Student Loan Guaranteed by TERI Was Nondischargeable

Posted by NCBRC - May 13, 2021

The debtor’s student loan was “funded” by TERI, a nonprofit organization that guaranteed the loan, and was, therefore, nondischargeable under section 523(a)(8). Medina v. Nat’l Collegiate Student Loan Trust 2006-3, No. 20-1912 (S.D. Cal. April 20, 2021).

In 2006, the debtor, Krystal Anne Medina, took out a loan in the amount of $33,149.17 from JP Morgan Chase Bank to finance her education at the San Diego Culinary Institute. JP Morgan then sold the loan to the National Collegiate Student Loan Trust (the “Trust”). The terms of the loan stated that it was an “education loan,” nondischargeable under section 523(a)(8), and that The Education Resources Institute, Inc. (“TERI”) was the loan guarantor. TERI filed for chapter 11 bankruptcy in 2008. In that proceeding, “all guaranty agreements executed in favor [of] the lenders were deemed rejected in exchange for TERI’s agreement to pay out amounts exceeding the anticipated default rates of outstanding loans.”

In August, 2017, the debtor and her husband filed for chapter 7 bankruptcy listing $28,926.00 in student loan debt. The debtors received their discharge, and the court notified the Trust of the discharge. When the Trust continued its collection efforts, the debtor filed an adversary proceeding seeking an order that the loan was discharged. The bankruptcy court found the loan was nondischargeable because it was made “through a loan program which was guaranteed by a nonprofit,” TERI.

On appeal, the debtor argued that the bankruptcy court made two factual errors: 1. That TERI was a nonprofit, and 2. That TERI guaranteed the loan.

The bankruptcy court was persuaded that TERI was a nonprofit organization, despite the lack of evidence as to its tax-exempt status, by the following facts: it called itself a non-profit on loan documents, its Articles of Organization were compliant with 26 U.S.C. section 501(c)(3), and it described itself as a nonprofit in its own chapter 11 bankruptcy. The district court expressed sympathy with the debtor’s argument that lenders use pseudo-nonprofit status to defeat dischargeability, but it found that the debtor failed to present evidence that that was the case here. It noted that many courts had reached the same conclusion as that reached by the bankruptcy court in this case.

The district court also found the bankruptcy did not commit clear error in its finding that TERI financed the loan. The debtor argued that TERI was not the guarantor of the loan at the time she and her husband filed for bankruptcy. The court found, however, that under the plain language of section 523(a)(8), the relevant date for determining TERI’s involvement in the loan was the date the loan was made.

The court rejected the debtor’s challenge to the bankruptcy court’s finding that TERI actually guaranteed the loan. The debtor failed to counter the competent evidence the bankruptcy court relied on, pointing, instead, to alleged infirmities in the Trust’s arguments. The district court found those infirmities to be immaterial. It also held that there was no requirement that TERI’s guarantee be unconditional.

Similarly, the court rejected the debtor’s chain-of-title argument that the Trust was not the actual holder of the loan. The court again found that the bankruptcy court relied on competent evidence which the debtor failed to challenge before that court.

The debtor next argued that TERI’s guarantee of the loan did not constitute “funding” for purposes of dischargeability under section 523(a)(8). Citing several cases reaching the opposite conclusion, the bankruptcy court was persuaded that the guaranty was equivalent to “funding” because without the guaranty, the loan would not have been made. The district court recognized that “[t]hese cases and the Bankruptcy Code wrestle with competing principles: Protecting lenders by allowing these non-profit guarantees to qualify as ‘funding’ increases the availability of funds for higher education while simultaneously increasing the risk commercial lenders will take advantage of borrowers by leveraging relationships with sham ‘nonprofits’ to exploit Section 523(a)(8)’s non-dischargeability provision.” Nonetheless, the court found no error in the bankruptcy court’s conclusion that TERI funded the loan within the meaning of section 523(a)(8).

Having found no error below, the district court affirmed. The debtor has filed a motion for reconsideration.

Medina SD Cal Apr 2021



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