A Loan Is Not an “Educational Benefit” for Dischargeability Purposes

Posted by NCBRC - May 3, 2017

A loan is not an “educational benefit” within the meaning of section 523(a)(8)(A)(ii), therefore, that student loan discharge exception in did not apply. Kashikar v. Turnstile Capital Management, No. 16-1298 (B.A.P. 9th Cir. April 28, 2017).

Ms. Kashikar attended St. Matthew University School (SMU) in the Grand Cayman Islands. She obtained loans which were paid directly by the creditor to SMU and which, by the time she filed chapter 7 bankruptcy, amounted to over $73,000. She received her chapter 7 discharge and filed an adversary complaint seeking determination that her loans related to her attendance at SMU were discharged. The parties stipulated that “SMU has never been, and is not now, an ‘eligible educational institution’ as that term is defined under section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088), and has never been, and is not now, eligible to participate in a program under title IV of the Higher Education Act.” The court declined to address Ms. Kashikar’s argument under section 523(a)(8)(A)(i) because she had not raised that provision in her complaint. The court, however, applied an “expansive” reading of the phrase “educational benefit,” in section 523(a)(8)(A)(ii), and found the loans nondischargeable.

On appeal, the BAP reiterated its finding in Institute of Imaginal Studies v. Christoff (In re Christoff), 527 B.R. 624, 632 (B.A.P. 9th Cir. 2015) that, in the absence of “undue hardship,” section 523(a)(8) excepts from discharge: (1) loans made, insured, or guaranteed by a governmental unit; (2) loans made under any program partially or fully funded by a governmental unit or nonprofit institution; (3) claims for funds received as an educational benefit, scholarship, or stipend; and (4) and ‘qualified educational loan’ as that term is defined in the Internal Revenue Code.”

The Panel began its analysis with a discussion of the bankruptcy court’s decision that the debt was nondischargeable under the exception provided in section 523(a)(8)(A)(ii). It quickly dispensed with Ms. Kashikar’s argument that because the loan was paid directly to SMU rather than to her, the loan did not meet the “funds received” requirement of that section, finding that the reasoning in Christoff precluded that argument. Where actual funds were transferred to SMU on Ms. Kashikar’s behalf, the “funds received” requirement was met.

The court went on to find, however, that the bankruptcy court erred in deciding that the loan was an “educational benefit” within the meaning of section 523(a)(8)(A)(ii). Distinguishing an “educational benefit” in subparagraph (A)(ii) from an “educational overpayment or loan” or a “qualified educational loan” in subparagraph (A)(i), the court, quoting Christoff, said: “§ 523(a)(8)(A)(ii), now standing alone, excepts from discharge only those debts that arise from ‘an obligation to repay funds received as an educational benefit,’ and must therefore be read as a separate exception to discharge as compared to that provided in § 523(a)(8)(A)(i) for a debt for an ‘educational overpayment or loan’ made by a governmental unit or nonprofit institution or, in § 523(a)(8)(B), for a ‘qualified education loan.’” The court concluded that “a ‘loan’ is not an ‘educational benefit’ within § 523(a)(8)(A)(ii).”

Having found that Ms. Kashikar’s loan was not covered by the exception to discharge found in section 523(a)(8)(A)(ii), the panel went on to note that the provisions of section 523(a)(8) are presented in the disjunctive and therefore the bankruptcy court erred in declining to address whether the nondischargeability provision in 523(a)(8)(A)(i) applied. It remanded the case for determination of the evidentiary and substantive issues raised by consideration of subparagraph (A)(i).

Kashikar BAP 9th Opinion April 2017

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