In re Kennedy
Mеmorandum Opinion and Order Overruling Debtor’s Objection to the Proof of Claim of Creditor Navient Solutions, Inc.
Admittedly, a $22,400 charge for collection costs on a $101,000 student loan debt is a breathtaking amount of money, especially for someone who finds herself in bankruptcy. No doubt a 22.5% collection cost rate is high. Recognizing this, Chapter 13 Debtor Jennifer Kennedy objects to the proof of claim of Creditor Navient Solutions, Inc. (“Navient”), arguing that the collection costs included in its proof of claim are not reasonable as required by the promissory note supporting that claim. Debtor asks that the collection costs be disallowed, and that Navient’s claim be allowed only for the principal and interest owed.
Because, however, this Court agrees with the reasoning of the Court of Appeals for the Seventh Circuit in Black v. Educational Credit Management Corp.,
1. Background and Procedural History
Debtor filed her Chapter 13 bankruptcy petition in April, 2015. In her petition, she listed, among other debt, $113,588 in unsecured debt she labeled as student loan or educational debt. Debtor’s Chapter 13 plan—confirmed in September, 2015—pro-poses a pro rata payment of her student loan obligations with other general unsecured creditors.
On May 20, 2015, Navient timely filed a proof of claim on behalf of United Student Aid Funds fоr a total of $123,548.34.
About five months after Navient filed its claim, Debtor filed an objection to it, arguing that the $22,389.43 in collection costs were not reasonable. Debtor argued the collection costs were not actually incurred and that the claim was never placed in active collections. For these reasons, Debtor requested this Court disallow all collection costs and instead allow only the principal and interest totaling $101,158.91. Navient responded that Debtor’s objection to its claim should be overruled, as Debtor had not met her burden of proof to challenge the claim.
Navient relies on a collection cost rate of 22.5% of the principal and interest balance, which results in the total collection costs of $22,389.43. Navient does not keep records of actual collection costs incurred, аnd thus has not provided an itemized list of collections costs or fees actually incurred. Instead, it relies on 34 C.F.R. § 30.60 to provide the formula for calculating a percentage charge for collection costs. That regulation permits guaranty agencies to include expenses such as mailing costs, telephone costs, credit reporting agency costs, collection contractor fees, and servicing fees. Navient performs a recalculation twice a year to keep collection costs in proportion to outstanding principal and interest.
A proceeding to determine the “allowance or disallowance of claims against the estate” is a core proceeding under 28 U.S.C. § 157(b)(2)(B), over which this Court may exercise subject matter jurisdiction.
II. Analysis
A. Burden of Proof; Application of Rule 3001
The parties first dispute who has the burden of proof on Debtor’s objection to claim. Under 11 U.S.C. § 502(b)(1), a claim is determined as of the date of filing the bankruptcy рetition. Federal Rule of Bankruptcy Procedure 3001 then governs the filing of a proof of claim. Rule 3001(c) dictates the supporting information required for a claim, and under Rule 3001(c)(2)(A), in individual debtor cases, when “a claim includes interest, fees, expenses, or other charges incurred before the petition was filed, an itemized statement of the interest, fees, expenses, or charges shall be filed with the proof of claim.” The “shall be filed” language indicates this information is required, not optional.
(i) preclude the holder from presenting the omitted information, in any form, as evidence in any contested matter or adversary proceeding in the case, unless the court determines that the failure was substantially justified or is harmless; or
(ii) award other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure.
Compliance is further encouraged by Rule 3001(f), which states that “[a] proof of claim executed and filed in accordance with these rules shall constitute prima fa-cie evidence of the validity and amount of the claim.”
As an initial matter, the parties dispute Navient’s compliance with Rule 3001, and, as a result, who carries the burden of proof here. Debtor argues that Navient did not comply with Rule 3001(c)(2)(A)’s requirement to file with its proof of claim “an itemized statement of the interest, fees, expenses, or charges.” As a result, Debtor claims Navient is not entitled to Rule 3001(f)’s presumption of validity, and also argues she is entitled to attorney’s fees under Rule 3001(c)(2)(D)(ii). Navient responds that because it supported its claim with a breakdown of the principal, interest, and collection costs, it has compliеd with the requirements of Rule 3001(c)(2)(A), and no further itemization of collection costs is required by that Rule.
Subdivision (c)(2)(A) was added to Rule 3001 in December 2011, and the Committee Notes for that amendment state that “[w]hen the holder of a claim seeks to recover—in addition to the principal amount of a debt—interest, fees, expenses, or other charges, the proof of claim must be accompanied by a statement itemizing these additional amounts with sufficient specificity to make clear the basis for the claimed amount.” (Emphasis added.) The purpose of the amendment, therefore, seems to bе that claims be itemized with sufficient specificity for a debtor to understand the basis for the amount owed.
Debtor relies on a 2009 Tenth Circuit case (before Rule 3001 was amended), Captan v. B-Line LLC (In re Kirkland)
Obviously, not only are the facts of Kirkland quite different from those in this case—there, the creditor did not provide
The current proof of claim form (Official Form 10) requires that claimants check a box if their claim “includes interest or other charges in additional to the principal amount of the claim.” If it does, claimants are then instructed to attach an “itemized statement of interest or charges.” In support of its proof of claim, Navient attached the promissory note, a borrower “summary sheet” listing types of loans and their status, and then a print out of the loan payоff sheet for Debtor’s loans, listing the principal outstanding ($97,500.15), the unpaid interest accrued ($3658.76), the unpaid collection costs ($22,389.43), the unpaid other charges ($0.00), and the total payoff ($123,548.34).
Due to the relative recency of the addition of subsections (c)(2)(A) to Rule 3001, there are not many cases discussing its application. And obviously, the cases discussing Rule 3001(c)(2)(A) are also highly fact dependent, just like Kirkland. For example, in In re Jimenez,
On the other end of the spectrum, however, is the case of White v. McDermott (In re White).
Obviously, to ensure compliance with the intent of Rule 3001, providing more information is always the better choice. But the Court does not find here that Navient failed under Rule 3001(c)(2)(A) to give enough information such that Debtor could not “make clear the basis for the claimed amount.” Navient broke down its total claim into principal, interest, charges, and collection costs, and gave the subtotal for each category. From this information, Debtor was able to determine what portion
As a result, thе “standard” burden shifting framework applies. The properly filed proof of claim “constitutes prima facie evidence of the validity and amount of the claim” and Debtor, as the objecting party, carries “the burden of going forward with evidence supporting the objection.”
B. Collection Costs on Student Loan Debts—What is Reasonable?
Debtor’s substantive attack on Navient’s proof of claim unfolds in two parts. First, Debtor attacks the regulation governing collection costs on student loans, claiming that the regulation does not provide for allowance of the collection costs on the basis Navient uses to calculate those costs. Debtor then argues that Navient has not shown, and cannot show; that the collection costs charged in this case are reasonаble.
Federal statutes govern the assessment of costs and other charges with respect to borrowers who have defaulted on student loans. Section 1091a(b)(l) of title 20 states: “Notwithstanding any provision of State law to the contrary—(1) a borrower who has defaulted on a loan made under this subchapter ... shall be required to pay, in addition to other charges specified in this subchapter ... reasonable collection costs.” The statute does not, however, define “reasonable collection costs.”
Federal regulations step in to fill this void. Regulations from the Department of Educatiоn governing administration of Federal Family Education Loan Programs by guaranty agencies state the “fiscal, administrative, and enforcement requirements” for those agencies. Section 682.410(b)(2) of title 34 specifies that guaranty agencies “shall charge a borrower an amount equal to reasonable costs incurred by the agency in collecting a loan.” The section further states that collection costs
Only one Circuit Court of Appeals—the Seventh Circuit—has addressed the collection costs included in a proof of claim by a student loan guаrantor, and the above regulations. In Black v. Educational Credit Management Corp.
The Seventh Circuit concluded that, regardless of whether it gave Chevron or Skidmore deference to the implementing regulations,
[The trustee objecting to the collection costs in the claim] urges that it is unfair to make borrowers who seek to repay their loan obligations responsible for the costs associated with the real deadbeats who never attempt to reconcile their accounts. Perhaps he is correct, as a matter of ultimate morality, but the real world does not operate this way. The price of merchandise in a store reflects the fact that some people shoplift; the rates associated with credit cards reflect the fact that some cardholders never pay their bills. In these and countless other instances, the many who pay end up absorbing the costs for the few who do not. [The trustee] points to no provision in the HEA that requires guarantors to charge each borrower in default only the collection costs that the agency spent in attempting to collect his or her individual debt.34
This Court agrees. It is reasonable that the Department of Education has implemented regulations that permit collections costs based on a flat rate percentage, rather than an item by item accounting of actual costs, given the high number of student loans in default.
In addition to challenging the propriety of the regulatory scheme itself, Debtor also argues that the § 682.410(b)(2) regula
But Arnold merely quotes the language of § 682.410(b)(2) and then states that the regulation “allows guaranty agencies to charge borrowers collections costs that take into account the total costs associated with the agency’s entire defaulted student loan portfolio, including attorney’s fees, provided that the total collection costs do not exceed the amount the same borrower would be charged for the cost of collection if the loan were held by the Department.”
In addition, this approach is exactly what Navient has stipulated to in the parties’ stipulation of facts. Navient asserts that its collection cost rate of 22.5% is based on the formula provided in 34 C.F.R. § 30.60, which provides a mathematical computation for the calculation of collection costs, based on:
(1) Salaries of employees performing Federal loan servicing and debt collection activities;
(2) Telephone and mailing costs;
(3) Costs for reporting debts to credit bureaus;
(4) Costs for purchase of credit bureau reports;
(5) Costs associated with computer operations and other costs associated with the maintenance of records;
(6) Bank charges;
(7) Collection agency costs;
(8) Court costs and attorney fees; and
(9) Costs charged by other Governmental agencies.
And Navient’s 22.5% fеe is below the Department of Education’s other limit on collection costs, which is that the collection costs charged be less that the Department of Education rate of 25%. Debtor claims that Navient is asking the Court to “trust” that its costs are reasonable.
Navient also relies on several examples of other courts determining reasonable collection costs. For example, in In re Schlehr,
Beyond challenging the regulatory scheme itself, Debtor also challenges the application of this scheme to her case. She argues that even if a percentage fee is utilized, the fee must still be based on actual costs, citing United States v. Ratto
In Ratto, on default judgment, the court denied a request fоr attorneys’ fees as part of the collection costs on a student loan because a different regulation, 34 C.F.R. § 682.202(g)(l)(i), states that attorney’s fees may be awarded only if provided for in the borrower’s promissory note.
The Ratto case also denied a request for the cost of service of process because the creditor “failed to provide substantiation” for such costs.
Another case cited by Debtor for its take on reasonableness is likewise distinguishable. In Educational Credit Man
Finally, Debtor also claims the promissory note supporting Navient’s claim limits the collection cost percentage to 18.5%, citing language from the promissory note that collection costs “may not exceed 18.5 percent of the outstanding principal and interest on the loan at the time the holders certify the payoff amounts.”
I understand that if any collection costs are owed on the loans selected for consolidation, these costs may be added to the principal balance of the Federal Consolidation Loan and, in the casе of Federal Stafford, SLS, PLUS, or Consolidation loans in default and held by a guaranty agency, may not exceed 18.5 percent of the outstanding principal and interest on the loan at the time the holders certify the payoff amounts.53
This provision indicates that the loans that were themselves consolidated into the consolidation loans currently held by Navient were limited to a collection cost rate of 18.5%. The collection cost rate on the consolidation loan is a different matter, and is limited only by the “reasonableness” language discussed here.
III. Conclusion
Navient has carried its “ultimate burden of persuasion as to the validity and amount of [its] claim.”
It is so Ordered.
Notes
.
. Debtor’s Schedule F lists an undisputed student loan from USA Funds for an unknown amount.
. The collection cost percentage was adjusted in January, 2016, from 22.5% to 17.5%.
. Neither party presented any discovery dispute to the Court for resolution.
. 28 U.S.C. § 157(b)(1) and § 1334(b).
. See Wellness Int’l Network, Ltd. v. Sharif, — U.S. —,
.See, e.g., Jewell v. United States,
.
. Id. at 840.
. Id.
. id.
. Id. at 841.
. In re Reynolds,
.
. Id. at 545-46.
. Id. at 546.
.
. Id. at 758.
.
. Id. at 377,
. Howes v. Wells Fargo Bank, N.A., No. ELH-14-2814,
. In re Picacho Hills Util. Co., Inc.,
.Id.
. See, e.g., Wilson v. Broadband Wireless Int’l Corp. (In re Broadband Wireless Int'l Corp),
. Federal Family Education Loan Program, 61 Fed. Reg. 47398, 47398 (Sept. 6, 1996). This comment, in an unrelated notice of proposed rulemaking, is the most recent commentary the Court could find on the current Department of Education collection rate.
.
. Id. at 798.
. Id.
. Id.
. Id.
. In Chevron, U.S.A., Inc. v. Nat'l Res. Def. Council, Inc.,
.Black,
Debtor also claims that the regulatory scheme does not "permit or require a percentage fee to be utilized.” But contrary to Debtor’s position, the regulation does exactly that: § 682.410(b)(2) refers to both § 30.60 and the cost of collection computed by the Department of Education, both of which рermit a percentage fee.
. Id. at 800-01.
. Id. at 800.
. Josh Mitchell, More Than 40% of Student Loan Borrowers Aren’t Making Payments, The Wall Street Journal, Apr. 7, 2016 (stating that, according to Department of Education statistics, “[a]bout 1 in 6 borrowers” were in default on their student loan debt, to the tune of 3,6 million Americans, for a total of $56 billion.).
.United States v. Larson, No. 08-3438,
. No. 12-80689-CIV-Hurley,
. Doc. 72 at 9 n.26.
. Arnold,
. Doc. 72 at 9-10.
.'
. 419 F.Supp,2d 293 (E.D.N.Y. 2005).
. Id. at 298.
. Id. at 299-300.
. Id. at 298.
. No. l:12-cv-00893,
. Id. at *2.
. Id. at *3. The court in Ratto, like many cases discussing reasonable collection costs on student loans, analyzed attorney's fees because of the particular posture of those cases: suits for judgment by the United State against an individual borrower. Id. at *1. In these cases, the United States enters into cоntingent fee agreements with a particular attorney for the pursuit of the judgment. See, e.g., Vilus,
By entering into a contingency-fee agreement to collect upon the numerous student loans it issues each year, the Government necessarily passes on more than the actual costs of litigating each individual debtor's case to the debtor. This is so because any private attorney entering into a contingency contract with the Government to collect these notes knows that a substantial portion of them will go uncollected. Not all debtors will pay. In negotiating his contract, an attorney will therefore require a higher contingency rate to compensate for the fact that not all of the cases he works on will result in remuneration. A debtor who does pay therefore pays attorneys fees at a higher rate than he would if all debtors paid their judgments, and higher than the amount he would pay if the Government hired attorneys at an hourly rate.”
Id. at 299, Again, this contingent fee agreement scenario is inapposite from this case, but this explains why many of the cases upon which the parties rely discuss contingency fees.
.Id.
.
. Id. at 187-88.
. Doc. 72 at 7-88, citing Claim No. 8, page 8, para. 35.A.
.Claim No. 8, page 8, para. 35.A.
. In re Picacho Hills Util. Co., Inc.,
. Doc.43.