COLLEGE LOAN CORPORATION, a California Corporation, Plaintiff-Appellant, v. SLM CORPORATION, a Delaware Corporation; Sallie Mae, Inc., a Delaware Corporation; Sallie Mae Servicing, L.P., a Delaware Limited Partnership; Student Loan Marketing Association, a Government Sponsored Enterprise, Defendants-Appellees.
No. 03-1867.
United States Court of Appeals, Fourth Circuit.
Argued: Sept. 28, 2004. Decided: Jan. 31, 2005.
396 F.3d 588
Before WIDENER, KING, and DUNCAN, Circuit Judges.
Vacated and remanded by published opinion. Judge KING wrote the opinion, in which Judge WIDENER and Judge DUNCAN joined.
KING, Circuit Judge:
This appeal arises from a dispute between two lenders of student loans, plaintiff College Loan Corporation (“College Loan“), and defendants SLM Corporation and several of its affiliates (sometimes collectively referred to as “Sallie Mae“).1 College Loan appeals from a judgment rendered against it in the Eastern District of Virginia, flowing from that court‘s pretrial rulings and a June 2003 jury verdict on certain of College Loan‘s state law claims against Sallie Mae. College Loan‘s primary contention is that the district court erred when it held that College Loan‘s state law claims were in certain aspects pre-empted by federal law—specifically, the Higher Education Act of 1965 (the “HEA“),
I.
A.
In order to properly assess the issues raised in this appeal, it is necessary to possess an elementary understanding of the HEA and the student loan programs that it established. The Federal Family Education Loan Program (“FFELP“), created by Title IV of the HEA and codified at
A consolidation loan is one of the several types of loans authorized by FFELP. See
B.
Turning to the facts and allegations underlying this dispute, plaintiff College Loan conducts a business involving the marketing and monitoring of FFELP consolidation loans. Defendant Sallie Mae, a significant primary student loan lender, also processes and services consolidation loan applications, and itself makes FFELP consolidation loans.
In May 2000, College Loan entered into a Master Loan Agreement with USA Group, Inc. and certain of its affiliates (the “Agreement“). Pursuant to the Agreement, USA Group agreed, inter alia, to act as College Loan‘s servicer in processing a portion of the loan applications made by College Loan‘s prospective consolidation borrowers. Among other provisions, USA Group agreed to “Guarantee Consolidation Loans that have been processed in accordance with the terms of the Consolidation Loan Program and for which Customer complies in all material respects with the Policies and the Act.” Agreement at ¶ 1.12. USA Group also agreed to “provide administrative services for the continued maintenance of each Consolidation Loan Guaranteed as required by the Consolidation Loan Program and [the HEA].” Id. USA
In July 2000, two months after the Agreement was executed, SLM Corporation acquired certain aspects of the business of USA Group, including its loan servicing operations. These loan servicing operations were then assumed by SLM Corporation‘s subsidiary Sallie Mae Servicing, L.P., and Sallie Mae and College Loan thus became contractually obliged to work together in a lender-processor relationship. Because Sallie Mae affiliates continued to offer primary and consolidation loans, College Loan and Sallie Mae continued to directly compete as consolidation loan lenders.
College Loan contends that, when interest rates fell in July 2001 (and as demand for consolidation loans increased), Sallie Mae began to breach its obligations under the Agreement. Specifically, College Loan maintains that, after SLM Corporation‘s acquisition of USA Group, Sallie Mae Servicing failed to properly process more than 500 loan applications submitted to it by College Loan for processing. College Loan alleges that, in a scheme orchestrated by SLM Corporation, Sallie Mae Servicing diverted many of the College Loan consolidation applications to SLM-affiliated lenders, primarily the Student Loan Marketing Association. College Loan contends that the diversion of these loan applications was improper, and that it was often accomplished without customer knowledge and in spite of the specific selection of College Loan by prospective borrowers as their consolidation lender. College Loan also claims that Sallie Mae Servicing sometimes used prospective borrower information from College Loan‘s confidential loan consolidation forms to contact prospective College Loan borrowers and solicit them to enter into consolidation loans with Sallie Mae rather than with College Loan. When confronted by College Loan in late 2001 about such improprieties, Sallie Mae terminated the Agreement.
College Loan contends that Sallie Mae also interfered with College Loan‘s business by failing to comply with the Ten Day Rule governing the handling of LVCs. College Loan maintains that Sallie Mae consistently refused to complete in a timely manner (or at all) LVCs on more than 10,000 students’ loans held by Sallie Mae-affiliates which College Loan sought to consolidate. According to College Loan, Sallie Mae‘s pattern of non-compliance with the Ten Day Rule substantially increased in early 2002, shortly after Sallie Mae terminated the Agreement.
Sallie Mae defends these actions by asserting that most of the rejected College Loan consolidation loan applications violated the Single Holder Rule, and thus could not be consolidated. Importantly, Sallie Mae interprets the Single Holder Rule more expansively than does College Loan. In Sallie Mae‘s view, the Single Holder Rule applies not only to those borrowers whose loans are held by the same lender, but also (1) to borrowers whose loans are held by various Sallie Mae affiliates, though not by the same affiliate, and (2) to borrowers whose loans have been transferred to a securitization trust, where some residual financial interest is retained by a Sallie Mae affiliate. As a result, though College Loan required its consolidation applicants to certify, sometimes multiple times, that their loans were not held by the same lender or that they had been denied a consolidation loan by the applicable “single holder,” Sallie Mae nonetheless rejected, pursuant to its broad
College Loan maintains that Sallie Mae‘s overly broad interpretation of the Single Holder Rule was part of what Sallie Mae deemed a “consolidation counteroffensive,” launched to stem the loss of its loan portfolios. For support, College Loan emphasizes, inter alia, that Sallie Mae‘s current interpretation of the Single Holder Rule is contrary to the position it previously espoused to the courts of the District of Columbia, and which that Circuit adopted in Student Loan Marketing Ass‘n v. Riley, 104 F.3d 397 (D.C. Cir. 1997).
C.
On September 16, 2002, College Loan filed this civil action in the Eastern District of Virginia, which possessed diversity jurisdiction pursuant to
On October 21, 2001, Sallie Mae moved to dismiss College Loan‘s complaint under Rule 12(b)(6), for failure to state a claim on which relief could be granted. Sallie Mae principally contended that College Loan‘s claims constituted an impermissible effort to assert private rights of action under the HEA because, “[r]egardless of how College Loan might try to disguise or plead these claims, they all boil down to, and turn on, an alleged violation of the HEA“—that is, the Single Holder Rule. Because the courts have consistently held that no private right of action is available for violation of the HEA, see, e.g., Labickas v. Ark. State Univ., 78 F.3d 333, 334 (8th Cir. 1996) (finding no private right of action for student borrowers); Parks Sch. of Bus. v. Symington, 51 F.3d 1480, 1485 (9th Cir. 1995) (finding no private right of action for educational institutions); L‘ggrke v. Benkula, 966 F.2d 1346, 1348 (10th Cir. 1992) (finding no private right of action for student borrowers), Sallie Mae requested the district court to dismiss College Loan‘s complaint.
On December 10, 2002, the district court rendered its opinion on Sallie Mae‘s motion to dismiss. See College Loan Corp. v. SLM Corp., No. 02-cv-1377-A (E.D. Va. Dec. 10, 2002) (granting in part and denying in part motion to dismiss) (the “Preemption Ruling“). The court noted Sallie Mae‘s “private cause of action” position, but characterized the real issue as whether the HEA preempted College Loan‘s state law claims. The court then concluded that the HEA impliedly preempts any state law action that utilizes the HEA to satisfy an element of the state law claim. Preemption Ruling at 8. The court declined to dismiss the majority of College Loan‘s HEA claims, however, observing that most of the claims could proceed independent of any reliance on the HEA or its regulations. The court dismissed without prejudice College Loan‘s conspiracy claim (Count VII) and its state and federal antitrust claims (Counts VIII and IX), and it
Shortly before trial, in the spring of 2003, the parties each filed motions that implicated the Preemption Ruling. First, College Loan moved to compel discovery of documents relating to consolidation loan applications that Sallie Mae Servicing had declined to process, relying on its view of the Single Holder Rule. In opposing College Loan‘s motion, Sallie Mae claimed that the Preemption Ruling meant that “no claims for consolidation applications or LVCs which were denied by Sallie Mae because of the single holder rule contained in the Higher Education Act should be before the court at this time.” College Loan maintained, on the other hand, that documents relating to Sallie Mae‘s decision to rely on the Single Holder Rule were directly relevant to whether the Rule was being used by Sallie Mae as a pretext, and that such discovery was not precluded by the Pre-emption Ruling. College Loan also urged the court to allow it to contest whether Sallie Mae‘s invocation of the Single Holder Rule was in good faith, despite the fact that the court refused to allow the Single Holder Rule defense to be challenged on the merits. Otherwise, College Loan maintained, Sallie Mae‘s mere assertion of the term “Single Holder Rule” would, under the Preemption Ruling, provide it with a complete, unexamined, and impenetrable defense. On April 9, 2003, the magistrate judge granted College Loan‘s motion to compel discovery in part, but denied the motion in part, and College Loan sought review in the district court.
Second, Sallie Mae filed a motion in limine with respect to the trial evidence, asking the district court to exclude evidence pertaining to approximately 662 of College Loan‘s loan applications and approximately 11,748 LVCs that Sallie Mae had rejected based on the Single Holder Rule. As in their response to College Loan‘s motion to compel, Sallie Mae maintained that evidence of consolidation loan applications not being processed on the basis of the Single Holder Rule was irrelevant to the issues at trial.
The district court denied both of these motions by its Memorandum Opinion of May 13, 2003. See College Loan Corp. v. SLM Corp., No. 02-cv-1377-A (E.D. Va. May 13, 2003) (the “Discovery Phase Ruling“). The court therein clarified its Preemption Ruling, observing that it had held “that [it] lacked the power to adjudicate state common law claims, if the resolution of those claims would require [the district court] to interpret and apply the Single Holder Rule.” Discovery Phase Ruling at 10. In the context of the issues at hand, this meant that College Loan could not “prove that [Sallie Mae‘s invocation of] the Single Holder Rule was a pretext by showing that Defendants’ invocation of the Single Holder Rule was—on the merits of the Single Holder Rule—incorrect.” Id. at 14. Instead, according to the court, the issue was “whether Defendants invoked the Single Holder Rule in good faith or whether they invoked it as part of some bad faith scheme to harm the Plaintiff.” Id.
Sallie Mae thereafter moved for summary judgment on College Loan‘s remaining claims. On June 10, 2003, the district court denied summary judgment with respect to those four counts: breach of contract (Count I); breach of fiduciary duty (Count II); aiding and abetting a breach of fiduciary duty (Count III); and interference with prospective contractual relations (Count V). The court emphasized that, at trial, College Loan could defeat Sallie
If you find that defendants’ interpretation of the singleholder rule was undertaken in good faith and did not employ wrongful means, then you must find the defendants are not liable for rejecting or refusing to provide payoff information in response to LVCs ... [or] for redirecting or declining to process loan applications if defendants’ actions were based on their good faith interpretation of the rule. However, if you find that defendants’ interpretation of the rule was not taken in good faith and that the rejection of the LVCs and/or loan application was based in bad faith or use of wrongful means, then you must find for the plaintiff.
So instructed, the jury, on June 25, 2003, returned a verdict in favor of Sallie Mae on each of the four claims. This appeal followed, and we possess jurisdiction pursuant to
II.
On appeal, College Loan maintains that the district court erred when it concluded that College Loan‘s state law claims implicating the Single Holder Rule were preempted because the court‘s adjudication of those claims would disrupt “uniformity” in the administration of the HEA and create an “obstacle” to achieving the congressional objectives of the HEA. In order to resolve this dispute, we must assess whether the Preemption Ruling was legally sound, a question of law that we review de novo. See Cox v. Shalala, 112 F.3d 151, 153 (4th Cir. 1997).
Next, College Loan contends that the court erred in concluding in its Discovery Phase Ruling that the HEA precluded College Loan from defeating Sallie Mae‘s Single Holder Rule defense by contesting its interpretation of that Rule, instead imposing a “bad faith” element on College Loan‘s state law claims. We generally review a trial court‘s discovery rulings and jury instructions for abuse of discretion. Lone Star Steakhouse & Saloon, Inc. v. Alpha of Va., Inc., 43 F.3d 922, 929 (4th Cir. 1995) (discovery rulings); Johnson v. MBNA Am. Bank, NA, 357 F.3d 426, 432 (4th Cir. 2004) (jury instructions). And a trial court “by definition abuses its discretion when it makes an error of law.” Koon v. United States, 518 U.S. 81, 100, 116 S. Ct. 2035, 135 L. Ed. 2d 392 (1996) (citing Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S. Ct. 2447, 110 L. Ed. 2d 359 (1990)). Even if a jury was erroneously instructed, however, we will not set aside a resulting verdict unless the erroneous instruction “seriously prejudiced the challenging party‘s case.” Johnson, 357 F.3d at 432 (internal quotation omitted).
III.
The Supremacy Clause of the Constitution makes federal law “the supreme Law of the Land.”
In making its rulings in this proceeding, the district court relied on the doctrine of conflict preemption, which may arise in two circumstances: from a direct conflict between state and federal law, such such that compliance with both is impossible (called “direct conflict“), or because a state law “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” (called “obstacle preemption“). S. Blasting, 288 F.3d at 591 (quoting Hillsborough County, Fla. v. Automated Med. Labs., Inc., 471 U.S. 707, 712, 105 S. Ct. 2371, 85 L. Ed. 2d 714 (1985)). A state law may pose an obstacle to federal purposes by interfering with the accomplishment of Congress‘s actual objectives, or by interfering with the methods that Congress selected for meeting those legislative goals. Gade v. Nat‘l Solid Waste Mgmt. Assoc., 505 U.S. 88, 103, 112 S. Ct. 2374, 120 L. Ed. 2d 73 (1992).
By its Preemption Ruling, the district court decided that, even though there was no direct conflict between the HEA and College Loan‘s state law claims, permitting College Loan to utilize violations of the HEA and its regulations to support those claims against Sallie Mae would pose an “obstacle” to the accomplishment of Congress‘s objectives in enacting the HEA.6 The court found such an obstacle present primarily because the Secretary has created a “detailed structure of regulations” for implementing the HEA. As a result, the court concluded:
Congress intended to create a uniform remedial framework for lenders and servicers who violate the terms of the FFELP, by encouraging comprehensive administrative enforcement as a means of resolving disputes between lenders
and servicers. However, this intent is compromised when the remedies are administered according to the ebbs and flows of state law.
Preemption Ruling at 8 (internal quotations omitted). The district court clarified this conclusion several months later, in its Discovery Phase Ruling. In so doing, the court explained that it could not adjudicate the merits of asserted violations of the HEA and its regulations because exposing regulated FFELP lenders to such a remedy would disrupt the uniformity of the student loan business that Congress sought when it enacted the HEA. Discovery Phase Ruling at 10. In the context of College Loan‘s claims, this meant that College Loan could not defeat the Single Holder Rule defense by showing that Sallie Mae‘s interpretation of the rule was legally incorrect. Discovery Phase Ruling at 13-14. However, the court ruled that it would permit College Loan to rebut the Single Holder Rule defense by showing that Sallie Mae had invoked it in bad faith. Id.
A.
On appeal, College Loan first contends that the district court erred when it ruled that College Loan was not entitled to utilize evidence that SLM had violated the HEA and its regulations to satisfy elements of its state law claims. In analyzing whether a state law is preempted by a federal statute or regulation, our “starting presumption,” is that “Congress does not intend to supplant state law.” Coyne Delany Co. v. Selman, 98 F.3d 1457, 1467 (4th Cir. 1996) (quoting NY State Conference of Blue Cross Blue Shield Plans v. Travelers, 514 U.S. 645, 654-55, 115 S. Ct. 1671, 131 L. Ed. 2d 695 (1995)); see also S. Blasting, 288 F.3d at 589-90. As we explained in Abbot v. American Cyanamid Co., 844 F.2d 1108, 1112 (4th Cir. 1988) (citing Silkwood v. Kerr-McGee Corp., 464 U.S. 238, 251, 104 S. Ct. 615, 78 L. Ed. 2d 443 (1984)), “the presumption against preemption is even stronger against preemption of state remedies, like tort recoveries, when no federal remedy exists.”
We are unable to confirm that the creation of “uniformity,” a goal relied on by the district court in its Preemption Ruling, was actually an important goal of the HEA. The purposes of FFELP are spelled out in
Nor does the fact that only the Secretary is authorized to enforce the HEA, see, e.g., McCulloch v. PNC Bank, Inc., 298 F.3d 1217, 1221 (11th Cir. 2002) (listing authorities), compel the conclusion that College Loan‘s pursuit of its state law claims, relying in part on violations of the HEA or its regulations, will obstruct the federal scheme.8 To the contrary, the Supreme Court (and this Court as well) has recognized that the availability of a state law claim is even more important in an area where no federal private right of action exists. As we observed in Worm v. American Cyanamid Co., 970 F.2d 1301, 1308 (4th Cir. 1992), “it would be difficult to believe that Congress would without comment, remove all means of recourse for those injured by illegal conduct.” Id. at 1308 (quoting Silkwood v. Kerr-McGee Corp., 464 U.S. 238, 251, 104 S. Ct. 615, 78 L. Ed. 2d 443 (1984)), on appeal after remand, 5 F.3d 744 (4th Cir. 1993) (“Worm II“). This point is particularly obvious in relation to College Loan‘s contract claim. As parties to the Agreement, College Loan and Sallie Mae (through assumption of USA Group‘s duties) voluntarily included federal standards (the HEA) in their bargained-for private contractual arrangement. Both expressly agreed to comply with the HEA. In that context, Sallie Mae‘s argument that enforcement of the Agreement‘s terms is preempted by the HEA boils down to a contention that it was free to enter into a contract that invoked a federal standard as the indicator of compliance, then to proceed to breach its duties thereunder and to shield its breach by pleading preemption. In this case at least, federal supremacy does not mandate such a result. Cf. Cipollone v. Liggett Group, Inc., 505 U.S. 504, 526 n.24, 112 S. Ct. 2608, 120 L. Ed. 2d 407 (1992) (interpreting statutory preemption clause and concluding that voluntarily undertaken obligations are not “imposed” by state law, but “imposed” by contracting party upon itself).
Furthermore, the courts have generally authorized state tort claims to be pursued in areas where the federal government has regulated, even when such claims are in
For these reasons, the Preemption Ruling, as clarified by the Discovery Phase Ruling, was erroneous. The HEA and its regulations do not preempt the state law claims which College Loan seeks to pursue in this proceeding. To the extent that state law principles authorize College Loan to rely on violations of the Single Holder Rule or the Ten Day Rule in proving its state law claims, College Loan is not precluded by the HEA and the Supremacy Clause from so doing.
B.
Finally, College Loan maintains that the Preemption Ruling unfairly tainted the trial of its state law claims against Sallie Mae because College Loan was not permitted to show that Sallie Mae‘s interpretation of the Single Holder Rule was incorrect.10
Instead, the court adopted and instructed the jury on its “bad faith” standard, which authorized College Loan to defeat Sallie Mae‘s Single Holder Rule defense only by showing that the defense was interposed in bad faith. This ruling flowed directly from the district court‘s erroneous conclusion, set forth explicitly in the Discovery Phase Ruling and embodied in the jury instructions, that it could not rule on the correct interpretation of the Single Holder Rule.11
Furthermore, the imposition of the bad faith standard onto College Loan‘s state law claims obviously prejudiced the pursuit of those claims. None of the claims tried to the jury—breach of contract, breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, or tortious interference with contractual relations—had “bad faith” as an element.12 Indeed, the court‘s instruction on the state of mind necessary to justify a jury award of punitive damages to College Loan was less onerous than the bad faith requirement it imposed on College Loan‘s compensatory damages claims, allowing the jury to award punitive damages if Sallie Mae‘s conduct was found to be with either a “bad motive” or with “reckless indifference.”
The bad faith standard thus engrafted an erroneous additional element onto each of College Loan‘s four state law claims. There is a reasonable probability that this additional element affected the jury‘s verdict, “seriously prejudicing” College Loan‘s case, Johnson, 357 F.3d at 432, and reversal of the judgment is thus warranted.13
IV.
Pursuant to the foregoing, we vacate the judgment of the district court, reverse its Preemption Ruling, and remand for such other and further proceedings as may be warranted.
VACATED AND REMANDED