Leary v. Great Lakes Educ. Loan Servs. (In re Leary)

620 B.R. 39

IN RE: Sheldon Bert LEARY, Debtor.

Sheldon Bert Leary, Plaintiff,

v.Great Lakes Educational Loan Services and U.S. Department of Education Defendants.

Case No. 15-11583 (MG)

Adv. Proc. No. 15-01295 (MG)

United States Bankruptcy Court, S.D. New York.

Signed September 8, 2020

SHELDON B. LEARY, Pro se,

AUDREY STRAUSS, Acting United States Attorney, Southern District of New York, Attorney for U.S. Department of Education, 86 Chambers Street, 3rd Floor, New York, NY 10007, By: Joshua E. Kahane, Esq.

THE SENIAWSKI LAW FIRM PPLC, Attorneys for Great Lakes Educational Loan Services, 1460 Broadway, FL 4, New York, NY 10036, By: Barbara L. Seniawski, Esq.

MEMORANDUM OPINION AND ORDER IMPOSING CIVIL CONTEMPT SANCTIONS ON GREAT LAKES EDUCATIONAL LOAN SERVICES IN THE AMOUNT OF $378,629.62

MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE

Too often student loan borrowers face nearly insurmountable hurdles in their efforts to pay back student loan debt. Borrowers' challenges stem, in part, from predatory tactics used by some loan servicers to collect on student loan debt and from the borrowers' lack of resources to prevent such abuse, particularly when the borrower does not have an attorney. The actions—or, more appropriately, inaction—of Great Lakes Educational Loan Services ("Great Lakes"), a named defendant in this adversary proceeding over the last five years, evidences just such abuse. As explained below, Great Lakes' behavior—failing to respond to the complaint, ignoring multiple orders entered by the Court ordering Great Lakes to appear at hearings, and failing to pay $123,625.52 in sanctions ordered by this Court on April 29, 2020—was, at a minimum , grossly negligent, but really much worse. The debtor-plaintiff, Sheldon Leary, the obligor on seven student loans that were serviced by Great Lakes on behalf of the U.S. Department of Education ("DOE") was directly and seriously harmed by Great Lakes' conduct. Until a hearing before this Court on August 31, 2020, DOE was demanding that Mr. Leary pay DOE a total of $416,877.56, for unpaid principal, accrued interest and collection costs. During the August 31, 2020 hearing, DOE's counsel said that DOE is now only seeking $354,629.62, having agreed to forego collection costs.

Over five years ago, Mr. Leary, acting pro se , filed a Chapter 7 bankruptcy case; he also filed an adversary complaint, again acting pro se, seeking to discharge substantial student loan debt obtained from DOE and other student loan lenders.² Under five master promissory notes with the DOE, Mr. Leary borrowed nearly three hundred thousand dollars to pay for his three children's college tuitions. Mr. Leary's adversary proceeding named multiple defendants, including Great Lakes. Mr. Leary believed that Great Lakes, the DOE's loan servicer from whom he always received billing statements and other communications concerning the DOE loans, was the proper party to be named as a defendant in order to discharge the DOE student loans.³ Therefore, Mr. Leary served the summons and complaint on Great Lakes. While it has taken nearly five years, Great Lakes and DOE both now concede that Mr. Leary properly served the complaint on Great Lakes in September 2015, and Great Lakes promptly forwarded a copy of the complaint to DOE in early October 2015. Great Lakes did not respond to the summons and complaint. When it received the complaint from Great Lakes, DOE forwarded the complaint to the U.S. Attorney's Office for the Southern District of New York, which concluded that since DOE was not a named defendant in the complaint, DOE did not need to respond to the complaint.

The Court's docket in this adversary proceeding shows that over the next five years multiple notices and orders in connection with the default judgment Mr. Leary obtained against Great Lakes in March 2016 discharging the student loan debt were simply ignored by Great Lakes. Four years after the default judgment was entered, Mr. Leary filed a motion for contempt, seeking to enforce the discharge injunction against the DOE and Great Lakes after the DOE threatened to garnish Mr. Leary's wages for defaulting on the previously discharged debt. The Court reopened the case and entered several orders requiring Great Lakes, a named defendant in this case, to respond to the motion for contempt and appear at several case management conferences so that the Court could adjudicate the issues raised by the DOE's actions to collect the student loan debt from Mr. Leary. After repeated unsuccessful attempts to get Great Lakes to respond to this Court's scheduling orders, the Court entered an order to show cause why sanctions should not be imposed on Great Lakes. Great Lakes ignored that order as well, so the Court entered an order imposing sanctions on Great Lakes in the amount of $123,625.52 (explained below) payable to the Clerk of the Court within 14 days from the April 29, 2020 date of the order. Great Lakes' counsel acknowledges that Great Lakes was served with all of these orders, but it ignored the sanctions order as well. That blatant disregard of the Court's orders necessitated a second order to show cause why additional sanctions should not be imposed. The second order to show cause scheduled a hearing for August 31, 2020.

During the August 31, 2020 hearing on the second order to show cause to hold Great Lakes in contempt and impose sanctions, Great Lakes' counsel, who finally filed a notice of appearance in this adversary proceeding on August 13, 2020, admitted that Great Lakes had in fact been served with multiple orders, all of which Great Lakes ignored until counsel filed a response on August 24, 2020 to the Second Order to Show Cause (as defined below). The notice of appearance of Great Lakes' counsel only came about because DOE's counsel (the Office of the United States Attorney for the Southern District of New York) called Great Lakes and advised it of the scheduled hearing on the Second Order to Show Cause. Against this backdrop, Great Lakes unbelievably argues that its inaction over the last five years resulted from an "unintentional procedural error."

The Court finds this cavalier excuse wholly unsatisfactory. Great Lakes' indifference to this proceeding—in which it has been a named defendant since September 2015—seriously prejudiced Mr. Leary. To obtain a discharge of these student loan debts, Mr. Leary would have been required to show that, as of September 2015 when the complaint was filed, that his student loan debt would impose an "undue burden" on him under 11 U.S.C. § 523(a)(8). That is a difficult feat at any time, but nearly impossible now so many years later. Great Lakes' conduct highlights the exploitative tactics perpetrated by Great Lakes, seemingly with DOE's knowledge.⁴ For the reasons explained below, the Court, therefore, orders Great Lakes to pay sanctions in the amount of $354,629.62 to DOE, in full satisfaction of the amount DOE contends it is owed by Mr. Leary. To be clear, the sanctions of $354,629.62 payable to DOE is in lieu of the sanctions of $123,625.52 that Great Lakes was previously ordered to pay to the Clerk of the Court. Additionally, however, the Court orders Great Lakes to pay $24,000 to Mr. Leary for the harm he suffered over the last five years as a result of negative credit ratings, aggravation, loss of sleep and worry, harassment, pain and suffering, in addition to contributing marital strain. ("Motion for Contempt," ECF Doc. # 38 at 5; "Second Motion to Amend," ECF Doc. # 74 at 5.) Finally, upon receiving payment from Great Lakes, DOE is required to report to all credit reporting agencies that all of Mr. Leary's student loan debt has been paid in full.

I. BACKGROUND

A. Mr. Leary's Complaint, the Summons and the Great Lakes' Default Judgment

On June 17, 2015, Mr. Leary filed a petition for relief under chapter 7 of the Bankruptcy Code. (Main Case, Case No. 15-11583-mg, ECF Doc. # 1.) In his Schedule F, "Creditors Holding Unsecured Nonpriority claims," Mr. Leary listed an unsecured claim owed to Great Lakes in the amount of $259,741. (Main Case, ECF Doc. # 11.) On August 28, 2015, Mr. Leary filed an adversary complaint against Discover Student Loans, EDSI, Great Lakes, Navient, and Wells Fargo Educational Financial Services ("Wells Fargo," and collectively, the "Defendants"), seeking a discharge of his student loan debt pursuant to section 523(a)(8) of the Bankruptcy Code because "undue hardship" would result if Mr. Leary had to repay the debt. ("Complaint," ECF Doc. # 1.) The Complaint alleged that Mr. Leary owed a debt to Great Lakes in the amount of $259,741. (Complaint at 7.) Mr. Leary did not reference any debt owed to the DOE or name the DOE as a defendant.

On September 2, 2015, this Court issued a Summons and Notice of Pretrial Conference in Adversary Proceeding. ("Summons," ECF Doc. # 2.) The Summons required Great Lakes (and the other Defendants) to submit a motion or answer to the Complaint within 30 days after the Summons was issued. (See id. ) The Summons also scheduled a case management conference for October 14, 2015 at 10:00 a.m. (See id. ) Mr. Leary's affidavit of service demonstrates he served Great Lakes with the Summons and Complaint on September 23, 2015 at P.O. Box 3059, Milwaukee, WI 53201- 3059, but Great Lakes did not file any response to the Complaint. ("Affidavit of Service," ECF Doc. # 54 at 11.) Defendants Wells Fargo, Navient, and Educational Credit Management Corporation ("ECMC") filed answers to Mr. Leary's Complaint. (ECF Doc. ## 3–5.) ECMC subsequently filed an amended answer. (ECF Doc. # 7.) Mr. Leary and Defendants Navient, Wells Fargo, and ECMC reached settlements, approved by the Court, to resolve their disputes. (ECF Doc. ## 28–30, 36.)

At the August 31, 2020 hearing, counsel to Great Lakes disclosed that Great Lakes kept servicing records reflecting that Great Lakes received the Summons and Complaint in September 2015 and subsequently forwarded it to the DOE in October 2015. The...