College Loan Corp v. SLM Corp , 396 F.3d 588 ( 2005 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
COLLEGE LOAN CORPORATION, a 
California Corporation,
Plaintiff-Appellant,
v.
SLM CORPORATION, a Delaware
Corporation; SALLIE MAE, INC., a  No. 03-1867
Delaware Corporation; SALLIE MAE
SERVICING, L.P., a Delaware Limited
Partnership; STUDENT LOAN
MARKETING ASSOCIATION, a
Government Sponsored Enterprise,
Defendants-Appellees.

Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
James C. Cacheris, Senior District Judge.
(CA-02-1377-A)
Argued: September 28, 2004
Decided: January 31, 2005
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.
COUNSEL
ARGUED: Steven John Routh, HOGAN & HARTSON, L.L.P.,
Washington, D.C., for Appellant. Joseph Paul Esposito, AKIN,
2 COLLEGE LOAN CORP. v. SLM CORP.
GUMP, STRAUSS, HAUER & FELD, L.L.P., Washington, D.C., for
Appellees. ON BRIEF: Mark J. Brenner, COLLEGE LOAN COR-
PORATION, San Diego, California; Saul Moskowitz, MOSKOWITZ
& AUSTIN, L.L.C., Silver Spring, Maryland; Viet D. Dinh, BAN-
CROFT ASSOCIATES, P.L.L.C., Washington, D.C.; H. Christopher
Bartolomucci, Lorane F. Hebert, Chanel A. Reedy, HOGAN &
HARTSON, L.L.P., Washington, D.C.; Emily M. Yinger, James K.
Trefil, James S. Rixse, HOGAN & HARTSON, L.L.P., McLean, Vir-
ginia, for Appellant. Robert S. Lavet, Deputy General Counsel, SAL-
LIE MAE, INC., Reston, Virginia; Larry E. Tanenbaum, Matthew A.
Rossi, Nicolas Jafarieh, Timothy J. Stockwell, AKIN, GUMP,
STRAUSS, HAUER & FELD, L.L.P., Washington, D.C.; William E.
Potts, Jr., AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.,
McLean, Virginia, for Appellees.
OPINION
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. Col-
lege 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"), 20 U.S.C. § 1001 et seq., and regulations promul-
gated thereunder — a ruling which, in effect, altered the elements of
College Loan’s state law claims. Because the district court erred in
1
In addition to SLM Corporation, the Sallie Mae-affiliated defendants
are corporate management and marketing subsidiary Sallie Mae, Inc.;
servicing agent Sallie Mae Servicing, L.P.; and the government-
sponsored lender Student Loan Marketing Association, now a wholly-
owned subsidiary of SLM Corporation.
COLLEGE LOAN CORP. v. SLM CORP. 3
ruling that College Loan could not utilize violations of federal law to
establish its state law claims against Sallie Mae, and in ruling that
College Loan could rebut Sallie Mae’s HEA-based defense (known
as the Single Holder Rule) only by demonstrating that the defense
was interposed in bad faith, we vacate the judgment and remand for
further proceedings.
I.
A.
In order to properly assess the issues raised in this appeal, it is nec-
essary to possess an elementary understanding of the HEA and the
student loan programs that it established. The Federal Family Educa-
tion Loan Program ("FFELP"), created by Title IV of the HEA and
codified at 20 U.S.C. §§ 1071 to 1087-4 (2000), is the largest of the
HEA’s several student financial aid programs. The goal of FFELP is
to provide access to post-secondary education for all students by help-
ing families and students to finance higher education through multiple
means: encouraging states and nonprofit private institutions and orga-
nizations to establish adequate loan insurance programs; providing a
federal program of student loan insurance for certain students or lend-
ers; paying a portion of the interest on federally-insured loans to qual-
ified students; and guaranteeing a portion of certain insured loans. See
20 U.S.C. § 1071(a)(1) (2000); see also, e.g., S. Rep. No. 102-204, at
6-9 (1991). Under FFELP, private lenders, such as College Loan, uti-
lize their own funds to make loans to students attending post-
secondary institutions and to the parents of such students. See 34
C.F.R. § 682.100 (2004). These loans are guaranteed by state or non-
profit entities known as guaranty agencies, which are reinsured by the
federal government. See 20 U.S.C. § 1078(a)-(c) (2000). The Secre-
tary of Education (the "Secretary") administers FFELP and has pro-
mulgated appropriate regulations to carry out and enforce the FFELP
program. See id. at § 1082(a)(1).
A consolidation loan is one of the several types of loans authorized
by FFELP. See 20 U.S.C. § 1078-3 (2000). Such a loan pays off the
outstanding balances on a borrower’s existing FFELP loans and con-
solidates them into a single loan with a fixed interest rate. Id. Before
a consolidation lender such as College Loan is entitled to process a
4 COLLEGE LOAN CORP. v. SLM CORP.
consolidation loan, it is required by the HEA to obtain a loan verifica-
tion certificate ("LVC"), reflecting the payoff amount on each such
outstanding loan, from the borrower’s loan holders. The regulations
require FFELP loan holders receiving LVC requests to complete and
return LVCs to the would-be consolidation lender within ten business
days. 34 C.F.R. § 682.209(j) (2004) (the "Ten Day Rule").2 If certifi-
cation of an LVC request is not possible, a loan holder is obliged to
provide the requesting consolidation lender with an explanation of its
inability to comply. Id. After a consolidation lender has received an
LVC on each of a borrower’s outstanding student loans, it may pro-
cess a consolidation loan, pay off the other lenders, and become the
holder of a consolidation loan. When consummated, a consolidation
loan transfers a student borrower’s educational debt from the portfo-
lios of pre-existing loan holders to that of the consolidation lender.
Pursuant to the HEA, when a student borrower has multiple loans
with multiple private lenders, another lender is entitled to offer the
borrower a consolidation loan. 20 U.S.C. § 1078-3(b)(1)(A) (2000).3
2
The full text of the Ten Day Rule provides:
Certification on loans to be repaid through consolidation. Within
10 business days after receiving a written request for a certifica-
tion from a lender under § 682.206(f), a holder shall either pro-
vide the requesting lender the certification or, if it is unable to
certify to the matters described in that paragraph, provide the
requesting lender and the guarantor on the loan at issue with a
written explanation of the reasons for its inability to provide the
certification.
34 C.F.R. § 682.209(j) (2004).
3
The text of 20 U.S.C. § 1078-3(b)(1)(A) sets forth the statutory aspect
of the "Single Holder Rule," and reads as follows:
Any lender . . . who wishes to make consolidation loans under
this section shall enter into an agreement with the Secretary or
a guaranty agency which provides—
(A) that, in the case of all lenders described in subsection (a)(1),
the lender will make a consolidation loan to an eligible borrower
(on request of that borrower) only if the borrower certifies that
the borrower has no other application pending for a loan under
this section and (i) the lender holds an outstanding loan of that
COLLEGE LOAN CORP. v. SLM CORP. 5
However, if the borrower’s multiple loans are all held by a single pri-
vate lender, that lender is entitled to priority; a new lender cannot
offer a consolidation loan to the borrower unless the single private
lender declines to offer the borrower a consolidation loan, or unless
the single private lender declines to offer the borrower a consolidation
loan with income-sensitive repayment terms. Id.; see also 34 C.F.R.
§ 682.102(d) (2004).4 Collectively, these requirements constitute what
is known as the "Single Holder Rule." The HEA defines such a
"holder" as "an eligible lender who owns a loan." 20 U.S.C. § 1085(i)
(2000).
B.
Turning to the facts and allegations underlying this dispute, plain-
tiff College Loan conducts a business involving the marketing and
monitoring of FFELP consolidation loans. Defendant Sallie Mae, a
borrower which is selected by the borrower for consolidation
under this section, except that this clause shall not apply in the
case of a borrower with multiple holders of loans under this part
[20 U.S.C.A. § 1071 et seq.], or (ii) the borrower certifies that
the borrower has sought and has been unable to obtain a consoli-
dation loan with income-sensitive repayment terms from the
holders of the outstanding loans of that borrower (which are so
selected for consolidation) . . . .
20 U.S.C. § 1078-3(b)(1)(A) (2000).
4
The Single Holder Rule regulation, as promulgated by the Secretary
at 34 C.F.R. § 682.102(d), provides as follows:
Consolidation loan application. To obtain a Consolidation loan,
a borrower completes an application and submits it to the lender
holding the borrower’s FFEL Program loan or loans. If the bor-
rower has multiple holders of FFEL Program loans, or if the bor-
rower’s single loan holder declines to make a Consolidation
loan, or declines to make one with income-sensitive repayment
terms, the borrower may submit the application to any lender
participating in the Consolidation Loan Program . . . . If a lender
decides to make the loan, the lender obtains a loan guarantee
from a guaranty agency or the Secretary.
34 C.F.R. § 682.102(d) (2004).
6 COLLEGE LOAN CORP. v. SLM CORP.
significant primary student loan lender, also processes and services
consolidation loan applications, and itself makes FFELP consolida-
tion 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 applica-
tions made by College Loan’s prospective consolidation borrowers.
Among other provisions, USA Group agreed to "Guarantee Consoli-
dation 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 Group specifically certified that its consolidation loan servicing
"shall comply in all respects with the Act." Id. at ¶ 4.26. Through
these and other provisions of the Agreement, the obligations of the
parties included compliance with the HEA.
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 opera-
tions were then assumed by SLM Corporation’s subsidiary Sallie Mae
Servicing, L.P., and Sallie Mae and College Loan thus became con-
tractually obliged to work together in a lender-processor relationship.
Because Sallie Mae affiliates continued to offer primary and consoli-
dation loans, College Loan and Sallie Mae continued to directly com-
pete 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. Col-
lege Loan alleges that, in a scheme orchestrated by SLM Corporation,
Sallie Mae Servicing diverted many of the College Loan consolida-
tion applications to SLM-affiliated lenders, primarily the Student
COLLEGE LOAN CORP. v. SLM CORP. 7
Loan Marketing Association. College Loan contends that the diver-
sion 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 consoli-
dation 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 con-
fronted 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 govern-
ing 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 termi-
nated 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 Sal-
lie Mae affiliates, though not by the same affiliate, and (2) to borrow-
ers 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, pursu-
ant to its broad view of the Single Holder Rule, a substantial number
of College Loan’s consolidation loan applications.
College Loan maintains that Sallie Mae’s overly broad interpreta-
tion of the Single Holder Rule was part of what Sallie Mae deemed
8 COLLEGE LOAN CORP. v. SLM CORP.
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 con-
trary to the position it previously espoused to the courts of the District
of Columbia, and which that Circuit adopted in Student Loan Market-
ing 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 28 U.S.C. § 1332(a)(1). College Loan’s initial complaint
alleged claims for breach of contract against Sallie Mae Servicing;
breach of fiduciary duty against Sallie Mae Servicing, and aiding and
abetting such a breach against the other Sallie Mae defendants; con-
version against Sallie Mae Servicing and the Student Loan Marketing
Association; tortious interference with contractual relations against all
the Sallie Mae defendants; and various other claims, including con-
spiracy, violation of the Virginia Business Conspiracy Statute, and
violations of state and federal antitrust statutes. College Loan also
sought a declaratory judgment that Sallie Mae’s interpretation of the
Single Holder Rule was incorrect. The complaint alleged that Sallie
Mae’s defense to these claims was that its actions were in conformity
with the Single Holder Rule.
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., Lab-
ickas 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
COLLEGE LOAN CORP. v. SLM CORP. 9
for student borrowers), Sallie Mae requested the district court to dis-
miss 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 sat-
isfy 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 indepen-
dent of any reliance on the HEA or its regulations. The court dis-
missed without prejudice College Loan’s conspiracy claim (Count
VII) and its state and federal antitrust claims (Counts VIII and IX),
and it dismissed with prejudice College Loan’s claim for declaratory
relief (Count X). College Loan thereafter filed an Amended Com-
plaint, repleading certain claims and clarifying its position that its
state law claims did not impermissibly rely on violations of the HEA
or its regulations.
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 con-
test 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, Col-
10 COLLEGE LOAN CORP. v. SLM CORP.
lege 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 dis-
covery 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 approxi-
mately 11,748 LVCs that Sallie Mae had rejected based on the Single
Holder Rule. As in their response to College Loan’s motion to com-
pel, Sallie Mae maintained that evidence of consolidation loan appli-
cations 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 Rul-
ing"). 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 Sin-
gle 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 con-
tract (Count I); breach of fiduciary duty (Count II); aiding and abet-
ting 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 Mae’s Single Holder
Rule defense only by demonstrating that Sallie Mae’s actions were
COLLEGE LOAN CORP. v. SLM CORP. 11
undertaken in bad faith or in willful disregard of that Rule. The trial
of College Loan’s four state law claims began on June 17, 2003, and
the evidence closed on June 24, 2003. Those four claims went to the
jury, which was instructed on the Single Holder Rule defense in the
following terms:
If you find that defendants’ interpretation of the single-
holder 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 28 U.S.C. § 1291.
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 adjudica-
tion 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.
12 COLLEGE LOAN CORP. v. SLM CORP.
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 (1996) (citing
Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990)). Even
if a jury was erroneously instructed, however, we will not set aside
a resulting verdict unless the erroneous instruction "seriously preju-
diced the challenging party’s case." Johnson, 357 F.3d at 432 (inter-
nal quotation omitted).
III.
The Supremacy Clause of the Constitution makes federal law "the
supreme Law of the Land." U.S. Const. art. VI, cl. 2. As a result, fed-
eral statutes and regulations properly enacted and promulgated "can
nullify conflicting state or local actions." Nat’l Home Equity Mort-
gage Ass’n v. Face, 239 F.3d 633, 637 (4th Cir. 2001) (quoting Worm
v. Am. Cyanide Co., 970 F.2d 1301, 1304-05 (4th Cir. 1992)). Pursu-
ant to the applicable principles, state law is preempted under the
Supremacy Clause in three circumstances: (1) when Congress has
clearly expressed an intention to do so ("express preemption"); (2)
when Congress has clearly intended, by legislating comprehensively,
to occupy an entire field of regulation ("field preemption"); and (3)
when a state law conflicts with federal law ("conflict preemption").
S. Blasting Servs., Inc. v. Wilkes County, N.C., 288 F.3d 584, 590 (4th
Cir. 2002). The doctrine of express preemption has no application
here (as the parties agree), because the HEA makes no mention of
preempting state tort and contract claims. The parties also agree that
the second of the preemption doctrines, that of field preemption, has
no application to this dispute.5
5
Certain sections of the HEA expressly preempt certain state law
claims. See, e.g., 20 U.S.C. § 1078(d) (2000) (displacing state usury
laws); id. at § 1091a(a) (displacing state statutes of limitations); id. at
§ 1091a(b) (displacing state infancy defenses); id. at § 1099 (displacing
state disclosure requirements). Because Congress deemed it necessary to
specifically preempt certain state laws, it is clear that Congress could not
have intended the HEA to so "occupy the field" that it would automati-
cally preempt all state laws. See Cipollone v. Liggett Group, Inc., 505
COLLEGE LOAN CORP. v. SLM CORP. 13
In making its rulings in this proceeding, the district court relied on
the doctrine of conflict preemption, which may arise in two circum-
stances: from a direct conflict between state and federal law, 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 Hills-
borough County, Fla. v. Automated Med. Labs., Inc., 471 U.S. 707,
712 (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 (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 struc-
ture of regulations" for implementing the HEA. As a result, the court
concluded:
U.S. 504, 517 (1992) ("Congress’ enactment of a provision defining the
pre-emptive reach of a statute implies that matters beyond that reach are
not pre-empted."); accord Keams v. Tempe Tech. Inst., Inc., 39 F.3d 222,
225 (9th Cir. 1994) (holding that express provisions in the HEA which
preempt state law necessarily "imply that Congress intentionally did not
preempt state law generally, or in respects other than those it
addressed").
6
Although the district court, in making its Preemption Ruling, charac-
terized the type of preemption as "obstacle preemption," the concept
relied on by the court resembles "field preemption," which arises when
Congress has regulated so pervasively in an area that there is no room
for state law. Our analysis reveals that the courts addressing the issue
have consistently concluded that the HEA does not occupy the field of
higher education loans. See, e.g., Armstrong v. Accrediting Council, 168
F.3d 1362, 1369 (D.C. Cir. 1999); Keams, 39 F.3d at 225-26; Morgan v.
Markerdowne Corp., 976 F. Supp. 301, 318 (D.N.J. 1997).
14 COLLEGE LOAN CORP. v. SLM CORP.
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 lend-
ers 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 adjudi-
cate 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 Sal-
lie 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 Con-
ference of Blue Cross Blue Shield Plans v. Travelers, 514 U.S. 645,
654-55 (1995)); see also S. Blasting, 288 F.3d at 589-90. As we
explained in Abbot v. American Cyanamid Co., "the presumption
against preemption is even stronger against preemption of state reme-
dies, like tort recoveries, when no federal remedy exists." 844 F.2d
1108, 1112 (4th Cir. 1988)(citing Silkwood v. Kerr-McGee Corp., 464
U.S. 238, 251 (1984)).
COLLEGE LOAN CORP. v. SLM CORP. 15
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 § 1071(a)(1) of the HEA: they include encouraging states and non-
profit organizations to make loans to students for post-secondary edu-
cation, providing loans to those students who might not otherwise
have access to funds, paying a portion of the interest accruing on stu-
dent loans, and guaranteeing lenders against losses. 20 U.S.C.
§ 1071(a)(1) (2000); see also Cliff v. Payco Gen. Am. Credits, Inc.,
363 F.3d 1113, 1127-30 (11th Cir. 2004) (describing FFELP goals,
and concluding that such goals did not bar consolidation debtor’s
claim against lender under Florida debt collection act). Importantly,
neither the district court nor the parties have explained how these stat-
utory purposes would be compromised by a lender, such as College
Loan, pursuing breach of contract or tort claims against other lenders
or servicers.7
The fact that the Secretary has promulgated extensive regulations
pursuant to the HEA does not, standing alone, persuade us to the con-
trary. The existence of comprehensive federal regulations that fail to
occupy the regulatory field do not, by their mere existence, preempt
non-conflicting state law. See Abbot, 844 F.2d at 1112. Instead, as the
Supreme Court has observed, "[t]o infer pre-emption whenever an
agency deals with a problem comprehensively is virtually tantamount
to saying that whenever a federal agency decides to step into a field,
its regulations will be exclusive." Hillsborough County, 471 U.S. at
717. And the Court has "observed repeatedly that pre-emption is ordi-
narily not to be implied absent an ‘actual conflict.’" English v. Gen.
Elec. Co., 496 U.S. 72, 90 (1990) (internal citations omitted). The
Court’s mandate thus seems clear: we should not "seek[ ] out conflicts
between state and federal regulation where none clearly exists." Id. at
7
Although the district court, in making its Preemption Ruling, relied on
the Ninth Circuit’s decision in Brannan v. United Student Aid Funds Inc.,
94 F.3d 1260, 1263 (9th Cir. 1996), that case is distinguishable. There,
the court deferred to a Notice of Interpretation issued by the Secretary,
opining that any state law conflicting with the collection procedures
established by the Act is preempted. No such interpretation is present
here. Furthermore, the Eleventh Circuit in Cliff, addressing the same col-
lection issue, declined to so interpret the Notice. 363 F.3d at 1127-30.
16 COLLEGE LOAN CORP. v. SLM CORP.
90 (quoting Huron Portland Cement Co. v. Detroit, 362 U.S. 440, 446
(1960)).
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 viola-
tions of the HEA or its regulations, will obstruct the federal scheme.8
To the contrary, the Supreme Court (and this Court as well) has rec-
ognized that the availability of a state law claim is even more impor-
tant in an area where no federal private right of action exists. As we
observed in Worm v. American Cyanide Co., "it would be difficult to
believe that Congress would without comment, remove all means of
recourse for those injured by illegal conduct." 970 F.2d 1301, 1308
(4th Cir. 1992) (quoting Silkwood v. Kerr-McGee Corp., 464 U.S.
238, 251 (1984)), on appeal after remand, 5 F.3d 744 (4th Cir. 1993)
("Worm I"). 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 conten-
tion that it was free to enter into a contract that invoked a federal stan-
dard 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 (1992)
(interpreting statutory preemption clause and concluding that volun-
tarily undertaken obligations are not "imposed" by state law, but "im-
posed" by contracting party upon itself).
8
It seems settled that private parties are entitled to sue to redress viola-
tions of other aspects of the HEA. See Cliff, 363 F.3d at 1127-30 (allow-
ing suit by debtor against consolidation lender under both Federal Debt
Collection Practices Act and Florida Consumer Collection Practices
Act); Brannan, 94 F.3d at 1266 (finding state debt collection practices
act claim preempted but allowing FDCPA action); Keams, 39 F.3d at 226
(allowing state tort suits against accrediting agencies).
COLLEGE LOAN CORP. v. SLM CORP. 17
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 some manner premised on violations of
federal regulations. See, e.g., English, 496 U.S. at 85 (authorizing
nuclear facility employee to assert intentional infliction of emotional
distress claim against employer based on perceived violations of
nuclear-safety standards established by Energy Reorganization Act,
despite existence of statutory remedies). In fact, the states are some-
times entitled to impose more stringent common law and statutory
requirements in areas regulated by federal law, so long as such
requirements are not incompatible with those established under fed-
eral law. Int’l Paper Co. v. Ouellette, 479 U.S. 481, 498 (1987) (con-
cluding that Clean Water Act precludes only incompatible state
standards). As a result, the existence of the Secretary’s exclusive
authority to enforce the HEA and its regulations does not, standing
alone, mandate the conclusion that a state law claim which relies on
HEA violations for support "obstructs" the federal scheme.
For these reasons, the Preemption Ruling, as clarified by the Dis-
covery Phase Ruling, was erroneous.9 The HEA and its regulations do
9
Sallie Mae maintains, in the alternative, that the district court’s Pre-
emption Ruling was nonetheless correct because College Loan is not
entitled to pursue an HEA private action in the guise of a state law claim.
However, the lack of a statutory private right of action does not, in and
of itself, bar a plaintiff from relying on violations of that statute as evi-
dence supporting a state law claim. See Medatronics v. Lohr, 518 U.S.
470, 487 (1996) (rejecting as "implausible" contention that lack of pri-
vate right of action precluded state common law remedies). Furthermore,
we have specifically recognized that, absent preemption, an injured
plaintiff may sue under state law seeking redress for a violation of a fed-
eral regulation. See Worm I, 970 F.2d at 1308 (observing that "if the
Maryland common law recognized a tort based on the breach of a feder-
ally imposed standard, the [plaintiff] would be able to pursue that claim
without conflicting with federal law"); see also Lowe v. Sporicidin Int’l,
47 F.3d 124, 128 (4th Cir. 1995) (reaffirming rationale of Worm I).
While the Ten Day Rule and the Single Holder Rule are intertwined with
the questions being litigated here, College Loan alleges garden-variety
contract and tort claims, supported by violations of the Single Holder
Rule and the Ten Day Rule, and responses to Sallie Mae’s anticipated
Single Holder Rule defense. In these circumstances, Sallie Mae’s private
right of action rationale is not applicable.
18 COLLEGE LOAN CORP. v. SLM CORP.
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 pre-
cluded 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
10
Sallie Mae contends that College Loan waived any objection to the
district court’s "bad faith" requirement. On the contrary, College Loan
resisted Sallie Mae’s Rule 12(b)(6) motion to dismiss, which asserted
that College Loan was seeking to pursue impermissible private actions
under the HEA, contending that a preemption assessment should be con-
ducted and explaining that its state law claims were not preempted by
federal law. College Loan lost that contention, and it then proceeded to
litigate its state law claims within the confines of the rulings of the dis-
trict court. Part of that effort was an attempt to cabin the Preemption Rul-
ing by contending that the Single Holder Rule defense was interposed by
Sallie Mae in bad faith, even if the court would not permit College Loan
to contest that defense on its merits. That College Loan litigated in that
manner does not constitute a waiver of the error made in the Preemption
and Discovery Phase Rulings.
Nor does College Loan’s failure to specifically object to the instruc-
tions on the bad faith issue waive the position it had already unsuccess-
fully presented to the district court. The trial court’s instruction on bad
faith was simply its application of the Preemption Ruling at trial, as the
court recognized in its Discovery Phase Ruling. As a result, when the
jury was instructed, the court was "fully aware of the plaintiff’s position"
on the preemption issue, and it "had obviously considered and rejected
that position." City of Richmond v. Madison Mgmt. Group, Inc., 918 F.2d
438, 453 (4th Cir. 1990) (internal quotations omitted).
COLLEGE LOAN CORP. v. SLM CORP. 19
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 probabil-
ity 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
11
On remand, the district court may, of course (if it concludes that such
a determination is procedurally proper) credit Sallie Mae’s interpretation
of the Single Holder Rule, in which event some or all of College Loan’s
claims may be disposed of on summary judgment. College Loan is enti-
tled, however, to have the district court address whether Sallie Mae’s
interpretation and application of that Rule was legally sound.
12
The district court, by its pretrial rulings, eliminated several other of
College Loan’s original claims in their entirety. We do not decide which,
if any, of those claims should be reinstated, and leave that assessment to
the sound judgment of the district court.
13
Because the district court’s bad faith ruling was erroneous, it is
unnecessary for us to address the court’s rulings on evidence proffered
by College Loan pursuant to that standard.