Commonwealth v. Pa. Higher Educ. Assistance Agency

COMMONWEALTH OF MASSACHUSETTS v. PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY D/B/A FEDLOAN SERVICING

Docket: 1784CV02682-BLS2

Commonwealth of Massachusetts Superior Court

February 28, 2018

Dates: February 28, 2018

Present: Kenneth W. Salinger, Justice of the Superior Court

County: SUFFOLK

Keywords: MEMORANDUM AND ORDER DENYING DEFENDANTS MOTION TO DISMISS

The Commonwealth of Massachusetts has sued the Pennsylvania Higher Education Assistance Agency (PHEAA) for engaging in allegedly unfair and deceptive acts and practices against Massachusetts student loan borrowers. It appears to be undisputed that PHEAA, although originally established to help provide student loans and grants for Pennsylvania residents, has become one of the largest student loan servicers in the country and now manages the federal student loan accounts of hundreds of thousands of Massachusetts residents under a contract with the United States Department of Education. The Commonwealth claims that PHEAA violated the federal Consumer Financial Protection Act and G.L. c. 93A by charging and collecting amounts not owed by borrowers, failing to process borrowers' applications for income driven repayment plans in a timely and accurate manner, and failing to properly count borrowers' qualifying payments under the Public Service Loan Forgiveness program.

PHEAA has moved to dismiss this action on several grounds. The Court will DENY this motion because it is not convinced that PHEAA is an arm of the Commonwealth of Pennsylvania and shares in its sovereign immunity, that PHEAA cannot be sued under G.L. c. 93A or that its alleged misconduct is exempt from c. 93A because it is affirmatively permitted by federal law, or that the United States Department of Education is an indispensable party.

1. Background—PHEAA's Enabling Act. Certain aspects of the enabling act that created PHEAA provide background relevant to PHEAA's claims that it is entitled to invoke the Commonwealth of Pennsylvania's sovereign immunity and that it cannot be sued under G.L. c. 93A because it is a public entity.

PHEAA was established by the Pennsylvania Legislature as "a public corporation and government instrumentality." 24 Pa. Stat. § 5101. It is authorized to make, guarantee, and service student loans. Id § 5104(3).

By statute, PHEAA has substantial financial and operational independence from the Commonwealth of Pennsylvania. PHEAA can spend money "for any of its purposes" without needing any legislative appropriation. Id § 5104(3). Although PHEAA must deposit its revenues "in the State Treasury," it may use its funds whenever it wants "at the discretion of the board of directors for carrying out any of the corporate purposes of the agency." Id; see also id. § 5105.10 (PHEAA's loan servicing, loan repayment, and other revenues are held within State Treasury in a segregated "Educational Loan Assistance Fund," are all "appropriated to [PHEAA's] board," and "may be applied and reapplied as the board shall direct and shall not be subject to lapsing"). And PHEAA may borrow money, enter into contracts, and exercise most other powers of an independent corporate entity without needing approval from the Commonwealth of Pennsylvania. Id. § 5104.

Furthermore, by law Pennsylvania cannot be held liable for any of PHEAA's debts or other obligations. Id. § 5014(3) ("no obligation of the agency shall be a debt of the State and it shall have no power to pledge the credit or taxing power of the State nor to make its debts payable out of any moneys except those of the corporation").

2. PHEAA Does Not Share Pennsylvania's Sovereign Immunity. PHEAA urges the Court to dismiss this action as a matter of comity, out of respect for the sovereign immunity of the Commonwealth of Pennsylvania.

Federal courts have repeatedly rejected PHEAA's assertion that it shares Pennsylvania's sovereign immunity from suit. See United States ex rel. Oberg v. Pennsylvania Higher Educ. Asst. Agency, 804 F.3d 646, 676-677 (4th Cir. 2015) (PHEAA not immune from suit under federal False Claims Act), cert. denied, 137 S.Ct. 617 (2017); Pele v. Pennsylvania Higher Educ. Asst. Agency, 13 F.Supp.3d 518 (E.D. Va. 2014), aff’d, 628 F.Appx. 870 (4th Cir. 2015) (PHEAA not immune from suit under federal Fair Credit Act), cert. denied, 137 S.Ct. 617 (2017); Lang v. Pennsylvania Higher Educ. Asst. Agency, 201 F.Supp.3d 613 (M.D. Pa. 2016) (PHEAA not immune from suit under federal Fair Labor Standards Act).

The doctrine of issue preclusion bars PHEAA from relitigating this issue yet again. See Lang, supra, at 621-628 (issue preclusion barred PHEAA from relitigating whether it was arm of state for Eleventh Amendment immunity purposes, even though Third Circuit's arm-of-the-state test differs somewhat from test applied by Fourth Circuit in Oberg); Pennsylvania Higher Educ. Asst. Agency v. NC Owners, LLC, No. 1:16-CV-1826, 2017 WL 2506397 (M.D. Pa. 2017) (issue preclusion barred PHEAA from relitigating whether it was arm of state for purposes of diversity jurisdiction, even though issue was litigated in Oberg in context of Eleventh Amendment assertion of sovereign immunity).

"Ultimately, ‘[f]airness is the "decisive consideration" in determining whether to apply offensive issue preclusion' " against a defendant in a civil action, based on a decision in a prior lawsuit that did not involve the current plaintiff. Pierce v. Morrison Mahoney LLP, 452 Mass. 718, 730 (2008), quoting Matter of Goldstone, 445 Mass. 551, 559 (2005), quoting in turn Matter of Cohen, 435 Mass. 7, 16 (2001). A trial court judge has " 'wide discretion in determining whether' applying offensive collateral estoppel 'would be fair to the defendant.' "Pierce, supra, at 731, quoting Bar Counsel v. Board of Bar Overseers, 420 Mass. 6, 11 (1995). For the reasons discussed below, the Court concludes in the exercise of its discretion that PHEAA should be bound by the Fourth Circuit's resolution of essentially identical sovereign immunity issues in Oberg and that applying offensive issue preclusion against PHEAA is completely fair and appropriate in these circumstances.

2.1. Question of Comity. When one State is sued in the courts of another State, any application of the defendant's sovereign immunity is a discretionary matter of comity, not something mandated by law.

Nothing in the United States Constitution requires the courts of one State to recognize the sovereign immunity of another State. Neither the Eleventh Amendment (which restricts the power of federal courts to entertain suits against a State), nor the Full Faith and Credit Clause, nor the federal structure of the Constitution requires one state to treat others as immune from suit. Nevada v. Hall, 440 U.S. 410, 418-427 (1979); see also Franchise Tax Bd. of Calif v. Hyatt, 136 S.Ct. 1277, 1279 (2016) (Franchise Tax Bd. II) (equally divided Supreme Court declined to overrule Hall). All that the Full Faith and Credit Clause requires in this context is that, if the courts of one State entertain a suit against a second State, then the forum State is bound to provide at least the same extent of immunity that it would afford its own government. Franchise Tax Bd. II, 136 S.Ct. at 1281. In other words, the forum State may not, acting under its own law, award damages against agencies of the second State "that are greater than it could award against [its own] agencies in similar circumstances." Id.

"It may be wise policy, as a matter of harmonious interstate relations, for States to accord each other immunity or to respect any established limits on liability." Hall, 440 U.S. at 426. But it is up to each State to decide whether and to what extent to recognize and apply such a voluntary principle of interstate comity. Id.

The Supreme Judicial Court has not decided whether it "should create an exception to our rule of asserting jurisdiction to the fullest possible extent where the nonresident defendant is another State," or is some other entity that "could properly be considered part of the State government." Carlson Corp. v. University of Vermont, 380 Mass. 102, 103 n.3 (1980).

But even though it is not "constitutionally mandated ..., this court retains the discretion to decline the exercise of jurisdiction as a matter of comity" out of respect for the sovereign immunity of other States. Mejia-Cabral v. Eagleton School, Inc., 10 Mass. L. Rptr. 1999 WL 791957, *3 (Mass. Sup. Ct. 1999) (Sosman, J.).

2.2. Rules that Apply as a matter of Comity. The principle of comity will be satisfied here if the Court applies to PHEAA the same sovereign immunity rules that would apply to an otherwise identical authority created under Massachusetts law. See Franchise Tax Bd. II, 136 S.Ct. at 1281-1282; Franchise Tax Bd. of Calif v. Hyatt, 538 U.S. 488, 499 (2003) ("Franchise Tax Bd.1"); see also Mejia-Cabral, supra, (comity required Massachusetts court to respect sovereign immunity of State of Connecticut, where Commonwealth would be immune from similar claim under Massachusetts law). This approach, of "relying on the contours of [the forum State's] own sovereign immunity from suit as a benchmark for [the] analysis," allows the forum State court to "sensitively apply] principles of comity with a healthy regard for [the other State's] sovereign status." Franchise Tax Bd. I., 538 U.S. at 499.

Pennsylvania courts apply this principle. They will not recognize the sovereign immunity of agencies created by other States if similarly situated Pennsylvania agencies would not be immune from suit under Pennsylvania law. See Laconis v. Burlington County Bridge Comm'n, 583 A.2d 1218, 1221-1222 (Pa. Supr. Ct. 1990) (declining to recognize immunity of New Jersey public commission that was "not funded by tax money" with respect to injuries sustained by Pennsylvania resident at Pennsylvania end of bridge, because similarly situated Pennsylvania commission would have no sovereign immunity under Pennsylvania law); see also Flamer v. New Jersey Transit Bus...