Did TERI guaranty bring NCSLT-securitized student loans within the nondischargeability provision of the Bankruptcy Code?

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.

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.

No. 18-6011.

United States Bankruptcy Appellate Panel, Eighth Circuit.

Submitted: September 24, 2018.    Filed: November 20, 2018. 

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.

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." 

We agree that the court made ample findings based on undisputed facts to support its conclusion that the Loan was an "educational loan" within the meaning of §523(a)(8)(A).

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)

https://www.sec.gov/Archives/edgar/data/1352760/000088237706000922/p060388_ex10-10.htm

NATIONAL COLLEGIATE STUDENT LOAN TRUST 2006-1 - INDEX FOR NCSLT 2006-1

Cosigner liable to National Collegiate Student Loan Trust on private student loan after no-asset bankruptcy discharge, based on TERI guaranty

Indiana Court of Appeals holds that loan on which Defendant in collection suit by National Collegiate Student Loan Trust was co-signer was not discharged in Defendant's bankruptcy because it had been guaranteed by TERI, a nonprofit entity; reverses trial court's grant of summary judgment in the cosignor's favor. National Collegiate Student Loan Trust 2006-4 v. Debra Vance (Bock), No. 18A-CC-1061, Court of Appeals of Indiana, Oct. 29, 2018) (nonprecedental mem. op.). Undue hardship had not been raised and was not an issue. In its opinion, the court equated the securitization Trust with the lender and referred to it as such. As usual, the Trust's affidavit in support of its debt claim was provided by an employee of Transworld Systems, Inc. (TSI), a collection agency. 

But see: ---> Did TERI guaranty make private student loan nondischargeable? In re Page v. NCSLT 2006-1, No. 18-6011 (8th Cir. Nov. 20, 2018) 
--> Bankruptcy court in New York denies arbitration of dispute over whether private student loan debt was discharged  

National Collegiate Student Loan Trust 2006-4, Appellant-Plaintiff,
v.
Debra Vance (Bock), Appellee-Defendant.

No. 18A-CC-1061.

Court of Appeals of Indiana.

October 29, 2018.    

Appeal from the Fulton Superior Court, Trial Court Cause No. 25D01-1601-CC-50 The Honorable Wayne E. Steele, Judge.

Seth Row, Daniel Bogatz, Cleveland, Ohio, Attorneys for Appellant.

T. Andrew Perkins, Rochester, Indiana, Attorney for appellee.

Pursuant to Ind. Appellate Rule 65(D), this Memorandum Decision shall not be regarded as precedent or cited before any court except for the purpose of establishing the defense of res judicata, collateral estoppel, or the law of the case.

MEMORANDUM DECISION

ALTICE, Judge.

Debra Vance, now known as Debra Bock,^[1] co-signed on a student loan for another individual, who never made payments on the loan. National Collegiate Student Loan Trust 2006-4 (Lender) filed a complaint against Vance to collect on the delinquent loan. Lender filed a motion for summary judgment, and Vance filed her own motion for summary judgment. Following a hearing, the trial court granted summary judgment in favor of Vance, and Lender now appeals, raising three issues that we consolidate and restate as: whether the trial court erred when it determined that Vance's debt on the student loan had been discharged in her Chapter 7 bankruptcy.

We reverse and remand.

Facts and Procedural History

On October 22, 2006, Vance co-signed a student loan promissory note with Charter One Bank, N.A. (Charter One) for an Astrive Education Loan for Sean P. Dehoney (Student) to attend Axia College. The principal amount of the loan including a prepaid finance charge was $19,398.91, which funds were disbursed to Student pursuant to the contract on November 9, 2006. In December 2006, the loan was assigned by Charter One to National Collegiate Funding, LLC through a 2006-4 Pool Supplement, and on that same date, National Collegiate Funding, LLC assigned the account to Lender through a Deposit and Sale Agreement, assigning all right, title, and interest. No payment was ever made on the student loan.

In June 2013, Vance filed a petition for bankruptcy under Chapter 7 of the Bankruptcy Code. According to Vance, she listed the student loan as a scheduled debt, but its dischargeability was not expressly litigated in the bankruptcy proceeding. In September 2013, Vance received a general discharge pursuant to 11 U.S.C. § 727 (Section 727), and the bankruptcy case was closed in June 2014.

In January 2016, Lender filed a Complaint in the Fulton Superior Court against Vance to collect on the student loan debt, stating that the total amount due at that time including accrued interest was $34,597.78. Lender attached to its Complaint the Loan Credit Agreement and the Note Disclosure Statement. Vance by counsel filed an Answer, asserting as an affirmative defense that,"[w]hile the Complaint appears to reference a student loan, which under certain circumstances would be excepted from a discharge in a Chapter 7 case, the type of student loan contained in the Complaint is not the type of student loan excepted from a discharge in a Chapter 7 Bankruptcy case," and "[a]ny claim . . . contained in the Complaint is barred from collection and was discharged in the Defendant's bankruptcy case pursuant to the discharge order." Appellant's Appendix Vol. 2 at 19. Vance attached to her Answer the Discharge of Debtor (Discharge) dated September 16, 2013. The Discharge directed the debtor to "SEE THE BACK OF THIS ORDER FOR IMPORTANT INFORMATION," and, on the reverse side was an "EXPLANATION OF BANKRUPTCY DISCHARGE IN A CHAPTER 7 CASE." Id. at 21. It stated, "Most, but not all, types of debts are discharged if the debt existed on the date the bankruptcy case was filed." Id. It continued:

Debts That are Not Discharged

Some of the common types of debts which are not discharged in a chapter 7 bankruptcy are:

d. Debts for most student loans[.]

Id. (emphasis in original).

In March 2017, Lender filed its Motion for Summary Judgment, arguing that Lender and Vance entered into a credit agreement, Vance failed to make required payments and is in default, no genuine issues of material fact existed, and Lender was entitled to judgment as matter of law. In its designation of evidence, Lender designated, in addition to the Complaint and Answer, the Affidavit of Dudley Turner, who was employed by Transworld Systems Inc. (TSI), the company that was "the Subservicer for [Lender] pertaining to the education loan" at issue. Id. at 38. According to Dudley's Affidavit, TSI maintained loan account records and documentation concerning the subject student loan. The Affidavit included seven attachments, one of which was the Credit Agreement that contained the following pertinent provision:

12. I understand and agree that this loan is an education loan and certify that it will be used only for costs of attendance at the School. I acknowledge that the requested loan is subject to the limitations on dischargeability in bankruptcy contained in Section 523(a)(8) of the United States Bankruptcy Code because either or both of the following apply: (a) this loan was made pursuant to a program funded in whole or in part by The Education Resources Institute, Inc. ("TERI"), a non-profit institution, or (b) this is a qualified education loan as defined in the Internal Revenue Code. This means that if, in the event of bankruptcy, my other debts are discharged, I will probably still have to pay this loan in full.

Id. at 45 (emphasis in original).

In April 2017, Vance filed her Response to Lender's motion for summary judgment and, separately, filed her own Motion for Summary Judgment. Vance asserted that "either there are genuine issues of material fact in this case" and Lender's motion should be denied, "OR, in the alternative, that there are no genuine issues of material fact, and that [Vance] is entitled to judgment as a matter of law[.]" Id. at 89. In her Response, Vance initially argued, "clearly a genuine issue of material fact" existed as to whether the debt was discharged in her bankruptcy case, specifically, "whether the education loan that is the subject of [Lender]'s Complaint is the type of debt which is excepted from a discharge or not." Appellant's Appendix Vol. 2 at 90. Vance recognized that, under the Bankruptcy Code, certain student loans are not generally dischargeable but argued that the student loan in this case "was not a government loan, but a private loan" and, further, that the subject loan was not a "qualified education loan" as that term is defined by the Internal Revenue Service; therefore, she argued, "the type of loan in this case is not the type of loan excepted from discharge in a bankruptcy case." Id. at 92. Vance asserted in her Response that Lender "presented no evidence" that the loan qualified "for an exception to [her] bankruptcy discharge" and thus Lender "failed to satisfy its burden of proof." Id. at 93.

Alternatively, Vance asserted in her Response that she was entitled to summary judgment because the debt was listed on her bankruptcy schedules, and "even if this debt was not listed on her schedules, her case was a `no asset' case which . .. did not require debts to be listed on the . . . schedules for them to be discharged," and, in any event, she "provided proof" that the bankruptcy provision indicating that certain student loans are not discharged in bankruptcy "does not apply to the loan" in question. Id. at 93.

Vance filed a Designation of Evidence "relevant to the genuine issues of material fact," which designated, in addition to the pleadings and attachments, an Affidavit by Vance. Vance averred that (1) Student "is not my spouse or dependent," (2) "[t]he loan proceeds were paid to [him] . . . and they were spent by him for his own expenses," (3) she filed bankruptcy and "listed the loan that is the subject of [Lender]'s Complaint . . . on [her] bankruptcy schedules," (4) her bankruptcy was "a `no asset' case in that no assets were collected and distributed to creditors by the trustee," (5) she was granted a discharge in the bankruptcy case on September 16, 2013, as evidenced by the Discharge of Debtor form attached to her Affidavit, and (6) her bankruptcy case was closed on June 23, 2014, as evidenced by the Order Approving Final Account, Discharging Trustee and Closing Case, attached to her Affidavit. Id. at 78-79.

Lender timely filed a Reply, asserting that the student loan was excepted from discharge. Lender argued that pursuant to 11 U.S.C. § 523(a)(8) (Section 523), as well as federal case law, "[s]tudent loans are generally not dischargeable in bankruptcy unless the debtor proves that excluding the loans from discharge would impose an undue hardship on the debtor." Appellant's Appendix Vol. 2 at 96 (citing Tetzlaff v. Educ. Credit Mgmt. Corp., 794 F.3d 756, 758 (7th Cir. 2015)). It further asserted that Vance was incorrect in claiming that it was Lender's burden to establish that the debt was not discharged, as the burden was on her to establish that the educational loan was excluded from discharge, "typically [accomplished] by filing an adversary proceeding" in bankruptcy court. Id. at 95. In response to Vance's assertion that the loan in question did not qualify for the definition of a "qualified educational loan," Lender stated, first, that a determination of whether the loan was a "qualified educational loan" was unnecessary to the analysis based on other provisions of Section 523, and second, any such determination "could only properly be adjudicated by the Bankruptcy Court." Id. Lender maintained that it was entitled to judgment as a matter of law, but that, should the trial court disagree that Lender was entitled to judgment, Lender consented "to an indefinite stay . . . so as to permit [Vance] to seek a declaratory judgment from the bankruptcy court clarifying whether the instant loan was discharged." Id.

At the March 2018 hearing on the parties' motions for summary judgment, Lender argued that (1) typically student loans are not discharged unless the debtor presents evidence of undue hardship, and (2) the debtor or other party responsible for payment has the burden of proving that the student loan was discharged. Vance responded that it is the creditor's obligation to prove that the specific debt trying to be collected is excepted from discharge. Vance also clarified that she was not claiming undue hardship; rather, her position was that "this is not the kind of student loan that is accepted [sic] from discharge," arguing that Lender had not "made the required showing" that this student loan meets the "qualified education loan" definition and that she was thus entitled to summary judgment. Transcript at 6, 8. Alternatively, Vance asserted "there are multiple genuine issues of material fact." Id. at 9. Lender offered that Lender would be amenable to an indefinite stay "just to allow time for the Bankruptcy Court to determine whether or not this particular loan was discharged." Id. Vance maintained that a stay was not warranted, arguing that Lender should have asked for relief from discharge in the two years that the case had been pending. Following the hearing, the trial court issued an order summarily granting judgment in Vance's favor. Lender now appeals.

Discussion & Decision

There is no dispute that Vance co-signed on the student loan or that the claimed amount is due and owing to Lender. Vance's position is that the trial court correctly entered summary judgment in her favor because the debt was discharged in her Chapter 7 bankruptcy. Lender maintains, on the other hand, that the trial court should have granted summary judgment in its favor because the student loan debt was nondischargeable pursuant to Section 523 and no genuine issues of material fact remained as to whether Vance owed the debt on the defaulted student loan.

When reviewing a grant or denial of a motion for summary judgment, our standard of review is the same as it is for the trial court. McCullough v. CitiMortgage, Inc., 70 N.E.3d 820, 824 (Ind. 2017). "The moving party `bears the initial burden of making a prima facie showing that there are no genuine issues of material fact and that it is entitled to judgment as a matter of law.'" Id. (quoting Gill v. Evansville Sheet Metal Works, Inc., 970 N.E.2d 633, 637 (Ind. 2012)). If the movant carries its burden, "`then the nonmoving party must come forward with evidence establishing the existence of a genuine issue of material fact.'" Id. In determining whether summary judgment is proper, the reviewing court considers only the evidentiary matter the parties have specifically designated to the trial court. Ind. Trial R. 56(C). We construe all factual inferences in the nonmoving party's favor and resolve all doubts as to the existence of a material issue against the moving party. McCullough, 70 N.E.3d at 824.

In determining whether Vance's debt on the student loan was discharged, as she claims, or nondischargeable, as Lender claims, we must examine relevant Bankruptcy Code provisions. We begin by examining Section 727, under which Vance received her Discharge. Section 727 provides in relevant part:

(b) Except as provided in section 523 of this title, a discharge under subsection (a) of this section discharges the debtor from all debts that arose before the date of the order for relief under this chapter[.]

(Emphasis added). Section 523 states, in relevant part:

(a) A discharge under section 727 . . . does not discharge an individual debtor from any debt —

(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for —

(A) (i) any 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[.]

"`The legislative history of section 523(a)(8) indicates that the statute was meant to be self-executing so that the creditor would not be required to file a complaint to determine the dischargeability of a student loan.'" In re Clark, 341 B.R. 238, 248 (Bankr. N.D. Ill. 2006) (quoting United States v. Wood, 925 F.22d 1580, 1583 (7th Cir. 1991)). "Thus, it is the debtor who is required to file an adversary proceeding against the holder of a student loan debt in order to show that the debt should be discharged." Id. (citing In re Hanson,397 F.3d 482, 484 (7th Cir. 2005)).

The parties agree that Section 523(a)(8) has been interpreted to mean that four types of educational loans are not included in a Section 727 discharge, absent undue hardship on the debtor, and those four types are: (1) loans made, insured, or guaranteed by a governmental unit; (2) loans made under any program partially or fully funded by a government unit or nonprofit institution; (3) loans received as an educational benefit, scholarship, or stipend; and (4) any "qualified educational loan" as that term is defined in the Internal Revenue Code.

Vance, while focusing exclusively on the last of the four types, regarding any "qualified educational loan," contends that Section 523 does not apply to the student loan at issue. Specifically, she argues that the student loan does not meet the definition of a "qualified education loan" as that term is defined by the Internal Revenue Code in 26 U.S.C. § 221(d)(1), which states in relevant part:

(1) Qualified education loan. — The term "qualified education loan" means any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses—

(A) which are incurred on behalf of the taxpayer, the taxpayer's spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred,

(B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and

(C) which are attributable to education furnished during a period during which the recipient was an eligible student.

(Emphasis added). Vance's argument is that since the student loan in question was "not incurred on behalf of [Vance], or [Vance]'s spouse or dependent, then the loan is not a qualified education loan under 26 U.S.C. § 221(d)(1) and is not excepted from discharge under 11 U.S.C. § 523(a)(8)." Appellee's Brief at 15.

Lender, however, maintains that the "qualified education loan" exception — in Section 523(a)(8)(B) — is not the relevant subsection and thus it is unnecessary to determine whether the student loan at issue satisfies that definition.^[2] Lender explains that, instead, "the subject student loan was excepted from discharge under subsection (A)(i) because it was `an educational 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.'" Appellant's Brief at 14 (quoting from and adding emphasis to 11 U.S.C. § 523(a)(8)(A)(i)).

Lender urges that "the record plainly establishes" that the student loan in question was an education loan that was funded in whole or in part by a non-profit institution. Appellant's Brief at 14. In doing so, Lender refers to the loan documents, including the Credit Agreement which states in bolded letters:

12. I understand and agree that this loan is an education loan and certify that it will be used only for costs of attendance at the School. I acknowledge that the requested loan is subject to the limitations on dischargeability in bankruptcy contained in Section 523(a)(8) of the United States Bankruptcy Code because either or both of the following apply: (a) this loan was made pursuant to a program funded in whole or in part by The Education Resources Institute, Inc. ("TERI"), a non-profit institution, or (b) this is a qualified education loan as defined in the Internal Revenue Code. This means that if, in the event of bankruptcy, my other debts are discharged, I will probably still have to pay this loan in full.

Appellant's Appendix Vol. 2 at 45 (italics added). Other designated documents, namely the account's payment history and the 2006-4 Pool Supplement, which transferred and assigned the loan to National Collegiate Funding LLC, also reflect that TERI was a guarantor.^[3] Lender argues that it thereby designated evidence showing that the student loan was made pursuant to a program funded by a non-profit institution, TERI, and, absent undue hardship to the debtor, which Vance does not claim, the student loan was not discharged in Vance's Section 727 general discharge from bankruptcy. We agree.

Where, as here, Lender designated evidence that the loan was not discharged, the burden shifted to Vance to show that a genuine issue of material fact existed precluding summary judgment. Although Vance suggested that a question of fact remained as to whether the loan was a "qualified educational loan" under Section 523(a)(8)(B), we agree with Lender that such a determination is not warranted under the facts of this case, where the loan satisfied the parameters of Section 523(a)(8)(A).^[4]

Having found that Lender established, through Section 523 and the designated evidence, that the student loan at issue was not discharged in bankruptcy, and where there is no dispute as to the fact that Vance co-signed on the loan or as to the amount due and owing, Lender has established that it is entitled to judgment as a matter of law on its claim to collect the debt. Accordingly, we reverse the trial court's entry of summary judgment in favor of Vance and remand with instructions to enter judgment in Lender's favor on its Complaint against Vance.

Judgment reversed and remanded with instructions.

Brown, J. and Tavitas, J., concur.

[1] For the sake of simplicity and consistency, we will use the name Vance in this decision as that is the name that appears in the relevant loan documents.

[2] Lender states that, not only is it unnecessary to decide that issue, but also any such determination would need to be made by the bankruptcy court.

[3] As pointed out by Lender, case law provides that a TERI-guaranteed loan program, even if TERI did not fund the debtor's specific loan, meets the standard set forth in Section 523(a)(8)(A)(i). Appellant's Brief at 15-18 and Reply Brief at 11; see e.g., In re O'Brien, 419 F.3d 104, 106 (2nd Cir. 2005) (holding that Section 523(a)(8) was applicable where TERI "merely guaranteed, without funding" the debtor's particular loan, obtained through Key Bank, as 523(a)(8) requires only that loan was "made under any program funded in whole or in part by" a non-profit institution); Decker v. EduCap, Inc., 476 B.R. 463, 468 (W.D. Pa. 2012) (finding that Section 523(a)(8)(A)(i) was satisfied where non-profit entity guaranteed loan that was funded by Bank of America, noting "Congress' intentionally stringent limits on the dischargeability of educational loans"); In re Drumm, 329 B.R. 23, 35 (Bankr. W.D. Pa. 2005) (finding that a non-profit guarantee was enough and that meaningful financial contribution or meaningful financial risk are not required).

[4] Courts have determined Section 523(a)(8)(A)(i)'s discharge exception for government or non-profit-funded loans applies to non-related, non-student debtors, like Vance. See Corletta v. Texas Higher Educ. Coordinating Bd., 531 B.R. 647, 653 (W.D. Tex. 2015); Cockels v. Mae, 414 B.R. 149, 155 (E.D. Mich. 2009).