National Collegiate Student Loan Trusts: California Update

Categories: Chapter 13, Chapter 7, Debt Collections, Student Loans & Bankruptcy

Even though private student loans make up a fraction of the overall student loan debt in the United States, they pose a threat to our future economy for several reasons. First, nearly all of these loans are co-signed, which means we have multiple borrowers that have taken responsibility for repayment.  I’ve seen parents, in-laws, ex-spouses and even grandmas signing for these debts.  Second, and in particular, National Collegiate does not fight fair in courts all over the country because they are obtaining default judgments without one shred of credible evidence they even have the right to collect on these loans. Lastly, our state court judges are NOT going to give you a FREE loan just because this Plaintiff cannot prove their case.

In fact, I was just on trial against National Collegiate last month and made the following arguments:

Except as otherwise provided by statute, “every action must be prosecuted in the name of the real party in interest . . .” Code of Civil Procedure § 367; see also Cloud v. Northrop Grumman Corp. (1998) 67 Cal.App.4th 995, 1004. Generally, the real party in interest is the person who has the right to sue under the substantive law. It is the person who owns or holds title to the claim or property involved, as opposed to others who may be interested or benefitted by the litigation. Gantman v. United Pac. Ins. Co. (1991) 232 Cal.App.3d 1560, 1566.

National Collegiate Student Loan Trust 2007-3(“National Collegiate”) is a third party securitized trust pool of student loans and does not extend credit directly to the public. This requires it to prove that it is the valid assignee of the debt alleged. Under Rowena F. Cockerell v. Title Insurance and Trust Company, “[t]he burden of proving an assignment falls upon the party asserting rights there under.”

Rowena F. Cockerell v. Title Insurance and Trust Company (1954) 42 Cal 2d 284, 292, see also Mission Valley East, Inc. v. County of Kern (1981) 120 Cal. App. 3d 89, 97 (“the assignment must describe the subject matter with sufficient particularity to identify the rights assigned.”) and Jonathan Cobb v. San Francisco Residential Rent Stabilization and Arbitration Board (2002) 98 Cal App 4th 345, 352. As National Collegiate alleges that they are an assignee of the debt alleged, National Collegiate must prove that a valid assignment occurred in order to establish standing.

Article 9 of the Uniform Commercial Code (“UCC”) applies in this case, pursuant to the terms of the contract that is the subject of this litigation.  UCC section 9-102(1)(b) provides that UCC Article 9 applies “to any sale of accounts or chattel paper.” See In re Amex-Protein Development Corporation, 504 F. 2d 1056 – Court of Appeals, 9th Circuit 1974.  Unless a transaction is specifically excluded, Revised Article 9 generally applies to consensual security interests in personal property or fixtures, the sale of accounts, chattel paper, payment intangibles or promissory notes.[1]         Whether a writing is properly characterized as an instrument under the UCC is a question of law, In re Commercial Money Center, Inc., 392 B.R. 814 (B.A.P. 9th Cir., 2008).

The perfection rules of Revised UCC Article 9 apply not just to security interests for loans but also to sales of chattel paper and payment intangibles. Nev.Rev.Stat. § 104.9109(1)(c) (with inapplicable exceptions, “this article applies to… (c) a sale of accounts, chattel paper, payment intangibles, or promissory notes”) (emphasis added). In re Commercial Money Center, Inc., 350 B.R. 465 (B.A.P. 9th Cir., 2006), which supersedes all prior case law and state statutes as to sales of payment intangibles (mortgage loans) and promissory notes (§ 9-109; §§ 1-102 & 103); § 9-309(4): automatic perfection against third parties and requires complete chain of title (§ 9-203(b)(2)); this means that the seller cannot transfer more than it owned.

Initially, a note is owned by the payee to whom it was issued. If that payee seeks either to use the note as collateral or sell the note outright to a third party in a manner not within Article 3,28 Article 9 of the UCC governs that sale or loan transaction and determines whether the purchaser of the note or creditor of the payee obtains a property interest in the note. See UCC § 9–109(a)(3).

Within the Ninth Circuit, the agent must have actual possession of the collateral in order for the secured party to have a perfected security interest pursuant to UCC § 9-313. Heinicke, 543 F.2d at 701-02; Huffman v. Wikle (In re Staff Mortgage & Inv. Corp.), 550 F.2d 1228, 1230 (9th Cir.1977).30 See also Fogler v. Casa Grande Cotton Finance Co. (In re Allen), 134 B.R. 373, 376 n. 5 (9th Cir. BAP 1991). In re Commercial Money Center, Inc., 392 B.R. 814 (B.A.P. 9th Cir., 2008)

A secured party or its agent takes actual possession when the collateral is physically transferred to the secured party or its agent. Raiton v. G & R Props. (In re Raiton), 139 B.R. 931, 936 (9th Cir. BAP 1992) (defining “possession” under former Cal. Com.Code § 9-305). By having the agent take actual possession of the collateral, notice is provided to prospective third-party creditors that the debtor “`no longer has unfettered use of [the secured party’s] collateral.’” Heinicke, 543 F.2d at 702 (quoting In re Copeland, 391 F.Supp. 134, 151 (D.Del.1975)); Huffman, 550 F.2d at 1230.  In re Commercial Money Center, Inc., 392 B.R. 814 (B.A.P. 9th Cir., 2008)

In In re Veal, 450 B.R. 897, 11 Cal. Daily Op. Serv. 7989, 2011 Daily Journal D.A.R. 9592 (B.A.P. 9th Cir., 2011) neither AHMSI nor Wells Fargo was the initial payee of the Note. Due to this fact, each was required to demonstrate facts sufficient to establish its respective standing. In this regard, facts that would be sufficient for AHMSI are different from those that would be sufficient for Wells Fargo. As to Wells Fargo, it had to show it had a colorable claim to receive payment pursuant to the Note, which it could accomplish by showing that it had some ownership or other property interest in the Note. As to AHMSI, as it sought a distribution from the estate in payment of the Note, it had to show that it was a “person entitled to enforce” the Note, or was the agent of such a person.

In this present case, National Collegiate Student Loan Trust, 2007-3 (“NCSLT”) has admitted that they do not possess, nor have they ever taken possession of the original of the Non-Negotiable Credit Agreement that is the subject of this litigation. [See Plaintiff response to Defedant RFP SET ONE ¶3; and RFP ¶14; Special Interrogatory response ¶9]. Further, it cannot prove that the original document flowed from the original lender, through each link in the chain, and eventually landed in the trust. Therefore, NCSLT has no standing to bring this action.  [1] California Commercial Code, Section 9109(a)

At trial, I was forced to cross examine National Collegiate’s witness (even though she brought no evidence to support that she was an agent of the Plaintiff, or servicer) and got their Securities Exchange Free Writing Prospectus admitted into evidence, which provides this relevant and important information:

“Custodial Responsibility. The PHEAA servicing agreement requires that PHEAA for each student loan hold the credit agreement or promissory note and related documents on behalf of the trust until five years after the earlier of the date such student loan is paid in full or such student loan is deconverted. PHEAA must maintain all original physical credit agreements or promissory notes in a fire resistant vault equipped with a security locking system. In addition, microfilm or electronic records of all promissory notes and related documents are maintained on-site at PHEAA’s servicing center located at 1200 North Seventh Street, Harrisburg, Pennsylvania 17102 and at an off-site facility, at least 100 miles from the PHEAA servicing center, in a fire resistant vault with a security locking system. All credit agreements or promissory notes are stored at all times in a state other than the State of Louisiana.” [Defendant’s Exhibit 21]

I also brought up the point that their Truth in Lending Act Disclosures remain always unsigned, and clients are testifying that they have never received such notice.  This is important because the disclosure is where the interest terms and other accounting terms are.  Without this, the lender cannot prove that the amount they are seeking is correct.

On cross examination, National Collegiate’s witness had no personal knowledge of this prospectus, even though she claimed to be a document custodian for the trust!!!  Having accomplished what I thought were an impossible task, I felt like I adequately attacked her credibility.  After closing, the judge instructed that he would rule one way or the other and sent us into the hall for a discussion. In the hallway, we were able to significantly reduce the amount to more than 90% off what they initially asked for in their complaint. Next time, I’ll remove the case to federal court and see if that makes a difference in the outcome.  Why?  Because after we settled, we inquired with the judge how he would have ruled and he said he would have ruled in favor of the Plaintiff!!!  He also admitted to me that he was not up to speed on these UCC Article 9 arguments.  Thanks for the hat tip judge and I’ll make a federal case out of it then!

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