March 13 (Bloomberg) -- Pennsylvania and Vermont student-loan agencies must face false-billing claims brought in 2007 by a former U.S. Education Department employee, a federal appeals court ruled, reviving the whistle-blower lawsuit.
The Pennsylvania Higher Education Assistance Agency and the Vermont Student Assistance Corp. aren’t subject to sufficient state control to protect them from suits under the U.S. False Claims Act, a federal appeals court in Richmond, Virginia, ruled today, vacating a lower-court decision.
The lenders were among a group sued by Jon Oberg under the law, which lets private citizens file on behalf of the government and share in a recovery.
“We recognize that some of Dr. Oberg’s allegations test the outer bounds of the plausibility standard, but at this juncture, we must construe all facts in the light most favorable to the plaintiff,” the appeals court said.
Oberg sued lenders over claims they created billing systems that allowed them to get inflated government subsidies on a special class of student loans. The subsidies guaranteed nonprofit lenders a 9.5 percent return on loans financed by tax-exempt bonds. Congress ended the program for new loans in 1993.
From 2002 to 2006, the lenders allegedly created a scheme to sell or transfer existing 9.5 percent loans into another financing vehicle that could then be recycled into a new version of those loans to circumvent the 1993 rule, according to Oberg’s complaint. The scheme cost the government as much as $1 billion in overpayments, he said.
Nelnet Inc. and three other lenders named as defendants in the lawsuit paid $57.8 million in November 2010 to resolve claims against them.
The Justice Department didn’t intervene in the suit, which Oberg litigated through his own attorneys. He received $16.7 million as his share of the lender settlement, the Justice Department said in 2010.
A trial judge dismissed the claims against the Pennsylvania and Vermont loan agencies in 2009 and again in 2012 after the same appeals court sent the case back for further review. Both times the lower court ruled that the agencies were arms of their states not subject to False Claims Act suits, according to court documents.
Keith New, a spokesman for the Pennsylvania agency, didn’t immediately return a phone call seeking comment on the ruling.
“Vermont Student Assistance Corporation is an instrumentality and agency of the state,” spokeswoman Sabina Haskell said in an e-mailed statement. “This type of case may not be brought against state agencies.”
The appeals court decided 2-1 to uphold the trial court’s decision dismissing Oberg’s claims against the Arkansas Student Loan Authority. The Arkansas agency is an “instrument of a single state” and state law provides that all its lending income belongs to that state, the majority ruled. In dissenting, Chief Judge William B. Traxler Jr. wrote that the question of whether the loan companies qualify as arms of their creating state should be resolved by the trial court.
The case is U.S. ex rel Oberg v. Pennsylvania Higher Education Assistance Agency, 12-2513, U.S. Court of Appeals for the Fourth Circuit (Richmond).
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