In re: Reanna Leigh Irigoyen
In re:
REANNA LEIGH IRIGOYEN,
Debtor.
REANNA LEIGH IRIGOYEN,
Appellant,
v.
1600 WEST INVESTMENTS, LLC;
WHITE KNIGHT FUNDING, LLC,
Appellees.
OPINION
Appeal from the United States Bankruptcy Court for the District of Arizona
Madeleine C. Wanslee, Bankruptcy Judge, Presiding
APPEARANCES
German Yusufov of Yusufov Law Firm PLLC argued for appellant; John D. Parker, II of Parker Law Firm, P.L.C. argued for appellees.
Before: LAFFERTY, BRAND, and CORBIT, Bankruptcy Judges.
INTRODUCTION
This case presents a more pointed question: what should the consequence be if a court determines after discharge that a debt is not qualified as the type of educational loan excepted from discharge? Should the debt be presumed nondischargeable until the debtor proves otherwise? And should efforts to collect that presumptively nondischargeable debt be exempt from the consequences of violating the discharge injunction?
After Reanna Leigh Irigoyen (“Debtor“) received her chapter 7 discharge, appellees 1600 West Investments, LLC (“1600 West“) and White Knight Funding, LLC (“White Knight” and, together with 1600 West, “Creditors“) continued to attempt collection of the debt owed to them. Debtor and Creditors disputed whether the subject debt was discharged under
The bankruptcy court further held that the debt to Creditors was not discharged until Debtor obtained a judgment of dischargeability and, as a result, did not assess whether Creditors should be subject to contempt sanctions for violation of the discharge injunction. The bankruptcy court relied on Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440, 450 (2004), for the proposition that
FACTS2
A. Prepetition Events
Well prior to the commencement of Debtor‘s bankruptcy case, Debtor borrowed funds to pay for her higher education (the “Original Loan“). The Original Loan was serviced by Navient Solutions, Inc. (“Navient“). Subsequently, Debtor and Navient entered into an agreement whereby Debtor agreed to pay Navient $11,600 in exchange for Navient to consider the Original Loan settled in full.
To finance her litigation, negotiation, and settlement of the Original Loan, Debtor obtained a separate loan from 1600 West, a for-profit lender (the “Debt“). 1600 West later assigned the Debt to White Knight.3
B. Debtor‘s Bankruptcy Filing and the Adversary Proceeding
On May 1, 2020, Debtor filed a chapter 7 petition. On August 31, 2020, following the chapter 7 trustee‘s report of no distribution, Debtor received her chapter 7 discharge.
Almost immediately after Debtor received her discharge, Creditors, through their agent, continued their attempts to collect on the Debt. In response to these collection efforts, Debtor‘s counsel sent several emails and letters to Creditors’ counsel, asserting that the Debt was discharged.4 Notwithstanding these emails and letters, Creditors regularly contacted Debtor to demand payment on the Debt.
In February 2021, Debtor filed a complaint against Creditors, requesting: (i) a declaration that the Debt was discharged notwithstanding
After trial, the bankruptcy court issued a decision containing a thorough factual analysis of the detailed statutory requirements of
The bankruptcy court further held that, because
JURISDICTION
The bankruptcy court had jurisdiction under
ISSUE
Did the bankruptcy court err in holding that a debt that is dischargeable because it does not qualify as an educational loan under
STANDARD OF REVIEW
The issue before the Panel is purely a question of law, which we review de novo. Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee), 218 B.R. 916, 919 (9th Cir. BAP 1998) (“We review conclusions of law, including the bankruptcy court‘s interpretation of the Bankruptcy Code, de novo.“), aff‘d, 193 F.3d 1083 (9th Cir. 1999). ”De novo review is independent and gives no deference to the trial court‘s conclusion.” Roth v. Educ. Credit Mgmt. Corp. (In re Roth), 490 B.R. 908, 915 (9th Cir. BAP 2013).
DISCUSSION
In chapter 7 cases, unless one of the grounds for denial of a discharge applies, “[t]he court shall grant the debtor a discharge. . . .”
The bankruptcy court, relying on Hood, interpreted this “self-executing” statutory scheme as excepting any debt that may, however tangentially, be covered by
As discussed in section B, there is no binding authority addressing the specific issue before the Panel. However, as discussed in sections C and D, a review of statutory language, relevant case law from other jurisdictions, and policy leads the Panel to a different conclusion from the one reached by the bankruptcy court. We believe the phrase “self-executing,” for purposes of
This reading harmonizes
A. Supreme Court authorities on § 523(a)(8) .
The Supreme Court has addressed
filed a motion to dismiss the lawsuit, asserting that it was immune under the Eleventh Amendment. Id. at 445.
Although Hood involved the issue of sovereign immunity, the Supreme Court addressed the “self-executing” nature of
Student loans used to be presumptively discharged in a general discharge. But in 1976, Congress provided a significant benefit to the States by making it more difficult for debtors to discharge student loan debts guaranteed by States. That benefit is currently governed by
11 U.S.C. § 523(a)(8) , which provides that student loan debts guaranteed by governmental units are not included in a general discharge order unless excepting the debt from the order would impose an “undue hardship” on the debtor. See also§ 727(b) (providing that a discharge under§ 727(a) discharges the debtor from all prepetition debts except as listed in§ 523(a) ).Section 523(a)(8) is “self-executing.” Norton § 47:52, at 47-137 to 47-138; see also S.Rep. No. 95-989, p. 79 (1978), U.S. Code Cong. & Admin. News 1978, 5787, 5864-5865. Unless the debtor affirmatively secures a hardship determination, the discharge order will not include a student loan debt. Norton § 47:52, at 47-137 to 47-138. Thus, the major difference between the discharge of a student loan debt and the discharge of most other debts is that governmental creditors, including States, that choose not to submit themselves to the court‘s jurisdiction might still receive some benefit: The debtor‘s personal liability on the loan may survive the discharge.
Id. (emphases added) (cleaned up).8
Two points may be gleaned from the emphasized language above. First, the Supreme Court ruled only on the “undue hardship” exception to
In other words, the Court did not hold that every debt with a loose connection to
B. Prior Panel decisions regarding the “self-executing” nature of § 523(a)(8) .
For its part, the Ninth Circuit Court of Appeals has never addressed the self-executing nature of
In Taylor, post-discharge, the debtor requested sanctions against his lenders for attempting collection on his student loans. In re Taylor, 2012 WL 1957984, at *1. The debtor argued that, during his bankruptcy case, he had filed a declaration stating that excepting his student loans from discharge would cause him “undue hardship” and, as a result, the discharge order entered in his case discharged his student loans. Id. at *3-4. The Panel disagreed, holding that “[i]t is beyond cavil that student loan debt covered by
In Gustafson, the Panel assessed whether the automatic stay applied to a debt that was presumed, but not yet determined, to be nondischargeable. In re Gustafson, 111 B.R. at 285. As part of this discussion, the Panel noted that
The purpose of the automatic stay is to give the debtor a breathing spell from his or her creditors and to relieve the financial pressures that drove him or her to bankruptcy. As such, the automatic stay is one of the most fundamental debtor protections provided by the bankruptcy laws. If the automatic stay is found to be inapplicable to debts that are presumed, but not determined, to be nondischargeable, this fundamental protection of the automatic stay could be lost even though the debt may ultimately turn out to be dischargeable. For example, a debtor may assert time bar and/or hardship defenses against a student loan creditor who seeks to establish the nondischargeability of the student
loan obligation. If a debtor who has a valid time bar or hardship defense is contacted by a student loan creditor who disagrees with the validity of these defenses, the debtor will be forced to affirmatively seek a stay to prevent efforts to collect a debt that will ultimately be nondischargeable unless the automatic stay is applicable to efforts to collect presumptively nondischargeable debts. Such a result is contrary to the purposes of the automatic stay.
Id. at 286 (cleaned up).
In Gustafson, the Panel was clear that they were not deciding “whether the post-discharge injunction of section 524(a) applies to prevent acts to collect debts that are presumed, but not determined, to be nondischargeable under section 523(a)(8).” Id. at 286 n.4. As such, Gustafson is not binding authority. Nevertheless, the Panel‘s policy discussion sheds some light on the issues presented herein. As further discussed below, the discharge injunction is as fundamental a debtor protection as the automatic stay. Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367 (2007) (“The principal purpose of the Bankruptcy Code is to grant a fresh start to the honest but unfortunate debtor.“) (cleaned up).
C. A survey of relevant cases.
As is clear from the authorities cited above, in “undue hardship” cases, debtors do not receive a discharge of a qualified educational loan until they obtain a judgment from the bankruptcy court declaring the debt dischargeable. A vast majority of cases discussing the “self-executing” nature of
In cases where the “undue hardship” exception was not implicated, several courts outside this circuit have held that a debt that did not qualify for exception under
The Panel finds these cases, which squarely address the issue presented in this appeal, persuasive. For instance, in McDaniel, after receiving their discharge, the debtors filed a complaint against Navient: (i) asserting that the debt owed to Navient was not excepted from discharge under
The Court concludes Plaintiffs have stated a valid claim for contempt. The Discharge
Order and the statutory bases for its issuance and enforcement (Sections 1328 and 524(a)(2)) are broad and unequivocal. All debts were discharged, except those enumerated in Section 1328(a). There is no such thing as a personalized discharge order addressed to each creditor in a given bankruptcy case. That neither party sought to determine the dischargeability of the. . .[subject loans] until now does not alter whether or not the debts were discharged under Section 523(a)(8) at the time the Discharge Order was entered; thereafter they both proceeded at their own risk. Any ambiguity in the law, or uncertainty as to the injunction‘s applicability to the. . .[subject loans], is relevant to the inquiry as to whether any contempt violation, if proven, was willful.
Id. at 552 (emphasis in original).
Similarly, in Haroon, a debtor sued his student loan lender for violation of the discharge injunction. Haroon, 313 B.R. at 688. The primary argument before the court was whether the debtor or the lender bore the burden of proof as to dischargeability. Id. In parsing the relevant statutory scheme, the court determined:
The better approach to determining the burden of proof is to look to sections 523, 524 and 727 all of which must be read together. Section 727(b) plainly states that all debts that arose before the date of the order of relief are discharged unless they fall within § 523. The plain language of Section 523(a) re-enforces the broad discharge of § 727 by expressly limiting its effect. Section 524 then describes the effect of the discharge. Generally, a creditor must file a complaint in the bankruptcy court during the pendency of the bankruptcy case to determine whether a debt falls within a § 523 exception.
11 U.S.C. § 523(c) . If no complaint is timely filed, the exception is lost and the debt is discharged under § 727. This procedure is not applicable to all exceptions to discharge enumerated in § 523. One type of debt for which this procedure is not required is a student loan under § 523(a)(8).
Id. at 689. In light of this statutory structure, the court concluded that, although a “student loan creditor is not required to seek a dischargeability determination during the pendency of the bankruptcy case,” the failure to obtain a judgment “does not alter the fact that the debt is or is not discharged upon entry of the discharge order.” Id. “It merely avoids a judicial declaration of that fact at that time.” Id.
The Haroon court was explicit about the consequences a lender may face by failing to obtain a nondischargeability judgment before attempting collection on a student loan:
[A] creditor who attempts to collect the debt proceeds at his own peril and accepts the consequences of his own actions. If a creditor wants to avoid the adverse consequences of an erroneous analysis, he can come to this court at any time, even after the case has been closed, and seek an adjudication of the dischargeability issue. If he fails to do that and seeks to collect the debt, the debtor may use a show cause order to have this determination made. If the creditor is wrong and the debt was discharged, he has violated § 524.
Id. (cleaned up).
Yet another court interpreted the term “self-executing,” as it was used in legislative records, “as a means of distinguishing the application of Section 523(a)(8) from that of Sections 523(a)(2), 523(a)(4), 523(a)(6), and 523(c).” Griffin v. U.S. (In re Griffin), 108 B.R. 717, 720 (Bankr. W.D. Mo. 1989). In other words, the Griffin court believed Congress simply intended
Moreover, in numerous cases similar to this one, i.e., where a lender attempted collection of a debt after the debtor received a general discharge and the court subsequently held that the debt was not a qualified educational loan under
D. The bankruptcy court erred in holding that the Debt was not discharged until Debtor obtained the judgment of dischargeability from the bankruptcy court.
In light of the above, if as the case law cited above suggests, the Debt was discharged by the general discharge order entered in Debtor‘s case, Creditors’ post-discharge collection efforts must be scrutinized under the standard set forth in Taggart. 139 S.Ct. 1795. In Taggart, the Supreme Court held that creditors who violate the discharge injunction without a “fair ground of doubt as to whether the [discharge] order barred the creditor‘s conduct” are subject to contempt sanctions. Taggart, 139 S.Ct. at 1799.
Here, the bankruptcy court did not analyze whether Creditors had a “fair ground of doubt” about the dischargeability of the Debt when they attempted collection post-discharge. Instead, the bankruptcy court held that, because
We think a more prudent interpretation is that
First, the plain statutory language of
Second, although the Senate Report referenced by Hood may at first glance lend itself to a broad interpretation that would be consistent with the bankruptcy court‘s conclusion here, such an interpretation would conflict with Congress‘s own strongly worded policy related to the discharge statutes, i.e.,
At the heart of the fresh start provisions of the bankruptcy law is section 727 covering discharge. The discharge provisions require the court to grant the debtor a discharge of all his debts except for very specific and serious infractions on his part.
S. REP. No. 95-989, at 7 (1978) (emphasis added). The House of Representatives echoed the importance of the discharge provisions, stressing that “[t]he injunction is to give complete effect to the discharge and to eliminate any doubt concerning the effect of the discharge as a total prohibition on debt collection efforts.” H.R. REP. No. 95-595, at 365 (1978). As is evident by both the plain statutory language and the Congressional reports, Congress intended to limit exceptions to discharge to the “very specific” exceptions set forth in the Code and strictly enforce the discharge with respect to debts that were not specifically excepted.
Contrary to the Code, the bankruptcy court‘s interpretation would protect lenders acting without a “fair ground of doubt” from the discharge injunction of
While it is true that the Senate Report reflects Congress‘s intent to relieve student loan lenders from the burden of filing a lawsuit, our interpretation does not conflict with that intent. If a debt is clearly within the
To be sure, many cases discussing the “undue hardship” exception to
“Undue hardship” cases are unique because they are circumstantial, and circumstances change; a debtor may reopen her case and seek an “undue hardship” determination based on changed circumstances at any time. Walker v. Sallie Mae Serv. Corp. (In re Walker), 427 B.R. 471, 480 (8th Cir. BAP 2010). Moreover,
The nature of the student loan and whether it qualifies as an excepted loan, on the other hand, is static – either the loan satisfies the statutory criteria set forth in
For the reasons stated above, based on the bankruptcy court‘s determination that the Debt did not qualify as the type of debt excepted from discharge under
Although the parties argue on appeal whether Creditors acted with a “fair ground of doubt” when they violated the discharge injunction, that issue is not properly before the Panel. The bankruptcy court did not make findings regarding Creditors’ “fair ground of doubt.”9 On remand, the bankruptcy court must make appropriate findings regarding whether Creditors violated the discharge injunction without a “fair ground of doubt,” as required by the Supreme Court in Taggart, 139 S.Ct. at 1799, and determine the appropriate amount of sanctions for such a violation, if any.
CONCLUSION
For the reasons set forth above, we VACATE the portion of the bankruptcy court‘s ruling that is inconsistent with this decision and REMAND with instructions for the bankruptcy court to make findings regarding whether Creditors violated the discharge injunction without “a fair ground of doubt.”
Notes
Paragraph (8) follows generally current law and excepts from discharge student loans until such loans have been due and owing for five years. Such loans include direct student loans as well as insured and guaranteed loans. This provision is intended to be self-executing and the lender or institution is not required to file a complaint to determine the nondischargeability of any student loan.
S. REP. No. at 95-989, 79 (1978).