No Excuses for Student Loan Servicer’s Failure to Comply with Plan

Posted by NCBRC - February 15, 2018

The chapter 13 debtor was entitled to an award of attorney’s fees for her efforts to get the DOE’s student loan servicer to comply with the terms of her confirmed Plan. In re Berry, No. 16-1460 (Bankr. D. S.C. Feb. 2, 2018).

LaDiedre Berry was paying her federal student loans through an Income-Driven Repayment plan “IDR” with the expectation of debt forgiveness after 120 months under a Public Service Loan Forgiveness “PSLF” program. When she filed for chapter 13 bankruptcy, she proposed to maintain payments on the debt outside the bankruptcy under the terms of the both the IDR and the PSLF program. The bankruptcy court confirmed her plan. Nonetheless, FedLoan Servicing put the debt into administrative forbearance and refused to apply her payments to the IDR. When FedLoan and the DOE continued to refuse to apply Ms. Berry’s payments according to the terms of the confirmed plan, she filed a Motion to Enforce in which she also sought attorney’s fees. The parties entered into a Consent Order rectifying the misapplication of her payments and eliminating accumulated interest. The DOE settled her subsequent attorney fee claim for $6,000 and the case went forward on Ms. Berry’s motion for the remainder of the fees against FedLoan.

The court began with the finding that section 105(a) gives a court power to hold a party in contempt and award attorney’s fees for violation of its orders. The court then turned to whether FedLoan’s conduct constituted contempt. FedLoan was served with the Plan, failed to object to it, and was therefore bound by its terms under section 1327. Its failure to comply with those terms constituted contempt and entitled Ms. Berry to her attorney’s fees both under the court’s inherent power and under the express terms of the parties’ settlement agreement.

Although FedLoan’s defenses were rendered moot by this conclusion, the court nonetheless went ahead and addressed them. FedLoan argued that it was unable to comply with the Plan because it was bound by its contract with the DOE. The court disagreed finding, as a factual matter, that the contract simply did not preclude FedLoan from complying with the Plan. Furthermore, had there been a conflict, the appropriate avenue would have been for FedLoan to object to the Plan not simply refuse to comply with it.

FedLoan further argued that it did not act in bad faith because it believed it was acting according to federal regulations. But the court found that its contempt power under section 105(a) was not limited to bad faith conduct. Furthermore, the regulation relied on by FedLoan did not preclude taking the payments as provided for in the Plan and, in any case, applied to action taken “outside bankruptcy” and was therefore inapplicable on its face.

The court granted Ms. Berry’s entire attorney fee request consisting of $22,317.30 of which, after the DOE’s $6,000 settlement, FedLoan owed $16,317.30.

Berry Bankr SC opinion Feb 2018

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