10th Circuit – Student Loan Not Excepted from Discharge as Educational Benefit

Posted by NCBRC - September 3, 2020

An educational benefit is not a student loan for nondischargeability purposes under section 523(a)(8)(A)(ii). McDaniel v. Navient Solutions, LLC, No. 18-1445 (10th Cir. Aug. 31, 2020).

When the debtors filed their chapter 13 petition, they had many outstanding student loans including six private educational loans held by Navient totaling approximately $107,000 (the Loan). The trustee objected to confirmation of the plan citing its failure to provide for nondischargeable student loans. The debtors filed an amended plan specifically to correct certain inaccuracies not related to student loans. They also added the provision that “[s]tudent loans are to be treated as an unsecured Class Four claim or as follows: deferred until end of plan.” The plan defined unsecured Class Four claims as “[a]llowed unsecured claims not otherwise referred to in the Plan.” Navient agreed that class four claims were dischargeable.

In light of the amendment, the bankruptcy court dismissed the trustee’s objection to the original plan as moot, and confirmed the amended plan. Upon successful completion of their plan, the debtors received their discharge. The discharge order did not specify which debts were discharged but stated “debts for most student loans” were not discharged. Two years later, the debtors moved to reopen their bankruptcy seeking a declaration that the Loan had been discharged and claiming that Navient’s post-discharge conduct violated the discharge injunction. Navient moved to dismiss the debtors’ complaint arguing that the doctrine of res judicata barred the debtors’ assertion that the Loan was discharged, and, in the alternative, that the Loan was nondischargeable under section 523(a)(8).

The bankruptcy court found that the confirmed plan did not establish that the Loan was nondischargeable and, therefore, res judicata did not bar the debtors’ motion for declaratory judgment. The court further found that the Loan did not fall under any exception to discharge in section 523(a)(8).

The Tenth Circuit granted leave to appeal.

The circuit court began with the issue of whether the dischargeability of the Loan was foreclosed by the doctrine of issue preclusion as having been decided by the language of the debtors’ confirmed plan. The court found that it was not. Rather, the plan provided that student loans be treated as class four claims, or deferred to the end of the plan. Neither option required a finding that any particular loan was nondischargeable. The court found that the fact that the plan allowed for the possibility of student loans being deferred to the end of the plan, did not affect their dischargeability but simply provided an alternate payment schedule.

Navient argued that the language of the amended plan should be interpreted in light of the trustee’s objection to the original plan in which the trustee cited the plan’s failure to provide for nondischargeable student loans. The court found this argument misconstrued the proceedings. While it was undisputed that some of the debtors’ student loans were nondischargeable, neither the trustee’s objection, nor the amended plan, specified which student loans were nondischargeable. In any case, the bankruptcy court did not sustain the trustee’s objections, as Navient contended, but found the trustee’s motion moot once the debtors amended their plan.

Because the confirmed plan did not state, either explicitly or implicitly, whether the Loan was nondischargeable, the court concluded that the doctrine of res judicata did not apply.

The court turned to whether the Loan was otherwise nondischargeable under the language of section 523(a)(8)(A)(ii) which excepts from discharge “obligations to repay funds received as an educational benefit, scholarship or stipend.” The court noted that, unlike section 523(a)(8)(A)(i) which applies to “educational benefit overpayment or loan,” (A)(ii) does not mention “loans.” The court reasoned that the fact that Congress differentiated between an “education benefit” and a “loan” in (A)(i) by the use of the disjunctive “or,” indicates that the two are not the same thing.

With that understanding, the court turned to whether (A)(ii) should be read to incorporate loans such as those extended by Navient in this case. Applying the doctrine of noscitur a sociis (construing the meaning of a term based on the company it keeps), the court noted that (A)(ii) applies to “educational benefit, scholarship, or stipend” all of which, unlike student loans, are conditional grants which a student typically does not need to repay. Furthermore, the common understanding of the word “benefit” refers to something given to a recipient without an attached obligation to repay. In fact, if (A)(ii) included student loans, there would be no need for the provision to begin with the words “an obligation to pay,” as loans are defined by an obligation to repay.

The court concluded that Congress’s failure to include “loan” in (A)(ii), taken in conjunction with the types of benefits specifically excluded in that section, indicated that that provision does not encompass student loans within its exceptions to discharge.

The court went on to address Navient’s arguments that the Loan was nonetheless nondischargeable.

The court made quick work of Navient’s argument that the 2005 amendments to the Bankruptcy Code made all private student loans nondischargeable. Citing Crocker v. Navient Sols., L.L.C. (In re Crocker), 941 F.3d 206, 218–19 (5th Cir. 2019), which rejected the identical argument, the court found that the only change the BAPCPA amendments made to section 523(a)(8)(A)(ii) was to add a comma between scholarship and stipend. BAPCPA did not otherwise change the scope of section 523(a)(8)(A)(ii).

The court was likewise unpersuaded by the contrary holding in Desormes v. Infilaw Corp. (In re Desormes), 569 F. App’x 42 (2d Cir. 2014) (unpublished), as not having delved into analysis of whether a student loan was an “educational benefit” before finding that section 523(a)(8)(A)(ii) covered private student loans.

Navient argued that the phrase, “obligation to repay” in (A)(ii) necessarily incorporates student loans. The court disagreed, finding that had Congress meant to include loans, it could have plainly said so. Furthermore, as the court explained previously, the three listed terms attached to the obligation to repay indicate something other than a loan. If that provision included loans, there would have been no need to use the phrase “obligation to repay.” Thus, contrary to Navient’s position, the fact that Congress specified an obligation to repay, supports the view that the enumerated debts are not ones which would typically carry that obligation.

The court likewise rejected Navient’s argument that because section 523(a)(8)(B) begins with the phrase “any other education loan,” the prior subsection must include student loans in both (A)(i) and (A)(ii). The court found that the language in subparagraph (B) simply limited its reference to the prior reference to loans in (A)(i). It did not create references where there were none. Moreover, because section 523(a)(8)(B) was part of BAPCPA, enacted in 2005, while section 523(a)(8)(A)(ii) was enacted in 1990, the court found the former an inappropriate basis for inferring intent of the latter.

Navient next took issue with the court’s finding that interpreting (A)(ii) to include student loans would render other provisions in section 523(a)(8) superfluous. Navient argued that despite some overlap among the provisions, if (A)(ii) were interpreted to include student loans it would capture some instances of student loan nondischargeability that would otherwise be missed. Navient cited as examples that (a)(8)(A)(i) has a governmental component lacking in (a)(8)(A)(ii), and that (a)(8)(A)(ii) includes certain types of schools not included in (a)(8)(B).

Rejecting this argument, the court pointed out that if section 523(a)(8)(A)(ii) were construed to include and expand the coverage of (a)(8)(A)(i) and (a)(8)(B), it would necessarily render language in the other provisions superfluous.

Finally, the court declined Navient’s invitation to expand its application of noscitur a sociis to all the exceptions included in section 523(a)(8). Navient argued that under that expansive application, it would be clear that all the exceptions represented some form of student loan. The court found that Navient demonstrated no reason for the court to look beyond the three terms listed in (A)(ii) when interpreting the meaning of that exception to discharge. Nor did it agree that a more global approach to section 523(a)(8) would reveal a commonality supporting a finding that Congress intended each subparagraph to include student loans. The court specifically noted that scholarships and stipends are not student loans. The court noted that applying Navient’s interpretation under which any funds that assist the student with the cost of education should be deemed “student loans” would be overbroad, encompassing such things as credit card purchases for textbooks.

The court concluded that the bankruptcy court correctly found that res judicata did not bar the debtors’ efforts to have Navient’s claim declared discharged, and that the claim did not fall under the exception to discharge found in section 523(a)(8)(A)(ii). The court affirmed.

McDaniel (10th Cir 2020)

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