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Appellate Division Affirms Trial Court’s Decision Denying Recovery Of Interest On Student Loan Notes

January 21, 2019

ROBERT B. SPAWN reports on a recent unpublished decision from the Superior Court of New Jersey, Appellate Division.

In a recent New Jersey case, a Plaintiff-borrowing institution brought suit against a Defendant-borrower to recover the balance due on two outstanding student loans.  The first loan, issued in 2007, was for $16,700, and the second loan, issued in 2008, was for $7,609.  While in school, Defendant’s loan payments were deferred.  Then, upon the completion of her coursework in January 2010, Defendant’s payments became due.


Because Defendant had not made any payments on either loan after her deferment period had ended, Plaintiff deemed the loans in default in September 2010.  Upon default, Defendant became “liable for the entire balance of the loan” per N.J.A.C. 9A:10-6:16.  Accordingly, in March 2016, Plaintiff filed suit to recover the loans’ principal balance due, accrued interest, and collection costs.  In support of its claim, Plaintiff introduced into evidence the two promissory notes, accompanied by two identical documents entitled “Terms, Conditions and Definitions.” 


The notes set forth the loan amounts, but neither specified an interest rate.  Rather, the notes provided that interest would be calculated as set forth in the “Terms, Conditions and Definitions.”  However, the “Terms, Conditions and Definitions” merely stated that a third class of documents—the “Disclosure Statements”—would reveal the interest rates for the notes.  Plaintiff did not produce these Disclosure Statements, nor did it provide proof that it supplied them to Defendant.  Instead, Defendant introduced printouts from its “Direct Loan System” (dated less than a week before trial) which purported to set forth the interest rates.  These printouts included a line that read, “Date Disclosure: August 19, 2009.”  The trial judge disregarded the printouts, asserting that there was no testimony explaining the meaning of the documents, and no evidence that they had been provided to Plaintiff.  Thus, as Plaintiff could not prove that Defendant was ever provided with any document specifying the applicable interest rates, the trial court held that Plaintiff was not entitled to interest on the notes (though Plaintiff was entitled to principal and reasonable collection costs).


On appeal, Plaintiff argued that the record contained sufficient proof of the loans’ interest rates.  It also argued that Defendant never contested the interest rates, nor did she deny receipt of the Disclosure Statements when the loans were disbursed.  The Appellate Division rejected Plaintiff’s arguments, and explained that Plaintiff bore the burden of establishing the interest rates on the notes, as the interest rates were essential terms of the loan agreements.  The Court then cited the Best Evidence Rule, which requires a party to produce an original writing in order to prove that writing’s contents (when the writing’s contents are material to the dispute).  By application of the Best Evidence Rule, the Court reasoned that the contents of the Disclosure Statements were clearly material to Plaintiff’s claim.  Indeed, the Disclosure Statements set the interest rates for the notes, and proof of the interest rates was an essential element of Plaintiff’s claim for entitlement to accrued interest.  Therefore, because Plaintiff had failed to produce original Disclosure Statements (or duplicates), the Appellate Division concluded that Plaintiff could not prove an essential element of its claim.  The Court also held that proof of the interest rates by other evidence (i.e., the printouts) was not admissible, as Plaintiff did not establish that the Disclosure Statements were lost, destroyed, unobtainable, or in Defendant’s possession.  Thus, the Appellate Division held that Plaintiff was not entitled to collect interest on the notes, and affirmed the lower court’s decision.


Please contact Robert B. Spawn if you have any questions or need assistance in connection with this subject.