Win for Debtor in Student Loan Arena

Posted by NCBRC - November 21, 2017

A loan that is not itself an “educational benefit” does not fall under section 523(a)(8)(A)(ii)’s exception to discharge as an “obligation to repay funds received.” Essangui v. SLF V-2015 Trust, No. 16-12984, Adv. Proc. No. 16-201 (Bankr. Md. Oct. 2, 2017).

Chapter 7 debtor, Yolande Essangui, enrolled in a Medical Education Readiness Program (MERP, or Program) in preparation for entering Ross University School of Medicine. Because MERP was not a Title IV institution, students were not eligible to receive federal student loans to attend the Program. Ms. Essangui financed her attendance in MERP with the private loan at issue, which, by the time of her bankruptcy, totaled $37,175.25. She used the money to pay tuition, buy books and pay for housing and other expenses during her schooling. Ms. Essangui completed the Program and enrolled in Ross University, but never graduated.

As it was undisputed that the loan was not an “educational benefit overpayment or loan” under section 523(a)(8)(A)(i), or a “qualified education loan” under section 523(a)(8)(B), the issue was whether the debt was “an obligation to repay funds received as an educational benefit, scholarship, or stipend,” under section 523(a)(8)(A)(ii).

After a walk through the history of student loan treatment in bankruptcy, the court arrived at the relevant language in BAPCPA, which it found was intended to “enhance fairness” to both creditors and debtors. Citing Inst. of Imaginal Studies v. Christoff (In re Christoff), 527 B.R. 624, 635 (B.A.P. 9th Cir. 2015), the court adhered to the minority position that Congress’s separation, in 2005, of “an educational benefit overpayment or loan” in paragraph (A)(i) and “funds received” in paragraph (A)(ii) indicates that Congress did not intend the latter paragraph to cover loans.

The court rested its decision on principals of statutory interpretation in which Congress is presumed to organize statutes meaningfully and give different meanings to different words. The court found it significant that the funds received in paragraph (A)(ii) must be “as” an educational benefit rather than be “for” an educational benefit. Under this language, the funds themselves must be the educational benefit rather than be provided for the purpose of acquiring the educational benefit. Furthermore, paragraph (A)(ii) delineates three types of funds: an “educational benefit,” a scholarship and a stipend. Where scholarships and stipends typically need to be repaid only upon the debtor’s failure to complete her education, the court reasoned that Congress intended “educational benefit,” to be similarly contingent. This contingent “obligation to repay funds” is not equivalent to a “loan.”

The court further found that applying paragraph (A)(ii) to loans would render the language in paragraph (A)(i), which specifically covers government-related loans, and paragraph (B), which covers “any other educational loan that is a qualified education loan,” superfluous. Paragraph (A)(ii), if given the broad interpretation endorsed by the creditor here, would already cover those loans. The minority position also comports with the general principal of narrowly interpreting exceptions to discharge.

The court concluded that “the language of the statute suggests that Congress worked to strike a delicate balance between the fresh start policy for debtors and the protection of certain educational programs and lenders offering loans for such programs.” Where the creditor did not argue that the funds themselves were an “educational benefit,” and section 523(a)(8)(A)(ii) does not apply to loans, Ms. Essangui was entitled to summary judgment.

Essangui Bankr Md opinion Oct 2017

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