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Lord Abbett Affiliated Fund, Inc. v. Navient Corp.

United States District Court, D. Delaware

September 6, 2017

LORD ABBETT AFFILIATED FUND, INC., et al., Individually and on Behalf of All Others Similarly Situated, Plaintiffs,
v.
NAVIENT CORPORATION, et al, Defendants.

          MEMORANDUM

         I. INTRODUCTION

         Lead Plaintiffs, referred to collectively as the Lord Abbett Funds, filed a consolidated amended class action complaint (the "complaint") alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the "Securities Act").[1] (D.I. 36). Defendant Navient Corporation ("Navient") and the Individual Defendants have moved to dismiss the complaint pursuant to Fed.R.Civ.P. 9(b) and 12(b)(6), and the Private Securities Litigation Reform Act of 1995 (the "PSLRA").[2] (D.I. 38). The Underwriter Defendants have joined in the motion to dismiss.[3] (D.I. 42, D.I. 48). Navient, the Individual Defendants, and the Underwriter Defendants are referred to herein collectively as the "Defendants." The court has subject matter jurisdiction over this action pursuant to 28 U.S.C. § 1331 (federal question jurisdiction), 15 U.S.C. § 78aa (jurisdiction for violations of the Exchange Act), and 15 U.S.C. § 77v (jurisdiction for violations of the Securities Act). For the following reasons, the motion to dismiss is granted and the complaint is dismissed with leave to amend.

         II. BACKGROUND

         Navient is one of the country's largest servicers of student loans. (D.I. 43 at 3). The company was formed in April 2014 through a spin-off from Sallie Mae. (D.I. 39 at 2; D.I. 36 ¶ 81). The complaint is based on various disclosures Navient made between April 17, 2014 and December 28, 2015, which Defendants have helpfully grouped into three categories: (1) Navient's allowance for loan losses and related financial metrics, (2) Navient's compliance culture, and (3) Navient's credit facilities. (D.I. 36 ¶ 1; D.I. 39 at 7-8).

         A. Allowance for Loan Losses

         Navient holds a significant portfolio of private education loans ("PELs") on which it earns net interest income. (D.I. 36 ¶ 12; D.I. 39 at 2). When Navient concludes that a PEL is uncollectible, the unrecoverable portion of the loan is charged against an allowance for loan losses. (D.I. 36 ¶ 89). Navient estimates and maintains an allowance for loan losses at a level sufficient to cover charge-offs expected over the next two years. (Id.). The complaint alleges that Navient manipulated loan forbearances-temporary reprieves of distressed borrowers' payment obligations-to avoid having to classify loans as delinquent. (Id. at ¶ 1)- Reporting artificially low delinquency rates allowed Navient to report artificially low loan loss provisions. (Id.). Because loan loss provisions were recorded as expenses against income, Navient was consequently able to report artificially high net interest income. (Id.). In July 2015, Navient disclosed that it increased its loan loss provision for its PEL segment of business 31.7%. (Id. at ¶ 177).

         B. Compliance Culture

         Navient made several disclosures during the class period regarding its interactions with federal regulators. For example, on May 9, 2014, Navient disclosed that its wholly-owned subsidiary Navient Solutions, Inc. ("NSI") had received a civil investigative demand from the Consumer Financial Protection Bureau ("CFPB") related to its disclosure and assessment of late fees. (D.I. 36 ¶ 98). On May 13, 2014, the Department of Justice issued apress release announcing a $60 million settlement of allegations that NSI, Navient, and Sallie Mae charged military service members excessive rates on student loans, in violation of the Servicemembers Civil Relief Act ("SCRA"). (Id. at ¶ 100). In November 2014, Navient disclosed that its wholly-owned subsidiary Pioneer received a civil investigative demand from the CFPB relating to the rehabilitation of loans and collection of defaulted student debt. (Id. at ¶ 142). On February 27, 2015, the Department of Education announced that it was terminating its contracts with Pioneer and four other private collection agencies following a review by the Department's Federal Student Aid office, which "found that agents of [the five entities] made materially inaccurate representations to borrowers about the loan rehabilitation program." (Id. at ¶¶ 42, 156). On August 24, 2015, Navient disclosed that NSI received a notice from the CFPB that its Office of Enforcement was considering taking legal action against NSI regarding its disclosure and assessment of late fees. (Id. at ¶ 186). There are several other allegations scattered throughout the. complaint regarding other regulations governing Navient, compliance, and the SCRA. (See, e.g., Id. at ¶¶ 19, 99, 146, 192, 221). For the reasons explained below, it is difficult to grasp the entirety of the story the complaint is trying to tell with respect to Navient's compliance culture, other than the conclusory allegation that it was not as good as claimed.

         C. Credit Facilities

         Navient made several disclosures regarding its credit facilities. For example, on October 20, 2015, Navient disclosed that its borrowing capacity under credit facilities not identified in the complaint had been reduced. (D.I. 36 ¶ 60). On December 28, 2015, Navient disclosed that the Federal Home Loan Bank of Des Moines ("FHLB-DM") was reducing the borrowing capacity available to Navient's wholly-owned subsidiary HICA Education Loan Corporation. (Id. at ¶ 61). The complaint alleges that these credit facilities were a source of low-cost borrowing and, therefore, the reduction in aggregate borrowing capacity, had a material impact on Navient's liquidity. (Id. at ¶ 62).

         III. STANDARD OF REVIEW

         A. Rule 12(b)(6)

         Under Rule 8(a), a complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). Each allegation "must be simple, concise, and direct." Fed.R.Civ.P. 8(d)(1). To survive a motion to dismiss under Rule 12(b)(6), a plaintiff must plead facts sufficient to "state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 677-78 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Courts must accept all well-pleaded factual allegations in the complaint as true and draw all reasonable inferences in favor of the plaintiff. In re Rockefeller Ctr. Prop., Inc. Sec. Litig., 311 F.3d 198, 215 (3d Cir. 2002). The court's review is limited to the allegations in the complaint, exhibits attached to the complaint, documents incorporated by reference, and items subject to judicial notice. Siwulec v. J.M. Adjustment Serv., LLC, 465 Fed.App'x 200, 202 (3d Cir. 2012).

         B. Rule 9(b) ...


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