Terms of Promissory Note Not Enough to Show Nondischargeability of Student Loan

Posted by NCBRC - April 5, 2022

Because it was unclear whether the debtor’s private student loan was issued under the auspices of a federally-funded program, neither the debtor nor the student loan creditor were entitled to summary judgment on the issue of whether the loan was excepted from discharge under section 523(a)(8)(A)(i). Mazloom v. Navient Solutions, LLC., No. 18-60206, Adv. Proc. No. 20-80033 (Bankr. N.D.N.Y. March 29, 2022).

The debtor received a $38,400 private student loan through the EXCEL Grad Loan Program to fund her attendance in medical school. The lender was Nellie Mae, Navient’s predecessor in interest. The debtor filed for chapter 7 bankruptcy listing the loan as a “student loan.” Two years after she received her discharge, the bankruptcy court allowed the debtor to reopen her bankruptcy case to bring an adversary complaint against Navient seeking a declaration that her loan did not fall under any of the student loan exceptions enumerated in section 523(a)(8)(A) and had therefore been discharged in bankruptcy.

The parties filed cross-motions for summary judgment with the sole issue being whether the student loan at issue fell under the first category of student loans excepted from discharge under section 523(a)(8)(A)(i). That section excepts from discharge “education benefit overpayments or loans made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution.”

The court began its analysis by noting that, in the interest of supporting the debtor’s fresh start, exceptions to discharge are construed narrowly against the creditor. Counter-balancing those interests, the court recognized that section 523(a)(8) was intended to preserve the viability of student lending programs. Because the loan was, in fact, entirely privately funded, the court observed discharging it would not undermine any Stafford Loan program or other non-profit student lending program.

Navient argued that the debtor was bound by the language in the promissory note stating that the loan was “made under a program that includes Stafford Loans and other loans and which is funded in part by non-profit organizations, including governmental units, and, therefore, is not dischargeable in bankruptcy.”

The court was not persuaded. While such boilerplate taken in conjunction with other evidence of non-profit or governmental funding, has led courts to find student loans nondischargeable, the boilerplate by itself is mere tautology insufficient to prove government involvement. The court reasoned that “[i]f lenders could simply aver that a private loan was a part of a program involving a nonprofit or governmental unit and have that statement serve as the proof of the program’s existence, every lender would do so.”

The court declined to credit the deposition testimony of a senior executive of Navient who testified that the EXCEL loans are funded by Stafford Loans and government funding, but who relied solely on the language of the promissory note for her testimony in this case. The court found her testimony self-serving and lacking in documentary support.

Other courts, including In re O’Brien, 419 F.3d 104, 105 (2d Cir. 2005), have required the creditor to show that the government has made some “meaningful contribution” to the loan by devoting financial resources, such as by maintaining a fund to cover defaults or by offering funding guarantees.

Here, Navient did not offer any evidence other than the self-serving testimony of its employee and the boilerplate language in the promissory note, to support its claim that the loan was made possible by federal government involvement.

The court was likewise unpersuaded by Mader v. Experian Info. Sols., LLC, 2020 U.S. Dist. LEXIS 132073 (S.D.N.Y. July 24, 2020), which relied entirely on language in the promissory note that the student loan at issue was made under the same program that issued Stafford Loans to find sufficient government involvement. The court here found the Mader court misconstrued O’Brien, which involved similar language in the promissory note, by ignoring the fact that the O’Brien court specifically relied on evidence that the federal government guaranteed every loan issued by the lender. Other courts following O’Brien have likewise found specific evidence of government involvement beyond mere boilerplate in the promissory note.

The court stated that “[u]nlike O’Brien and its progeny, this Court has no written evidence of participation by a nonprofit or governmental unit before it, meaningful or otherwise.” For that reason, the court concluded that Navient “failed to meet their burden of showing the § 523(a)(8)(A)(i) exception to discharge applies to Plaintiff’s Private Student Loan, Defendants’ Motion for Summary Judgment at this stage must be denied.”

The court turned to whether the debtor had established for purposes of summary judgment that the loan did not fall under the exception set forth in section 523(a)(8)(A)(i) as a “program funded in whole or in part by a governmental unit or nonprofit institution.” The court noted that the term “program” is undefined in the statute, but the use of the word “any” suggested a broad definition. “Without an accepted understanding of what constitutes a program, [debtor] faces an uphill battle of establishing that there is no genuine dispute as to whether the Private Student Loan fell inside or outside a governmental or nonprofit program in this case.”

The court looked back at the legislative record and observed that the student loan exception to discharge had been expanded over several amendments and demonstrated a clear desire by Congress to protect student lenders. These considerations made this case “poorly suited” for summary judgment at this time.

The court rejected the debtor’s argument that the definition of student loan program provided in section 525, resolves the issue. That section defines such programs in terms of Title IV of the Higher Education Act of 1965, and section 523(a)(8) does not mirror that language. Rules of statutory construction dictate that the presence of a clear definition in one section that is deliberately omitted in another indicates that Congress did not intend the word or phrase to be identically defined. Moreover, section 525 deals with the different context of discrimination against bankruptcy filers.

Like Navient which relied on the terms of the promissory note to support its motion, the debtor relied on the terms of Navient’s 2014 Prospectus which treated the type of loan she received separately from Stafford loans. Specifically, the Prospectus stated that “EXCEL Loans [are] funded by several commercial banks” and the program is “not guaranteed by any federal guarantor….” The court found the language to be boilerplate, and worse, temporally unconnected to the loan at issue here which was made in 2006.

The court also found the debtor’s reference to the testimony of Navient’s senior executive relating to private funding of EXCEL loans to be unconvincing as her testimony did not relate directly to the program under which the debtor received her loan. The court found that the debtor failed to credit the distinction between the EXCEL Grad Loan Program, which includes both the privately-funded EXCEL Grad Loan, and the government-funded Stafford loan.

The court found the debtor failed to present sufficient evidence that the government did not provide resources to support the program under which she received her loan.

In conclusion, the court denied both motions for summary judgment.

Mazloom Bank ND NY March 2022



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