Opinion
No. 98-83504, Adv. No. 01-8088
July 18, 2002
OPINION
This matter is before the Court on cross motions for summary judgment filed by Tamara M. Rouse, the Debtor ("DEBTOR"), and the Defendants, United States of America through the Department of Education ("DEPARTMENT"), and GC Services ("GC SERVICES") the collection agent for the DEPARTMENT (jointly referred to as the "DEFENDANTS").
BACKGROUND
The DEBTOR filed a Chapter 7 petition on October 5, 1998, listing assets of $1,050.00, all of which were exempt. The only creditor she listed was the DEPARTMENT, holding a claim of $20,904.00 for a student loan debt. The Trustee filed his report of no distribution and a discharge was granted on January 11, 1999. A final decree was issued and the case was closed. No adversary proceeding was filed to determine the dischargeability of the student loan.
The DEBTOR reopened her case to file this adversary complaint against the DEPARTMENT and GC SERVICES, claiming that GC SERVICES' attempts to collect her educational loan violate the discharge injunction provided by 11 U.S.C. § 524(a). The DEBTOR alleges that her student loan first became due more than seven years before she filed her bankruptcy petition and has been discharged. She alleges that GC SERVICES has written and telephoned her frequently demanding money and threatening to garnish her wages. The DEBTOR seeks an order directing the DEFENDANTS to cease collection attempts and an award of costs, including attorney fees. Attached to the complaint is correspondence from the DEBTOR'S attorney to the DEPARTMENT requesting a verification that the student loan is dischargeable.
GC SERVICES answered the complaint, denying that the debt was dischargeable and admitting it contacted the DEBTOR in attempting to collect the debt after the discharge was entered. GC SERVICES also admits receiving the correspondence from the DEBTOR'S attorney. In its answer to the complaint, the DEPARTMENT asserted an affirmative defense that GC SERVICES is an independent contractor and that it is not liable for its improper actions.
The DEBTOR filed a motion for summary judgment on the issue of nondischarge-ability, leaving the question of her right to damages and of the DEPARTMENT'S liability for trial, alleging that her educational loans first became payable in 1987, 1988 and 1989, more than seven years prior to the filing of her Chapter 7 petition on October 5, 1998. The DEBTOR attached copies of the promissory notes evidencing the loans, which may be summarized as follows:
Date Amount School Term Specified Repayment Date 08/07/84 $2,500.00 08/84 — 05/85 6 months after 05/86 10/17/85 2,500.00 08/85 — 05/86 6 months after 05/87 12/20/86 2,380.00 08/86 — 05/87 6 months after 12/87 04/24/87 940.00 01/87 — 07/87 6 months after 12/88 07/09/87 1,500.00 06/87 — 07/87 6 months after 05/88 12/02/87 3,434.00 08/24/87 — 05/06/88 6 months after 05/30/88
The last loan, dated December 2, 1987, is captioned a "renewal loan." With respect to the due date of the loans, each promissory note contains the following provision, with the specific date set forth above filled in the blank on the note:
I will repay this loan in periodic installments during a repayment period that will begin no later than six months ("the grace period") after __________, or the month I either leave school or cease to carry at least one half the normal full-time academic workload (whichever comes first) at a school that is participating in the Guaranteed Student Loan Program (GSLP).
The DEBTOR filed an affidavit, attesting that the six promissory notes attached to her motion are all of her educational loans and that the loans were not consolidated at any time, nor did she ever seek a suspension of payments. Her affidavit does not state when she left school or ceased to carry a one-half (½) workload. Nor does it state the date that her first payment on the loans was due.
GC SERVICES filed a cross motion for summary judgment, asserting that as a result of the DEBTOR'S failure to seek a determination of the dischargeability of her educational loans in the bankruptcy proceeding, her loans were not discharged as a matter of law and that its collection attempts could not have violated the discharge injunction. The DEPARTMENT joined in GC SERVICES' cross motion, reiterating that the loans were not discharged.
At the hearing held on the motions, this Court inquired whether the issue raised by GC SERVICES regarding the necessity of the filing of a complaint to determine discharge-ablity by the DEBTOR would be dispositive of the proceeding. Both DEFENDANTS and the DEBTOR agreed that it would be, and that narrow issue was taken under advisement by the Court. Upon further consideration, however, this Court will deny the pending motions for summary judgment, determining that the issue of the dischargeability of the DEBTOR'S student loan, involving a disputed issue of material fact, should be decided first.
ANALYSIS
Under Federal Rule of Civil Procedure 56(c), made applicable to adversary proceedings in bankruptcy by Federal Rule of Bankruptcy Procedure 7056, summary judgment is proper if the pleadings, depositions, answers to interrogatories, and admissions on file, together with any affidavits show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The burden is on the moving party to show that there is no factual dispute. Id. at 322. Inferences to be drawn from underlying facts must be viewed in the light most favorable to parties opposing the motion. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A material factual dispute is sufficient to prevent summary judgment only when the disputed fact is determinative of the outcome under applicable law. Id. at 248. When each side seeks summary judgment, that does not by itself indicate that there are no genuine issues of material fact. In re Schreiber, 163 B.R. 327, 331 (Bankr.N.D.Ill. 1994). Each motion must be ruled on separately in determining whether or not each judgment should be entered, in accordance with applicable principles, and the court can deny both motions if both parties fail to meet their burden. Id.; In re TennOhio Transp. Co., 247 B.R. 715 (Bankr.S.D.Ohio 2000).
1. DEBTOR'S Motion for Summary Judgment.
The Court will consider the DEBTOR'S motion first. At the time that the DEBTOR filed her petition on October 5, 1998, Section 523(a)(8) provided an exception to discharge of a debt:
(8) for an educational benefit overpayment or loan 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, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless —
(A) such loan, benefit, scholarship, or stipend overpayment first became due more than 7 years (exclusive of any applicable suspension of the repayment period) before the date of the filing of the petition; or
(B) excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents.
Two days after the filing of the DEBTOR'S petition, an amendment eliminating the "seven-year" exception to nondischargeability took effect, leaving undue hardship as the only basis for discharge of student loans. The statute in effect on the petition date is applicable.
Section 523(c) and Rule 4007 govern the determination of dischargeability. A complaint under Sections 523(a)(2), (4), (6) and (15) must be filed by the creditor within sixty (60) days following the first meeting of creditors, unless an extension is requested and granted. The bankruptcy court has exclusive jurisdiction to make these determinations.
However, a creditor claiming that its debt is nondischargeable under any of the other subsections of Section 523(a) faces no time limit, and may file a complaint at any time, reopening the case if need be. Moreover, the issue of dischargeability need not be raised in the bankruptcy court, for state courts have concurrent jurisdiction to make this determination. See, Indiana University v. Canganelli, 149 Ill. App.3d 852, 501 N.E.2d 299, 103 Ill. Dec. 278 (1st Dist. 1986). When a debtor is confronted by a creditor attempting to collect on a debt in state court proceedings after the bankruptcy case is closed, the debtor may litigate the dischargeability of the debt in any or all of the following ways: (1) raise the discharge as an affirmative defense in the state court proceeding and request the state court to determine dischargeability; (2) remove the entire state court cause of action or the dischargeability defense to federal court under 28 U.S.C. § 1452(a); (3) move to reopen the bankruptcy case for the purpose of filing a complaint to determine dischargeability; or (4) bring an adversary complaint in bankruptcy court to enforce the statutory injunction under Section 524(a)(2) of the Bankruptcy Code. In re Kewanee Boiler Corp., 270 B.R. 912, 918 (Bankr.N.D.Ill. 2002); In re Stucker, 153 B.R. 219, 222 (Bankr.N.D.Ill. 1993).
The DEBTOR here has pursued the last option. The adversary complaint, though not specifically requesting the Court to make a determination that the student loan debt is dischargeable, squarely places that determination at issue and its resolution is fundamental to the contempt proceeding. A genuine issue of material fact exists regarding the discharge-ability of the student loans. Though the DEBTOR'S affidavit answers whether the loans were consolidated and whether the repayment period was ever suspended, it does not address when the loans first became due. That the dischargeability determination is required to be made to provide the parties with complete relief is underscored by the DEBTOR'S recent filing of a motion to enjoin the seizure of her tax refund. If, in fact, the debt is determined to be nondischargeable, no violation of the discharge order will have occurred and the DEBTOR'S complaint will be dismissed. On the other hand, if this Court determines the debt to be dischargeable, it will address the remaining issues raised by the DEBTOR'S complaint, including GC SERVICES' contention that it did not violate the discharge injunction. Because the disputed issue of when the loans first became due is determinative of the dischargeability determination, the DEBTOR'S motion must be denied.
The United States, on behalf of the Internal Revenue Service, filed a response in opposition to the motion, asserting the Tax Anti-Injunction Act, 26 U.S.C. § 7421, bars the relief sought by the DEBTOR. Determining the United States' position to be well taken, this Court denied the DEBTOR'S motion, noting that she would be entitled to return of the monies if she ultimately prevails.
2. DEFENDANTS' Motions for Summary Judgment.
The Court next turns to the DEFENDANTS' motions. The DEFENDANTS assert that student loans made by a governmental unit are not discharged by entry of the general discharge order, but are only discharged when a judgment is entered in an adversary proceeding determining the loans to be dischargeable. It follows, they maintain, that a student loan creditor may pursue collection, after entry of a general discharge order but prior to an adversary judgment for dischargeability, without violating the discharge injunction of Section 524(a), no matter when the student loan first became due. Therefore, they conclude, where, as here, no adversary judgment discharging the student loan has been entered, their collection action has not been enjoined and they are entitled to judgment as a matter of law.
Nonsense, responds the DEBTOR, pointing out that application of the seven-year rule of former Section 523(a)(8) is a simple time computation based upon information necessarily contained in the lender's file, i.e., the date the first payment was due on the loan. Moreover, argues the DEBTOR, this is not even a close case since the evidence shows the loans first became due more than nine (9) years before the petition date.
In support of their position, the DEFENDANTS rely chiefly on Buford v. Higher Educ. Assistance Foundation, 85 B.R. 579 (D.Kan. 1988) and U.S. v. Wood, 925 F.2d 1580 (7th Cir. 1991), holding that Section 523(a)(8) is "self-effectuating," and that it is the debtor who must file a complaint to determine the nondischargeability of a student loan. A close examination of those cases, however, reveals that they are not applicable here. In Buford, the debtor had filed a contempt motion against a student loan creditor for continuing collection actions on the debt. The parties agreed that the general discharge did not affect the student loan debt. Noting that the debtor did not appear to contest the dischargeability of the debt and that the narrow issue before it was who had the duty to initiate the inquiry into the dischargeability of the loan, the district court reversed the bankruptcy court's ruling enjoining the creditor from further collection attempts until it filed a dischargeability complaint, holding that the language of Section 523(a)(8) "permits the student loan creditor to seek collection of the debt without having to first file a complaint to determine dischargeability in the bankruptcy court, at least in a case such as the present one in which the debtor already acknowledged that he has no defenses to the loan."
The court noted that the debtor acknowledged in his bankruptcy petition that he had no defenses to the validity of the debt.
In U.S. v. Wood, the Seventh Circuit Court of Appeals addressed an issue of the dischargeability of a Health Education Assistance Loan (HEAL) under 42 U.S.C. § 294f(g), which provided that a student loan in bankruptcy was not discharged unless all three of the following conditions were met: (1) the loan was more than five years old; (2) the bankruptcy court finds that nondischarge would be unconscionable; and (3) the Secretary has waived certain rights. Concerned only with the second condition that nondischarge would be unconscionable, the court, comparing the similarities between the two provisions, rejected the debtor's contention that by not objecting to the discharge of the loan in the bankruptcy proceeding the government waived its right to have the bankruptcy court make the requisite determination and concluded that the burden of initiating the inquiry into dischargeability fell upon the debtor.
Both of those cases are distinguishable and neither addresses the issue before this Court. Unlike the DEBTOR here, the debtor in Buford did not contest the dischargeability of the loan, at least at that stage of the proceedings. Many of the decisions that have followed the rule requiring a debtor to file an adversary proceeding before the loan can be discharged, such as In re Oldham, 220 B.R. 607 (Bkrtcy.N.D.Ill. 1998), also relied on by the DEFENDANTS, involve the undue hardship exception of Section 523(a)(8)(B). However, that same rule does not apply to the first exception of Section 523(a)(8)(A), based upon the aging of the loan, as explained by the court in In re Griffin, 108 B.R. 717 (Bankr.W.D.Mo. 1989). At issue in Griffin was whether the debtor's student loan which had become due more than five years prior to the filing of the bankruptcy petition had been discharged under Section 523(a)(8)(A) in the absence of an adversary proceeding. Rejecting the Department of Education's contention that the provision requires a debtor to file an adversary proceeding before the student loan can be discharged, the court drew a distinction between the two specific exceptions contained in Section 523(a)(8):
In a later action to set aside a default judgment entered against the debtor in favor of the student loan creditor, the court considered the debtor bound by his prior agreement that the debt was not affected by the general discharge. U.S. v. Buford, 214 B.R. 394 (D.Kan. 1997).
The Court agrees with In re Johnson, 17 B.R. 95 (Bankr.W.D.Mo. 1981) that the provisions of Section 523(a)(8) are self-executing and that the USA need not file adversary proceedings to determine dischargeability of a student loan when the date upon which the loan first came due is less than five years prior to the filing of the bankruptcy petition. The Court further concludes that debtors need not file an adversary proceeding to determine dischargeability of a student loan when the date upon which the loan first came due is more than five years prior to the filing of the bankruptcy petition. Thus both the lender and debtor are placed upon equal footing; neither side is required to file a complaint when the statute clearly provides that a student loan is either nondischargeable or dischargeable. In close cases, such as In re Johnson, where there is a question of the application of Section 523(a)(8)(A), either of the parties can file a complaint to determine the dischargeability of the student loan.
The Court interprets the use of the term "self-executing" in the legislative history of Section 523(a)(8) 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). Under these sections, if a creditor wants to have a debt declared nondischargeable for, as an example, fraud or defalcation while acting in a fiduciary capacity, it must file an action in the Bankruptcy Court within a specified time period and meet its burden of showing that such fraud or defalcation did in fact exist. 11 U.S.C. § 523(a)(4); Federal Bankruptcy Rule 4007(c) and (d). Congress did not intend that lenders be required to timely file dischargeability actions under Section 523(a)(8). But that does not mean that such debts are not discharged where, as here, the debt is clearly within the Section 523(a)(8)(A) exception. The USA's interpretation of the self-executing provisions of Sections 523(a)(8) and 523(a)(8)(A) would result in a rule that all debtors would be required to file dischargeability complaints as to clearly dischargeable debts, while the USA would not be required to file complaints for clearly nondischargeable debts. The USA's interpretation would effectively render Sections 523(a)(8) and 523(a)(8)(A) self-executing only for the benefit of the USA. The Court does not read Sections 523(a)(8) and 523(a)(8)(A) as requiring this result and finds no authority for the USA's interpretation.
Regarding its ruling as a case of first impression, the court declined to award the debtor punitive damages, fees and costs.
In In re Wright, 7 B.R. 197 (Bankr.N.D.Ala. 1980), the court chronicled the development of both the jurisdictional and procedural aspects of dischargeability determinations, from the turn of the last century, through the enactment of the Bankruptcy Code. Against that background, and noting that the Bankruptcy Code imposed no duty on either party to seek a determination of the dischargeability of the student loan during the pendency of the bankruptcy proceeding, the court interpreted the legislative history's pronouncement that Section 523(a)(8) was intended to be self-executing and that the lender is not required to file a dischargeability complaint:
It has been suggested that if the debt has not existed for five years or more from due date, at which time suit could be brought, no burden exists on the holder to pursue his claim in bankruptcy. The Code is self-executing and Congress has declared such debts not discharged. No findings of fact by the Bankruptcy Court is essential or necessary. The creditor is free to proceed in any court after discharge is granted. (Footnote omitted).
Acknowledging that a student loan is presumed discharged if it first became due before five years before the date of the filing of the petition, the court concluded that the creditor must exercise sound judgment in determining whether to appear and seek an adjudication of rights in the bankruptcy court.
By not obtaining a determination of dischargeability of an allegedly nondischargeable debt during his bankruptcy case, a debtor runs the risk of having to return to court later to litigate the issue. The creditor, on the other hand, risks sanctions for violating the discharge injunction where it undertakes to make its own determination of what the discharge means. In re Gray, 97 B.R. 930, 936 (Bankr.N.D.Ill. 1989).
In this Court's view, the result reached by the court in Griffin is correct. The adage that educational loans are "presumed to be nondischargeable" cannot be taken at face value.
Given the elimination of the exception to dischargeability based upon the date a student loan first became due, the maxim's application to current cases holds true. As to earlier cases not involving the "undue hardship" exception, however, the loan will either have been discharged — or not discharged — upon entry of the discharge order. In this case, that date is January 11, 1999. Whether the DEBTOR'S loans were discharged on that date depends upon whether they first became due prior to October 5, 1991. The DEFENDANTS' motions for summary judgment, premised only upon the DEBTOR'S failure to file an adversary proceeding to have the loans determined to be dischargeable, must be denied.
This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be entered.
ORDER
For the reasons stated in an Opinion entered this day, IT IS HEREBY ORDERED:
1. The Motion for Summary Judgment filed by the DEBTOR is DENIED;
2. The Cross Motions for Summary Judgment filed by GC SERVICES and the DEPARTMENT are DENIED; and
3. The Clerk is directed to set the matter for Final Pretrial.