Fifth Circuit Grants Small Victories to Student Loan Debtors

The news for student loan borrowers in bankruptcy is usually so grim that even a small victory is cause to sit up and take notice.   The Fifth Circuit recently handed student loan debtors two small victories, ruling that dischargeability of student loans was not subject to arbitration and that bar exam loans could be discharged.  The cases are Case No. 18-20809, Stephanie Marie Henry v. Educational Financial Service (Matter of Stephanie Marie Henry)(Fifth Cir. 10/17/19) and Case No. 18-20254, Evan Brian Crocker v. Navient Solutions, LLC (Matter of Evan Brian Crocker)(Fifth Cir. 10/21/19).   The opinions can be found here and here.

No Arbitration of Student Loan Discharge

The Henry case is pretty straightforward.  Ms. Henry filed chapter 7 bankruptcy and received a discharge.  Later she sought a determination that the debt had been discharged.   Educational Financial Service, a division of Wells Fargo, moved to compel arbitration.   The bankruptcy court denied the motion and the Fifth Circuit affirmed.  

The arbitration clause in question said that any "controversy or claim arising out of or related to this Note, or an alleged breach of this Note" shall be subject to arbitration.    The Fifth Circuit ruled that

Bankruptcy courts may decline to enforce arbitration clauses when two requirements are met. First, the proceeding must adjudicate statutory rights conferred by the Bankruptcy Code and not the debtor’s prepetition legal or equitable rights. Second, bankruptcy courts may decline enforcement of arbitration agreements only if requiring arbitration would conflict with the purposes of the Bankruptcy Code. (cleaned up).

Opinion, p. 5.    The Fifth Circuit found that a clause requiring arbitration of dischargeability met both requirements and rejected an argument that the intervening Supreme Court opinion in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018) overruled prior Fifth Circuit precedent.  Thus, the debtor will be able to try her case in bankruptcy court.

Bar Study Loans Dischargeable; No Nationwide Authority to Enforce Discharge

The Crocker case involved both a substantive question, whether loans made to study for the bar exam are dischargeable, and a procedural one, whether one court can enforce a discharge issued by another court.   The Fifth Circuit ruled that the loan was discharged but that the Court's ability to enforce the discharge ended at its own borders.

Evan Crocker took out a $15,000 loan to study for the bar exam from SLM Corporation, d/b/a Sallie Mae, which subsequently assigned the loan to Navient.    Mr. Crocker filed bankruptcy in the Southern District of Texas.

Michael Shahbazi obtained a loan for $11,658.99 from Sallie Mae to attend a technical school.  Mr. Shahbazi filed bankruptcy in the Eastern District of Virginia.

Crocker and Shahbazi asked the bankruptcy court for the Southern District of Texas to certify a nationwide class of those who obtained private education loans from Navient or related companies to cover expenses at an institution not accredited under Title IV, received a discharge and were subject to collection efforts post-discharge.

 Navient moved for summary judgment that the bankruptcy court had no jurisdiction to interpret and enforce discharge orders entered by courts in other judicial districts and that the loans were non-dischargeable.  The bankruptcy court denied the motion.   It then authorized both an interlocutory appeal and a direct appeal to the Fifth Circuit.

A.   No Nationwide Discharge Violation Class

The Fifth Circuit followed the Second Circuit opinion in  Anderson v. Credit One Bank, N.A., (In re Anderson), 884 F.3d 382, 390–91 (2d Cir. 2018) to hold that only the court which issued the discharge injunction may enforce it.  

We adopt the language of the Second Circuit that returning to the issuing bankruptcy court to enforce an injunction is required at least in order to uphold “respect for judicial process.”  The bankruptcy court erred in holding that it could address contempt for violations of injunctions arising from discharges by bankruptcy courts in other districts. Therefore, as to Shahbazi and at least those debtors whose discharges were entered by courts in other districts, the bankruptcy court in these proceedings has no authority to enforce the resulting injunction.

Opinion, p. 16.   The court left open the issue of whether one bankruptcy judge has the power to enforce a discharge entered by another judge in the same district.

The opinion does not address the question of whether the bankruptcy court could certify a nationwide class of debtors seeking a remedy other than enforcement of the discharge.   Several decisions from the Southern District have concluded that bankruptcy courts may certify nationwide class actions.   Adv. No. 16-3235, Katrina Jones v. Atlas Acquisitions, LLC (Bankr. S.D. Tex. 5/19/17);  Cano v. GMAC Mortg. Corp. (1n re Cano), 410 B.R. 506, 550 (Bankr. S.D. Tex. 2009).  However, both of these decisions relied the assumption that the Fifth Circuit implicitly endorsed nationwide class actions when it vacated an order certifying a nationwide class of debtors but did not dismiss the suit.  Bolin v. Sears, 231 F.2d 970 (5th Cir. 2000).    However, Bolin was a case seeking to enforce the discharge.  The Fifth Circuit has now said that a bankruptcy court may not certify a nationwide class of debtors seeking to enforce the discharge.  This means that the implication from Bolin is no longer good law.   However, it is unclear how this would apply to non-discharge injunction cases.

B.  Bar Study Loans Can Be Discharged

Because Mr. Shahbazi received his discharge in Virginia, the Fifth Circuit did not consider whether his loan was dischargeable.  However, it did consider whether Crocker's bar study loan was dischargeable. 

There are three types of student loans debts which may not be discharged:

• 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 (11 U.S.C. Sec. 523(a)(8)(i)

• an obligation to repay funds received as an educational benefit, scholarship, or stipend (11 U.S.C. Sec. 523(a)(8)(ii)

• any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual (11 U.S.C. Sec. 523(a)(8)(B).

The Navient loan was a private loan.  Therefore, it did not fall within Sec. 523(a)(8)(i).   It was not a loan that was a "qualified education loan" because it was not made to attend a qualifying institution.  Therefore Sec. 523(a)(8)(B) did not apply.   That left the question of whether a private loan made to an individual to study for the bar exam constituted an education benefit, scholarship or stipend.  The Fifth Circuit said no.

The Court's statutory analysis is quite lengthy.   However, an oversimplification is that of the three terms, scholarship and stipend have narrow meanings.  Navient argued that "educational benefit" could refer to any benefit that a person received in connection with their education.  The Fifth Circuit found that it did not make sense that one item in a list of otherwise narrow terms would be interpreted so expansively.  It also found that Navient's construction would essentially swallow the remainder of Sec. 523(a)(8) rendering it superfluous.   

Thus, a private loan which is not a qualified education loan is a dischargeable debt.  Crocker's loan was a private loan.  It was not made to attend a qualifed institution and therefore was not a qualified education loan.  Therefore, it was discharged.  For a more expansive discussion of dischargeability of student loans, please see my prior article here.

Disclosure:  Barron & Newburger represented Navient in the very early stages of the case but did not file the motion for summary judgment in question.

Note on Style:  I have used the parenthetical "cleaned up" for the first time in referring to a citation where the quotation has been cleaned up to remove internal citations and other extraneous matters.   This convention is recommended in Jack Metzler, Cleaning Up Quotations, 18 Journal of Appellate Practice and Process 143 (2017).   I am going to continue using this convention in the blog although I am not sure whether I am ready to use it in submissions to the court yet.