In re Crawford

653 B.R. 627

IN RE: James N. CRAWFORD, Debtor.

Case No. 16-52599

United States Bankruptcy Court, S.D. Ohio, Eastern Division

Signed September 19, 2023

Kenneth L. Sheppard, Jr., Sheppard Law Offices Co. L.P.A., Columbus, OH, for Debtor.

ORDER DISCHARGING ORDER TO SHOW CAUSE TO SALLIE MAE BANK

C. Kathryn Preston, United States Bankruptcy Judge

James N. Crawford, the Debtor in this 2016 Chapter 7 case ("Debtor"), filed an Amended Motion for an Order to Show Cause Why Creditor Sallie Mae Bank Should not be Held in Contempt of Court for Violation of the Automatic Stay and Discharge Injunctions (Doc. #27) (the "Motion), whereupon the Court issued an Order Requiring Sallie Mae Bank to Appear and Show Cause Why It/They Should Not Be Held in Contempt for Willful Violation of Automatic Stay and/or Discharge Injunction (Doc. #28) (the "OTSC"). Sallie Mae Bank ("Sallie Mae") filed a response to the Motion (Doc. #34). Debtor filed a reply (Doc. #35) ("Debtor's Reply"), which alleged numerous facts and posited numerous new theories not raised in the Motion. At the Court's invitation, Sallie Mae filed a surreply (Doc. #46). Each party submitted affidavits with their papers. At the hearing on the OTSC, the parties agreed that a threshold issue is whether the debt owed to Sallie Mae was discharged by Debtor's Chapter 7 discharge, and that the issue can be decided upon the materials before the Court. The Court will consider the appropriate averments in the affidavits, but cannot, of course, consider any legal conclusions set forth in an affidavit, facts of which the affiant has not illustrated that he or she has personal knowledge, or facts to which the affiant would not be permitted to testify (based on the information contained in the affidavit).

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and Amended General Order 05-02 entered by the United States District Court for the Southern District of Ohio, referring all bankruptcy matters to this Court. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) and (O).

I. Findings of Fact

The facts relevant to resolution of the threshold issue are without genuine material dispute. Debtor is indebted to Sallie Mae for two student loans incurred prior to his Chapter 7 bankruptcy case. Sallie Mae identifies the loans as Loan 1413 and Loan 9232. To defray the costs of her education at Oklahoma City University ("OCU"), Debtor and his daughter Emily Crawford ("Emily") had obtained the two student loans, under a program known as "Smart Option Student Loans." Debtor co-signed the loans with Emily.

Debtor filed a Voluntary Petition for relief under Chapter 7 of the Bankruptcy Code on April 20, 2016. A copy of the Notice of Chapter 7 Bankruptcy Case (Doc. #7), alerting creditors and parties in interest to the pendency of the bankruptcy case and the automatic stay, was mailed to Sallie Mae by the clerk of court. See BNC Certificate of Notice (Doc. #8). No objections to discharge or requests for determination of dischargeability of debt were lodged. The Court issued an Order of Discharge (Doc. #14) on September 13, 2016. A copy of the Order of Discharge was mailed to Sallie Mae by the clerk of court. See BNC Certificate of Notice (Doc. #15).

After the Discharge was issued, Sallie Mae began efforts to collect the balances due under the two notes. After payment of some of the debt,¹ Debtor filed the Motion asserting that Sallie Mae's conduct constitutes violation of the automatic stay and the discharge injunction. Debtor seeks an order holding Sallie Mae in contempt and awarding Debtor actual and punitive damages.

II. Arguments of the Parties

Debtor argues that the student loans held by Sallie Mae are private, dischargeable loans, which do not fall within the scope of exceptions to discharge articulated in 11 U.S.C. § 523(a)(8)(A). Debtor relies on Homaidan v. Sallie Mae, Inc., 3 F.4th 595 (2d Cir. 2021) for this proposition. Debtor points out that Sallie Mae did not file an adversary proceeding seeking a court determination of dischargeability of the debt, and that Debtor did not enter into a reaffirmation agreement with Sallie Mae regarding the loans. In the alternative, Debtor asserts that, for a plethora of reasons, the loans are not qualified education loans as that term is used in 11 U.S.C. § 523(a)(8)(B), which also excepts certain debts from the Discharge. Either way, according to Debtor, the loans are not excepted from discharge pursuant to § 523(a)(8) and actions to collect the outstanding balance are, therefore, barred by the discharge injunction.

Sallie Mae counters that (1) Homaidan does not apply; (2) the loans are nondischargeable "qualified education loans" pursuant to § 523(a)(8)(B) of the Bankruptcy Code; and (3) Debtor's theories why the loans were allegedly discharged are not supported by any factual evidence or law. Moreover, according to Sallie Mae, even if the dischargeability of the loans is in question, the remedy of civil contempt is not available to Debtor under the Supreme Court decision Taggart v. Lorenzen, — U.S. —, 139 S. Ct. 1795, 204 L.Ed.2d 129 (2019), because there is a "fair ground of doubt" whether Sallie Mae's conduct was wrongful based on case law holding private student loans nondischargeable and such loans collectable despite a bankruptcy discharge.

III. Analysis

A. Sallie Mae Did Not Violate the Automatic Stay

Before addressing the question of dischargeability of the Sallie Mae loans, the Court can dispose of that prong of the Motion asserting violation of the automatic stay.

When Debtor filed his petition for relief under the Bankruptcy Code, § 362 of the Bankruptcy Code automatically imposed a stay prohibiting most activity to collect debts owed by Debtor. 11 U.S.C. § 362(a). Upon entry of the Discharge on September 13, 2016, the automatic stay expired as to Debtor and Debtor's assets. 11 U.S.C. § 362(c)(2). Debtor's materials indicate that Sallie Mae commenced efforts to collect the balances due from Debtor on or about September 20, 2016, after entry of the Discharge. The Motion does not allege that Sallie Mae undertook any efforts to collect the debt owed by Debtor prior to the entry of the Discharge. Thus, the Motion fails to illustrate that the automatic stay was violated by Sallie Mae, and the Motion must be denied to the extent that it asserts such violations.

B. Sallie Mae Did Not Violate the Discharge Injunction

Upon entry of the order granting Debtor a discharge and the resulting expiration of the automatic stay, in its place the Bankruptcy Code imposed the discharge injunction.

Section 727 of the Bankruptcy Code provides for a bankruptcy discharge in Chapter 7 cases, stating in pertinent part:

(a) The court shall grant the debtor a discharge . . . .

(b) Except as provided in section 523 of the title, a discharge under subsection (a) of this section discharges the debtor from all debts that arose before the date of the order for relief under this chapter

. . . .

11 U.S.C. § 727(a) and (b). Obtaining a discharge is the goal of most individuals who seek bankruptcy relief. The discharge essentially represents the release of the legal obligation to pay the debtor's debts, except as provided in § 523. Houston v. Edgeworth (In re Edgeworth), 993 F.2d 51, 53 (5th Cir. 1993). As stated in § 727, exceptions to the discharge are set forth in § 523. Among the exceptions are particular student loans. Section 523(a) provides in pertinent part:

(a) A discharge under section 727 . . . does not discharge an individual debtor from any debt

. . .

(8) . . . for

(A)(I) . . . [a] 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; or

. . .

(B) 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.

11 U.S.C. § 523(a)(8).

In order to effectuate the bankruptcy discharge, § 524 provides:

(a) A discharge in a case under this title

(1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727 . . . of this title . . . ;

(2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor

. . . .

11 U.S.C. § 524(a) (emphasis added). Thus, if a debt is excepted from the bankruptcy discharge, the discharge injunction presents no impediment to collection activities by the creditor holding that debt.

1. Dischargeability of Private Educational Loans under § 523(a)(8)(A)(ii)

Debtor first argues that the student loans were "direct-to-consumer" private loans that were not made for "qualified education expenses." Thus, asserts Debtor, the loans were dischargeable, relying on Homaidan v. Sallie Mae, Inc. (In re Homaidan), 3 F.4th 595 (2d Cir. 2021). Homaidan does not avail him.

In Homaidan, Homaidan had brought a complaint for declaratory judgment against certain student loan lenders (collectively referred to as "Navient"), seeking a determination that his direct-to-consumer loans had been discharged by his Chapter 7 bankruptcy. Because Navient had made attempts to collect the debt after entry of Homaidan's discharge, Homaidan also sought damages for violation of the discharge injunction. Section 523(a)(8)(B) was at the core of the complaint. Navient moved to dismiss the adversary proceeding, arguing that the court need not assess the dischargeability of Navient's debt under § 523(a)(8)(B) because the debt was excepted from discharge by § 523(a)(8)(A)(ii) absent a finding of undue hardship on the debtor or the debtors dependents. The bankruptcy court denied Navient's motion to dismiss the complaint. Homaidan v. SLM Corp. (In re Homaidan), 596 B.R. 86 (Bankr. E.D.N.Y. 2019).

Navient...