Attorney Fee Award Upheld Against Student Loan Servicer

Posted by NCBRC - March 21, 2019

The district court found that the bankruptcy court did not abuse its discretion in holding the student loan servicer in contempt for failing to apply the student debtor’s payments outside the plan in accordance with pre-petition payments as required by the debtor’s confirmed chapter 13 plan. Penn. Higher Educ. Assistance Agency v. Berry, No. 18-444 (D. S.C. March 5, 2019).

Berry had student loans issued by the Department of Education (DOE) and administered by the Pennsylvania Higher Education Assistance Agency (PHEAA). She was paying off her loans under an Income-Driven Repayment plan (IDR) and a Public Service Loan Forgiveness (PSLF) program. In her chapter 13 bankruptcy, her confirmed amended plan provided for continued payments on her student loan debts outside the plan with those payments being applied exactly as before thereby allowing her to continue to benefit from the IDR and PSLF. The PHEAA, however, put the loans into administrative forbearance under which it applied the payments to principal and interest. Ms. Berry filed a Motion to Enforce seeking sanctions in the amount of $22,317.30, representing the attorney fees she incurred pursuing proper application of the payments. The DOE eventually settled its portion of the action for $6,000 and Ms. Berry sought the remaining amount from PHEAA. The bankruptcy court granted Ms. Berry’s entire attorney fee request consisting of $22,317.30 of which, after the DOE’s $6,000 settlement, the PHEAA owed $16,317.30.

On appeal, the district court began with PHEAA’s defense that it was limited in its authority by its servicing contract with the DOE. The court found that the bankruptcy court did not commit clear error in its application of law or in its findings of fact when it concluded that PHEAA had a contractual obligation to deal with borrower’s complaints and to bring unresolved problems to the attention of the DOE. In this case, it did neither.

The district court turned to the bankruptcy court’s conclusion that bad faith was not necessary to imposition of sanctions under section 105(a), reciting the necessary elements of contempt as: “(1) The existence of a valid decree of which the alleged contemnor had actual or constructive knowledge; (2) . . . that the decree was in the movant’s ‘favor’; (3) . . . that the alleged contemnor by its conduct violated the terms of the decree, and had knowledge (at least constructive knowledge) of such violations; and (4) . . . that [the] movant suffered harm as a result.” Here, even if PHEAA lacked authority to treat Ms. Berry’s payments as provided for in her plan, the bankruptcy court did not err in finding that it could not simply ignore the confirmed plan. At the very least, it should have sought guidance from the DOE, or objected to the plan.

Along the same lines, PHEAA argued that the bankruptcy court abused its discretion by holding it in contempt where its conduct was governed by its contract with the DOE and was therefore not willful. The court found that the bankruptcy court’s authority to impose sanctions under section 105(a) did not require a finding of willfulness.

The court found that the bankruptcy court correctly based its decision on its broad authority to craft a remedy based on the particular circumstances of a given case and that, here, the bankruptcy court was persuaded by PHEAA’s failure to make any attempt to either comply with the debtor’s plan or seek guidance from the DOE. This finding was not an abuse of discretion.

Finally, the district court affirmed the bankruptcy court’s allocation of sanctions as having been based on the debtor’s efforts to obtain compliance from PHEAA.

Berry SC March 2019

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