The U.S. Court of Appeals for the Fifth Circuit recently held that a bankruptcy court lacks the power to enforce discharge injunctions entered in other districts, and that the debtors' particular private education loans were not excepted from discharge.
A copy of the opinion is available at: Link to Opinion
Two debtors obtained student loans, one to prepare for his bar exam, and the other to fund tuition and expenses to attend a vocational school, from a "for-profit, public corporation whose loans are not part of any governmental loan program." The loans were then transferred to a loan servicing company.
Both debtors filed for Chapter 7 bankruptcy, one in Texas and the other in Virginia. Both listed the loans on their schedules and neither disputed the debt. Both received general discharges. After the discharges, the loan servicer made telephone calls and sent e-mails demanding repayment.
One of the debtors filed an adversary proceeding in the same Texas bankruptcy court that granted him the discharge, seeking a temporary injunction barring further collection efforts, a declaratory judgment that his student loan had been discharged, and an order holding the loan servicer in contempt for violating the discharge injunction.
The second debtor joined in an amended complaint "seeking to certify a nationwide class of those who (1) obtained prepetition private education loans from [the loan servicer] or related companies to cover expenses at an institution not accredited under Title IV; (2) later filed for bankruptcy and were issued discharge orders; (3) have never reaffirmed their prepetition private education loan debt; and (4) are being induced to pay their allegedly discharged private education loans."
The loan servicer moved for summary judgment, "arguing that a bankruptcy court has no jurisdiction to interpret and enforce discharge orders entered by courts in other judicial districts and that the plaintiffs' education loans were nondischargeable."
The bankruptcy court denied the motion, finding that "the general rule giving an issuing court sole authority to enforce its own injunctions [did not apply] to the automatic injunction created by statute when a bankruptcy court grants a discharge under 11 U.S.C. § 727." The court also held that the subject "private loans" "were not within the ambit of the Bankruptcy Code's bar on the discharge of some student loans."
The bankruptcy court "authorized an interlocutory appeal, then certified the order for direct appeal [to the 5th Circuit], eschewing the usual initial appellate review by a district court." A panel of the Fifth Circuit "granted the unopposed motion to authorize the appeal."
On appeal, the loan servicer argued "that the bankruptcy court either has no jurisdiction to enforce the statutory injunctions arising from a bankruptcy discharge that another bankruptcy court ordered, or at least for prudential reasons may not do so. Second, … that the plaintiffs' education loans are within the category of loans that under the Bankruptcy Code are nondischargeable."
The Fifth Circuit first addressed whether "a bankruptcy court other than the one that granted the discharge [may] enforce the injunction[,]" finding that "[t]he question of a bankruptcy judge's injunctive reach within its own district has not been answered."
After analyzing the history of the bankruptcy discharge injunction, the Court found that "Congress's decision to eliminate language that seemed to allow enforcement of the discharge injunction in a new district gives weight to the argument that after the 1978 Bankruptcy Code was adopted, enforcement in … a different district was prohibited."
Turning to "the law that exists today[,]" the Fifth Circuit reviewed opinions from "[o]ther circuits [that] have insisted on a return to the bankruptcy court whose discharge order created the injunction[,] including the Eleventh Circuit, which] has held that only the bankruptcy court issuing the discharge has jurisdiction to enforce the injunction through contempt."
Although not willing to go as far as the Eleventh Circuit, the Fifth Circuit "adopt[ed] 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[,]' concluding that …[t]he bankruptcy court erred in holding that it could address contempt for violations of injunctions arising from discharges by bankruptcy courts in other districts."
Because "the bankruptcy court did not reach the issue of certification of a class," the Court warned "that because of the limitation on enforcement we have just identified, and indeed because we are aware of no prior certification of a class that includes debtors whose discharges were entered by bankruptcy courts in other districts, certifying such a class would be highly dubious."
The Court also left "for the court on remand the separate issue … of whether that court has authority to enforce the injunctions arising from discharges entered by any bankruptcy court in the same judicial district."
Turning to the issue of whether the subject loans were dischargeable, the Court examined the language of 11 U.S.C. § 523(a), which excepts from discharge certain educational loans "unless excepting such debt from discharge … would impose an undue hardship on the debtor and the debtor's dependents[.]" It then discussed "some of the prior statutory language that the current statute has replaced or supplemented" before concluding that "[t]he loans at issue here, though obtained in order to pay expenses of education, do not qualify as 'an obligation to repay funds received as an educational benefit, scholarship, or stipend' [under subsection 523(a)(8)(A)(ii)] because their repayment was unconditional. They therefore are dischargeable."
Accordingly, the Fifth Circuit reversed "the bankruptcy court's determination that it has authority to enforce a discharge injunction entered by a different district's bankruptcy court[,] … [affirmed] the determination that loans such as those in issue here are dischargeable" and remanded the case to the bankruptcy court.
Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Admitted to practice law in Illinois
Alabama | California | Florida | Georgia | Illinois | Massachusetts | New Jersey | New York | Ohio | Pennsylvania | Texas | Washington, DC
NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.
Our updates and webinar presentations are available on the internet, in searchable format, at:
Financial Services Law Updates
The Consumer Financial Services Blog™
California Finance Law Developments