In re Jordan

555 B.R. 636

In re: Adam Edward Jordan and Kimberley Jordan, Debtors.

Case No. 15-51041

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

Signed July 1, 2016

Laura M. Nesbitt, The Nesbitt Law Firm, Dublin, OH, for Debtors.

Edward M. King, Frost Brown Todd LLC, Louisville, KY, for Educational Credit Management Corporation.

Faye D. English, Chapter 13 Trustee, Columbus, Ohio.

Bethany J. Hamilton, Assistant United States Attorney, Columbus, Ohio, for United States Department of Education

OPINION AND ORDER ON OBJECTIONS TO CONFIRMATION OF THE DEBTORS' CHAPTER 13 PLAN

John E. Hoffman, Jr., United States Bankruptcy Judge

I. Introduction

Under the Bankruptcy Code, student loan debts are dischargeable only if repayment of the debts would impose an undue hardship on the debtors and their dependents. Adam Edward Jordan and Kimberley Jordan (collectively, the “Debtors”) have not attempted to demonstrate undue hardship, and their student loan debts therefore currently are nondischargeable. It is hornbook bankruptcy law that debtors remain personally liable for the entirety of their nondischargeable debts. Yet the Debtors are seeking confirmation of a Chapter 13 plan containing a special provision that would eliminate their personal liability for a portion of their nondischargeable student loan debt. Because this proposed treatment of the student loan debt violates the Bankruptcy Code, the Court denies confirmation of the plan without prejudice to the Debtors' right to file an amended plan that is consistent with this opinion.

II. Jurisdiction and Constitutional Authority

The Court has jurisdiction to hear and determine this contested matter pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(L). Although the Court would have the constitutional authority to enter an order denying confirmation of the Debtors' Chapter 13 plan even if the order were final, see, e.g. , In re Digerati Techs., Inc. , No. 13–33264, 2014 WL 2203895, at *2 (Bankr.S.D.Tex. May 27, 2014), it is settled that an order denying confirmation of a Chapter 13 plan is not a final order if it permits the debtor to propose an amended plan. Bullard v. Blue Hills Bank , ––– U.S. ––––, 135 S.Ct. 1686, 191 L.Ed.2d 621 (2015).

III. Background

A. The Debtors' Student Loan Debt

On February 25, 2015 (the “Petition Date”), the Debtors commenced their bankruptcy case by filing a petition for relief under Chapter 13 of the Bankruptcy Code. On their Schedule F—Creditors Holding Unsecured Nonpriority Claims (Doc. 1), the Debtors listed several student loan debts, and two entities—the Educational Credit Management Corporation (“ECMC”) and the United States Department of Education (the “Department”)—filed proofs of claim based on these debts:

• The Debtors scheduled two student loan claims against Mrs. Jordan in the names of “ED America/GLELSI” and the Great Lakes Higher Education Corporation. After the Petition Date, the loans were assigned to ECMC, which filed proof of claim number 4-1, asserting an unsecured nonpriority claim against the bankruptcy estate of Mrs. Jordan in the amount of $44,584.01. ECMC's claim included interest accruing prior to the Petition Date in the amount of $3,508.28 and, pursuant to 34 C.F.R. § 682.410(b)(2), collection costs in the amount of $8,727.47.¹

• The Debtors listed a claim against Mr. Jordan on Schedule F for which the Department filed proof of claim number 9-1, asserting an unsecured nonpriority claim against the bankruptcy estate of Mr. Jordan in the amount of $48,038.64, including interest in the amount of $1,324.65.

Student loan borrowers are in “default” if they are delinquent on their monthly payments for 270 days. See 20 U.S.C. § 1085(l). According to the Debtors' own testimony at the confirmation hearing, their student loan debts were more than 270 days delinquent as of the Petition Date. Doc. 57 (the “Hearing Transcript”) at 36, 39–40. In their brief in support of confirmation (the “Debtors' Brief”) (Doc. 64), the Debtors conceded that each of their student loans was in default on the Petition Date. Debtors' Br. at 7.

B. The Debtors' Proposed Treatment of Their Student Loan Debt

The Debtors seek confirmation of a Chapter 13 plan (the “Plan”) (Doc. 44) containing several special provisions.² The special provision at issue here (the “Special Provision”) provides:

Student Loans: Any student loan creditor shall be permanently enjoined from charging late fees, collection fees, or any other penalties based solely upon its pro rata Chapter 13 Plan distributions being less than the minimum monthly payments it would otherwise be contractually entitled to during the life of the plan. Any default status on any student loan account is waived by the creditor pursuant to § 1322(b)(3) upon confirmation and the student loan creditor shall remove the default status on the student loan account as of the date of plan confirmation; cease any ongoing reporting of default status to the national credit bureaus; cease all wage garnishment; and cease any requested withholding of income tax refunds. An interest rate no higher than the standard promissory note interest rate shall apply to any student loan as of the date of filing going forward through discharge.

Plan at 12.

In other words, the Special Provision would:

• permanently enjoin the Debtors' student loan creditors from charging certain late fees, collection fees and other penalties;

• unilaterally declare that the creditors have waived the default status on the Debtors' student loans upon confirmation of the Plan and require the creditors to (i) remove the default status on the loan accounts as of the date of confirmation of the Plan and (ii) cease reporting the default status to the national credit bureaus; and

• prohibit the creditors from accruing interest at the default rate from the Petition Date to the date the Debtors receive a discharge.³

Contending that the Special Provision violates the Bankruptcy Code and other federal law, the Department, ECMC and Faye D. English, the Chapter 13 trustee (the “Trustee”), oppose confirmation of the Plan.⁴

IV. Legal Analysis

A. The Nondischargeable Nature of Student Loan Debt

Student loan debt is nondischargeable unless debtors carry their burden of proving that “excepting such debt from discharge ... would impose an undue hardship on [them] and [their] dependents.” 11 U.S.C. § 523(a)(8). Debts excepted from discharge under § 523(a)(8) are not discharged in Chapter 13 cases. See 11 U.S.C. § 1328(a)(2). Thus, as is the case under other chapters of the Bankruptcy Code, unless debtors establish undue hardship, “[s]tudent loans ... fall within the category of nondischargeable debts and pass through the [Chapter 13] bankruptcy process unaffected.” Ekenasi v. Educ. Res. Inst. (In re Ekenasi) , 325 F.3d 541, 545 (4th Cir.2003).

The Debtors have not demonstrated undue hardship—in fact, they have not even attempted to do so—and the student loan debt held by the Department and ECMC therefore currently is nondischargeable. In addition, the Department and ECMC hold unsecured claims. As discussed below, the unsecured nature of the claims and the nondischargeability of the debt on which those claims are based have consequences dictated by longstanding Supreme Court precedent.

B. Amounts Accruing Postpetition on Unsecured Claims

The Department and ECMC both hold unsecured claims. ECMC's proof of claim expressly states that it includes interest only to the extent the interest had accrued as of the Petition Date, and there is no reason to believe that the Department failed to likewise so limit the amount of its claim. This is because unsecured creditors generally are not permitted to recover postpetition interest on their claims.⁵ See 11 U.S.C. § 502(b)(2) ( “[I]f [an] objection to a claim is made, the court ... shall determine the amount of such claim ... as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that ... such claim is for unmatured interest.”);⁶ see also Official Comm. of Unsecured Creditors v. Dow Corning Corp. (In re Dow Corning Corp.) , 456 F.3d 668, 682 (6th Cir.2006) (describing as “persuasive” those cases in which courts “have denied unsecured creditors attorneys' fees, costs and expenses from insolvent debtors based upon, inter alia , [an] analogy between these charges and postpetition interest”).

Section 502(b)(2) of the Bankruptcy Code applies even if the debt on which the claim is based is nondischargeable.⁷ The Department and ECMC do not argue otherwise—nor could they in light of Supreme Court precedent. In Bruning, a decision involving nondischargeable tax debt, the Supreme Court pointed out that “the general rule for liquidation of the bankruptcy estate has long been that a creditor will be allowed interest only to the date of the petition in bankruptcy.” Bruning , 376 U.S. at 361–62, 84 S.Ct. 906. According to the Supreme Court, “[t]he basic reasons for the rule denying post-petition interest as a claim against the bankruptcy estate are the avoidance of unfairness as between competing creditors and the avoidance of administrative inconvenience.” Id. at 362, 84 S.Ct. 906. The Supreme Court explained that when “assets are... insufficient to pay debts in full” (i.e., the bankruptcy estate is insolvent), allowing postpetition interest on unsecured claims would be either pointless or unfair:

If all claims ... bore the same rate of interest ... it would be immaterial whether the dividend was calculated on the basis of the principal alone or of principal and interest combined. But some of the debts might carry a high rate and some a low rate, and hence inequality would result in the payment of interest which accrued during the delay incident to collecting and distributing the funds. As this delay was the act of the law, no one should thereby gain an advantage or suffer a loss.

Id. at 362 n....