Sanctions Against Student Loan Servicer

Posted by NCBRC - October 28, 2020

A student loan servicing company’s failure, over the course of five years, to respond to an adversary complaint and multiple court orders, justified a finding of contempt and sanctions against the servicer requiring it to pay off the debtor’s student loans to the DOE in the amount of $354,629.62, and pay damages to the debtor in the amount of $24,000. Leary v. Great Lakes Educational Loan Services, No. 15-11583, Adv. Proc. No. 15-1295 (Bankr. S.D.N.Y. Sept. 8, 2020).

The debtor borrowed nearly $300,000 from the Department of Education (DOE) to pay college tuition for his three children. The loans were serviced by Great Lakes. In June, 2015, the debtor filed for chapter 7 bankruptcy. Acting pro se, he initiated an adversary proceeding against Great Lakes seeking to discharge student loans held by the DOE in the amount of $259,741. The complaint did not name the DOE as a defendant. Although Great Lakes forwarded the complaint to the DOE, neither the DOE nor Great Lakes responded to it. Nor did either take action when, in January, 2016, the bankruptcy court granted default judgment in favor of the debtor. One year later, the court dismissed the adversary complaint, discharged the debtor’s student loans, and closed the case.

Shortly after the discharge, and for the subsequent three years, Great Lakes resumed its collection efforts against the debtor, and the DOE threatened to garnish the debtor’s wages to pay the discharged debt.

The debtor filed a motion for contempt against Great Lakes. The court reopened the bankruptcy case and ordered Great Lakes to respond. When it failed to do so, the court issued a show cause order which was likewise ignored. The court then ordered sanctions against Great Lakes in the amount of $123,625.52. Great Lakes ignored the order. After the court issued a second show-cause order, the debtor sought to amend the complaint to add the DOE as a party. Instead of opposing the amendment, the DOE filed an answer to the complaint.

The court scheduled a hearing for August, 2020 and, for the first time, Great Lakes put in an appearance through counsel. At the hearing, Great Lakes acknowledged that it had received notifications of the court actions and forwarded fifteen pleadings to the DOE including the initial adversary complaint. Great Lakes also monitored the progress of the bankruptcy case on PACER.

The court observed that the purpose behind civil contempt is to coerce cooperation with court orders and to compensate the party injured by the lack of cooperation. The court laid out the findings necessary for a civil contempt order: “(1) the order the contemnor failed to comply with is clear and unambiguous; (2) the proof of non-compliance is clear and convincing; and (3) the contemnor has not diligently attempted to comply in a reasonable manner.”

The court found its orders, consisting of orders to appear at scheduled hearings or conferences, to show cause, and to pay sanctions, were clear and unambiguous. Nor was there any question that Great Lakes failed to comply with the orders. Great Lakes’ assertion that it intended to challenge the sanctions order was deemed “too little, too late,” and did not provide a valid reason for its lengthy noncompliance. The court thus found the first two elements satisfied.

With respect to the third element, the Second Circuit requires a showing of “substantial” compliance under which the only excuse for noncompliance is “factual impossibility.” Here, Great Lakes made little to no effort at any time to comply with orders. The court found Great Lakes guilty of gross negligence at minimum. It took a dim view of Great Lakes’ counsel’s explanation that it ignored five years of notifications and orders from the court due to “unintentional procedural error,” its belief that it was not a proper party, and Covid-related disruptions, finding the excuses “unbelievable” and “cavalier.”

Great Lakes argued that it should not be sanctioned under section 105(a) because it acted in good faith. But the court found that willfulness was not an element of civil contempt. Specifically declining to rule on the issue of bad faith, the court stated: “Great Lakes’ repeated disregard for multiple court orders is a sufficient basis to hold Great Lakes in contempt of court.”

Having found Great Lakes liable for civil contempt, the court turned to the appropriate amount of sanctions noting that it had “broad discretion to fashion an appropriate coercive remedy . . . based on the nature of the harm and the probable effect of alternative sanctions.” With respect to compensatory sanctions, the court stated that there must be a causal connection between the defendant’s conduct and the alleged harm and that damages need not be solely pecuniary. Great Lakes’ argument that the debtor suffered no injury because he did not pay attorney fees, was a non-starter.

The court found that the debtor was injured by his reliance on Great Lakes’ lack of action. For five years, the debtor was allowed to believe that he had sued the correct party and that his debt was discharged. The court found that requiring him to prove undue hardship five years after he filed his adversary complaint would be a nearly impossible task.

The court ordered Great Lakes to pay $354,629.62 in sanctions, representing the entire amount of the outstanding loans owed to the DOE. It found this amount, in addition to compensating the debtor for his reliance, would coerce Great Lakes into compliance with court orders in the future. The court also ordered Great Lakes to pay an additional $24,000 to the debtor in compensation “for the harm he suffered over the last five years as a result of negative credit ratings, aggravation, loss of sleep and worry, harassment, pain and suffering, in addition to contributing marital strain.” Finally, the court ordered the DOE to report to all credit agencies that the debt was paid.

Great Lakes filed an appeal to the District Court for the Southern District of New York, Case No. 20-8050.

Leary_Bankr SD New York_Sept 2020

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