Debtors’ Challenge to Private Student Loan Survives Dismissal Motion

Posted by NCBRC - September 26, 2018

A private loan in excess of the cost of attendance is not subject to exception from discharge under section 523(a)(8)(A)(ii). McDaniel v. Navient Solutions, No. 09-37450, Adv. Proc. No. 17-1274 (Bankr. D. Colo. Sept. 2018).

In their confirmed chapter 13 plan, Byron and Laura McDaniel treated their student loans, including those held by Navient Solutions, as unsecured Class Four claims to be deferred until after discharge. Upon completion of their plan, the McDaniels obtained discharge, but later moved to reopen. They filed an adversary proceeding seeking a declaration that a particular private loan held by Navient was not excepted from discharge. They also sought a finding that Navient violated the discharge injunction by collecting on that private loan post-discharge. Navient moved to dismiss the adversary proceeding.

The loan at issue in this case was a “Tuition Answer Loan,” of more than $107,000 which Ms. McDaniel took out after she had acquired student loans that fully covered her cost of attendance. The McDaniels made payments on the Tuition Answer Loan through their chapter 13 plan. After the McDaniels obtained their discharge, Navient continued to dun them for repayment on the loan, as a student loan not subject to their discharge. The McDaniels paid an additional $37,000 toward the loan post-discharge.

As a threshold matter, once a debt is challenged under section 523(a)(8), the creditor bears the burden of showing that the debt is subject to an exception-to-discharge provision. In its motion to dismiss, Navient argued that the McDaniels should be estopped from taking the position that the Tuition Answer Loan was not a non-dischargeable student loan. Navient pointed to language in the McDaniels’ chapter 13 filings and in their confirmed plan in which they allegedly characterized the loan as non-dischargeable.

The court disagreed, finding simply that there was no such characterizing language in the plan. On that basis, the court also rejected Navient’s argument, relying on United States Aid Funds v. Espinosa, 559 U.S. 260 (2010), that would hold a party to the terms of a confirmed plan even in the face of legal error. The fact that the McDaniels referred to the loans as “educational” in their bankruptcy schedules was also non-dispositive. Non-dischargeability is a legal question requiring application of the criteria set forth in section 523(a)(8).

The court went on to address Navient’s argument that the loan did, in fact, meet the definition of a non-dischargeable debt set forth in section 523(a)(8)(A)(ii). That section provides that, absent undue hardship, a debtor may not discharge “an obligation to repay funds received as an education benefit, scholarship, or stipend.” Courts have disagreed on the issue of whether a private loan qualifies under that section, with some courts holding that any loan providing an educational benefit qualifies, and others more narrowly holding that such loans do not fall within the meaning of the provision.

Because the Tenth Circuit has not ruled on the issue, the court looked to the statutory text. It noted that while sections 523(a)(8)(A)(i) and 523(a)(8)(B) both make reference to “loans,” section 523(a)(3)(A)(ii) does not. The court found that by failing to refer to a “loan” in section 523(a)(8)(A)(ii), Congress intended to exclude loans from the list of non-dischargeable benefits covered by that section. Furthermore, Congress’s use of the word “as” rather than “for” suggests that the nature of the funds is the educational benefit rather than a loan used to acquire an educational benefit. The court found that if subsection (A)(ii) were interpreted to include private loans, that provision would swallow up other provisions in section 523(a)(8) which address the non-dischargeability of loans. The fact that (A)(ii) lists funds received as scholarships and stipends further supports the finding that the “educational benefit” is a similar type of benefit not intended to be repaid. Finally, the legislative history of section 523(a)(8) supports the finding that the provision was intended to address the financial stability of government loan programs rather than private loans.

For these reasons, the court denied Navient’s motion to dismiss the claim that the Tuition Answer Loan was discharged in bankruptcy.

The court next addressed Navient’s attack on the McDaniels’s claim for violation of the discharge injunction. Navient argued that because there is no private right of action for a discharge order violation, the only avenue for relief is through contempt and, it argued, the discharge order was not specific enough to impose specific conduct on Navient which could support a contempt finding.

The court disagreed, finding the elements of contempt were satisfactorily stated for purposes of defeating a motion to dismiss. The court found that discharge orders in general do not specify which individual debts are covered by it. Rather, the discharge order broadly encompassed all debts. If the court were to find that Navient’s conduct violated that order, Navient’s uncertainty as to whether the debt was actually subject to the discharge would go to the issue of willfulness.

Finally, the court denied Navient’s motion to strike, finding that while some of the language in the challenged allegations may have been “hyperbolic,” the allegations were not unrelated to the claims in general and were specifically relevant to the discharge violation claim.

McDaniel Bankr Colo Sept 2018


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