People of the State of California v. Pennsylvania Higher Education Assistance…

Background

The People of the State of California, acting through the Commissioner of Business Oversight, sued Pennsylvania Higher Education Assistance Agency, doing business as FedLoan. The Department of Business Oversight (DBO) alleged that FedLoan was licensed under the California Student Loan Servicing Act (CSLSA), which requires student-loan servicers operating in California to obtain a license.

FedLoan services private and federal student loans. The United States Department of Education awarded FedLoan a national contract to service federally owned loans and an exclusive contract to administer the Teacher Education Assistance for College and Higher Education (TEACH) Grant program. The Department of Education later designated FedLoan to administer a reconsideration process for grant-to-loan conversions that had allegedly been erroneous.

The DBO requested documents and information about FedLoan’s handling of the TEACH Grant reconsideration process and the California borrowers affected by it. FedLoan refused to provide the materials, relying in part on its position that the DBO’s examination authority under the CSLSA was overridden by federal law.

Claims and motion

The DBO brought two causes of action. The first sought an injunction requiring FedLoan to provide the requested documents. The second sought a declaration about the parties’ rights and duties under the CSLSA, including whether federal law overrode the statute.

FedLoan moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. For purposes of that motion, the court treated the complaint’s factual allegations as true.

Court’s analysis

The court held that the first cause of action was preempted. Federal preemption means that federal law overrides state law when the state law conflicts with or obstructs federal purposes. The court relied on federal law governing the Department of Education’s selection and oversight of contractors, including requirements concerning competitive prices, qualifications, experience, effectiveness, responsibility, financial resources, and business ethics.

The court reasoned that the CSLSA gave the DBO discretion to grant, deny, suspend, or revoke a license based on factors such as the servicer’s honesty, fairness, efficiency, competence, experience, character, and general fitness. Applying those licensing powers to FedLoan’s federal-loan servicing would allow California to review or interfere with the federal government’s decision to select FedLoan as a contractor. The court therefore concluded that the CSLSA was overridden by federal law as applied to federal contractors such as FedLoan.

The court rejected the DBO’s argument that there was no present conflict because it had not yet fined FedLoan or suspended or revoked its license. The court stated that interference occurred when the state required the federal contractor to comply with its licensing laws. It also noted that the CSLSA authorized penalties and possible criminal referral based on FedLoan’s alleged failure to provide the requested documents.

Ruling

The court dismissed the first cause of action without leave to amend because it was preempted. It dismissed the second cause of action as essentially duplicative of the first and because the court had concluded that the CSLSA was preempted when applied to federal contractors such as FedLoan.

In the conclusion, the court granted FedLoan’s motion to dismiss and dismissed the complaint. The court stated that the DBO could file a First Amended Complaint by October 23, 2020, to assert any claim that was not preempted. The court continued the case-management conference from October 9, 2020, to January 29, 2021, and required a joint case-management statement by January 22, 2021.