A.L. Lee Memorial Hospital v. McFadyen (In Re McFadyen)A.L. Lee Memorial Hospital v. McFadyen (In Re McFadyen)
MEMORANDUM-DECISION, FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER
Before the Court is an adversary proceeding commenced by A.L. Lee Memorial Hospital (“Plaintiff’) against Christine M. McFa-dyen, fik/a Christine Kyle (“Debtor”). Plaintiffs original complaint, filed June 14, 1994, sought a determination of nondis-chargeability of a debt pursuant to § 523 of the Bankruptcy Code (11 U.S.C. §§ 101-1330) (“Code”). 1 On March 8, 1995, the Plaintiff filed an amended сomplaint (“Amended Complaint”) adding a second cause of action pursuant to Code § 523(a)(8). On March 27, 1995, Debtor filed her amended answer (“Amended Answer”) and also asserted a counterclaim pursuant to Code § 523(d), seeking costs and attorney’s fees.
A trial of the adversary proceeding was held in Utica, New Yоrk, on September 14, 1995. At Plaintiffs request, the parties stipulated to the dismissal of the Plaintiffs first cause of action based on fraud and misrepresentation. The parties were afforded an opportunity to file memoranda of law, and the matter was submitted for decision on October 6,1995.
JURISDICTIONAL STATEMENT
The Court has core jurisdiction оver the parties and subject matter of this adversary proceeding pursuant to 28 U.S.C. §§ 1334(b), 157(a), (b)(1) and (b)(2)(I).
FACTS
According to Debtor’s Amended Answer, she participated in the nursing program at Crouse Irving Memorial Hospital (“Crouse Irving”), Syracuse, New York and was employed there for a period in 1993 prior to being employed by Plaintiff. In connection with her employment with the Plaintiff, the Debtor entered into an “RN Scholarship Agreement” (“Agreement”) with Plaintiff on or about August 26, 1993 (see Plaintiffs Exhibit 3). According to the terms of the Agreement, Plaintiff agreed to pay Debtor’s tuition for the completion of the R.N. program at Crouse Irving. The total payment made to Crouse Irving on behalf of the Debt- or was $7,645 (see Plaintiffs Exhibit 4). Debtor in turn agreed to work for Plaintiff for three years, beginning September 1, 1993. Debtor was required to reimburse Plaintiff the $7,645, plus 15% interest, in the event she terminated employment before the three years had elapsed.
Plaintiff is located in Fulton, New York. In January, 1975, Plaintiff was designated as exempt from fedеral income taxes pursuant to § 501(c)(3) of the Internal Revenue Code (“IRC”). According to the testimony of Mary Kay Jandrew (“Jandrew”), who was employed as Human Resource Manager for
Plaintiff alleged that Debtor terminated her employment on or about December 5, 1993, requiring that she immediately reimburse Plaintiff for the tuition paid to Crouse Irving on her behalf. On March 9, 1994, Debtor, along with her husband Robert S. McFadyen, filed a voluntary petition pursuant to Chapter 7 of the Code.
DISCUSSION
The Bankruptcy Code was enacted to provide a debtor with ‘a new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.’
Grogan v. Garner,
In response to concerns about the escalation in the default rate of student loans, in 1978 Congress enacted Code § 523(a)(8) “to curb the abuses of the educational loan system by restricting the ability of a student to discharge an educational loan by filing bankruptcy shortly after graduation, and to safeguard the financial integrity of educational loan programs.”
In re Pilcher,
For example, the 1978 version of Code § 523(a)(8) excepted from discharge those obligations “to a governmental unit, or a nonprofit institution of higher education, for an educational loan.” Bankruptcy Reform Act of 1978, Pub.L. No. 95-598, § 523(a)(8), 92 Stat. 2549 (1978). In 1979 the section was amended to include “educational loan[s] 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 of higher education.” Act of August 14, 1979, Pub.L. No. 96-56, § 3(1), 93 Stat. 387 (1979). The Bankruptcy Amendments and Federal Judgeship Act of 1984 deleted the words “of higher eduсation.” Pub.L. No. 98-353, § 454(a)(2), 98 Stat. 333 (Supp.1984). In 1990 the section was again expanded to include government made, insured or guaranteed educational benefit overpayments, and obligations to repay funds received as an educational benefit, scholarship or stipend. Crime Control Act of 1990, Pub.L. No. 101-647, § 3631(a), 104 Stat. 4865 (1990).
For purpоses of the decision herein, the Court focuses on that portion of Code § 523(a)(8) which excepts from discharge an educational loan made “under any program funded ... by a ... nonprofit institution ...” In this regard, there are three elements that Plaintiff must establish by a preponderance of the evidence if the dеbt owed to it by Debtor is to be deemed nondis-chargeable, namely, that (1) it was an educational loan, (2) made as part of a program, and (3) by a nonprofit institution.
Plaintiff presented evidence of its status as a nonprofit organization for tax purposes. Tax exempt status pursuant to IRC § 501(e)(3), which requires that thе net earnings of the entity not inure to the benefit
The question then arises whether Plaintiff established that the monies paid to Crouse Irving on behalf of the Debtor were made аvailable through a program funded by the Plaintiff. The focus is on whether there was an outlay of funds which had been set apart for a specific purpose or objective.
See generally In re Alibatya,
The final issue to be determined is whether the funds madе available under the program constituted an educational loan for purposes of Code § 523(a)(8). The fact that the funds were disbursed to Crouse Irving
after
Debtor had received her education does not preclude Plaintiff from seeking to have the debt determined to be nondisehargeable pursuant to Codе § 523(a)(8). Several courts have concluded that loans consolidated after the completion of a student’s education are excepted from discharge pursuant to Code § 523(a)(8).
See e.g. Hiatt v. Indiana State Student Assistance Comm’n,
The Court does have concerns, however, about the fact that the loan to the Debtor was made for the рurpose of securing Debt- or’s services as a nurse. In
Segal,
as part of her employment contract, the debtor was provided with a loan to satisfy her obligation to the United States National Health Service. The monies were to be repaid by the debtor to her prospective employer over a period of thirty-six months. The court did not analyze whether the loan made to the debtor was for “educational purposes,” electing simply to assume that it was for purposes of the court’s analysis.
Segal, supra,
According to the House Report leading to the enactment of Code § 523(a)(8), Congress recognized that “educational loans are different from most loans. They are made
without business considerations,
without security, without cosigners, and relying for repayment solely on the debtor’s future increased income resulting from the education.”
U.S. Dep’t of Health and Human Services v. Smith,
Clearly, these contingencies give emphasis to the fact that the monies were being made available on the basis of certain business considerations of the Plaintiff and not simply to allow the Plaintiff to finance an education. The Court, therefore, concludes that the loan was not made for “educational purposes,” and the debt is deemed dischargeable.
The final issue before the Court is whether to grant Debtor’s counterclaim seeking to recover costs and attorney’s fees pursuant to Code § 523(d). To prevail on a motion рursuant to Code § 523(d), the debtor must establish (1) the creditor sought a determination of the dischargeability of a debt pursuant to Code § 523(a)(2), (2) the debt is a consumer debt, and (3) the debt was discharged.
See generally In re Harvey,
In the matter sub judice, there is no question that Plaintiff initially sought a determination of the dischargeability of a debt based on fraud and misrepresentation. Although not specified in Plaintiffs Amended Complaint, the Court has interpreted Plaintiffs initial allegations to be based on Codе §§ 523(a)(2)(A).
The Code defines “consumer debt” as one “incurred by an individual primarily for a personal, family, or household purpose.”
See
Code § 101(8). In this case, Debtor incurred the original debt to Crouse Irving for the purpose of obtaining a nursing degree. When Plaintiff reimbursed Crouse Irving on behalf of the Debtor, as discussed above, it was in connection with the employment of the Debtor. The courts generally ascribe a
business
purpose, rather than a personal, family or household purpose to debts which are incurred “with an eye toward profit”
(see In re Booth,
The third element to be established by Debtor is that she received a discharge of the debt. In his opening remarks, counsel for Plaintiff requеsted that it be permitted to discontinue its first cause of action alleging fraud and misrepresentation on the part of the Debtor. In making the request, Plaintiffs counsel acknowledged that by discontinuing the cause of action and requiring no testimony or evidence, it was conceding that Debtor “wins that cause of aсtion.”
Debtor’s counsel objected to the request, describing it as “litigation by ambush.” Debtor’s counsel asserted that Plaintiffs original complaint was filed well over a year ago and at no time prior to trial had Plaintiff sought to withdraw its first cause of action. As a result, he had spent time preparing to rebut Plaintiffs allegatiоns of fraud and misrepresentation. Although both parties agreed to stipulate to the discontinuance of Plaintiffs first cause of action, the Court concludes that as far as Plaintiffs allegations made pursuant to Code § 523(a)(2)(A), the debt was discharged. The fact that no trial occurred on the merits of Plaintiffs cause of action based on Code § 523(a)(2)(A) does not preclude the Debtor from recovering costs and attorney’s fees pursuant to Code
Any recovery of attorney’s fees and costs may only be denied by the Court if Plaintiff is able to establish that it was substantially justified in seeking to have the debt discharged pursuant to Code § 523(a)(2)(A). In other words, Plaintiff must prove that its allegations against Debt- or “had a reasonable basis in law and fact.”
See Dobbins, supra,
For the foregoing reasons, it is
ORDERED that Plaintiffs Complaint against the Debtor, alleging a causes of action pursuant to Code § 523(a)(8) be dismissed; it is further
ORDERED that pursuant to Code § 523(d), Debtor be awarded attorney’s fees and costs associated with the defense of the cause of action based on Code § 523(a)(2)(A); and it is further
ORDERED that counsel for Debtor file with the Court and serve on Plaintiff an affidavit, along with time records, in support of said award of attorney’s fees and costs, said affidavit to be filed and served within 30 days of the date of this Order.
Notes
. Plaintiff's original complaint did not specify the particular subsection of Code § 523. However, as Plaintiff alleged fraud and misrepresentation on the part of the Debtor, the Court will presume that Plaintiff's first cause of action is one based on Code § 523(a)(2)(A).