In the fourth claim, pursued against the same defendants, plaintiff sues solely on her own behalf. Alleging further misrepresentations on the part of NBS (again in violation of D.C. law), plaintiff claims that D.C. law, the FTC's Holder Rule, and federal law allow her to pursue claims and defenses she has against NBS against the defendants.
Defendants oppose these assertions by interposing preemption, either complete or limited. Barring that, defendants claim that plaintiff has failed to state a claim under any of the theories she asserts. Each of these interrelated claims and defenses is addressed in turn.
A. The HEA does not completely Preempt State Law.
HEAF and CSLFC/BA argue that the HEA completely preempts state law, thus rendering plaintiff's reliance on state law remedies ineffectual.
It is quite clear, however, that the court must reject this argument. After lengthy exegesis, several other courts have determined that the HEA neither explicitly nor implicitly preempts all state law. See Tipton v. Secretary of Education, 768 F. Supp. 540 (S.D. W. Va. 1991); Jackson v. Culinary School of Washington, 788 F. Supp. 1233 (D.D.C. 1992) ("Jackson I").22
All parties acknowledge that the HEA does not explicitly preempt all state law, although it does provide a few cases of limited explicit preemptive authority. See, e.g., 20 U.S.C. §§ 1078(d), 1091(a), and 1091(b). However, the parties disagree as to whether the HEA implicitly preempts all relevant state law. The court determines that plaintiff has the better of the argument: following Supreme Court precedents, particularly California Fed. Sav. & Loan v. Guerra, 479 U.S. 272, 93 L. Ed. 2d 613, 107 S. Ct. 683 (1986), a court may infer complete preemption only when a statute is so comprehensive that it leaves no room for state law. 479 U.S. at 272. The HEA is not such a statute.
For instance, the HEA does provide a few circumstances under which a guaranteed student loan borrower's liability is discharged. § 1087. Defendants claim that this section enumerates the only conditions under which a borrower's liability may be discharged. However, this section does not provide the exclusive universe of events which may lead to discharge, but rather ensures that every borrower who dies, becomes permanently and totally disabled, or receives a discharge in bankruptcy, is discharged from his obligation on the loan. Thus, the court can not find that all state law is preempted solely because Congress saw fit to mandate discharge in a few specific circumstances; rather, in addition to these enumerated cases, there are - implicitly - other events which also would result in a discharge, for instance, claims under state law.
Nor can the court accept defendants' argument that the application of any state law would undermine the congressional intent behind the HEA. Although the court holds below that the application of some state law provisions does indeed frustrate the HEA, see Part IV.B. below, defendants have not demonstrated that the application of any state regulation would dismantle the HEA.
Finally, defendants are not persuasive when they argue that the Clearfield Trust doctrine, deriving from Clearfield Trust Co. v. United States, 318 U.S. 363, 87 L. Ed. 838, 63 S. Ct. 573 (1974), applies to the HEA. Defendants assert that the court should find that the HEA requires a uniform, national rule regarding the discharge of debts in order to function. However, although the application of some local rules, which might differ from state to state, could upset the functioning of the HEA, those rules are addressed adequately - through partial preemption - below. There simply is no reason to dismiss all state law.
Therefore, the court finds that the HEA does not preempt all relevant state law - either explicitly or implicitly and that the Clearfield Trust doctrine does not apply.
B. There is Limited Preemption of Local Law under the HEA.
Although the HEA does not preempt all state and local law, it does, under the Supremacy Clause, preempt any state law with which it conflicts. This may happen in one of two ways. First, it may be impossible for an individual to abide by both the state law and the HEA; in that case, the HEA preempts the conflicting state law. Second, the state law may preclude execution of the purposes and objectives of the HEA; again, the impeding state law is preempted. See Guerra, 479 U.S. at 280.
Plaintiff's third and fourth claims largely are based on the operation of state law. First, plaintiff asserts that she maintains her NBS-related claims and defenses against defendants because of D.C. Code § 28-3809, the D.C. law subjecting lenders of direct installment loans to all claims and defenses the purchaser has against the seller. She also argues that the claims survive under § 28-3807(b), which prohibits negotiable instruments. Finally, plaintiff asserts that these violations are willful, thus bringing into play § 28-3813(f). The court finds that each of these laws is preempted by the HEA.
1. Section 28-3807.
The court finds that section 28-3807 does not apply to GSLs. Moreover, even if it did apply, it would be preempted by the HEA.
Section 28-3807, the title of which is "Negotiable instruments prohibited," proscribes the use of "an instrument, except a check, payable 'to order' or 'to bearer' as evidence of the consumer obligation of the consumer." § 28-3807(a) (emphasis added).
Defendants' first argument, that NBS itself was not the actual lender, likely is unavailing under D.C. law. The statute (§ 28-3807) does not specifically limit itself to lender-financed circumstances. However, as with the Howard case discussed in Part III., above, it is unlikely that the D.C. courts would hold § 28-3807 applicable to this "supply-side" transaction.
Moreover, other arguments asserted by defendants are even more persuasive. First, although the text of the statute does not clearly proscribe negotiable instruments as such, its text does proscribe "instruments;" excludes one type of negotiable instrument (a check); and, refers to one of the most important aspects of the textbook definition of negotiable instrument (that it be payable "to order" or "to bearer").
These elements, when considered jointly with the title of the section (which is crystalline in its clarity), demonstrate that the statute is designed to prohibit negotiable instruments. However, the notes evidencing GSLs are not negotiable instruments. Although they may be payable "to order" or "to bearer," they are subject to a great number of regulations which prevent them from qualifying for negotiable instrument's "payable on demand" criterion. See D.C. Code § 28:3-104(1)(c). Thus, the court finds as a matter of law that § 28-3807 does not apply to GSLs.
However, even if the code provision did apply to GSLs, it would be preempted by the HEA. In order to provide sufficient funding for the GSL program, it is necessary that the notes evidencing GSLs be transferrable (albeit only among those entities statutorily permitted to trade in GSLs). If § 28-3807 were to apply to the HEA, and thus prohibit making credit sales with notes easily transferrable among approved lenders, banks would be able to make GSLs only with their own funds, thus severely limiting the amount of capital available for the program and effectively crippling it. The application of § 28-3807, therefore, would frustrate the purposes behind the HEA to such an extent that it would have to be preempted. See Jackson I, 788 F. Supp. at 1255.
2. Section 28-3809.
Section 28-3809 (a) provides as follows:
A lender who makes a direct installment loan for the purposes of enabling a consumer to purchase goods or services is subject to all claims and defenses of the consumer against the seller arising out of the purchase of the goods or service if such lender acts at the express request of the seller, and --
(1) the seller participates in the preparation of the loan instruments, or