary school, which was not named as a defendant.
Bradshaw and other students said they did not now that an education with the school held little or no value, nor did they understand that there was no job market for the academy's graduates that would pay enough to allow graduates to pay back the tuition fees.
Sallie Mae and SLM acted as the preferred lenders for the school. They are accused of issuing the students high-interest private education loans knowing that the education the students received was unlikely to allow them to ever repay the loans.
The students argued in the 2013 lawsuit that the lenders knew that students were unaware of the high likelihood of default and purposefully failed to inform them of the risk but a federal judge dismissed the students' complaint without leave to amend, prompting them to appeal to the Ninth Circuit Court of Appeals.
Judge Jeffrey Watford on Friday questioned what facts alleged in the complaint would lead to the inference that the lender knew the school was lying about its educational value.
The students' attorney, Chris Patterson, countered that along with being part of an endeavor to recruit students, Sallie Mae also had a "due diligence in terms of what they were doing in underwriting these loans, so they should have and would have studied the operations of these for-profit colleges. These facts are sufficient to give rise to plausibility.”
Patterson argued that even if Sallie Mae did not communicate directly with the students the lender worked with the school and became intimately involved in the mechanism by which students were recruited to attend it.
Judge Andrew Kleinfeld asked Patterson, "I know you are saying that they shouldn't have done business with Culinary Academy, that they should have figured out that they were a lying outfit. What I want to know is, what was the lie that Sallie Mae was making to students?”
The appeals court panel did not indicate how or when it would make a final ruling.
Arguing on behalf of Sallie Mae, attorney Lisa Simonetti told the panel that the students' complaint contains no specific allegations that there was knowledge of a tort fraud. She said that all of the allegations about job placement rates and graduation rates were all directed by the culinary school to the students, with no involvement from Sallie Mae or SLM.