Opinion
Case No. 11-08757-PB7 Adv. No. 11-90413-PB
07-24-2014
In re ZXELAN RICHARD BONN, Debtor, ZXELAN RICHARD BONN, Plaintiff, v. SALLIE MAE, INC., NATIONAL UNIVERSITY, and EDUCATIONAL CREDIT MANAGEMENT CORPORATION, et al, Defendants.
WRITTEN DECISION - NOT FOR PUBLICATION
ORDER ON ECMC'S MOTION
TO DISMISS
Debtor commenced this adversary proceeding under § 523(a)(8) seeking to discharge his student loan debt. Educational Credit Management Corporation (ECMC), the purported holder of the debt, seeks dismissal on the ground that it has written-off the obligation, and Debtor no longer owes ECMC any student loan debt, so the complaint is moot. Because the legal impact of ECMC's write-off of the debt is unclear, the Court denies the motion without prejudice.
BACKGROUND
Debtor, Zxelan Richard Bonn (Debtor) was the obligor of a consolidated loan made through the Federal Family Education Loan Program (FFELP),in the original amount of $67,698.56 which was disbursed on March 15, 2002 (Consolidated Note). The Consolidated was guaranteed by United Student Aid Funds (USAF). Sallie Mae, Inc. (Sallie Mae) was the original servicing agent on the Consolidated.
Debtor filed the complaint commencing this adversary "proceeding on August 22, 2011, and an amended complaint on September 7, 2011 (Complaint). The Complaint contained several causes of action including a request for discharge of his student loan under Bankruptcy Code § 523(a)(8).
Upon the filing of the Complaint, pursuant to the Code of Federal Regulations and the terms of the loan's guaranty, Sallie Mae, as servicing agent, transferred all servicing of the Consolidated Note to USAF, the guarantor. ECMC contends that by an agreement triggered by the filing of the adversary, USAF assigned all right, title and interest in the Consolidated Note to ECMC.
ECMC filed an answer on October 19, 2011, and on December 12, 2011 the Court granted its motion to intervene.
The United States Department of Education (DDE) filed a motion to dismiss. On December 27, 2011 the Court entered an order dismissing the DOE as a defendant and limiting the Complaint to the sole claim of undue hardship under § 523(a)(8).
In support of the current motion ECMC contends that "[o]n or about May 20, 2014, ECMC 'wrote-off Debtor's Consolidated Note, pursuant to its regulatory authority found in 3 4 C.F.R. § 682.402 (i). Plaintiff no longer owes ECMC any student loan debt." See Motion at 3:2-4. Kerry Kirsch, a Bankruptcy Litigation Specialist for ECMC, declared in support of the Motion, "Plaintiff no longer owes anything on the [Consolidated Note].... Therefore, the debt longer exists." Based thereon, ECMC seeks dismissal of this adversary proceeding.
DISCUSSION
Debtor seeks discharge of his student loans under § 523(a)(8), on the ground that failure to discharge the debt would impose an undue hardship. However, no § 523(a)(8) action can lie where there is no debt to be excepted from the discharge - the opening language of§ 523(a) provides that a discharge "does not discharge an individual debtor from any debt..." Without a debt, there can be no action under any subsection of§ 523(a). So, if, as ECMC contends, the "debt no longer exists," then this case must be dismissed. The problem is that the Court has not been provided sufficient evidence or authority establishing that ECMC's "write-off" of the debt extinguished Debtor's student loan -obligation completely.
Title 34, Section 682.100 et. seq. of the Code of Federal Regulations governs the Federal Family Education Loan programs. Section 682.102 is entitled "Repaying a loan." Subsection (a) provides:
(a) General. Generally, the borrower is obligated to repay the full amount of the loan, late fees, collection costs chargeable to the borrower, and any interest not payable by the Secretary. The borrower's obligation to repay is cancelled if the borrower dies, becomes totally and permanently disabled, or has that obligation discharged in bankruptcy. A parent borrower's obligation to repay a PLUS loan is cancelled if the student, on whose behalf the parent borrowed, dies. The borrower's or student's obligation to repay all or a portion of his or her loan may be cancelled if the student is unable to complete his or her program of study because the school closed or the borrower's or student's eligibility to borrow was falsely certified by the school. The obligation to repay all or a portion of a loan may be forgiven Tor Stafford Loan borrowers who enter certain areas of the teaching profession.ECMC does not contend that Debtor has died, become disabled, nor that his school closed or his eligibility was falsely certified. The debt has not been discharged. Rather, ECMC contends that they wrote the Consolidated Note off under 34 C.F.R. § 682.402(i). However, the Court finds neither express authorization for write-off under that section, nor an explanation of what happens to a loan written off from the perspective of ECMC.
Section 682.402 (i) provides:
(i) Guaranty agency participation in bankruptcy proceedings--The Court sees no express authority to write-off a student loan claim under this section, and ECMC has pointed out no specific authority. As the Court reads this section, a guaranty agency is required to "use diligence" to "avoid a discharge of the loan" unless it finds undue hardship or that the costs of opposing discharge would likely exceed one-third of the total amount of the loan. However, the section does not, so far as the Court can determine, spell out what the guaranty agency may or must do if it does find undue hardship or that the costs of opposing discharge would likely exceed one-third of the total amount of the loan. That is, the Court finds no express authority for the voluntary write-off alleged by ECMC.
(1) Undue hardship claims.
(i) In response to a petition filed prior to October 8, 1998 with regard to any bankruptcy proceeding by the borrower for discharge
under 11 U.S.C. 523(a)(8) on the grounds of undue hardship, the guaranty agency must, on the basis of reasonably available information, determine whether the first payment on the loan was due more than 7 years (exclusive of any applicable suspension of the repayment period) before the filing of that petition and, if so, process the claim.
(ii) In all other cases, the guaranty agency must determine whether repayment under either the current repayment schedule or any adjusted schedule authorized under this part would impose an undue hardship on the borrower and his or her dependents.
(iii) If the guaranty agency determines that repayment would not constitute an undue hardship, the guaranty agency must then determine whether the expected costs of opposing the discharge petition would exceed one-third of the total amount owed on the loan, including principal, interest, late charges, and collection costs. If the guaranty agency has determined that the expected costs of opposing the discharge petition will exceed one-third of the total amount of the loan, it may, but is not required to, engage in the activities described in paragraph (i) (1) (iv) of this section.
(iv) The guaranty agency must use diligence and may assert any defense consistent with its status under applicable law to avoid discharge of the loan. Unless discharge would be more effectively opposed by not taking the following actions, the agency must-
(A) Oppose the borrower's petition for a determination of dischargeability; and
(B) If the borrower is in default on the loan, seek a judgment for the amount owed on the loan.
(v) In opposing a petition for a determination of dischargeability on the grounds of undue hardship, a guaranty agency may agree to discharge of a portion of the amount owed on a loan if it reasonably determines that the agreement is necessary in order to obtain a judgment on the remainder of the loan.
(2) Response by a guaranty agency to plans
proposed under Chapters 11, 12, and 13. The guaranty agency shall take the following actions when a petition for relief in bankruptcy under Chapters 11, 12, or 13 is filed:
(i) The agency is not required to respond to a proposed plan that--
(A) Provides for repayment of the full outstanding balance of the loan;
(B) Makes no provision with regard to the loan or to general unsecured claims.
ii) In any other case, the agency shall determine, based on a review of its own records and documents filed by the debtor in the bankruptcy proceeding--
(A) What part of the loan obligation will be discharged under the plan as proposed;
(B) Whether the plan itself or the classification of the loan under the plan meets the requirements of 11 U.S.C. 1129, 1225, or 1325, as applicable; and
(C) Whether grounds exist under 11 U.S.C. 1112, 1208, or 1307, as applicable, to move for conversion or dismissal of the case.
(iii) If the agency determines that grounds exist to challenge the proposed plan, the agency shall, as appropriate, object to the plan or move to dismiss the case, if--
(A) The costs of litigation of these actions are not reasonably expected to exceed one-third of the amount of the loan to be discharged under the plan; and
(B) With respect to an objection under 11 U.S.C. 132 5, the additional amount that may be recovered under the plan if an objection is successful can reasonably be expected to equal or exceed the cost of litigating the objection.
(iv) The agency shall monitor the debtor's performance under a confirmed plan. If the debtor fails to make payments required under the plan or seeks but does not demonstrate entitlement to discharge under 11 U.S.C. 1328(b), the agency shall oppose any requested discharge or move to dismiss the case if the costs of litigation together with the costs incurred for objections to the plan are not reasonably expected to exceed one-third of the amount of the loan to be discharged under the plan.
On the other hand, the Debtor did provide, albeit at the hearing, a copy of a letter dated November 7, 1993, which includes an approval by Robert W. Evans, Director of Policy and Program Development of the DOE, of "the attached Standardized Compromise and Write-Off Procedures for use by guaranty agencies in the Federal Family Education Loan Program." Under the heading "DISCRETIONARY WRITE-OFF" the attached Standardized Compromise and Write-Off Procedures provides in part:
Write-off of a reinsured loan (s) is intended only for the purpose of the guaranty agency's ceasing required collection activity as described in 34 C.F.R. 682.410(b)(6) and (7). The write-off of the loan does not relieve the debtor of the debt. Once an agency has "written off" a loan(s), it will insure that the account is permanently assigned to the U.S. Department of Education under 34 C.F.R. 682.409 et seq.Since the Debtor only provided the letter at the hearing, ECMC has not had a chance to investigate and inform the Court whether the Standardized Compromise applies or is even still in effect. Nevertheless, as the record stands before the Court there is not sufficient evidence or authority that ECMC's write-off completely relieves Debtor's student loan obligation such that no action can lie under § 523(a)(8).
ECMC as movant bears the burden of establishing that the debt upon which Debtor's action is based has been extinguished. Even without the doubt cast by Debtor's letter, which was not properly submitted into evidence and to which, as noted, ECMC had not been afforded an adequate opportunity to respond, the record does not support such a finding.
Accordingly the motion is denied without prejudice. If ECMC wishes to renew its motion, it should be prepared to provide evidence and or authority that its write-off or waiver of the Consolidated Note provides complete relief to the Debtor, and assurances to the Court that no other entity will have rights to enforce the Consolidated Note. This should also include evidence that all rights under the Consolidated Note were properly transferred from the original holder to the entity that purports to forgive the obligation.
CONCLUSION
For the reasons set forth above, ECMC's motion to dismiss is denied without prejudice.
IT IS SO ORDERED.
__________
PETER W. BOWIE, Judge
United States Bankruptcy Court
In re Bankruptcy Case No(s).: 11-08757-PB7 ZXELAN RICHARD BONN
Adversary No(s)., if any: 11-90413-PB ZXELAN RICHARD BONN V. SALLIE MAE, INC., ET AL.
CERTIFICATE OF MAILING
The undersigned, a regularly appointed and qualified clerk in the office of the United States Bankruptcy Court for the Southern District of California, at San Diego, hereby certifies that a true copy of the attached document, to wit:
ORDER ON ECMC'S MOTION TO DISMISS
was enclosed in a sealed envelope bearing the lawful frank of the bankruptcy judges and mailed to each of the parties at their respective addresses listed below: Zxelan Richard Bonn
475 Chestnut Ave. #C
Carlsbad, CA 92008
Timothy P. Burke
1136 Fremont Ave., Ste. 108
South Pasadena, CA 91030
Said envelope(s) containing such document was deposited by me in a regular United States Mail Box in the City of San Diego, in said District on July 24, 2014.
__________
Lisa Cruz, Deputy Clerk