EIGHTH CIRCUIT WEIGHS IN ... SOMEWHAT TENTATIVELY
In re Page v. NCSLT 2006-1, No. 18-6011 (8th Cir. Nov. 20, 2018) (reversing summary judgment for Trust and remanding for fact determination regarding TERI's guaranty of private student loan and its significance to the loan's dischargeability).
TERI apparently did not "fund" educational loan program after all by being involved in origination of private student loans and providing loan guarantee [for a fee added to the loan balance] so as to make such loans non-dischargeable when students later filed for bankruptcy. After all, because some courts had already resolved this issue against struggling student loan debtors who sought relief in bankruptcy court.
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| Page v. NCSLT 2006-1 (8th Cir. Nov. 20, 2018) |
On Nov 20, 2018, Bankruptcy Panel of Eight Circuit Court of Appeals reversed summary judgment obtained by one of the 15 National Collegiate student loan securitization trusts regarding nondischargeability of private student loan debt, which was based on the contention that the loan qualifies for BK discharge immunity because the The Education Resources Institute (TERI), a nonprofit entity, had been involved in loan origination.
UPDATE: Hearing consistent with the BAP's remand directive scheduled for 1/8/2019 to consider the issue regarding TERI's guarantee of the Loan and funding of the Loan program. U.S. Bankruptcy Court for the Eastern District of Missouri - St. Louis).In a to-be-published opinion, the appeals panel agreed with the bankruptcy court that a private student loan taken out by the debtor--a community college student at the time of loan origination--was an "educational loan" within the meaning of §523(a)(8)(A), but determined that the "funded by" requirement was not met based on TERI's involvement as loan processor and guarantor, - at least not based on the scant evidence presented to and ruled upon by the court below.
Based on the record below and considering the established case law on the meaning of "educational loan," we hold that the bankruptcy court did not err in characterizing the Debtor's Loan as an "educational loan" within the meaning of §523(a)(8)(A)(i). However, we conclude that the bankruptcy court's inference in NCST's favor that TERI "funded" the loan program was not reasonable as it was not supported by the evidence. We, therefore, reverse and remand the issue regarding TERI's guarantee of the Loan and funding of the program for further consideration in accordance with this opinion.While there is no definitive ruling on dischargeability yet, the Court of Appeal's opinion could turn out to be an important first step toward debt relief on a much larger scale than what the CFPB was trying to accomplish with its ill-fated enforcement action against the National Collegiate Student Loan Trust machine last year: A first glimmer of light at the end of the tunnel for debtors because all of the loans under the National Collegiate moniker were covered by a TERI guaranty agreement.
By design.
The TERI guaranty was integral to the private student loan scheme because it provided a "credit enhancement" in Wall Street lingo by making it difficult, if not impossible, for students to shed their unsecured loan obligations if they found themselves unable to pay them back after graduation, which would obviously be good for the investors. Unlike with securitized mortgages, there were no homes as secured real assets to foreclose on, leaving collection lawsuits against borrowers and cosigners, followed by execution on nonexempt assets and garnishment, as forcible collection tools.
TERI was used by the First Marblehead Corporation, the architect of the National Collegiate Student Loan behemoth, to make the loans more palatable to investors upon securitization because TERI would hold investors harmless by purchasing defaulted loans and paying full value on them, i.e. principal and accrued interest. TERI would then endeavor to collect on those loans itself and try to rehabilitate them. But TERI couldn't keep up because borrowers could not keep up. In 2008 TERI filed for bankruptcy when it became clear that it would be unable to cover the mounting losses due to high rates of delinquencies on earlier vintages of loans that were then in repayment, and little prospect for new revenue from future deals because the market's appetite for student-student-asset-backed securities (SLABS) had dissipated.
The poor quality of the most recent [highly subprime] vintages originated in 2007 just before the big crash (NCSLT 2007-1, 2007-2, 2007-3, and 2007-4) did not yet have to be recognized because most of the borrowers were still in in-school deferment and couldn't therefore default under the terms their loans were made. For these student debtors, the day of reckoning was still in the future, even if their interest rate was an APR of 12% plus a 10% Origination Fee amount that was added to principal from day one. But the writing was already on the wall. And TERI was one of the first casualties.
But TERI was a corporate entity, and was arguably instrumentalized and misused to allow for-profit entities to take advantage of TERI's not-for-profit status. Borrowers are real people. And there are tens of thousands of them facing the fallout.
Big US student loan guarantor files for bankruptcy, Reuters April 7, 2008.
The Education Resources Institute (TERI) Files for Chapter 11 Bankruptcy Protection. Volatility in student loan market adversely impacts non-profit guarantor of private loans. BUSINESS WIRE (April 7, 2008).
Private Student Loan Origination in Hindsight: What the Litigation Paper Trail (in PDF) and SEC Filings Can Tell Us About the National Collegiate Student Loan Trust Debacle (SSRN working paper) (May 10, 2018) (addressing questionable loan origination practices with respect to 2007 vintages of securitized private student loans).
In re: Richelle A. Page, Debtor.
Richelle Angela Page, Plaintiff-Appellant,
v.
JP Morgan Chase Bank, Defendant,
National Collegiate Student Loan Trust 2006-1, Defendant-Appellee.
United States Bankruptcy Appellate Panel, Eighth Circuit.
Appeal from United States Bankruptcy Court for the Eastern District of Missouri — St. Louis.
Before SALADINO, Chief Judge, DOW and SANBERG, Bankruptcy Judges.
DENNIS R. DOW, Bankruptcy Judge.
Debtor Richelle Page appeals from the Bankruptcy Court's order granting summary judgment in favor of the National Collegiate Student Loan Trust ("NCSLT") and denying Debtor's motion for summary judgment seeking a discharge of her NCSLT debt pursuant to 11 U.S.C. §523(a)(8).
For the reasons that follow, we reverse and remand.
FACTUAL BACKGROUND
The Debtor attended St. Louis Community College in the spring semester of 2006, and paid for her tuition with financial aid. In response to a loan "preapproval notice" she received from Chase Bank ("Chase"), the Debtor executed a Loan Request/Credit Agreement (the "Agreement") requesting a $30,000 loan through the "Education One Undergraduate Loan" program. She acknowledged as part of the agreement that she would be responsible for repaying any funds which were not used for educational expenses related to the community college. The instruction sheet directed applicants to submit the agreement either by regular mail or expedited delivery to The Educational Resources Institute, Inc. ("TERI"), a non-profit organization.
The loan proceeds were disbursed to the Debtor (the "Debt" or the "Loan"). The Loan was subsequently sold to NCSLT. Despite the restriction in the Agreement, the Debtor used the proceeds to pay for non-educational expenses.
The Debtor filed bankruptcy in 2010. She listed the Debt in her Schedules. The bankruptcy court entered a discharge order providing that certain debts, including those for most student loans, were not discharged. Six years later, the Debtor filed her complaint seeking a determination that her student loan debt was not excepted from discharge. The NCSLT moved for summary judgment and the Debtor filed her own motion for summary judgment. The bankruptcy court granted summary judgment in favor of NCSLT and ordered that the Debt be excepted from discharge pursuant to §523(a)(8). Specifically, the court concluded that there was no genuine issue of material fact in dispute as to whether the Loan was an "educational loan" and as to whether TERI "funded" the Loan (program) for purposes of §523(a)(8)(A)(i).
The Debtor appeals.
The Debtor appeals.
STANDARD OF REVIEW
We review the Bankruptcy Court's determination of nondischargeability de novo. Educational Credit Management Corporation v. Jesperson, 571 F.3d 775, 779 (8th Cir. 2009). Findings of fact on which the legal conclusions are based are reviewed for clear error. Id.
DISCUSSION
Was the Loan an "educational loan" as contemplated by §523(a)(8)?
Section 523(a)(8) of the Bankruptcy Code provides for certain exceptions to discharge, including an educational 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. 11 U.S.C. §523(a)(8)(A)(i). The Debtor states in her Brief on appeal that the Loan was not an "educational loan" but rather a routinely dischargeable consumer loan because of its alleged attributes (e.g., Chase's security interest in the Loan, the requirement of co-signers, and a substantial origination fee). However, the Debtor cited no cases holding that the commercial features described disqualify a loan from being an "educational loan" under §523(a)(8).
Rather than focus on a loan's features, courts routinely look to the purpose of a loan to determine whether it is "educational." See, e.g., In re Murphy, 282 F.3d 868 (5th Cir. 2002); In re Jean-Baptiste, 584 B.R. 574, 585 (Bankr. E.D.N.Y. 2018); In re Busson-Sokolik, 635 F. 3d 261, 266 (7th Cir. 2011). The debtor in Busson-Sokolik challenged whether the loan could be properly considered "educational" as required to bring it within §523(a)(8)(A). The court applied the purpose test and found that the following facts established that the loan was indeed educational: the loan was part of a package that included scholarship and grant money toward completion of the debtor's education at the school, the promissory note was signed while the debtor was a student, the debtor had to be a student to be eligible for the loan, and the loan proceeds were deposited into the debtor's student account at the school. Id. at 267. The bankruptcy court here applied a similar analysis and concluded that there was no genuine issue of material fact in dispute as to whether the Debt was for an "educational loan" based largely on the many education-related terms in the Agreement: identification as an "Undergraduate Loan," made through the "Education One" Loan Program, covering an "Academic Year," while debtor is enrolled at a specific "School." In addition, NCSLT's witness attested that the Loan was "for educational purposes."
Did the bankruptcy court err in drawing the inference in NCSLT's favor that TERI funded the program?
The Debtor also argues on appeal that the bankruptcy court erroneously inferred (in NCSLT's favor) that TERI expended resources in processing some of the bank's mail and thereby funded the loan program, stating since "TERI served in a plenary capacity as the sole entity to which loan documents were submitted," it expended its resources on the administration of the loan program and thereby funded it. The Debtor asserts that the bankruptcy court reduced the meaning of "funded" so that any entity that plays even a marginal role in a loan program can be said to have funded it.
When considering a motion for summary judgment, the court is required to review the record and draw all reasonable inferences in favor of the non-movant. Foster v. John-Manville Sales Corp., 787 F.2d 390, 391-92 (8th Cir. 1986). These inferences must then be considered in light of any competing inferences. See, e.g., In re Sunnyside Timber, LLC, 413 B.R. 352, 363 (Bankr. W.D. La. 2009)(if a reasonable trier of fact could find that the defendants engaged in collusive conduct after considering any inferences of non-collusive conduct supported by the evidence, the court should not grant summary judgment). Where the parties file cross-motions, the standards by which the Court decides the motions do not change. Livingston v. South Dakota State Medical Holding Co., Inc., 411 F. Supp. 1161, 1163 (D.S.D. 2006)(citing Heublein Inc. v. United States,996 F.2d 1455, 1461 (2nd Cir.1993)). Each motion must be evaluated independently, "taking care in each instance to draw all reasonable inferences against the party whose motion is under consideration." Id. In this case, both parties filed competing summary judgment motions, so the question before us is whether the inference drawn by the court (that TERI funded the program) was appropriate, reasonable and supported by the evidence.
The widely-held view among courts considering this issue is that the definition of "funded" should not require that actual money be placed in some type of account. In re Gakinya, 364 B.R. 366, 374 (Bankr. W.D. Mo. 2007). Instead, the test adopted by many courts is whether the nonprofit entity played any meaningful part in procurement of the loans under the program.[1] In re O'Brien, 299 B.R. 725, 730 (Bankr. S.D.N.Y. 2003)(citing In re Hammarstrom, 95 B.R. 160, 165 (Bankr. N.D. Cal. 1989)("Congress intended to include within section 523(a)(8) all loans made under a program in which a nonprofit institution plays any meaningful part in providing funds.")). See also In re Sears, 393 B.R. 678, 680-81 (Bankr. W.D. Mo. 2008)(rather than focus on financial role of the nonprofit, courts should place emphasis on the institution's degree of involvement in administrative functions of the program). The cases applying the so-called "meaningful part" test hinge on whether the non-profit entity committed financial resources to the loan program, or contributed something of value to make the program successful. See, e.g., In re Merchant, 958 F.2d 738 (6th Cir. 1992)(non-profit's agreement to purchase all defaulted student loans from for-profit lender held to be sufficient); In re Pilcher, 149 B.R. 595 (9th Cir. BAP 1993)(sufficient that some participants of the loan program were nonprofit institutions).
A number of courts have held that a non-profit institution's guarantee of the loans is sufficient to constitute a "meaningful contribution" by the nonprofit. See, e.g., In re McClain, 272 B.R. 42 (Bankr. D.N.H. 2002); In re Jean-Baptiste, 584 B.R. at 584 (loans ultimately purchased or guaranteed by non-profit entities generally excepted from discharge).[2] The parties in this case disputed whether TERI in fact guaranteed this Loan. In the affidavit of Bradley Luke, custodian of records for NCSLT, he states that the Loan was guaranteed by TERI. The Debtor moved to strike that statement. The bankruptcy court denied the motion to strike as moot, stating that the court did not rely on that statement in rendering judgment.[3] The bankruptcy court declined to resolve the issue and adjudicated summary judgment without making that determination. It concluded that TERI played a meaningful part in the program regardless of whether it guaranteed the Loan.
The only role mentioned by the court was that "TERI served in a plenary or near-plenary capacity as the sole entity to which loan documents were submitted to the Loan Program by regular mail or overnight delivery." While the instructions for submitting the application provided a P.O Box Number and address for TERI, the facsimile number was not identified as TERI's. It is unclear, therefore, whether TERI received all of the loan applications. In addition, the bankruptcy court admitted that the record did not reflect the method by which the Debtor submitted her Agreement — just that it was submitted. Also, NCSLT does not assert that it was TERI employees who processed the applications, merely that TERI spent money on the facilities where the processing occurred.
In general, any evidence presented in connection with §523(a)(8) must be viewed with the Congressional intent that exceptions to discharge be narrowly construed against the creditor and liberally in favor of the debtor in order to provide the debtor with comprehensive relief from the burden of his indebtedness. In re Olson, 454 B.R. 466, 472 (Bankr. W.D. Mo. 2011). This principle applies equally to student loan exceptions to discharge. See, e.g., In re Johnson, 215 B.R. 750, 753 (Bankr. E.D. Mo. 1997), aff'd, 218 B.R. 449 (B.A.P. 8th Cir. 1998)(applying, in the context of student loan debt, the well-established principal that exceptions to discharge are to be narrowly construed).
Here, the bankruptcy court's broad construction of the term "funded" is inconsistent with Congress' intent that exceptions to discharge be narrowly construed. The evidence on which the bankruptcy court's conclusion that TERI funded the Loan is based is scanty. It was not established that TERI guaranteed the loans, processed the loans, or even received all the loans. TERI merely provided an address to which applications could be delivered, and that is not sufficient to support the inference that TERI "funded" this loan program. Further, that inference was drawn in favor of NCSLT, the movant, rather than the Debtor as legally required.
We are not in a position to make a factual finding on the issue of TERI's guarantee of the Loan since the bankruptcy court declined to make that finding. We, therefore, remand this issue to the court for that determination and its legal significance to the Loan's dischargeability.
CONCLUSION
Based on the record below and considering the established case law on the meaning of "educational loan," we hold that the bankruptcy court did not err in characterizing the Debtor's Loan as an "educational loan" within the meaning of §523(a)(8)(A)(i). However, we conclude that the bankruptcy court's inference in NCST's favor that TERI "funded" the loan program was not reasonable as it was not supported by the evidence. We, therefore, reverse and remand the issue regarding TERI's guarantee of the Loan and funding of the program for further consideration in accordance with this opinion.
Accordingly, the judgment of the bankruptcy court is reversed and remanded.
[1] At least one court has concluded that the "meaningful part" test should not be applied. In re Pilcher, 149 B.R. 595, 600 (9th Cir. BAP 1993)("The addition of the meaningfulness requirement is purely a judicial creation. No qualifying language was included by Congress to establish minimum levels of participation."). The issue of whether the bankruptcy court erred in applying the "meaningful part" test is not before this Panel. However, regardless of whether that test is applied, there is insufficient evidence to support a finding that TERI funded this loan program.
[2] But see In re Wiley, 579 B.R. 1 (Bankr. D. Me. 2017)(holding that guarantee by nonprofit institution is not, by itself, enough). This is the minority view.
[3] In addition, there was guaranty language in Paragraph L.11 of the Agreement: "I acknowledge that the requested loan is subject to the limit on dischargeability in bankruptcy contained in Section 523(a)(8) of the United States Bankruptcy Code. Specifically, I understand that you have purchased a guaranty of this loan, and that the loan is guaranteed by [TERI], a non-profit institution." It is unclear if the bankruptcy court considered this acknowledgment, as it made no mention of it in its opinion.
MORE ABOUT TERI'S GUARANTY OF PRIVATE STUDENT LOANS THAT ARE TRUST ASSETS OF NATIONAL COLLEGIATE STUDENT LOAN TRUST 2006-1
[not part of court opinion above]
TERI-RELATED TRUST AGREEMENT DEFINITIONS
“TERI” means The Education Resources
Institute, Inc., a private non-profit corporation organized under Chapter 180
of the Massachusetts General Laws.
“TERI Deposit Account” means
the special deposit account established by TERI pursuant to the Deposit and
Security Agreement.
“TERI Guaranty Agreements”
means each of the Guaranty Agreements entered into between each of the Loan
Originators and TERI as set forth on Schedule D attached hereto, as amended or
supplemented from time to time.
“TERI Guaranteed Loans” means
Student Loans originated under the Student Loan Programs owned by the Trust and
guaranteed by TERI pursuant to the Guaranty Agreements.
LIST OF TERI GUARANTY AGREEMENTS (SCHEDULE D)
Guaranty Agreements
Each of the following Guaranty Agreements, as amended or supplemented,
was entered into by and between The Education Resources Institute, Inc. and:
Bank of America, N.A., dated April 30, 2001, for loans that were
originated under Bank of America’s BAGEL Loan Program, CEDU Loan Program and
ISLP Loan Program.
Bank of America, N.A., dated June 30, 2003, for loans that were
originated under Bank of America’s Direct to Consumer Loan Program.
Bank One, N.A., dated May 13, 2002, for loans that were originated
under Bank One’s CORPORATE ADVANTAGE Loan Program and EDUCATION ONE Loan
Program.
Bank One, N.A., dated July 26, 2002, for loans that were originated
under Bank One’s M&T REFERRAL Loan Program
Charter One Bank, N.A., dated as of December 29, 2003 for loans that
were originated under Charter One’s AAA Southern New England Bank Loan Program.
Charter One Bank, N.A., dated October 31, 2003, for loans that were
originated under Charter One’s AES EducationGAIN Loan Program.
Charter One Bank, N.A., dated May 15, 2002, for loans that were
originated under Charter One’s (AMS) TuitionPay Diploma Loan Program.
Charter One Bank, N.A., dated July 15, 2003, for loans that were
originated under Charter One’s Brazos Alternative Loan Program.
Charter One Bank, N.A., dated May 15, 2002, for loans that were
originated under Charter One’s CFS Direct to Consumer Loan Program.
Charter One Bank, N.A., dated June 30, 2003, for loans that were
originated under Charter One’s Citibank Flexible Education Loan Program.
Charter One Bank, N.A., dated July 1, 2002, for loans that were
originated under Charter One’s College Loan Corporation Loan Program.
Charter One Bank, N.A., dated December 4, 2002, for loans that were
originated under Charter One’s Comerica Alternative Loan Program.
Charter One Bank, N.A., dated December 1, 2003, for loans that were
originated under Charter One’s Custom Educredit Loan Program.
Charter One Bank, N.A., dated May 10, 2004, for loans that were
originated under Charter One’s Edfinancial Loan Program.
Charter One Bank, N.A., dated May 15, 2002, for loans that were
originated under Charter One’s Education Assistance Services Loan Program.
Charter One Bank, N.A., dated May 15, 2003, for loans that were
originated under Charter One’s ESF Alternative Loan Program.
Charter One Bank, N.A., dated September 15, 2003, for loans that were
originated under Charter One’s Extra Credit II Loan Program (North Texas Higher
Education).
Charter One Bank, N.A., dated September 20, 2003, for loans that were
originated under Charter One’s M&I Alternative Loan Program.
Charter One Bank, N.A., dated November 17, 2003, for loans that were
originated under Charter One’s National Education Loan Program.
Charter One Bank, N.A., dated May 15, 2003, for loans that were
originated under Charter One’s Navy Federal Alternative Loan Program.
Charter One Bank, N.A., dated May 15, 2002, for loans that were
originated under Charter One’s NextStudent Alternative Loan Program.
Charter One Bank, N.A., dated March 26, 2004, for loans that were
originated under Charter One’s NextStudent Private Consolidation Loan Program.
Charter One Bank, N.A., dated March 17, 2003, for loans that were
originated under Charter One’s PNC Bank Resource Loan Program.
Charter One Bank, N.A., dated May 1, 2003, for loans that were
originated under Charter One’s SAF Alternative Loan Program.
Charter One Bank, N.A., dated September 20, 2002, for loans that were
originated under Charter One’s Southwest Loan Program.
Charter One Bank, N.A., dated March 25, 2004, for loans that were
originated under Charter One’s START Education Loan Program.
Charter One Bank, N.A., dated May 15, 2003, for loans that were
originated under Charter One’s WAMU Alternative Student Loan Program.
Charter One Bank, N.A., dated February 15, 2005, for loans that were
originated under Charter One’s Referral Loan Program and Axiom Alternative Loan
Program.
Chase Manhattan Bank USA, N.A., dated September 30, 2003, as amended on
March 1, 2004 and February 25, 2005, for loans that were originated under
Chase’s Chase Extra Loan Program.
Citizens Bank of Rhode Island, dated April 30, 2004, for loans that were
originated under Citizens Bank of Rhode Island’s Compass Bank Loan Program.
Citizens Bank of Rhode Island, dated April 30, 2004, for loans that
were originated under Citizens Bank of Rhode Island’s DTC Alternative Loan
Program.
Citizens Bank of Rhode Island, dated April 30, 2004, for loans that
were originated under Citizens Bank of Rhode Island’s Navy Federal Referral
Loan Program.
Citizens Bank of Rhode Island, dated April 30, 2004, for loans that
were originated under Citizens Bank of Rhode Island’s Xanthus Loan Program.
First National Bank Northeast, dated August 1, 2001, for loans that
were originated under First National Bank Northeast’s CASL Undergraduate
Alternative Loan Program.
HSBC Bank USA, National Association, dated April 17, 2002, as amended
on August 1, 2003 and May 14, 2004, for loans that were originated under the
HSBC Loan Program.
The Huntington National Bank, dated May 20, 2003, for loans that were
originated under The Huntington National Bank’s Huntington Bank Education Loan
Program.
Manufacturers and Traders Trust Company, dated April 29, 2004, for
loans that were originated under Manufacturers and Traders Trust Company’s
Alternative Loan Program.
National City Bank, dated July 26, 2002, for loans that were originated
under National City Bank’s National City Loan Program.
PNC Bank, N.A., dated April 22, 2004, for loans that were originated
under PNC Bank’s Alternative Conforming Loan Program.
Sovereign Bank, dated April 30, 2004, for loans that were originated
under Sovereign Bank’s Alternative Loan Program.
SunTrust Bank, dated March 1, 2002, for loans that were originated
under SunTrust Bank’s SunTrust Alternative Loan Program.
TCF National Bank, dated July 22, 2005, for loans that were originated
under TCF National Bank’s Alternative Loan Program.
U.S. Bank, N.A., dated May 1, 2005, for loans that were originated
under U.S Bank’s Alternative Loan Program.
Source: Trust
Agreement for NCSLT 2006-1 Exhibit 10.10 Form 8-K filed 2006-04-23 (SEC
website)
NATIONAL COLLEGIATE STUDENT LOAN TRUST 2006-1 - INDEX FOR NCSLT 2006-1
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