566 B.R. 28
Bankr. C.D. Cal.2017Background
- Debtor Scott Dufrane graduated law school with nearly $1,000,000 in student debt, including about $90,000 in two private loans from SunTrust.
- Dufrane filed Chapter 7 (filed Sept. 2015), received a discharge in Dec. 2015, and then sued to have the private loans declared dischargeable under 11 U.S.C. § 523(a)(8).
- Complaint alleges SunTrust loan proceeds were disbursed directly to Dufrane, were not used for educational expenses, and therefore do not qualify as nondischargeable “educational benefit” obligations.
- SunTrust moved to dismiss under Rule 12(b)(6), arguing the SunTrust loans are nondischargeable under § 523(a)(8)(A)(ii) as obligations to repay funds received as an educational benefit, regardless of lender type or actual use.
- The court denied SunTrust’s 12(b)(6) motion, holding the complaint plausibly alleges facts and that § 523(a)(8)(A)(ii) does not broadly encompass ordinary commercial student loans made by for‑profit lenders.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 523(a)(8)(A)(ii) bars discharge of SunTrust private loans as "obligation to repay funds received as an educational benefit" | Dufrane: loans were not used for educational purposes; the statutory term "educational benefit" does not cover ordinary commercial loans | SunTrust: the loans were made for educational purposes (per promissory notes); purpose of the loan (not actual use) controls and § 523(a)(8)(A)(ii) applies regardless of lender | Court: denied dismissal — complaint plausibly alleges SunTrust loans fall outside § 523(a)(8)(A)(ii); § 523(a)(8)(A)(ii) should not be read to subsume ordinary commercial loans made by for‑profit lenders |
| Proper scope of judicial notice and extrinsic declarations on 12(b)(6) motion | Dufrane: opposing party’s declaration is disputed and not incorporated into complaint | SunTrust: asked court to judicially notice prior declaration and attached promissory notes | Court: denied judicial notice of the declaration and declined to consider it on 12(b)(6) because facts were disputed and documents were not integral to the complaint |
| Proper statutory construction of § 523(a)(8) post‑2005 amendment | Dufrane: § 523(a)(8)(A)(ii) should be narrowly construed consistent with prior judicial interpretations and the structure of the statute | SunTrust: 2005 amendments broadened nondischargeability to include loans regardless of lender | Court: adopted narrow construction — the 2005 reorganization separates categories and supports that (A)(ii) targets conditional grants/benefits, not ordinary commercial loans |
| Sufficiency of pleading under Rule 12(b)(6) | Dufrane: complaint alleges plausible facts that, if true, place SunTrust loans outside (A)(ii) | SunTrust: contractual loan purpose statements defeat plaintiff’s theory as a matter of law | Court: complaint meets Rule 8/Iqbal/Twombly plausibility standard; dismissal inappropriate |
Key Cases Cited
- Kawaauhau v. Geiger, 523 U.S. 57 (1998) (exceptions to discharge are narrowly construed)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading must state a plausible claim)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility standard for pleadings)
- Brunner v. N.Y. State Higher Educ. Servs., 831 F.2d 395 (2d Cir. 1987) (test for undue hardship under § 523(a)(8))
- Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71 (2006) (repetition of statutory language incorporates prior judicial interpretations)
- Cazenovia Coll. v. Renshaw, 222 F.3d 82 (2d Cir. 2000) (purpose of § 523(a)(8) to protect government and nonprofit educational lenders)
- Campbell v. Citibank, N.A., 547 B.R. 49 (Bankr. E.D.N.Y. 2016) (interpreting "educational benefit" narrowly; grants/conditional benefits differ from commercial loans)
- Inst. of Imaginal Studies v. Christoff, 527 B.R. 624 (9th Cir. BAP 2015) (2005 BAPCPA reorganization of § 523(a)(8) creates distinct categories)