After Virginia resident Lee Pele discovered that his credit reports contained defaulted loans that were not his, he disputed the erroneous reports with the credit reporting agencies and with the loan servicer, the Pennsylvania Higher Education Assistance Agency (PHEAA). PHEAA modified but refused to delete the loans from Pele’s file, and as a result Pele was denied a mortgage loan and had credit problems for approximately two years.
Pele sued PHEAA for violating his rights under the Fair Credit Reporting Act. But the district court granted summary judgment to PHEAA on the ground that it is an “arm of the state” and therefore entitled to partake of Pennsylvania’s sovereign immunity even though it is functionally an independent loan servicing business.
Public Citizen is lead counsel in Pele’s appeal to the Fourth Circuit. On December 22, 2014, we filed Pele’s opening brief, arguing that PHEAA cannot be an “arm of the state” where most of its business is out of state, it is financially independent of the state, and the state is not liable for its debts. The appeal is one of the first to address whether state-affiliated student-loan entities have sovereign immunity. PHEAA is currently defending other claims – one for alleged wage and hour violations, and one for allegedly defrauding the federal government – with the same sovereign immunity argument. If PHEAA prevails, it will be able to avoid accountability for wrongful conduct of all kinds. The court heard oral argument on May 12, 2015.
On October 21, 2015, the court of appeals ruled in Pele’s favor, holding that PHEAA is not an arm of the state because of its financial independence from Pennsylvania, PHEAA’s control over its revenues and its policy, and its ability to support itself through its extensive commercial activities.
In February 2016, PHEAA sought review in the Supreme Court. In April 2016, we opposed review, arguing that the courts of appeals do not disagree with other about the test for when an entity is an “arm of the state,” and the Fourth Circuit correctly applied that test here. The Court requested the views of the United States as to whether to grant the petition, and the Solicitor General’s office recommended denial. On January 9, 2017, the Court denied the petition, allowing the case to return to the district court for litigation. The case then settled.