396 F.3d 588 (4th Cir. 2005), 03-1867, College Loan Corp. v. SLM Corporation, a Delaware Corp.

Docket Nº:03-1867.
Citation:396 F.3d 588
Party Name: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.
Case Date:January 31, 2005
Court:United States Courts of Appeals, Court of Appeals for the Fourth Circuit

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396 F.3d 588 (4th Cir. 2005)

COLLEGE LOAN CORPORATION, a California Corporation, Plaintiff-Appellant,


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

January 31, 2005

Argued: Sept. 28, 2004

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Steven John Routh, Hogan & Hartson, L.L.P., Washington, D.C., for Appellant.

Joseph Paul Esposito, Akin, Gump, Strauss, Hauer & Feld, L.L.P., Washington, D.C., for Appellees.


Mark J. Brenner, College Loan Corporation, San Diego, California; Saul Moskowitz, Moskowitz & Austin, L.L.C., Silver Spring, Maryland; Viet D. Dinh, Bancroft 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, Virginia, for Appellant.

Robert S. Lavet, Deputy General, Sallie 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.

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"), 20 U.S.C. § 1001 et seq., and regulations promulgated thereunder--a ruling which, in effect, altered the elements of College Loan's state law claims. Because the district court erred in 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

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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.



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 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 helping families and students to finance higher education through multiple means: encouraging states and nonprofit private institutions and organizations to establish adequate loan insurance programs; providing a federal program of student loan insurance for certain students or lenders; paying a portion of the interest on federally-insured loans to qualified 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, utilize 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 Secretary of Education (the "Secretary") administers FFELP and has promulgated 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 consolidates them into a single loan with a fixed interest rate. Id. Before a consolidation lender such as College Loan is entitled to process a consolidation loan, it is required by the HEA to obtain a loan verification 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 certification 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 process 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 portfolios of pre-existing loan holders to that of the consolidation lender.

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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 However, if the borrower's multiple loans are all held by a single private 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).


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

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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 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...

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