Pennsylvania Higher Education Assistance Agency v. Perez

416 F.Supp.3d 75

PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY, Plaintiff,

v.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.

No. 3:18-cv-1114 (MPS)

United States District Court, D. Connecticut.

Signed September 13, 2019

David A. Schulz, Ballard Spahr LLP, New York, NY, Burt M. Rublin, Eleanor Huyett, John Grugan, Thomas Burke, Ballard Spahr LLP, Philadelphia, PA,

James W. Caley, Vanessa Roberts Avery, Office of the Attorney General, John Langmaid, Office of the Attorney General - Elm Htfd Employment Rights Department, Joseph J. Chambers, State of Connecticut, Office of the Attorney General, Carolyn Aiko Ikari, U.S. Attorney's Office-HFD, Hartford, CT, Michael L. Drezner, Rebecca Kopplin, DOJ-Civ, Washington, DC, for Defendant

RULING ON FEDERAL DEFENDANTS' MOTION TO DISMISS

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.

I. FACTUAL BACKGROUND

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 US 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

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