Hoffman v. Educ. Credit Mgmt. Corp. (In re Hoffman)

557 B.R. 177

In re: Jerry Lewis Hoffman and Jan Marie Hoffman, Debtors.

Jerry Lewis Hoffman Plaintiff,

v.Educational Credit Management Corporation, Defendant.

Case No. 13-29577 HRT

Adversary No. 15-01484

United States Bankruptcy Court, D. Colorado.

Signed September 7, 2016

Matthew Berkus, Denver, CO, for Plaintiff.

Chad S. Caby, Conor A. Flanigan, Denver, CO, for Defendant.

ORDER ON MOTION FOR SUMMARY JUDGMENT

Howard R. Tallman, Judge United States Bankruptcy Court

This case comes before the Court on the Motion for Summary Judgment (“Motion”) filed by Defendant Educational Credit Management Corporation (“ECMC”) on April 19, 2016 (docket #15) and Memorandum in Support (docket #16), the Response thereto filed by Debtor Jerry Lewis Hoffman (“Debtor”) (docket #17), and the Reply in Support filed by ECMC (docket #22). The Court has reviewed the pleadings and the record and is now ready to rule.

I. Procedural Background

Debtor and his wife filed a petition under Chapter 13 of the Bankruptcy Code on November 25, 2013, and obtained confirmation of their plan on March 12, 2014. In February 2014, Creditor ECMC filed Proof of Claim No. 6–1, in the amount of $39,195.35, for student loan distributions made between 1990 and 1992. Debtor objected, asking the Court to disallow the claim and issue a declaratory judgment that the “debt is invalid and not owed by the Debtor.” Because no response was filed, the Proof of Claim was disallowed on July 22, 2014 (docket #52 in case #13-29577), and as a result, ECMC has and will not share in any distributions under the confirmed plan. In the order disallowing ECMC's claim, the Court noted no determination had been made as to the dischargeability of the claim, because Debtor had not initiated an adversary proceeding under 11 U.S.C. § 523(a)(8).¹

Over a year later, on November 24, 2015, Debtor brought this adversary proceeding against ECMC. In the complaint, Debtor stated as follows:

Although the Bankruptcy Court disallowed Defendant's Proof of Claim, [Defendant] may try to pursue collection activity following the entry of discharge in the underlying bankruptcy, due to the nondischargeable nature of student loans. In this instance, Plaintiff did not receive the student loan distributions, nor were the funds distributed to the school or any other third party. Plaintiff received no benefit of the funds claimed by Defendant .... Because the debt claimed by Defendant is an invalid debt, repayment of the amount claimed would result in a hardship on Debtor and Debtor's dependents .... A judicial declaration is necessary and appropriate at this time under the circumstances in order that Plaintiff may ascertain his rights and duties as to whether the Defendant may resume collections of this debt following the discharge of his Chapter 13 Bankruptcy.

In its answer, ECMC alleged the balance of Debtor's loan was not less than $54,759.60 (based on additional loans disbursed in 1993 and 1994). ECMC also contended Debtor's complaint failed to state a claim for relief for “undue hardship” as established by § 523(a)(8) and applicable case law.

At a scheduling conference, the parties agreed this matter is a core proceeding arising under Title 11 and is thereby authorized by 28 U.S.C. § 157(b)(2)(A). A discovery schedule was agreed upon, and a further scheduling conference is currently set for September 13, 2016, to set a trial.

II. Undisputed Facts

From 1989 to 1993, Debtor received six federal Stafford loans totaling $16,486. Debtor admits he borrowed these funds, and they were used to pay his tuition at Keene State College in New Hampshire (“Keene”), where he attended undergraduate school from September 1989 to April 1994. Checks from these loans were made payable to both the college and to Debtor, jointly. (Response, Ex. 3,4,5). Debtor acknowledges endorsing these checks and allowing them to be applied to his tuition account. These loans were consolidated in 2002, and are evidenced by Proof of Claim #3-1 filed by the Department of Education through its agent, MOHELA (Missouri Higher Education Loan Authority). Debtor has acknowledged this debt and not moved for MOHELA's claim to be disallowed or discharged.

From 1990 to 1994, Debtor also applied for four federal SLS loans from Citibank totaling $17,000. These loans are evidenced by four documents entitled “Application and Promissory Note for an SLS Loan.” (Ex. B-1 to B-4). Debtor signed these documents, as did a representative of Keene (in the “school certification” section). The notes are stamped by Citibank with a lender code and date received, but are not signed by a Citibank representative. Debtor admits he signed the documents, but alleges the applications were not properly processed and the funds he requested were never dispersed to him. Keene has no record of receiving the funds, and neither the school nor the lender has copies of the SLS disbursement checks.

While Citibank was the original lender, United Student Aid Funds (“USA Funds”) was the original guarantor. ECMC is the current guarantor providing services to the United States Department of Education. ECMC is a student loan guaranty agency in the Federal Family Education Loan Program (“FFELP”) and is governed by the Higher Education Act, 20 U.S.C. § 1070, et seq., and 34 C.F.R. 682.100, et seq. ECMC is a non-profit corporation that provides specialized guarantor services, which include accepting assignment of student loans when a borrower has filed bankruptcy or an adversary proceeding is commenced contesting the validity or enforceability of a student loan debt. (Ex. A).

In December 2005, Pioneer Credit Recovery, Inc. (“PCR”), a duly authorized representative of USA Funds, issued to Debtor a Notice Prior to Wage Withholding, pursuant to 20 U.S.C. § 1095a,² to collect amounts due under the SLS loans. Debtor requested an administrative wage garnishment hearing, challenging the legality and enforceability of the SLS Loans. In March 2006, a Wage Withholding Administrative Hearing (the “Administrative Hearing”) was granted. The parties submitted written evidence and argument. Debtor asserted the wage garnishment was improper because: 1) no SLS Loan disbursements were ever made to him; 2) the Promissory Notes were not enforceable because the lender portion was never completed; and 3) the Notice of Loan Guaranty and Disclosure Statements pertained only to two out of four academic calendar years and were not signed by Debtor. (Ex. G., p. 2).

After consideration of the written argument and evidence submitted by the parties, on April 13, 2006, the Hearing Officer issued a “Wage Withholding Administrative Hearing Final Decision” (the “Agency Decision”), in which he concluded as follows:

Borrower next argues that the Promissory Notes presented by Pioneer Credit Recovery, Inc. are not completed or signed by the lender and that they do not list the actual amount disbursed to Borrower or for Borrower's benefit. Borrower's argument is, in essence, that he does not remember the loans at issue being disbursed to him or for his benefit and that because the lender portion of the Promissory Note was not completed, Pioneer Credit Recovery, Inc. cannot prove that such loans were disbursed.

In response, Pioneer Credit Recovery, Inc. relies upon several other documents to establish that the loans were in fact disbursed and remain outstanding. First, Pioneer Credit Recovery, Inc. relies upon two Notices of Loan Guaranty and Disclosure Statements. The first reflects a total indebtedness to Citibank Student Loans of $12,000.00 and the second reflects a total indebtedness to Citibank Student Loans of $17,000.00. The lender in each instance was Citibank. Pioneer Credit Recovery, Inc. also submits a Forbearance Request Form signed by Borrower on October 3, 1995 requesting the forbearance of his loan balance in the amount of $17,073.01, an amount that corresponds to the Notice of Loan Guaranty and Disclosure Statement. Borrower's request for loan forbearance in October of 1995 of loans that were lended [sic] by Citibank Student Loans—loans that he has claimed in this hearing were not disbursed—undermines the credibility of his argument that none of the loans were disbursed.

Based upon all of the foregoing, and upon all of the documents submitted by Pioneer Credit Recovery, Inc. and by Borrower, it is my decision that Borrower has failed to prove by preponderance of the credible evidence that the loans at issue are not enforceable because they were not disbursed and/or for other reasons discussed above. While Pioneer Credit Recovery, Inc. has not produced perfect documentation, it is sufficient to establish the existence of unpaid student loan obligations. Accordingly, Borrower's request for relief from wage garnishment on the basis that the loans at issue are not enforceable is denied.

Ex. G., p. 3.

In May 2006, Debtor filed a complaint in the United States District Court for the District of Colorado seeking judicial review of the Agency Decision and a declaratory judgment that the student loan debts were not enforceable. On July 29, 2008, the complaint was dismissed without prejudice³ and the District Court action was closed. (Ex. I, J, K).

Following dismissal of the District Court Action, Debtor's wages were the subject of several administrative wage garnishment payments on his SLS Loans, including six voluntary or involuntary payments made on: (1) August 4, 2008; (2) August 8, 2008; (3) August 18, 2008; (4) August 25, 2008; (5) September 2, 2008; and September 8, 2008. (Ex. A).

When Debtor and his wife filed for bankruptcy in November 2013, they listed the following debts on Schedule E: (1) $10,842 owing to MOHELA; (2) $35,810 to Sallie Mae (for wife's student loan); and (3) four debts owing to the U.S. Department of Education in the amounts of $11,080, $9,395, $10,713, and $10,101 (totaling $52,131). These debts were all marked as disputed. After several objections were resolved, the plan was confirmed in March 2014, with Debtor to make...