The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:
Two different bankruptcy courts, one in the Northern District of California (the “CA Court”) and the other in the District of Nebraska (the “NE Court” and collectively “the Courts”) certified classes in class action cases against Navient Solutions, LLC and Navient Credit Finance Corporation for declaratory relief, injunctive relief, and possibly for damages for violating the discharge injunction of 11 U.S.C. § 524. One distinct difference was present in these two cases. In the NE Court case, Navient had admitted that private student loans which it tried to collect were not excepted from discharge under 11 U.S.C. 523(a)(8), whereas in the CA Court case that determination had not yet been made. In re Woodard, 2023 WL 2412750 (Bankr. D. Neb. 3/8/23); In re Teran, 649 B.R. 794 (Bankr. N.D. Cal. 2023).
Other than the distinction noted in the introduction above, these two cases are based on similar general facts. In both cases, the plaintiffs/proposed class representatives had received a private loan from Navient which might have been subject to the normal discharge issued in a prior bankruptcy case. As mentioned above, in the Woodard case Navient had admitted that at least 2900 of such loans were not nondischargeable under 11 U.S.C. § 523(a)(8) because they were private loans that were not funded in whole or in part by a governmental unit or nonprofit institution. In the Teran case, the private loans were similar but Navient had not admitted they were not funded in whole or part by a governmental unit or nonprofit and the bankruptcy court intended to hold a trial on that issue. If Navient does not present evidence of such funding, then the loans also were not excepted from discharge under § 523(a)(8). Nevertheless, the CA Court and the NE Court addressed similar issues when they certified the classes.
The proposed class in the NE Court case consisted of debtors in the Eighth Circuit who had received private loans from Navient, filed for bankruptcy after October 17, 2005, had received a discharge under § 524 in the normal course, and subsequently had been subjected to collection efforts by Navient. The proposed classes in the CA Court case were similar except there were subclasses for (a) persons residing in the United States, (b) persons residing within the Ninth Circuit, and (c) persons residing in California. The two courts addressed parallel issues in ruling on class certification: (1) whether a single bankruptcy court located in a particular district had authority to enforce any discharge orders other than the ones it entered; (2) whether Navient could enforce the arbitration provisions in its loan agreements or promissory notes; (3) whether a proposed class action was either forbidden or subjected to arbitration by the arbitration provisions; and (4) whether the class action requirements of Fed. R. Civ. Pro. § 23(a) were satisfied. Both courts ruled that a single bankruptcy court had authority to enforce discharge injunctions issued by other bankruptcy courts around the country; a class action was not subjected to arbitration by the provisions of the arbitration agreement nor was arbitration compelled for any individual relief arising from discharge violations; and the requirements of Rule 23(a) were satisfied.
The Courts swiftly concluded that a bankruptcy court sitting in any district had authority to enforce a discharge injunction, no matter where issued. They noted that a discharge under § 524 was issued as a matter of course as provided in § 727(a)unless specific enumerated exceptions applied. Without any of the exceptions, issuance of the discharge, per the CA Court, “was a ministerial act, without the court exercising any judicial discretion or authority.” A bankruptcy court utilizes a national form, issued the same in every case when a debtor is entitled to a discharge. An individual court or judge does not craft the language of the order as it would when issuing other types of injunctive relief, each order tailored to the issues at hand. An objective standard is used to determine what constitutes a violation of this universal order, as determined by the Supreme Court in Taggart v Lorenzen, 139 S. Ct. 1795 (2019). The Courts cited several cases to support their conclusions, with the CA Court even citing the NE Court as a relevant guidepost on the issue.
Navient raised two issues pertaining to arbitration: that by signing the note/loan agreement each individual plaintiff agreed to arbitrate disputes and that the individuals waived their right to participate in any class action case. The Courts focused on the language in the Arbitration Agreement to reject both arguments. The pertinent language was that the parties “agree that either party may elect to arbitrate – and require the other party to arbitrate – any Claim” under certain terms and conditions. “Claim” is defined as a dispute that arises from the Note. The Courts noted that the primary substantive issues of the cases stemmed from the dischargeability of the loans, which were not covered by the limiting definition of claims subject to arbitration. That alone made the provision inapplicable as to the class representatives before them. Per the language in the Arbitration Agreement, the purported class action waiver was dependent on the plaintiff having waived the right to a court or jury trial once compelled to arbitrate. Therefore, once arbitration could not be compelled, it followed that the plaintiffs had not waived the right to participate in a class action. Independently, addressing procedural issues peculiar to each case, each Court also concluded that Navient had waived any right to compel arbitration or to enforce the anti-class action provisions.
Rule 23(a) sets forth four prerequisites of class certification: (1) the class is so numerous that joinder of all members is impracticable; (2) there are common questions of law and fact; (3) the claims of the representative parties are typical of the claims of the class; and (4) the representatives will fairly and adequately protect the interests of the class. Because of the number of Navient private student loans in the relevant time span, the Courts dispensed with any challenge to numerosity in short shrift. Similarly, because of the universal language and effect of the discharge injunction and the irrefutable fact that each class was limited to those whom Navient had pursued post-discharge for collection, the common factual and legal issues prevailed. To make the necessary determinations on requirements (3) and (4), the courts concluded the exact type of private loan from Navient that was in play for each class member was not a controlling factor. The issue was that the requirement to repay the loan was discharged and Navient nevertheless tried to collect. Similarly, the chosen class representatives had typical experiences and no conflicts with the other class members. Thus, all four prerequisites for class certification were met.
As noted in footnote 1, some issues discussed in these cases were not covered due to the necessity of brevity here, so interested practitioners should read the opinions directly. They both reach two important conclusions: any bankruptcy court in the country can enforce a discharge injunction no matter where it was issued and Navient can neither compel arbitration of discharge violations nor prevent approval of a class action. The first conclusion has wider implications, since it would apply no matter what violation is alleged and no matter which bankruptcy court hears the matter. To me, that makes perfect sense, since we are talking about a national form, ministerially issued without any direct judicial involvement. No bankruptcy court is being asked to interpret a tailored injunction issued by another court. The second conclusion will not have such a broad impact, because the limiting definition of claim in the Navient Arbitration Agreement compelled the determination that the class claims were not subject to arbitration. However, dischargeability of any debt and the impact of such discharge is undeniably core to bankruptcy. In my view, those issues should never be arbitrated.
This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), 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.
 This review addresses only the common issues between the two cases. The CA Court decision had primarily procedural nuances based on controlling Ninth Circuit law which are not discussed here. In addition, each court also addressed differently the Rule 23(b) requirements for class certification which is not covered by this review. Interested readers are urged to read the opinions in full.