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Pennsylvania Higher Education Assistance Agency v. Perez

United States District Court, D. Connecticut

September 13, 2019

JORGE L. PEREZ in his official capacity as Commissioner of the Connecticut Department of Banking, the CONNECTICUT DEPARTMENT OF BANKING, BETSY DEVOS in her official capacity as Secretary of the United States Department of Education, and the UNITED STATES DEPARTMENT OF EDUCATION, Defendants.


          Michael P. Shea, U.S.D.J.

         Plaintiff Pennsylvania Higher Education Assistance Agency (“PHEAA”), a servicer of federal student loans, found itself “between a rock and a hard place” due to conflicting demands of the Connecticut Department of Banking (“CT DOB”), its state regulator, and the United States Department of Education (“Education”), its federal regulator and the agency that hired it to service the loans. The CT DOB demanded that it produce records containing identifying information of Connecticut residents whose federal student loans it services, while Education expressly prohibited it from releasing those records to the CT DOB. What to do? PHEAA's answer was to file this lawsuit, which seeks interpleader relief against the two agencies-asking the Court to require them to fight out between themselves the issue whether federal law preempts the CT DOB's document demand-and a declaratory judgment on the preemption issue. Education did not like this answer. Even though it asserts that federal preemption does indeed bar the State's document demand and even though this lawsuit offers it a forum to litigate that issue, it has moved to dismiss all claims against it. Education asserts that (1) the interpleader remedy does not fit the facts of this case, and (2) PHEAA has failed to plead any other cause of action against it. I agree with those two assertions but find that PHEAA may nonetheless join Education as a defendant under Rule 19 for the limited purpose of binding it to this Court's judgment on the preemption issue. As Rule 19 contemplates, this will free PHEAA from its predicament, sparing it from continuing to run “a substantial risk of incurring double, multiple, or otherwise inconsistent obligations because of [Education's] interest” in this case. Fed.R.Civ.P. 19(a)(1)(B)(ii). I therefore GRANT in part and DENY in part the Federal Defendants' motion to dismiss, as further explained below.


         PHEAA has named as defendants the Connecticut Department of Banking (“CT DOB”) and its Commissioner (together, “State Defendants”) as well as the United States Department of Education (“Education”) and its Secretary (together, “Federal Defendants”). The following facts are drawn from the amended complaint, ECF No. 34, and are accepted as true for the purpose of deciding the Federal Defendants' motion to dismiss.

         A. Administration of Federal Student Loans

         Education has the authority to issue a variety of federal loans and grants to student borrowers under the Higher Education Act, Pub. L. No. 89-329, 79 Stat. 1219 (1965), and related statutes and regulations. ECF No. 34 at ¶ 21. “Specifically relevant here are Direct Loans, which are issued by the federal government directly to eligible student borrowers, and benefits awarded to Direct Loan borrowers under the Public Service Loan Forgiveness (“PSLF”) Program.” Id. Education contracts with third-party servicers - like PHEAA - to service the Direct Loans it issues. Id. at ¶ 22; 20 U.S.C. § 1087f(a)(1) (“The Secretary shall, to the extent practicable, award contracts for origination, servicing, and collection [of loans].”). PHEAA was selected to service federal loans on a nationwide basis in 2009, and its contract with Education was renewed in 2014. ECF No. 34 at ¶ 24.

         Education regulates the servicing of these loans. Id. at ¶¶ 23, 25. The contract between PHEAA and Education specifies 124 obligations, many with sub-requirements, with which PHEAA must comply. Id. at ¶ 25. Among other things, the contract requires PHEAA to comply with federal and Education records management policies, including those policies associated with the safeguarding of records covered by the Privacy Act of 1974. Id. at ¶ 26. The Privacy Act provides that federal contractors are considered employees of a federal agency for purposes of the Act's criminal penalties for prohibited disclosure of protected records. Id. at ¶ 27; see also 5 U.S.C. § 552a(i) & (m). Education monitors PHEAA's performance through annual audits, program compliance reviews, and quarterly monitoring reviews of PHEAA's loan servicing practices. ECF No. 34 at ¶ 25. PHEAA is not paid for loans that are not serviced in compliance with the contractual requirements and other applicable policies and procedures. Id.

         PHEAA services federal and private student loans for approximately 100, 000 borrowers residing in Connecticut. Id. at ¶ 29. Of these borrowers, about 80, 000 have federal student loans owned by Education. Id. On May 1, 2017, PHEAA applied for a license from the CT DOB to act as a student loan servicer in Connecticut pursuant to Conn. Gen. Stat. § 36a-847(b). Id. at ¶ 30. PHEAA's application was approved on June 30, 2017. Id.

         B. Production of Federal Student Loan Records

         On November 3, 2017, PHEAA received a letter from the CT DOB explaining that it proposed to conduct a limited scope examination of PHEAA to review all accounts transferred to PHEAA from August to October 2017 as a result of the PSLF Program. ECF No. 34 at ¶ 32. The letter included a “Student Loan Servicer Management Questionnaire and Information Request” directed to PHEAA. Id. at ¶ 33. The request sought PHEAA's policies and procedures related to administering the PSLF Program as well as borrower-specific information, including borrower complaints. Id. at ¶ 34. PHEAA responded to the request on November 7, 2017 seeking clarification as to the scope of the proposed examination and the request. Id. at ¶ 35. CT DOB responded the same day and limited the scope of the request in several ways. Id. at ¶ 36. For instance, it limited its request for borrower complaints to “a list of CT [complaints] either filed directly with [PHEAA], through the U.S. Dept of Education, CFPB or any other entity starting 1/1/17 through October 31, 2017 regarding PSLF transfers.” Id.

         Education emailed PHEAA on November 7, 2017 with an express directive that PHEAA was prohibited under federal law from releasing any data or documentation related to PSLF to the CT DOB. Id. at ¶ 37. On November 9, 2017, PHEAA sought additional clarification from CT DOB about the request and the logistics of producing the documents and information requested. Id. at ¶ 38. The same day, PHEAA informed CT DOB of Education's position and provided contact information for Education officials so CT DOB could direct additional requests for documents to Education. Id. at ¶ 39.

         On January 11, 2018, CT DOB told PHEAA that a telephone conference between Education and the CT DOB took place that morning, and that CT DOB agreed to issue a direct request to Education for the documents and data owned by Education that it had previously sought from PHEAA. Id. at ¶¶ 40-41. PHEAA memorialized this conversation in a letter to CT DOB; in the letter, PHEAA stated that it would “not be providing any responsive documents [or] data that are specific to [Education's Office of Federal Student Aid].” Id. at ¶ 42. Along with this letter, PHEAA produced to CT DOB certain responses to the request that did not implicate the federal prohibition on disclosure and all requested documents and data not owned by Education or its Office of Federal Student Aid. Id. at ¶ 43. Meanwhile, on January 12, 2018, CT DOB made a direct request to Education for access to certain records. Id. at ¶ 44. Education denied this request on March 26, 2018. Id. at ¶ 50.

         On March 21, 2018, PHEAA received a letter from CT DOB “formally convey[ing] [its] concerns related to [the proposed] examination [of PHEAA] and [to] provide PHEAA with an opportunity to show compliance with all lawful requirements for the retention of its student loan servicer license in Connecticut pursuant to Section 4-182(c) of the Connecticut General Statutes.” Id. at ¶ 46. This was the first time CT DOB asserted that PHEAA failed to produce numerous records sought in the request in violation of the Connecticut Disclosure Statutes, which include Conn. Gen. Stat. §§ 36a-17, 36a-849, 36a-851.[1] These statutes provide, in pertinent part, as follows:

(c) For the purpose of any . . . examination . . . under this title the commissioner may . . . require the production of any records which the commissioner deems relevant or material. . . .
(d) Any person who is the subject of any such . . . examination . . . shall make its records available to the commissioner in readable form; provide personnel and equipment necessary, including, but not limited to, assistance in the analysis of computer-generated records; provide copies or computer printouts of records when so requested; . . . furnish unrestricted access to all areas of its principal place of business or wherever records may be located; and otherwise cooperate with the commissioner.

Conn. Gen. Stat. § 36a-17.

(a) Each student loan servicer licensee shall maintain adequate records of each student education loan transaction for not less than two years following the final payment on such student education loan or the assignment of such student education loan, whichever occurs first, or such longer period as may be required by any other provision of law.
(b) If requested by the commissioner, each student loan servicer licensee shall make such records available or send such records to the commissioner by registered or certified mail, return receipt requested, or by any express delivery carrier that provides a dated delivery receipt, not later than five business days after requested by the commissioner to do so. Upon request, the commissioner may grant a licensee additional time to make such records available or send the records to the commissioner.

Conn. Gen. Stat. § 36a-849.

(a) In addition to any authority provided under this title, the Banking Commissioner shall have the authority to conduct investigations and examinations as follows:
(1) For purposes of . . . general or specific inquiry or investigation to determine compliance with sections 36a-846 to 36a-854, inclusive, the commissioner may access, receive and use any books, accounts, records, files, documents, information or evidence including, but not limited to, . . .
(C) any other documents, information or evidence the commissioner deems relevant to the inquiry or investigation regardless of the location, possession, control or custody of such documents, information or evidence.

Conn. Gen. Stat. § 36a-851. The March 21, 2018 letter from CT DOB stated that PHEAA's failure to produce the requested documents “constitute[s] grounds to revoke PHEAA's student loan servicer license in Connecticut pursuant to Sections 36a-852 and 36a-51 of the Connecticut General Statutes and forms a basis to take other administrative action as the Commissioner deems appropriate, including, but not limited to, initiation of proceedings to order PHEAA to cease and desist and impose a civil penalty on PHEAA of up to $100, 000 per violation.” ECF No. 34 at ¶ 48. The letter concluded by stating that PHEAA had to respond in writing by April 4, 2018 and that if no written response was received by that date, or CT DOB found any such response insufficient, CT DOB could issue an administrative action against PHEAA's license. Id. at ¶ 49.

         On April 2, 2018, Education sent PHEAA a letter, with a copy to CT DOB, stating that the records requested by CT DOB “belong to the federal government and PHEAA is prohibited from releasing them under its contract with [Education].” Id. at ¶ 52. The letter also stated that “[a] state agency does not have the authority to prohibit PHEAA from servicing federal student loans when the federal government has specifically authorized it to do so.” Id. The letter concluded by stating that Education “would be willing to discuss with the [CT DOB] the requirements of PHEAA's contract, so that the [CT DOB] may avoid imposing requirements on PHEAA that conflict with federal law.” Id. at ¶ 53.

         On April 2, 2018, PHEAA representatives participated in a phone call with CT DOB representatives. Id. at ¶ 54. During the call, CT DOB informed PHEAA that it would not rescind its demand that PHEAA provide an explanation for its alleged non-compliance with the Connecticut disclosure statutes. Id. at ¶ 54. On June 28, 2018, however, CT DOB agreed to refrain from pursuing a suspension of PHEAA's license to service student loans in Connecticut while this lawsuit was pending. Id. at ¶ 55.

         C. Education's Memorandum on Records/Data and Notice on Preemption

         The Director of Federal Student Aid Acquisitions, Patrick A. Bradfield, released a public memorandum on behalf of Education on December 27, 2017 regarding ownership of and access to Education's records and data. Id. at ¶ 56. In the memorandum, Education explained that its Office of Federal Student Aid maintains identifying information related to federal student loans and grants and that such information is protected by the Privacy Act, which provides for criminal and civil penalties for the prohibited disclosure of protected records by agency employees. Id. at ¶ 57. As noted above, PHEAA employees are considered employees of a federal agency for purposes of this Act. Id. at ¶¶ 27, 58. The memorandum also stated that any request from a third party for Education records to which a contractor has access must be made directly to Education where it will be evaluated for compliance with the Privacy Act. Id. at ¶ 59. PHEAA shared this memorandum with CT DOB in January 2018. Id. at ¶ 60.

         On March 12, 2018, Education published a notice entitled “Federal Preemption and State Regulation of the Department of Education's Federal Student Loan Programs and Federal Student Loan Servicers” (“Preemption Notice”). Id. at ¶ 61; see also 83 Fed. Reg. 10619-01. In the Preemption Notice, Education explained that certain state requirements conflict with Education's power to select contractors and to determine whether contractors are in compliance with federal law. ECF No. 34 at ¶ 62. It also explained that certain state laws may undermine the “clear command for uniformity” in the Higher Education Act and that where “the Federal interest requires a uniform rule, the entire body of State law applicable to the area conflicts [with] and is replaced by Federal rules.” Id. at ¶ 63; see also 83 Fed. Reg. at 10619-01.

         D. Requested Relief

         PHEAA seeks interpleader relief under Federal Rule of Civil Procedure 22 (count one) as well as declaratory and injunctive relief regarding field preemption and conflict preemption under 28 U.S.C. §§ 2201 et seq. (counts two and three): Defendant Pennsylvania Higher Education Assistance Agency respectfully requests the following relief:

(i) an order requiring that the Interpleader Defendants interplead and settle all claims between themselves concerning the production of the Documents; (ii) an order that PHEAA may continue to hold the Documents and no Interpleader Defendant may make a claim or prohibition with respect to the Documents until the Court determines if state or federal law controls and whether the Documents must be produced or must be withheld; (iii) an order enjoining the Interpleader Defendants and all claiming through or acting with them from taking any action against PHEAA regarding its withholding or production of the Documents; and (iv) an award of such other and further relief as the Court may deem just, proper, and equitable.

ECF No. 34 at 17-18.

(a) A declaratory judgment that either: (i) federal law preempts the Connecticut Disclosure Statutes under which the State Defendants threaten to revoke PHEAA's license to service student loans in Connecticut; or (ii) that the Federal Defendants' prohibition on PHEAA's production of the Documents is not proper and that PHEAA is permitted to respond to the State Defendants' ...

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