Reed v. Zwick (In re Reed)

559 B.R. 194
CourtUnited States Bankruptcy Court, N.D. Ohio
DecidedSeptember 30, 2016
DocketCase No. 15-51790; Adversary Proceeding No. 15-5131
StatusPublished
Cited by5 cases

This text of 559 B.R. 194 (Reed v. Zwick (In re Reed)) is published on Counsel Stack Legal Research, covering United States Bankruptcy Court, N.D. Ohio primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Reed v. Zwick (In re Reed), 559 B.R. 194 (Ohio 2016).

Opinion

MEMORANDUM DECISION ON DE-FENDANT NAVIENT SOLUTIONS, INC.’S MOTION TO DISMISS COUNTS TWO AND THREE FOR LACK OF SUBJECT MATTER JU-RISDICTION

ALAN M. KOSCHIK, U.S. Bankruptcy Judge

Now before the Court is the motion (“Motion”) to dismiss counts two and three of the complaint (“Complaint”) of Debtor-Plaintiffs James M. Reed and Naomi M. Reed (“Debtors” or “Plaintiffs”) for lack of subject matter jurisdiction, filed by defen-dant Navient Solutions, Inc. (“Navient”) in the above-captioned adversary proceeding. For, the reasons set forth herein, Navient’s motion to dismiss will bp denied.

JURISDICTION AND VENUE

The question of this Court’s jurisdiction over this adversary proceeding is central to the pending Motion. Venue is proper pursuant to 28 U.S.C. § 1409(a).

FACTUAL AND PROCEDURAL HISTORY

The facts relfevant to the question of the Court’s subject-matter jurisdiction over Counts Two and Three of the Debtors’ Complaint are all matters of record before the Court.

Debtors filed a petition for relief under Chapter 7 of the Bankruptcy Code on July 28, 2015. In their Schedule F, a form in which debtors list their unsecured credi-tors, they disclosed numerous student loans, including two owed to Navient in amounts of $21,956.00 and $16,175.00 (“Na-vient Loans”).1 The Navient Loans were not scheduled as contingent, unliquidated, or disputed, nor were any of Debtors’ other student loans or student loan collection accounts. Debtors later amended their Schedule F, discussed below.

Debtors filed this adversary proceeding on December 11, 2015, to determine the dischargeability of them student loan debts. In addition to Navient, Debtors named JP Morgan Chase, Transworld Sys-tems, Inc., Wells Fargo, National Collegiate Student Loan Trust, and Javitch Block LLC as defendant creditors on various student loans or related collection ac-counts. Finally, Debtors named their daughter, Deborah Elaine Zwick (“Zwick”), as a defendant.

Debtors’ Complaint includes three counts. Count One asks the Court to ren-der a finding of undue hardship pursuant to 11 U.S.C. § 523(a)(8), thereby excepting each student loan debt from discharge. Counts Two and Three are less traditional, however. Count Two alleges that the stu-[197]*197dent loan obligation was obtained by actual fraud perpetrated on the Debtors by a third party. The Debtors allege that, un-known to them, Defendant Zwiek, their daughter and the student whose education was financed by the Navient Loans and other loans, forged their names as co-sig-natory on the student loan documents. Count Three alleges that the student loan debts are unconscionable as a result of their fraudulent origins. The Debtors con-tend that it is unconscionable and inconsis-tent with the purposes of the Bankruptcy Code and related statutes to exclude fraudulently created student loan obli-gations from discharge. (Compl. ¶36.) In essence, the Debtors raise defenses to the purported student loan debts themselves, seeking their disallowance both against their estate and against them.

' Debtors assert that the entire Complaint is both within this court’s jurisdiction un-der 28 U.S.C. § 1334 and is a core pro-ceeding under 28 U.S.C. § 157. (Compl. ¶¶ 3-4.)

On December 18, 2015, after Debtors filed their Complaint but before Navient filed its answer or the Motion, the appoint-ed chapter 7 trustee in the underlying case filed her report of no distribution, report-ing that there was no property available for distribution from the estate over and above amounts exempt by law and that the estate had been fully administered. The Court entered an order of discharge for the Debtors on December 21, 2015. Be-cause the trustee reported that this was a no-asset case, the trustee never caused notices to be sent to creditors requesting that they file proofs of claim in the under-lying case.

Navient filed its answer to the Com-plaint on January 12, 2016. That answer admits the jurisdiction of this Court and the core proceeding nature of this proceed-ing solely on the issue of undue hardship, but denies that this Court has subject-matter jurisdiction over “any claims unre-lated to 11 U.S.C. § 523(a)(8).” (Ans. ¶ 3.)

On February 29, 2016, Debtors amended their Schedule F to reflect that the Na-vient Loans and all of Debtors’ other stu-dent loans are disputed.

On April 7, 2016, Navient filed the in-stant Motion, reiterating and expanding upon the jurisdictional position staked out in its answer: that the Court has subject-matter jurisdiction over Count One and the determination of the undue hardship issue presented therein, but not over the fraud and unconscionability issues present-ed in Counts Two and Three of the Com-plaint. (E.g., Ans. ¶¶ 5-6.) Navieht argues that “[tjhere is no cause of action under Title 11 for a debtor’s claim for discharge against a creditor based on fraud on the debtor by a third party,” nor “for a debt- or’s claim for discharge against a creditor based on unconscionability.” (Mot. 2.) Na-vient argues that fraud and unconsciona-bility most closely resemble common law claims, not Bankruptcy Code statutory claims, and that this Court therefore lacks subject-matter jurisdiction to adjudicate them.

Debtors filed their response brief on April 29, 2016. Debtors argue that “Counts Two and Three are ‘core’ proceedings be-cause they related directly to the dis-chargeability of the debt,” and determina-tions as to the dischargeability of debts are core proceedings. (Br. in Opp. 2.) Debtors somewhat curiously focus their response brief overwhelmingly on the core/non-core distinction and not whether the Court has subject-matter jurisdiction in the first place.

Navient filed its reply on May 6, 2016. Navient responds that Plaintiffs’ claims under Counts Two and Three are non-core, and in fact, not even “related to” the [198]*198Plaintiffs’ ■ bankruptcy case, because the underlying bankruptcy case is a no-asset chapter 7 case and the resolution of Counts Two and Three will therefore “not affect the amount of property to be re-ceived by, or distributed by, the bankrupt-cy estate, or the allocation of property among creditors.” (Reply 4.)

The Court took the matter under advisement at the close of briefing.

LEGAL ANALYSIS

A substantial amount of the briefing in this matter has been directed at the secondary question of whether this matter is core or non-core rather than the central threshold question of whether the Court has jurisdiction to adjudicate Counts Two and Three at all. The determination of whether Counts Two and Three are core or noncore is irrelevant to the determination of whether those counts should be dismissed pursuant to Rule 12(b)(1); even if the claims were noncore, the Court may still have jurisdiction to hear them, albeit without authority to enter final orders unless the parties consent. 28 U.S.C. § 157(c)(l)-(2); General Order No. 2012-7 of the U.S.

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Bluebook (online)
559 B.R. 194, Counsel Stack Legal Research, https://law.counselstack.com/opinion/reed-v-zwick-in-re-reed-ohnb-2016.