Cruz v. Educational Credit Management Corp. (In Re Cruz)Cruz v. Educational Credit Management Corp. (In Re Cruz)
MEMORANDUM OPINION
On September 6, 2000, the court held a hearing on Debtors’ motion for contempt
FACTS
On May 22, 1987, Debtor Angel Cruz obtained an educational loan in the amount of $2625.00 evidenced by a Prоmissory Note (“Note”). ECMC is the holder of the Note.
On June 24, 1994, Debtors filed a voluntary petition under Chapter 13 of the Bankruptcy Code (“Code”) and on Septembеr 16, 1996, ECMC filed a Proof of Claim for $2271.90. On February 26,1998, Debtors objected to this Proof of Claim. ECMC did not respond to the objection and, on July 9, 1998, this court entered an order disаllowing the claim. ' The order stated that the claim was disallowed and that the “claim has been paid in full.” Doc. # 46.
After completing their Chapter 13 plan рayments, Debtors received a discharge on June 17, 1999. The order discharging Debtors excepted any debt “for a student loan ... as specified in 11 U.S.C. § 523(a)(8).” Doс. #58. On July 16, 1999, the court entered a final decree closing the case.
On March 3, 2000, ECMC intercepted Debtors’ federal income tax refund in the amount of $1522.00. ECMC applied the tax refund to Debtor Angel Cruz’s student loan balance. On July 12, 2000, this court granted Debtors’ motion to re-open their Chapter 13 case to pursue the present contempt action.
ECMC disputes that its claim was paid in full. The court’s order, dated July 9, 1998 disallowing the claim, did not determine the dischargeability of the claim. According to ECMC, dischargeability may be determined only by an adversary proceeding. ECMC further asserts that its failure to object to the disallowance of the claim does not matter because student loans are presumptively nondischargeable. Moreover, because there has been no determination of dischargeability, ECMC also argues that collateral estoppel does not bar its actions.
Debtors, however, argue that сollateral estoppel does bar ECMC’s actions. The language in the July 9, 1998 order is clear; the “claim has been paid in full.” Therefore, Debtors assеrt that the school debt was discharged. Debtors dispute that an adversary proceeding is required. They argue that this case is not any different merely beсause a school loan is involved; the fact that such loans are presumptively nondischargeable is irrelevant. As Debtors’ counsel argued at the hearing, “[i]f any other creditor had failed to respond to an order stating the ‘claim has been paid in full,’ estoppel would apply.”
On the issue of dаmages, Debtors assert that ECMC should be ordered to return the $1522.00 the tax refund that it intercepted. Debtors also request punitive damages in the sum of at least $500.00 fоr aggravation and agony that they allege has resulted from ECMC’s letters and phone calls.
DISCUSSION
The issue before the court is whether the court’s order disallоwing ECMC’s claim discharged that debt. Also before the court is whether ECMC’s failure to object to the court’s disallowing its claim
This court and other courts within this circuit have held that the disallowanсe of a claim does not necessarily discharge that debt.
See Bell v. ECMC,
As ECMC points out,
Bell
and
Mathis
were decided on facts very similar to the case before the court. In both cases, a student loan creditor filed a Proof of Claim to which debtors objected. Also, the creditors in each case did not respond to the objection. In
Bell,
the court reduced the claim and in
Mathis,
this court disallowed the claim.
See Bell
at 428;
Mathis
at 4. The court in
Bell
held that the order reducing the claim did not reduce the debt owed by Bell.
The reasoning from these cases is clear in the plain language of § 1328(a) of the Codе. In pertinent part, that subsection provides:
(a) ... the court shall grant the debtor a discharge of all debts provided for by the plan or disallowed under section 502 of this title, except any debt—
(2)of the kind specified in paragraph (5), (8), or (9) of section 523(a) of this title;
11 U.S.C. § 1328(a).
Furthermore, the court’s June 17, 1999 discharge ordеr tracked this language. As ECMC noted, that discharge order specifically excepted from discharge any debt “for a student loan or educationаl benefit overpayment as specified in 11 U.S.C. § 523(a)(8).” Doc. # 58.
Therefore, the court finds that its July 9, 1998 order disallowing ECMC’s claim did not effectuate a discharge of Dеbtors’ debt to ECMC. Educational loans are presumptively nondischargeable and Debtors will need to file an adversary proceeding to determinе the dischargeability of their debt to ECMC.
The court now turns to the issue of collateral estoppel. “Collateral estoppel or issue preclusion forecloses relitigation of an issue of fact or law that has been litigated and decided in a prior suit.”
I.A. Durbin, Inc. v. Jefferson National Bank,
(1) the issue at stake must be identical to the one decided in the prior litigation;
(2) the issue must havе been actually litigated in the prior proceeding;
(3) the prior determination of the issue must have been a critical and necessary part of the judgment in the earlier decision; and
(4) the standard of proof in the prior action must have been at least as stringent as the standard of proof in the later case.
Under the first element, the court finds that the issue at stake is not identical. The issue in the prior litigation involved a claim objection while the latter one entails the dischargeability of a student loаn.
Under the second element, the court finds that the issue has not been actually litigated. As the court in Mathis noted, sustaining Debtors’ objection to the claim was mоre akin to a default judgment which typically renders collateral estoppel inapplicable. See Mathis at 8.
Similarly, the court finds that the third element has not been established. The court disallowed the claim because of no response. Therefore, the determination could not have been a сritical and necessary part of the judgment. Id. at 9.
The court finds that the burden of proof is the same in both proceedings and accordingly, the fourth elemеnt has been established. However, given the fact that the three other elements have not been established, the court finds that ECMC is not collaterally estopped from collecting on the debt post-bankruptcy.
In conclusion, the court finds that its order disallowing ECMC’s claim did not discharge Debtors’ liability to ECMC. Dis-chаrgeability may be determined by an adversary proceeding. The court also finds that ECMC’s interception of Debtors’ tax refund was not barred by collaterаl estoppel. Therefore, the court finds that ECMC did not violate the court’s order. Accordingly, the court will deny Debtors’ motion for contempt.
An order in accordance with this Memorandum Opinion will be entered.