United States District Court, D. Connecticut
RULING ON FEDERAL DEFENDANTS' MOTION TO
Michael P. Shea, U.S.D.J.
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.
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.
Administration of Federal Student Loans
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.
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.
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.
Production of Federal Student Loan Records
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
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.
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.
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. 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 ¶
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 ¶
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
Education's Memorandum on Records/Data and Notice on
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.
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.
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' ...