Irigoyen v. 1600 W. Invs., LLC (In re Irigoyen)

659 B.R. 1

IN RE: Reanna Leigh IRIGOYEN, Debtor.

Reanna Leigh Irigoyen, Appellant, v. 1600 West Investments, LLC;

White Knight Funding, LLC, Appellees.

BAP No. AZ-23-1181-LBC

Bk. No. 2:20-bk-04594-MCW

Adv. No. 2:21-ap-00037-MCW

United States Bankruptcy Appellate Panel of the Ninth Circuit

Filed May 3, 2024

Appeal from the United States Bankruptcy Court for the District of Arizona, Madeleine C. Wanslee, Bankruptcy Judge, Presiding

German Yusufov of Yusufov Law Firm PLLC, Phoenix, AZ, argued for appellant.

John D. Parker, II of Parker Law Firm, P.L.C., Phoenix, AZ, argued for appellees.

Before: LAFFERTY, BRAND, and CORBIT, Bankruptcy Judges.

OPINION

LAFFERTY, Bankruptcy Judge:

INTRODUCTION

Section 523(a)(8)¹ of the Bankruptcy Code excepts from discharge certain qualifying loans used to fund a debtor's education. It is well established that, if a debtor wants to receive a discharge of a qualified educational loan, the debtor bears the burden of filing a lawsuit and obtaining a judgment of dischargeability. Otherwise, debts that come within the purview of § 523(a)(8) are automatically nondischargeable, and the lender is not required to obtain a nondischargeability judgment before collecting on the debt post-discharge.

This case presents a more pointed question: what should the consequence be if a court determines after discharge that a debt is not qualified as the type of educational loan excepted from discharge? Should the debt be presumed nondischargeable until the debtor proves otherwise? And should efforts to collect that presumptively nondischargeable debt be exempt from the consequences of violating the discharge injunction?

After Reanna Leigh Irigoyen ("Debtor") received her chapter 7 discharge, appellees 1600 West Investments, LLC ("1600 West") and White Knight Funding, LLC ("White Knight" and, together with 1600 West, "Creditors") continued to attempt collection of the debt owed to them. Debtor and Creditors disputed whether the subject debt was discharged under § 523(a)(8). After trial on the issue, the bankruptcy court held that the debt was dischargeable. That conclusion is not on appeal.

The bankruptcy court further held that the debt to Creditors was not discharged until Debtor obtained a judgment of dischargeability and, as a result, did not assess whether Creditors should be subject to contempt sanctions for violation of the discharge injunction. The bankruptcy court relied on Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440, 450, 124 S.Ct. 1905, 158 L.Ed.2d 764 (2004), for the proposition that § 523(a)(8) is "self-executing" and that therefore the debt is not discharged until the court determines otherwise. We believe the bankruptcy court erroneously interpreted the Supreme Court's decision and the "self-executing" nature of § 523(a)(8). We, therefore, VACATE the portion of the bankruptcy court's ruling that is inconsistent with this decision and REMAND with instructions to the bankruptcy court to assess whether Creditors should be held in contempt for a violation of the discharge injunction.

FACTS²

A. Prepetition Events

Well prior to the commencement of Debtor's bankruptcy case, Debtor borrowed funds to pay for her higher education (the "Original Loan"). The Original Loan was serviced by Navient Solutions, Inc. ("Navient"). Subsequently, Debtor and Navient entered into an agreement whereby Debtor agreed to pay Navient $11,600 in exchange for Navient to consider the Original Loan settled in full.

To finance her litigation, negotiation, and settlement of the Original Loan, Debtor obtained a separate loan from 1600 West, a for-profit lender (the "Debt"). 1600 West later assigned the Debt to White Knight.³

B. Debtor's Bankruptcy Filing and the Adversary Proceeding

On May 1, 2020, Debtor filed a chapter 7 petition. On August 31, 2020, following the chapter 7 trustee's report of no distribution, Debtor received her chapter 7 discharge.

Almost immediately after Debtor received her discharge, Creditors, through their agent, continued their attempts to collect on the Debt. In response to these collection efforts, Debtor's counsel sent several emails and letters to Creditors' counsel, asserting that the Debt was discharged.⁴ Notwithstanding these emails and letters, Creditors regularly contacted Debtor to demand payment on the Debt.

In February 2021, Debtor filed a complaint against Creditors, requesting: (i) a declaration that the Debt was discharged notwithstanding § 523(a)(8); (ii) contempt sanctions for Creditors' violation of the discharge injunction; and (iii) injunctive relief prohibiting further collection attempts by Creditors. Thereafter, Debtor filed a motion for summary judgment, requesting a judgment in her favor on all counts. The bankruptcy court denied the motion, holding that there was insufficient information in the record regarding the parties' factual dispute about whether the Original Loan was a qualified educational loan for purposes of § 523(a)(8); the bankruptcy court set the matter for trial.

After trial, the bankruptcy court issued a decision containing a thorough factual analysis of the detailed statutory requirements of § 523(a)(8), and ultimately finding that Creditors failed to establish the cost of attendance at Debtor's university or that Debtor's university was an eligible institution, as required by the statute. Thus, the bankruptcy court determined that Creditors failed to demonstrate that the Debt qualified as the type of debt described in § 523(a)(8) and, therefore, held that the Debt was discharged.

The bankruptcy court further held that, because § 523(a)(8) is "self-executing," the Debt was not discharged until Debtor obtained a judgment declaring that the Debt was discharged. As such, the bankruptcy court concluded that Creditors' post-discharge collection attempts did not violate the discharge injunction of § 524(a). Debtor timely appealed.⁵

JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.

ISSUE

Did the bankruptcy court err in holding that a debt that is dischargeable because it does not qualify as an educational loan under § 523(a)(8) is nevertheless considered nondischargeable until the debtor obtains a judgment of dischargeability, and that the lender is shielded from liability for violation of the discharge injunction until the court adjudicates the debt dischargeable?

STANDARD OF REVIEW

The issue before the Panel is purely a question of law, which we review de novo. Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee), 218 B.R. 916, 919 (9th Cir. BAP 1998) ("We review conclusions of law, including the bankruptcy court's interpretation of the Bankruptcy Code, de novo."), aff'd, 193 F.3d 1083 (9th Cir. 1999). "De novo review is independent and gives no deference to the trial court's conclusion." Roth v. Educ. Credit Mgmt. Corp. (In re Roth), 490 B.R. 908, 915 (9th Cir. BAP 2013).

DISCUSSION

In chapter 7 cases, unless one of the grounds for denial of a discharge applies, "[t]he court shall grant the debtor a discharge . . . ." § 727(a) (emphasis added). "Except as provided in section 523," the discharge is of "all debts that arose before the date of the order for relief . . . ." § 727(b). To enforce the discharge, § 524(a)(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 . . . [discharged] debt as a personal liability of the debtor, whether or not discharge of such debt is waived[.]" § 524(a)(2).

Section 523(a) excepts several types of debts from the general discharge and provides two types of exceptions: "(1) those that are self-executing and (2) those that require the creditor to seek a determination of dischargeability in the bankruptcy court by a fixed deadline, failing which the exception does not apply and the debt is discharged." Garcia v. Sklar (In re Sklar), 626 B.R. 750, 768 (Bankr. S.D.N.Y. 2021). Only three subsections of § 523 are not "self-executing" - § 523(a)(2), (a)(4), and (a)(6) - and thus require a complaint be filed by a creditor by a set deadline. § 523(c)(1); Rule 7001(6). Otherwise, a complaint for determination of dischargeability under the remaining subsections of § 523(a) may be brought at any time. Rule 4007(b); see also In re Sklar, 626 B.R. at 768.

Section 523(a)(8), which excepts from discharge certain types of educational debt, is one of the self-executing exceptions to discharge. Hood, 541 U.S. at 450, 124 S.Ct. 1905. Under § 523(a)(8), debts that meet the detailed statutory requirements of § 523(a)(8)(A)(i), (A)(ii), or (B) are excepted from discharge "unless excepting such debt from discharge . . . would impose an undue hardship on the debtor and the debtor's dependents[.]"

The bankruptcy court, relying on Hood, interpreted this "self-executing" statutory scheme as excepting any debt that may, however tangentially, be covered by § 523(a)(8), unless and until the debtor affirmatively obtains a judgment of dischargeability. Respectfully, we do not believe Hood resolves the issue before the Panel. As further discussed in section A, Hood analyzed the "undue hardship" exception to § 523(a)(8), not a loan's eligibility under § 523(a)(8). For purposes of this exception, Congress provided certain debtors an avenue for relief from an otherwise nondischargeable debt if such debtors meet the heavy factual burden of demonstrating "undue hardship." As explained below, the issues pertinent to the hardship determination are very different from those pertaining to whether a debt is statutorily excepted from discharge in the first place.

As discussed in section B, there is no binding authority addressing the specific issue before the Panel. However, as discussed in sections C and D, a review of statutory language, relevant case law from other jurisdictions, and policy leads the Panel to a different conclusion from the one reached by the bankruptcy court. We...