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:
In the most recent bankruptcy case dealing with the question of whether private student loans made by Navient Credit Finance Corporation (Navient) are nondischargeable under Bankruptcy Code § 523(a)(8), on cross summary judgment motions the Bankruptcy Court for the Northern District of New York (the Court) ruled (1) for the debtor that the loans were not “part of a program funded in part by the government” as required for nondischargeability under § 523(a)(8)(A)(i) but (2) for the creditor that the debtor’s loan was nondischargeable under § 523(a)(8)(B). Mazloom v Navient Solutions, LLC (In re Mazloom), 648 B.R. 1 (Bankr. N.D.N.Y. 2023).
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Debtor and plaintiff in this adversary, Stephanie Mazloom (Debtor), attended medical school in Antigua at the Kasturba Medical College (KMC), a Title IV institution affiliated with American University of Antigua. (A Title IV institution is authorized under Title IV of the Higher Education Act to process federal student aid.) To fund this education, Debtor took out a private student loan from Nellie Mae Bank, a predecessor of Navient. In conjunction with the loan, called an EXCEL Grad Loan (EXCEL loan), Debtor executed a promissory note that stated the “loan is an educational loan and is made under a program that includes Stafford Loans and other loans and which is funded in part by non-profit organizations, including governmental units, and, therefore, is not dischargeable in bankruptcy.”
In 2018 Debtor filed a chapter 7 bankruptcy and received a discharge of dischargeable debt in due course. In 2020, Debtor reopened the case to file this adversary complaint which asserted that EXCEL loans did not qualify as student loans under § 523(a)(8) and therefore were not excepted from discharge. The adversary purported to be a class action, with Debtor suing on behalf of herself and all others similarly situated. Both Debtor and Navient filed early summary judgment motions, which were denied because the record was not fully developed. After extensive discovery, the motions were refiled and resulted in this ruling, partially in favor of Navient – making Debtor’s loan nondischargeable under § 523(a)(8)(B) – but partially in favor of Debtor’s arguments under § 523(a)(8)(A)(i), since she purported to represent other class members whose facts might make their loans not subject to § 523(a)(8)(B) nondischargeability.
Section 523(a)(8)(A)(i) excepts from discharge “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.” Because it was undisputed that Debtor’s EXCEL loan was not funded by a nonprofit institution, the relevant inquiry for the Court was whether a governmental unit was involved. The Court quite simply concluded that Navient had failed to present any relevant evidence to prove that fact. Navient’s only arguments relied on the boilerplate language in the promissory note, quoted above, along with self-serving statements of an employee stating the same. Navient had made this same argument in its earlier motion which had been denied for insufficient evidence. After extensive discovery, Navient provided nothing more concrete to establish that the loan was reliant on the government. Navient asserted that EXCEL loans were in a “program” related to Stafford loans, which are nondischargeable as linked to governmental guarantees, but failed to provide any proof that such “program” actually existed. Its motion was denied a second time for this failure of proof; the boilerplate language alone was insufficient.
The Court then addressed the reasons Debtor’s EXCEL loan was nondischargeable under § 523(a)(8)(B), which excepts from discharge “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.” The Court walked through the definition in § 221(d)(1) and related federal statutes to pose the question: “the Court must determine if either party has established whether the Private Student Loan was incurred to pay a qualified education expense.” If so, the EXCEL loan was nondischargeable.
The Court noted the parties agreed that the “purpose test” governed the outcome of this question. That test holds that the proper analysis is to look at the initial purpose of the loan rather the actual use of the funds. The Court adopted a bright-line approach, which looked only to the purpose of the loan stated in the agreement to decide whether it fell within the scope of § 523(a)(8)(B). Any other construction would create uncertainty about the nondischargeable nature of such loans when made, which would not be conducive to the confidence lenders require when deciding to make such loans. Also, the bright-line test would prevent arbitrary application of the terms of the statute on a case-by-case basis.
The parties did not dispute that KMC was a Title IV institution and that the money was sent directly there, so on its face the funds were used for education. Debtor presented no evidence that the loan was not made for Debtor to attend medical school. Therefore, the requirements of § 523(a)(8)(B) were satisfied and Debtor’s EXCEL loan was nondischargeable.
The class in Mazloom has not been certified. If it is, then this decision provides limited hope that some members of the class will be able to discharge their EXCEL loans if they can get around § 523(a)(8)(B). This appears to be factually possible if the institution which received the funds was not a Title IV school or the class member can show the loan was for something other than an education. That hope seems slim under the Court’s application of the bright-line approach to the purpose test. It is hard to imagine that either the loan application or the promissory note, or both, will not state the initial purpose is for an education. As a consequence, only if the EXCEL loan was with a non-Title IV institution might the debt be discharged.
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.