Thursday, August 13, 2026
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Ninth Circuit: $12 Million Judgment Stands in Class Action Over ‘Predatory’ Student Loans
In Case Accusing Lender of Conspiring With Now-Defunct ITT Technical Institute to Defraud Borrowers, Opinion Rejects Idea That Plaintiffs Were on Notice Years Before Filing Suit Due to Regulatory Actions
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals has affirmed a $12 million judgment against a San Diego-based lender accused of conspiring with the now-defunct ITT Technical Institute to create a student-loan program that was purportedly designed to defraud pupils and evade regulators in violation of federal law.
Yesterday’s opinion, authored by Circuit Judge Salvador Mendoza Jr. and joined in by Circuit Judges Mark J. Bennett and Lucy H. Koh, rejects the defendants’ assertion that the students’ claims, under the Racketeer Influenced and Corrupt Organizations (“RICO”), are time-barred because regulatory investigations into ITT put them on notice of harm at least five-to-six years before their complaint was filed. Mendoza wrote:
“[I]nquiry notice depends heavily on context. A sophisticated financial institution reviewing regulatory investigations may reasonably be expected to appreciate implications that would not be obvious to ordinary consumers. But student borrowers are not held to the same level of financial sophistication as institutional investors, specialized corporations, or industry insiders. Indeed, our precedent rejects an ‘injury discovery’ rule that would assess inquiry notice in a vacuum. The question is what a similarly situated plaintiff would have understood under the circumstances.”
Creative Measures
The question arose after ITT undertook creative measures to adapt to conditions in the wake of the 2008 financial crisis by quietly creating its own source of financing for students. The move was designed to make it appear as though it was in compliance with a federal law that demands that a for-profit college generate at least 10% of its revenue from private sources (the “90/10 Rule”) at a time when banks were disinclined to issue loans to high-risk borrowers.
In 2010, ITT established a private student loan program, with the backing of Deutsche Bank, known as “PEAKS,” by which a trust fund sold securities to investors and then used the proceeds to produce financing for students enrolled at the trade school. Eventually, the program had 55,000 enrollees, issuing loans in an aggregate amount of approximately $300 million.
Vervent Inc., a company headquartered in San Diego, agreed to take on loan-servicing responsibilities for the program in 2011. Students enrolled with the PEAKS programs made loan payments through Vervent in accordance with agreements that frequently failed to include the exact amount of the loan, the applicable interest rate, the repayment schedule, or associated fees.
Financing for the loans was backed by substantial guarantees from ITT, which began to face financial difficulties as defaults began rolling in. The school began covertly making payments on behalf of delinquent borrowers in order to delay the triggering of its obligations as a guarantor; the move concealed millions in anticipated liabilities for the school and the PEAKS portfolio.
Regulatory Investigations
Between 2014 and 2015, the Consumer Financial Protection Bureau and the Securities and Exchange Commission opened investigations into ITT, which eventually settled with the regulators. Vervent, which was not a party to the civil enforcement actions, continued to collect on the PEAKS loans until ITT collapsed and filed for bankruptcy in September 2016, ceasing operations across its 130 campuses nationwide.
In April 2020, three former students at California campuses of ITT filed a putative class action complaint against Vervent, Chief Executive Officer David Johnson, a subsidiary operating as Activate Financial LLC, as well as other officers.
The plaintiffs asserted RICO claims under 18 U.S.C. §1962(d) and California law, alleging that the PEAKS program was designed to generate private revenue for ITT in order to preserve the institution’s facial compliance with the 90/10 Rule, and that the defendants knowingly serviced loans arising from that scheme.
After a nationwide class was certified and the case proceeded to trial in 2023, the defendants renewed an argument they unsuccessfully raised at summary judgment—that the plaintiff’s lawsuit was barred by the federal law’s four-year statute of limitations. They filed a motion for judgment as a matter of law under Federal Rule of Civil Procedure 50(a), arguing that publicly available information put them on notice of their causes of action no later than 2014.
Chief Judge Dana M. Sabraw of the Southern District of California denied the request, and a jury found for the plaintiffs on their RICO claim in the amount of $4 million in June 2023. Sabraw declared that the plaintiffs were entitled to treble damages under §1964, and judgment was entered in the amount of $12 million against Vervent, Activate, and Johnson in 2024; the chief judge denied a renewed request under Rule 50.
Knowledge Timeline
Mendoza wrote:
“This case asks us to decide a twelve-million-dollar question: What did the student borrowers know, and when did they know it?”
Pointing out that “[t]his court has long applied what is known as the ‘injury discovery’ rule” under which “the four-year ‘clock’ begins to run for a civil RICO claim when the plaintiff ‘knew or should have known of his injury,’ ” he commented:
“Where fraud masks the injury, accrual does not begin until the plaintiff knew, or reasonably should have known, of the fraud-induced nature of the injury.”
The jurist noted:
“Defendants contend that Plaintiffs knew, or should have known, of their alleged injury the moment they began making payments on the PEAKS loan or when the government initiated various regulatory investigations into the PEAKS program. On the other hand, Plaintiffs contend that they neither knew, nor should have known, of their injury until the high-profile bankruptcy and collapse of ITT in September 2016.”
Agreeing with the plaintiffs, he opined:
“The evidence supports the conclusion that ITT’s headline-grabbing dramatic collapse and bankruptcy in September 2016 represented the first moment when reasonable borrowers would likely have understood that something was awry with the PEAKS program. Until that point, borrowers continued making payments on what outwardly appeared to be ordinary student loans serviced through conventional channels. Only after ITT’s collapse did the broader structure of the PEAKS program and the extent of the alleged concealment become publicly visible such that ordinary student loan borrowers would have been aware.”
Deliberate Concealment
He continued:
“What makes their payments an ‘injury’ is the fact that the risk-laden support for the PEAKS loan program was deliberately concealed from the government and student borrowers alike. In other words, the injury was the payment on loans that were generated and maintained through concealment and fraud. The relevant inquiry is thus not when Plaintiffs knew they were making payments, but when Plaintiffs knew or reasonably should have known that those payments were fraudulently induced.”
Mendoza acknowledged that there were asserted “irregularities” in the loan documents but rejected the view that they were sufficient to trigger inquiry-notice obligations, noting the sophistication gap between the parties, and was unpersuaded that the government investigations should have made them aware of a problem. He called the defendants’ position “ironic,” saying:
“At trial, Defendants presented testimony emphasizing that even Vervent, a sophisticated loan-servicing entity operating within the industry itself, did not recognize the PEAKS program as fraudulent during the relevant period. Yet, on appeal, Defendants now contend that ordinary student borrowers necessarily should have dropped their notebooks and discovered the fraud years earlier based on complex regulatory filings and irregular loan paperwork that Vervent itself argued were seemingly benign.”
Substantial Evidence
He declared:
“Substantial evidence supports the jury’s determination that Plaintiffs neither knew, nor reasonably should have known, of their alleged injury more than four years before filing suit. Defendants’ statute-of-limitations challenge fails, and we affirm the district court’s denial of Defendants’ renewed motion for judgment as a matter of law.”
The judge added:
“This case…serves as an important reminder that statutes of limitations are designed to promote fairness, not gamesmanship. The law requires injured parties to act diligently once wrongdoing becomes reasonably discoverable. But it does not subject ordinary persons to the same standards as sophisticated actors. It also does not require clairvoyance by placing unrealistic obligations on consumers. Simply put, ordinary borrowers are not required to assume that seemingly routine financial obligations conceal a high-level, sophisticated fraudulent scheme involving major institutions, securitized trusts, and complex financial arrangements.”
The case is Turrey v. Vervent Inc., 25-2135.
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