Sanctions Upheld against ECMC for Trying to Collect Repaid Student Loan

Posted by NCBRC - April 1, 2013

The First Circuit upheld a sanction award against ECMC for abuse of bankruptcy process based on that lender’s continued efforts to collect a student loan that had been found to be fully satisfied prior to bankruptcy. Hann v. ECMC, No. 12-9006 (1st Cir. March 29, 2013).

ECMC filed a proof of claim in the debtor’s chapter 13 and the debtor objected. In the hearing on the objection, ECMC failed to appear and the debtor’s sole evidence went to support her claim that she had satisfied the student loan prior to bankruptcy. The court adopted the debtor’s proposed finding that “Debtor’s objection to Claim No. 1 filed by ECMC is sustained. This Court allows the claim of ECMC in the amount of $0.00.”

After the bankruptcy was concluded ECMC recommenced collection efforts against the debtor and she filed an adversary complaint based on ECMC’s alleged violation of the claim order.

ECMC argued that disallowance of the claim merely meant that the debt could not be paid through the bankruptcy estate but did not ultimately render it discharged where it was otherwise nondischargeable. Under this reasoning, ECMC’s failure to appear at the claim objection hearing made some strategic sense. It would be able to collect on the debt without regard to the result of the hearing.

The courts did not permit this result, however. In the adversary proceeding, conducted by a new bankruptcy judge, the court found that its predecessor had found the debt satisfied and awarded fees and costs to the debtor under section 524(a) as a remedial sanction. The BAP affirmed. Hann v. Educ. Credit Mgmt. Corp. (In re Hann), 476 B.R. 344 (B.A.P. 1st Cir. 2012).

The crux of the issue before the First Circuit turned on interpretation of the bankruptcy court’s terse order and whether it necessarily determined that the underlying debt had been fully satisfied. The court found that based on the fact that the debtor’s sole basis for objection to the POC, and the entirety of her evidence, was that she had repaid it in full, it could only be reasonably concluded that that was the basis for the court’s order. Therefore, the order established that there was no debt to be collected or discharged. (The court lamented that the conflict could have been avoided had the court used more straightforward language such as “ECMC’s claim is disallowed because the underlying loans have been repaid.”)

With respect to the actual imposition of sanctions, the court agreed that ECMC’s actions did not violate the discharge injunction because the student loan was not discharged in the bankruptcy. However, the court upheld the sanctions on the basis of the BAP opinion that ECMC’s actions in their entirety, including ignoring the claim objection process and then recommencing collection activities without clarifying the basis for the order, warranted sanction. Thus, although ECMC’s conduct could not have violated the discharge injunction, it constituted an abuse of process for which the court had authority to order sanctions under section 105.

Hann v. ECMC opinion


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