Written by: Daniel Morgan
MOHELA, one of the largest servicers of federal student loans in the country, has been mired in federal lawsuits over its bad streak of billing errors that have adversely affected borrowers and victims of identity theft alike. It has attempted to cloak itself in the protection of sovereign immunity but has failed twice. However, the third time may prove to be the charm.
Sovereign immunity is grounded in the old maxim that “the king can do no wrong.” The Eleventh Amendment expressly strips the federal judiciary of jurisdiction over cases where a state is sued by a citizen of another state. The Supreme Court has read this to incorporate a broader essence of sovereign immunity which bars suits by citizens against any state, even their home state, subject to some exceptions. This immunity is also extended to “arms of the state” which are non-state entities that bear a sufficient nexus to a state such that the state becomes the true party in interest. MOHELA is a semi-private entity created by Missouri statute that now primarily services a lion’s share of federal student debt.
On July 26th, the American Federation of Teachers (AFT) filed a lawsuit against MOHELA in the Superior Court of the District of Columbia over inaccurate billing, mishandling borrower accounts, and withholding important information pertaining to payment options. This was likely in response to the Eastern District of California’s holding against MOHELA in Walker v. Higher Education Loan Authority of the State of Missouri, which was handed down the same day.
In Walker, MOHELA failed in its two-pronged argument that it should be afforded sovereign immunity. First, MOHELA contended that, as per Biden v. Nebraska’s holding on Missouri’s standing to sue, MOHELA is a “part of the state of Missouri” and has no legal identity separate from Missouri. The Walker court did not find this persuasive because Biden did not decide MOHELA’s sovereign immunity status. Furthermore, a standing analysis substantively differs from a sovereign immunity analysis. An entity can be part of a state for some purposes but not for others, and MOHELA is not part of Missouri for purposes of sovereign immunity. MOHELA next contended that it was an “arm” of Missouri. This also failed.
The Walker court applied the Ninth Circuit’s three factor test to determine whether a non-state entity is an “arm of the state.” The D.C. Circuit, which is the D.C. Superior Court’s authority, utilizes the same test. Perhaps the AFT is confident that the D.C. Superior Court will reach the same result on sovereign immunity. However, there are interesting and subtle differences in how the D.C. Circuit has applied this test, so much so that it renders Walker’s straightforward application dubious.
First Factor
The first factor involves Missouri’s intent regarding MOHELA, which requires consideration of whether MOHELA is a state instrumentality, whether it performs state functions, whether it is treated like a state instrumentality by other state laws, and how the state has represented its status. The Walker court found that this factor was favorable to MOHELA as an “arm” because its enabling statute labeled it a state instrumentality, it fulfilled the “essential public function” of helping Missourians attain college financing and supporting public colleges, and because Missouri represented it as part of the state in Biden.
The D.C. Circuit applied this rather differently in Puerto Rico Ports Authority v. Federal Maritime Com’n. What may differ here is how the court will consider the essential public function of college financing. In Puerto Rico Ports, the enabling statute of the entity at issue expressed that it performed functions for the general welfare of Puerto Rico, thus tethering these functions to the benefit of the commonwealth as a whole. This highlights a difference between a public function in general and a state public function. Whether the D.C. Superior Court will consider college financing and supporting public colleges a state public function for the general welfare of the state is an open question and will require more context than Walker provided.
How the D.C. Circuit considers how the state represents the entity may also change in the D.C. Superior Court. In Walker, the court considered how Missouri represented MOHELA generally, which is why Missouri’s position in Biden was sufficient. In Puerto Rico Ports, the emphasis was on how Puerto Rico represented the entity in that particular case. So, if this applies literally, MOHELA would not find refuge in Missouri’s position in Biden.
Second Factor
The second factor involves Missouri’s control over MOHELA. Both Walker and Puerto Rico Ports look to how the entity’s governing board is selected. Most of MOHELA’s governing board is appointed by Missouri’s governor, with the remaining board members being board of education officials. However, it did not prevail on this factor because of its significant independence in taking certain actions.
This may be different here because the Puerto Rico Ports analysis stopped at the makeup of the governing board. Whether it was independent of Puerto Rico in other aspects was supplemental to the sufficient condition that the governing board be comprised of executive appointees and high-ranking governing officials. Furthermore, Walker only highlights what MOHELA can do on its own and neglects to mention whether or not it can be ordered to take certain actions by Missouri, the latter of which was emphasized by Puerto Rico Ports.
Thus, if applied literally, this may benefit MOHELA in the D.C. Superior Court. And if the court decides to stretch its Circuit’s sufficiency boundary to encompass MOHELA’s independence, then more context would be needed as to whether MOHELA can be ordered around by Missouri.
Third Factor
Lastly, the court will ponder MOHELA’s financial relationship with Missouri by considering Missouri’s overall responsibility for funding MOHELA as well as its exposure to MOHELA’s liability. In Walker, MOHELA failed because its revenue stream is significantly independent of Missouri funding, and Missouri has absolved itself of liability for MOHELA’s bonds, loans, and other agreements.
In Puerto Rico Ports, the entity had a largely independent revenue stream through collection of fees and bonds, but what favored sovereign immunity was Puerto Rico’s liability for certain actions of that entity, such as tortious acts committed by its members and officers, regardless of whether those acts relate to the controversy at issue. Interesting, Puerto Rico law absolves the commonwealth from the same liabilities that Missouri absolves itself of regarding MOHELA. So, the fact that there existed some liability for some things was dispositive for the D.C. Circuit. Thus, whether MOHELA can prevail on this factor in the D.C. Superior Court may depend on whether Missouri is liable for other acts of MOHELA’s members or officers.
Conclusion
When considering how the D.C. Circuit applies these factors, it becomes clear that Walker’s analysis may not have a straightforward application in the D.C. Superior Court. Only time, with the aid of skillful lawyering, will tell whether MOHELA, like the king, can do no wrong.
Sources:
Erum Salem, Teachers Union Sues Major Federal Student Loan Servicer, Alleging ‘Abuses’, THE GUARDIAN (August 15, 2024, 12:18 AM).
Hans v. Louisiana, 141 U.S. 1 (1890).
Puerto Rico Ports Authority v. Federal Maritime Com’n, 531 F.3d 868 (D.C. Cir. 2008).
U.S. Const. amend. XI.
Walker v. Higher Education Loan Authority of the State of Missouri, 2024 WL 3568576 (E.D. Cal. 2024).