Kashikar v. Turnstile Capital Mgmt., LLC (In re Kashikar)

567 B.R. 160

IN RE: Melissa Hoda KASHIKAR, Debtor.

Melissa Hoda Kashikar, Appellant,

v.Turnstile Capital Management, LLC, assignee from DB Structured Products, Inc., Appellee.

BAP No. CC–16–1298–FLKu

Bk. No. 2:14–bk–23848–ER

Adv. No. 2:15–ap–01184–ER

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Submitted without oral argument on March 23, 2017

Filed April 28, 2017

M. Jonathan Hayes on the brief for appellant

Melissa Hoda Kashikar; Scott S. Weltman on the brief for appellee Turnstile Capital Management, LLC.

Before: FARIS, LAFFERTY, and KURTZ, Bankruptcy Judges.

OPINION

FARIS, Bankruptcy Judge:

INTRODUCTION

Section 523(a)(8) of the Bankruptcy Code¹ provides that several categories of educational indebtedness are not dischargeable in bankruptcy unless the debtor proves that paying the debt would impose undue hardship on the debtor or her dependents. Chapter 7 debtor Melissa Hoda Kashikar argues that her educational debt owed to Appellee Turnstile Capital Management LLC ("Turnstile") is not covered by § 523(a)(8). The bankruptcy court declined to consider her argument concerning one of the categories of debt and held that her debt was included in the category of an "educational benefit" under § 523(a)(8)(A)(ii). The court erred on both counts. Accordingly, we REVERSE IN PART the court's ruling as to § 523(A)(8)(A)(ii), VACATE the court's ruling as to § 523(a)(8)(A)(i), and REMAND this case to the bankruptcy court.

FACTUAL BACKGROUND

Ms. Kashikar attended St. Matthew's University School of Medicine ("SMU") in Grand Cayman, Cayman Islands. In order to fund her education and pay for the costs of attending SMU, Ms. Kashikar signed an application and promissory note with StudentLoan Xpress. Turnstile's predecessor in interest² directly disbursed the funds to SMU.

There is no dispute that Ms. Kashikar attended classes at SMU for the purposes of obtaining a degree and learning about medicine. However, Ms. Kashikar did not complete her education at SMU. She returned to the United States, but could not transfer any of her SMU credits.

On July 21, 2014, Ms. Kashikar filed her chapter 7 petition. She scheduled her student loan on Schedule F in the amount of $73,804. She received a standard discharge on or around November 10, 2014.

On April 14, 2015, Ms. Kashikar filed an adversary complaint seeking a determination that the loan (the balance of which had grown to $74,968.74) was discharged under § 523(a)(8). The complaint is very brief. After identifying the parties and describing the loan, it alleges that:

Since the purpose of the loan(s) in question were not for an, "eligible education institution" as defined by 26 U.S.C. 221(d)(1) and (2), the subject loan(s) are not, "qualified education loan(s)" under 11 U.S.C. 523(a)(8)(B), and therefore not subject to the student loan general exception to discharge found at 11 U.S.C. 523(a)(8). Accordingly, the loan(s) alleged in Paragraph 4 were discharged on November 12, 2014, when Plaintiff/debtor obtained her discharge in the underlying bankruptcy case.

In response to this paragraph of the complaint, Turnstile denied that the loan was discharged.

The parties entered into a Pretrial Stipulation for Claims for Relief ("Pretrial Stipulation"). The parties agreed that certain facts were admitted and required no proof, including:

SMU has never been, and is not now, an "eligible educational institution" as that term is defined under section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088 ), and has never been, and is not now, eligible to participate in a program under title IV of the Higher Education Act.

The parties further stipulated that no issues of fact remained to be litigated and that:

The following issues of law, and no others, remain to be litigated:

Whether or not Plaintiff's student loans were excepted from discharge under 11 U.S.C. § 523(a)(8) ?

Defendant's Defenses:

Can Plaintiff discharge her Student Loans solely under 11 U.S.C. § 523(a)(8)(B), as plead [sic] in the complaint?

The Pretrial Stipulation provided that "this stipulation shall supersede the pleadings and govern the course of trial in this adversary proceeding, unless modified to prevent manifest injustice."

After reviewing the Pretrial Stipulation, the bankruptcy court determined that there were no disputed facts to be litigated and directed the parties to submit briefs explaining why each party was entitled to judgment as a matter of law. The court noted that it treated the Pretrial Stipulation as a pretrial order and said that "the Pretrial Stipulation supersedes the pleadings and governs this action."

On July 22, 2016, Ms. Kashikar filed her motion for judgment as a matter of law ("Motion").³ She contended that her loan did not fall within §§ 523(a)(8)(A)(i), (A)(ii), or (B). Regarding subsection (A)(i), she argued that SMU was not an eligible "governmental unit" as contemplated by the Bankruptcy Code. Regarding subsection (A)(ii), she said that the statute covers only "funds received" directly by the debtor. Because she did not "actually" or "directly" receive any of the loan proceeds (which were paid directly to SMU), she argued that subsection (A)(ii) was not applicable. Regarding subsection (B), she argued that Turnstile conceded that her loan was not a "qualified educational loan" as defined by the Internal Revenue Code.

In response, Turnstile contended that Ms. Kashikar's complaint was deficient under Civil Rule 8 and the pleading standards of Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), and Ashcroft v. Iqbal , 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), and only offered an unsupported legal conclusion concerning § 523(a)(8)(B). It also argued that she did not plead any theory relating to § 523(a)(8)(A) in her complaint and that it was prejudicial for her to raise that argument for the first time in her Motion. In the alternative, it argued that she received an "educational benefit" under § 523(a)(8)(A)(ii) and that the Ninth Circuit has commanded that the statute is to be interpreted broadly.

The bankruptcy court issued its memorandum decision on September 2, 2016. It considered whether Ms. Kashikar's loan fell into any of the categories enumerated in § 523(a)(8).

The court said that it would not decide whether § 523(a)(8)(A)(i) covered the loan because the complaint only mentioned § 523(a)(8)(B) and Turnstile had no opportunity to address or produce evidence regarding subsection (A)(i).

However, the court decided to consider § 523(a)(8)(A)(ii) because the facts concerning that subsection were undisputed and Turnstile had an opportunity to fully brief the issues (in connection with subsection (B)). The court extensively examined the conflicting case law and sided with the cases adopting an "expansive reading" of the phrase "educational benefit" in § 523(a)(8)(A)(ii). It held that "a tuition payment made by a third-party lender to a school on behalf of a debtor creates ‘an obligation to repay funds received as an educational benefit.’ " Accordingly, the court concluded that Ms. Kashikar's loan was excepted from discharge.⁴

The bankruptcy court entered its judgment in favor of Turnstile, and Ms. Kashikar timely appealed.

JURISDICTION

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

ISSUES

(1) Whether the bankruptcy court erred in holding that Ms. Kashikar's student loan was covered by § 523(a)(8)(A)(ii).

(2) Whether the bankruptcy court erred in declining to decide whether Ms. Kashikar's loan was covered by § 523(a)(8)(A)(i).

STANDARD OF REVIEW

"We review de novo the bankruptcy court's application of the legal standard in determining whether a student loan debt is dischargeable." Educ. Credit Mgmt. Corp. v. Jorgensen (In re Jorgensen) , 479 B.R. 79, 85 (9th Cir. BAP 2012) (citing Rifino v. United States (In re Rifino) , 245 F.3d 1083, 1087 (9th Cir. 2001) ). "To the extent the bankruptcy court interpreted statutory law, we review the issues of law de novo." Thorson v. Cal. Student Aid Comm'n (In re Thorson) , 195 B.R. 101, 104 (9th Cir. BAP 1996).

De novo review requires that we consider a matter anew, as if no decision had been rendered previously. United States v. Silverman , 861 F.2d 571, 576 (9th Cir. 1988).

DISCUSSION

Section 523(a)(8) provides that certain kinds of educational debts are not discharged in bankruptcy unless repayment of the debt would result in undue hardship. This section applies to:

(A)(i) an educational benefit overpayment or 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

(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; 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.

§ 523(a)(8).

We have previously said that § 523(a)(8) excepts four types of educational claims from discharge:

(1) loans made, insured, or guaranteed by a governmental unit; (2) loans made under any program partially or fully funded by a governmental unit or nonprofit institution; (3) claims for funds received as an educational benefit, scholarship, or stipend; and (4) any "qualified educational loan" as that term is defined in the Internal Revenue Code.

Institute of Imaginal Studies v. Christoff (In re Christoff) , 527 B.R. 624, 632 (9th Cir. BAP 2015) (quoting Benson v. Corbin (In re Corbin) , 506 B.R. 287, 291 (Bankr. W.D. Wash. 2014) ).

Ms. Kashikar did not plead or prove that repayment of the debt would subject her or a dependent to undue hardship. The only issue is whether § 523(a)(8) covers her debt to Turnstile.

A. The bankruptcy court erred in holding that Ms. Kashikar's loan is excepted from discharge under § 523(a)(8)(A)(ii).

The bankruptcy court held that Ms. Kashikar's student loan debt was...