Homaidan v. Sallie Mae, Inc. (2nd Cir.)

The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, CD CA, ret.), analyzing a recent decision of interest:

The Second Circuit Court of Appeals (the Court) joined two other circuits in ruling that a private student loan is not “funds received as an educational benefit” and therefore is not excepted from discharge under Bankruptcy Code § 523(a)(8)(A)(ii). Homaidan v Sallie Mae, Inc., 2021 WL 2964217 (2^nd Cir. July 15, 2021).

To view the opinion, click here.

FACTS

Debtor Hilal Homaidan (Homaidan) took out several loans to finance his education at Emerson College from 2003-2007. Two of the loans were direct-to-consumer Tuition Answer Loans from Sallie Mae Inc., a corporation to which Navient Credit Finance Corp (Navient) is the successor. The loans were not made solely to cover Homaidan’s cost of attendance at Emerson. They exceeded the amount of tuition and went directly to his bank account. Shortly after graduating, Homaidan filed a chapter 7 bankruptcy and received a discharge of his dischargeable debt. After the discharge, Navient demanded repayment of the loans from Homaidan. This prompted him to reopen his bankruptcy case to seek a determination, by way of adversary complaint, that the Navient loans were discharged.

Navient filed a motion to dismiss the adversary proceeding, arguing as pertinent here that the Tuition Answer Loans were excepted from discharge under § 523(a)(8)(A)(ii). The bankruptcy court denied the motion, concluding that this subsection does not sweep in all education-related debt and that the language of the subsection, read in context and on its face, did not include private student loans such as these. The district court certified a direct appeal of this issue of law to the Court, which authorized the appeal and affirmed in a published opinion.

REASONING

As in all matters of statutory interpretation, the Court’s inquiry began with the statutory text: § 523(a)(8)(A)(ii) excepts from discharge “an obligation to repay funds received as an educational benefit, scholarship, or stipend.” Per Navient’s arguments, only the first of these three terms, “educational benefit” could apply to except Homaidan’s loan from discharge. Thus, the Court’s inquiry was whether the Navient loans are “an obligation to repay funds received as an educational benefit.”

The Court rejected Navient’s simplistic argument that the loans constituted an “obligation to repay funds” and that since Homaidan received the funds for the purpose of advancing his education, they were therefore an “educational benefit.” Among other things, the Court noted that Congress had specifically used the term “loans” in subsections (A)(i) and (B), but had excluded it from subsection (ii). It then cited the statutory interpretation canon that “when Congress ‘includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and on purpose in the disparate inclusion or exclusion.” In other words, the word “loan” was omitted on purpose.

Additionally, the Court observed that if it adopted Navient’s broad construction that any obligation to repay must refer to a loan, much of the rest of § 523(a)(8) would be surplusage. If any loan used to further one’s education was de facto nondischargeable, then why were loans separately exempted from discharge under (A)(i), which speaks of loans made or guaranteed by government or funded by a nonprofit institution, and (B), which excepts from discharge certain loans qualified as education loans as defined by section 221(d)(1) of the Internal Revenue Code?

The Court also rejected Navient’s assertion that Congress created subsection (ii) separately with the intention of excepting all private student loans from discharge. It looked at the legislative and caselaw history leading up to the BAPCPA amendments to § 523(a)(8) to conclude that neither supported excluding all private loans from discharge. It ruled that an “educational benefit” applied only to conditional grant payments similar to scholarships and stipends, such as a promise to serve in the military or to practice medicine in an underserved area. If the condition was not met, then the benefit was excepted from discharge under subsection (ii). Since the Tuition Answer Loans were not conditional grants, they were not an educational benefit referred to in the statute.

AUTHOR’S COMMENTS

The Second Circuit decision joins similar rulings from the Fifth and Tenth Circuits, which narrowly construed the meaning of educational benefit. All properly have found that it is not a loan. When I sat on the Ninth Circuit Bankruptcy Appellate Panel, we decided Inst. Of Imaginal Stud. V Christoff (In re Christoff), 527 B.R. 624 (9th Cir. BAP 2015), which ruled that a private university’s provision of tuition credits to debtor was not an obligation for “funds received” and therefore not excepted from discharge under subsection (ii). The creditor initially appealed that BAP decision to the Ninth Circuit but wisely settled the case on appeal, not wanting a negative precedent from the Circuit.

All of these cases are limiting when a privately funded student loan can be excepted from discharge. With the recent insolvencies and failures of a number of private trade schools, the trend of the courts to narrow when such private fundings are excepted from discharge seems wise. In addition, the implementation of standard statutory interpretation canons demonstrates that these decisions are sound. In other words, it is hard to argue the cases were wrongly decided and I expect other circuits to follow.

This submission was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, CD CA, ret.), a member of the ad hoc group, with editorial contributions from Adam A. Lewis, Senior Counsel, Morrison & Foerster LLC, also a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.