615 B.R. 834
Bankr. D. Minn.2020Background
- Debtor William A. Schultz filed Chapter 7 on March 7, 2013, received a discharge on June 12, 2013, and listed >$180,000 in student loans.
- On July 1, 2014 Schultz executed a Federal Direct Consolidation Loan application; the consolidation was disbursed Sept. 5, 2014 and consolidated 41 prior loans held by multiple lenders/servicers into a Direct Consolidation Loan.
- The consolidated loan documents acknowledged that funds would be sent to prior loan holders to pay off the previous loans and that repayment terms (including forgiveness periods) start anew.
- Schultz sued the U.S. Department of Education (ED) in 2019 under 11 U.S.C. § 523(a)(8) seeking discharge of the consolidated loan as an undue hardship; ED moved to dismiss, arguing consolidation occurred post-discharge and created a nondischargeable postpetition obligation.
- Schultz relied on Smith (prepetition-consolidation facts) and on a prior, settled adversary against Navient; ED relied on statute, federal regulations (34 C.F.R. § 685.220), and controlling case law holding postpetition consolidations create new loans.
- The Court found no genuine dispute of material fact that the consolidation was postpetition, that prior loans were paid, and that the consolidated loan is a new postpetition obligation; the complaint was dismissed and Schultz’s summary-judgment motion denied.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a postpetition consolidation creates a new, nondischargeable postpetition debt | Schultz: consolidation did not create a new obligation because terms/ownership remained the same; thus it should be treated as prepetition debt | ED: consolidation paid prepetition loans and created a new Direct Consolidation Loan disbursed after discharge, which is postpetition and nondischargeable | Held: Consolidation paid prior loans and created a new postpetition loan; not dischargeable in this case |
| Whether same lender/owner status makes the consolidated loan prepetition | Schultz: ED was both prior and post holder, so ownership didn’t change and loan remains prepetition | ED: identity of holder is irrelevant; consolidation paid multiple lenders and federal regulations treat consolidation as creating a new loan | Held: Identity of holder is irrelevant; multiple prior holders were paid and terms changed, so loan is new postpetition debt |
| Whether Schultz’s prior adversary (Navient) or Smith supports discharge here (res judicata/collateral estoppel or "all-or-nothing") | Schultz: prior case and Smith justify discharge; dismissal/settlement of Navient claim and decisions finding some private loans dischargeable should require discharge of consolidated loan | ED: Navient settlement did not decide ED’s loan; parties differ so res judicata/collateral estoppel do not apply | Held: Prior adversary settled without merits and did not bind ED; Smith involved prepetition consolidation facts and is distinguishable; collateral estoppel and res judicata inapplicable |
Key Cases Cited
- Hiatt v. Ind. State Student Assistance Comm’n, 36 F.3d 21 (7th Cir. 1994) (postpetition consolidation restarts dischargeability period because consolidation pays prior loans)
- Educ. Credit Mgmt. Corp. v. McBurney (In re McBurney), 357 B.R. 536 (B.A.P. 9th Cir. 2006) (postpetition consolidation creates a new, nondischargeable loan)
- Grubin v. Sallie Mae Servicing Corp. (In re Grubin), 476 B.R. 699 (Bankr. E.D.N.Y. 2012) (consolidation after filing extinguishes prepetition loans and gives rise to new postpetition debt)
- Clarke v. Paige (In re Clarke), 266 B.R. 301 (Bankr. E.D. Pa. 2001) (postpetition consolidation not excepted from §523(a)(8) and is nondischargeable)
- Hull v. Fleet Bank (In re Hull), 223 B.R. 876 (Bankr. W.D.N.Y. 1998) (same-lender argument does not make a postpetition consolidation a prepetition debt)
- Smith v. Wells Fargo Educ. Fin. Servs. (In re Smith), 442 B.R. 550 (Bankr. S.D. Tex. 2010) (distinguished: involved prepetition consolidation and unique facts establishing consolidation occurred before filing)