Bankruptcy Court May Not Enforce Discharge Order from Other District

Posted by NCBRC - November 15, 2019

On direct interlocutory appeal, the Fifth Circuit found that courts may not use their contempt powers to enforce discharge orders issued by other courts outside their judicial districts. The court also held that the private student loans at issue were not subject to section 523(a)(8)(A)(ii)’s nondischargeability provision because that provision applies only to educational benefits where, as in the case of grants or scholarships, the obligation to repay is conditional. Crocker v. Navient Solutions LLC, No. 18-20254 (5th Cir. Oct. 22, 2019).

Evan Brian Crocker, obtained a chapter 7 discharge in the Bankruptcy Court for the Southern District of Texas. Michael Shahbazi, received a chapter 7 discharge in a bankruptcy court in Virginia. Both Crocker and Shahbazi listed in their bankruptcy schedules, debts based on private educational loans. Post-discharge, the lender, Navient Solutions, continued to pursue them for repayment of the loans. Crocker filed a complaint against Navient in the bankruptcy court where he had received his discharge, alleging violation of the discharge injunctions and seeking declaratory judgment, injunctive relief, and damages. Shahbazi later joined that case in Texas.

The bankruptcy court denied Navient’s motion for summary judgment, holding that the power to enforce discharge orders was not solely the province of the court that issued the order. The bankruptcy court was persuaded in part by the fact that the discharge orders at issue were general forms which did not specify that debts were or were not discharged and did not involve interpretation of orders unique to the particular debtors. The bankruptcy court further found that the private loans were not within the exceptions to discharge in section 523(a)(8)(A)(ii).

On direct appeal, the Fifth Circuit began with the question of whether only the issuing court may enforce a discharge order under section 524. Finding no clear precedent, the court noted that in Wilborn v. Wells Fargo Bank, N.A. (In re Wilborn), 609 F.3d 748, 753 (5th Cir. 2010), it held “in the class action context, that a bankruptcy judge in the Southern District of Texas may exercise ‘jurisdiction over claims that arise in other cases administered by other judges’ in the same judicial district.” That case did not deal with enforcement of a discharge order, however, nor did it involve a distant jurisdiction. In contrast, Waffenschmidt v. MacKay, 763 F.2d 711, 716 (5th Cir. 1985), determined that in the context of a securities case, an injunction to enforce a court order must be brought before that court “because contempt is an affront to the court issuing the order.”

With these cases in mind, the Fifth Circuit journeyed through the history of the discharge injunction, which was first statutorily enacted in 1970 to give courts the power to enforce the discharge order. An additional provision enacted at the same time, permitted a party to register a discharge order in any other district with the effect of giving courts in that district the power of enforcement of that order. In 1978 Congress repealed the registration provision. The circuit court interpreted that repeal as evidence that Congress intended to end injunction enforcement by foreign jurisdictions. The court went on to note that the Second, Seventh and Eleventh Circuits have all limited enforcement of injunctions relating to court orders to the issuing court.

The court then looked to traditional treatment of civil contempt for enforcement of injunctions in general, and found that because violation of a court order is an affront to that court, it is that court’s prerogative to deal with it. Taken in conjunction with the repeal of the registration provision in 1978, the court determined that Congress intended that general rule to apply in the bankruptcy context.

The court concluded, without deciding whether the issue was jurisdictional or prudential, that enforcement of discharge orders through a court’s contempt powers does not extend to courts outside that issuing court’s judicial district. The court reversed the bankruptcy court’s contrary holding on that issue, but left for determination on remand whether a bankruptcy court could enforce an order of another bankruptcy court within the same judicial district.

The court next addressed dischargeability of the loans under section 523(a)(8). Specifically, the question was whether private student loans were nondischargeable within the meaning of 523(a)(8)(A)(ii), which excepts from discharge “an obligation to repay funds received as an educational benefit, scholarship, or stipend.” The court found that they were not. The court distinguished paragraph (A)(ii) from the surrounding provisions of that section as not including the word “loan,” noting that when Congress uses different wording, particularly within the same statute, the difference must be treated as significant. In fact, the court reasoned, the language “obligation to repay” in paragraph (A)(ii) would be superfluous if the provision referred to loans because loans always involve a repayment obligation. The court found the words “scholarship” and “stipend” to exclude loans, and it turned to whether “education benefit” could be interpreted to include private loans. Relying on the Latin doctrine of noscitur a sociis—knowing words by the company they keep—the court found that “benefit” must be defined in relation to the definitions of scholarship and stipend, both of which refer to conditional grants which may or may not need to be repaid. In addition, an interpretation of “benefit” that would include private student loans would necessarily include public loans thereby rendering other sections of 523 superfluous.

In the face of Navient’s argument that the 2005 BAPCPA amendments expanded nondischargeability of student loans to include private loans, the court found that those amendments, which altered structure and added a comma, did little to change the meaning of the relevant provision here. The court noted that while section 523(a)(8)(B) was expanded to incorporate private loans that are “qualified education loans,” Navient conceded that that section did not apply to the loans here.

The court summed up its finding with respect to dischargeability stating, “We find nothing in this explanation of the 2005 revisions to alter our interpretation that Subsection 523(a)(8)(A)(ii) applies only to educational payments that are not initially loans but whose terms will create a reimbursement obligation upon the failure of conditions of the payments.” The court affirmed the bankruptcy court’s finding that the loans were dischargeable.

Crocker 5th Cir Oct 2019


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