Teran v. Navient Solutions, LLC

• Court: United States Bankruptcy Court, N.D. California
• Decided: February 15, 2022
• Docket: 20-03075
• Status: Unknown

Opinion

EDWARD J. EMMONS, CLERK 13 □□ \o. U.S. BANKRUPTCY COURT □□ NORTHERN DISTRICT OF CALIFORNIA Y, ay a Sal □□ 1 . . \ □□□ □□ Signed and Filed: February 15, 2022 □□□□ OL 2 Grin J An 4 Ve, ahs 5 DENNISMONTALL U.S. Bankruptcy Judge 6 7 UNITED STATES BANKRUPTCY COURT 8 NORTHERN DISTRICT OF CALIFORNIA 9 In re ) Bankruptcy Case 10 ) No. 10-31718-DM OSCAR D. TEHRAN, ) 11 ) Chapter 7 12 ) Debtor. ) 13 ) ) 14 |loscaR D. TERAN, ) Adversary Proceeding 15 ) No. 20-03075-DM Plaintiff, ) 16 ) Vv. ) Date: February 25, 2022 17 ) Time: 11:00 AM 18 NAVIENT SOLUTIONS, LCC; NAVIENT) Via Tele/Videoconference CREDIT FINANCE CORPORATION ) www.canb.uscourts.gov/calendars 19 ) Defendants. ) 20 ) 21 22 MEMORANDUM DECISION ON MOTION FOR SUMMARY JUDGMENT 23 INTRODUCTION AND PROCEDURAL HISTORY 24 Plaintiff Oscar D. Teran (“Teran”) was a law student at UC 25 ||Hastings from 2005 until 2008. In his final year of law school, 26 took out a private bar study loan (“Bar Loan”) from Sallie 27 ||Mae’s LAWLOANS program to cover the cost of a BarBri bar prep 2g ||course and living expenses while Teran studied for the Texas bar =_ 1 =_

1 exam. The Bar Loan was eventually assigned to Defendant Navient 2 Credit Finance Corporation and serviced by Defendant Navient 3 Solutions, LLC (together, “Navient”). 4 In May 2010, Teran filed for chapter 7 bankruptcy in this 5 court, and listed the Bar Loan among his unsecured debts. He 6 received a bankruptcy discharge in August 2010. In August 2020, 7 Teran initiated the above-captioned adversary proceeding on 8 behalf of himself and a proposed class of similarly situated 9 debtors against Navient (“Complaint”) (Dkt. 1), alleging that 10 Navient had been improperly collecting on Teran’s discharged Bar 11 Loan and reporting the Bar Loan as not discharged to credit 12 reporting agencies in violation of state consumer protection 13 law. 14 Navient filed a Motion to Dismiss Count Three of 15 Plaintiff’s Complaint, or Alternatively, Compel Arbitration 16 (“MTD”) (Dkt. 20), which Teran opposed (“Opposition to MTD”) 17 (Dkt. 24). The MTD and the Opposition to MTD focused on whether 18 the portion of the Complaint alleging wrongful credit reporting 19 was outside the court’s jurisdiction and thus should be 20 dismissed or submitted to arbitration. 21 At a hearing on the MTD, the court ruled that as a 22 threshold matter there first must be a determination as to 23 whether Teran’s Bar Loan is nondischargeable, because the 24 question of dischargeability is critical to all parts of the 25 proposed class action. The court deferred a ruling and directed 26 the parties to meet and confer to set a schedule on cross- 27 motions for summary judgment. 28 -2- 1 Pursuant to the schedule developed by the parties, Navient 2 filed a Defendant’s Motion for Summary Judgment (“MSJ”) (Dkt. 3 34) seeking a determination that the Bar Loan was excepted from 4 Teran’s bankruptcy discharge pursuant to 11 U.S.C. § 5 523(a)(8)(A)(i) and/or 11 U.S.C. § 523(a)(8)(B). Teran filed an 6 Opposition to Defendant’s Motion For Summary Judgment (Dkt. 41) 7 but did not file a cross-motion for summary judgment. The court 8 held a hearing on the MSJ, and directed to parties to file 9 further briefing, after which the court took the matter under 10 submission. 11 The court concludes that there is a material factual 12 dispute as to whether the Bar Loan was made under a program that 13 is excepted from discharge under § 523(a)(8)(A)(i), and summary 14 judgment as to this subsection must be denied. The court 15 further concludes that Bar Loan does not fall within the type of 16 loan contemplated under § 523(a)(8)(B) as a matter of law, and 17 summary judgment as to this subsection in favor of Teran is 18 appropriate. 19 II. STANDARD FOR SUMMARY JUDGMENT 20 On a motion for summary judgment, the court must determine 21 whether, viewing the evidence in the light most favorable to the 22 nonmoving party, there are any genuine issues of material fact 23 as to any claim, part of claim, defense, or part of defense. 24 Simo v. Union of Needletrades, Indus. & Textile Employees, 322 25 F.3d 602, 609-10 (9th Cir. 2003); Fed. R. Civ. P. 56. Summary 26 judgment against a party is appropriate when the pleadings, 27 depositions, answers to interrogatories, and admissions on file, 28 together with the affidavits, if any, show that there is no -3- 1 genuine issue as to any material fact and that the moving party 2 is entitled to judgment as a matter of law. Fed. R. Civ. P. 56. 3 It is within a court’s discretion to grant summary judgment in 4 favor of the nonmovant. Fed. R. Civ. P. 56(f)(1); Gospel 5 Missions of America v. City of Los Angeles, 328 F.3d 548, 553 6 (9th Cir. 2003) (court may enter summary judgment for nonmovant 7 if the movant had “full and fair opportunity to ventilate the 8 issues involved in the matter” and the issues adjudicated were 9 present in the original motion.) (citations omitted). 10 III. ANALYSIS 11 A. The LAWLOANS Program 12 According to Navient, LAWLOANS was a program set up to be a 13 “one-stop source of funding” through which both private loans 14 and federally funded Stafford loans and Grad PLUS loans 15 (together, “Stafford loans” for convenience) were made available 16 to student borrowers through a single application. The program 17 was established by a Multiparty Agreement between four private 18 entities and one nonprofit entity in 1989, which was later 19 amended at least four times between 1992 and 1995. (Box Decl., 20 Dkt. 36). The Multiparty Agreement and subsequent Amendments 21 presented by Navient show that, at least until 1995, there was 22 an agreement between four for-profit entities (including Sallie 23 Mae) and one nonprofit entity to advertise, originate, service, 24 and guarantee both private and federal loans. Id. In 25 particular, the Multiparty Agreement and Amendments show that 26 the role of the sole participating nonprofit, first the Higher 27 Education Assistance Foundation and later Northstar Guarantee 28 Inc., was critical to the origination, guarantee, reinsurance, -4- 1 and consolidation of Stafford loans. Navient concedes that it 2 cannot produce any Amendment of the Multiparty Agreement beyond 3 the 1995 Amendment. Navient contends that the LAWLOANS program 4 was still making federal Stafford loans in 2008, while Teran 5 disputes this claim. 6 B. Stafford Loans 7 At the time Teran obtained the private Bar Loan from the 8 LAWLOANS program in 2008, federal student loans including 9 Stafford loans were made under the Federal Family Education Loan 10 Program (“FFEL”). Under FFEL, private lenders would originate 11 student loans subject to specific eligibility criteria and set 12 interest rates. Those loans were then guaranteed by state or 13 nonprofit agencies1. Those nonprofit guarantors were 14 subsequently “reimbursed by the federal government for all or 15 part of the insurance claims they pay to lenders.” See Federal 16 Family Education Loan Programs: Federal Stafford Loans, Federal 17 PLUS, and Federal Consolidation Loans-Introduction (1998)2. 18 The legal structure of Stafford loans under FFEL meant that 19 it was impossible for a lender to have made a Stafford loan to a 20 borrower without the participation of a nonprofit entity. When 21 referencing Stafford loans made prior to 2010, the involvement 22 23 24 1 Because only nonprofit entities are relevant to this Order, the court will hereinafter only reference nonprofit entities as 25 guarantors of FFEL loans. 26 2 Available at https://fsapartners.ed.gov/knowledge- 27 center/library/handbooks-manuals-or-guides/1998-06-12/federal- family-education-loan-programs-federal-stafford-loans-federal- 28 plus-and-federal-consolidation-loan-programs-introduction -5- 1 of both a nonprofit and the government was essential to the 2 making of those loans. 3 C. 11 U.S.C. § 523(a)(8)(A)(i) 4 Generally, § 523(a)(8) excepts certain types of student 5 loans from the bankruptcy discharge unless a debtor can make a 6 showing of an undue hardship resulting in an inability to repay 7 the loans. No hardship on the part of Teran is at issue here, 8 only whether Teran’s Bar Loan is the type of loan contemplated 9 by any subsection of § 523(a)(8). 10 Section 523(a)(8)(A)(i) (hereafter referred to as the 11 “Program Section”) excepts from discharge “an educational 12 benefit overpayment or loan made, insured, or guaranteed by a 13 governmental unit, or made under any program funded in whole or 14 in part by a governmental unit or nonprofit institution.” 15 There is no dispute that the Bar Loan is generally an 16 “educational loan,” a term for which there is no set definition. 17 That the loan was meant at least in part for a bar study course 18 is enough, and an “educational loan” need not meet the rigorous 19 standards of a “qualified education loan” contemplated in 20 § 523(a)(8)(B) and discussed below. See In re Moon, 610 B.R. 21 616, 623-24 (Bankr. E.D. Wis. 2019). 22 Navient concedes that the Bar Loan is a wholly private 23 loan, with no hint of government or nonprofit funding. Instead, 24 Navient argues that because LAWLOANS was a program through which 25 private loans as well as Stafford loans were made available to 26 students, Teran’s Bar Loan is a loan “made under any program 27 funded in whole or in part by a governmental unit or nonprofit 28 institution.” -6- 1 1. Funded by Nonprofit 2 Curiously, while Navient’s general argument is that the 3 umbrella nature of the LAWLOANS program means that it is a 4 program funded by either a government or nonprofit institution, 5 the supporting evidence and caselaw asserted by Navient focus 6 solely on nonprofit, and not government, involvement. Navient’s 7 MSJ relies heavily on In re Pilcher, 149 B.R. 595 (B.A.P. 9th 8 Cir. 1993). In Pilcher, the plaintiff, a law student took out a 9 private loan under a program called the Law Access Program, an 10 umbrella program which made both private loans and federally 11 guaranteed loans. Id. at 596. The Law Access Program was the 12 culmination of a Multiparty Agreement between five private and 13 nonprofit entities to create “a streamlined method for the 14 procurement, processing, and service of law school educational 15 loans.” Id. at 599. The plaintiff asserted her loan was subject 16 to bankruptcy discharge because neither of the nonprofits 17 involved in the Law Access Program had anything to do with her 18 private loan. Id. The Ninth Circuit BAP interpreted the plain 19 language of the Program Section to mean that so long as a 20 private loan was derived from a program that was even minimally 21 funded by a nonprofit institution, that loan was 22 nondischargeable. Id. at 600. Thus, even the small amount of 23 participation by the nonprofit entities in the Law Access 24 Program generally meant that the plaintiff’s private loan was 25 made by a program at least partially funded by a nonprofit 26 entity and was thus nondischargeable. 27 Including Pilcher, every case cited by Navient determined 28 that a private loan was nondischargeable because the loan was -7- 1 made under a program that had at least a minimal amount of 2 voluntary nonprofit involvement.3 3 Unlike Pilcher and every other case cited by Navient, 4 Navient admits that there is no evidence that any nonprofit was 5 involved with the LAWLOANS program by the time Teran took out 6 his Bar Loan in 2008. Without any evidence of nonprofit 7 involvement in the LAWLOANS program, the court is unable to 8 apply the law of Pilcher to this matter. Without such evidence, 9 it is unclear whether LAWLOANS could even legally originate 10 Stafford loans. 11 As noted above, the most recent documentation of the 12 Multiparty Agreement governing the LAWLOANS program is from 13 1995, the fourth Amendment to the Multiparty Agreement in almost 14 as many years, and nearly thirteen years prior to the time Teran 15

16 3 O'Brien v. First Marblehead Educ. Resources, Inc. (In re 17 O'Brien), 419 F.3d 104 (2d Cir. 2005) (loan program that included loans guaranteed by a participating nonprofit); Univ. 18 v. Merchant (In re Merchant), 958 F.2d 738 (6th Cir. 1992) (same); Decker v. EduCap, Inc., 476 B.R. 463(W.D. Pa. 2012) 19 (program in which privately made loans were serviced and 20 guaranteed by nonprofit); Medina v. Nat'l Collegiate Student Loan Tr. 2, No. 17-05276-LT7, 2020 WL 5552687 (Bankr. S.D. Cal. 21 Aug. 4, 2020) (private educational loan that was later guaranteed by a nonprofit); In re Duits, No. 14-05277-RLM-13, 22 2020 WL 256770 (Bankr. S.D. Ind. Jan. 15, 2020) (private student 23 loan made under a program with a nonprofit that guaranteed federal loans); Greer-Allen v. Nat'l Collegiate Student Loan Tr. 24 2005-1 (In re Greer-Allen), 602 B.R. 831 (Bankr. D. Mass. 2019) (same); Cleveland v. Educ. Credit Mgmt. Corp. (ECMC) (In re 25 Cleveland), 559 B.R. 265 (Bankr. N.D. Ga. 2016) (debtor’s loans 26 were either federal loans or private loans made under a program funded in part by a nonprofit); Drumm v. New England Loan 27 Marketing Assoc. (In re Drumm), 329 B.R. 23 (Bankr. W.D. Pa. 2005) (program included loans guaranteed by nonprofit); In re 28 Hammarstrom, 95 B.R. 160 (Bankr. N.D. Cal. 1989) (same). -8- 1 accessed his loan through the LAWLOANS program. Navient does 2 not assert this lack of documentation is because the 1995 3 Amendment was the final Amendment to the Multiparty Agreement. 4 At the hearing on the MSJ, Navient conceded that it “was 5 unaware of any documents that postdate” the 1995 Amendment to 6 the Multiparty Agreement, and that nonprofit involvement in the 7 LAWLOANS program in 2008 could not be proved. Immediately after 8 this concession, Navient argued for the first time that because 9 federal loans were distributed under the LAWLOANS program in 10 2008 as demonstrated by its own Quick Reference Guide (Box 11 Decl., Dkt. 36), the program was funded in part by the 12 government and thus still fell under the purview of the Program 13 Section. 14 2. Funded by Government 15 The only case provided by Navient in support of the theory 16 that LAWLOANS is a program funded in whole or in part by the 17 government is a recent decision from the Southern District of 18 New York, Mader v. Experian Info. Sols., LLC., 2020 WL 427813 19 (S.D.N.Y. July 24, 2020). In Mader, the plaintiff was a former 20 seminary student who took out a private loan from Sallie Mae 21 (that was later assigned to Navient) through an unnamed program 22 that also made Stafford loans. Id. at *1. The court determined 23 that because Stafford loans were, by law, guaranteed by 24 nonprofits or government units, the program through which the 25 plaintiff took out his private loan was a program that was 26 funded in part by a government unit or nonprofit institution 27 pursuant to the requirement of the Program Section. Id. at *3. 28 -9- 1 Navient likens the LAWLOANS program to the program at issue 2 in Mader. Just as the unnamed program in Mader made both 3 private and Stafford loans, so too, did the LAWLOANS program. 4 The reasoning of Mader is not helpful or relevant in this 5 case. In Mader, there was no dispute that the program that 6 originated the plaintiff’s private loan also made Stafford 7 loans. There does appear to be such a dispute here. Navient 8 cannot admit that it is unable to produce any evidence of 9 nonprofit involvement in LAWLOANS program in 2008, and then 10 immediately state that the LAWLOANS program in 2008 issued 11 Stafford loans and therefore was funded in part by the 12 government. As discussed above, the legal framework of Stafford 13 loans made under FFEL meant that Stafford loans could not be 14 made without nonprofit involvement. Inability to show nonprofit 15 involvement inherently means that Navient is also unable to show 16 that the LAWLOANS program was funded in part by the government 17 or was able to make Stafford loans in 2008. 18 Navient contends that the Quick Reference Guide Sallie Mae 19 produced for the 2007-2008 academic year advertised LAWLOANS’ 20 ability to grant Stafford loans. The court takes note of the 21 reference guide, but also notes that this guide is only an 22 advertisement produced by Sallie Mae. The Quick Reference Guide 23 itself does not prove that LAWLOANS actually could or did make 24 such loans in 2008. Further calling into question LAWLOANS 25 ability to make Stafford loans in 2008 are Sallie Mae’s own 26 marketing materials to purchasers of student loan backed 27 securities from the same year, which defines LAWLOANS as a 28 program which provides law students with only supplemental -10- 1 private loans, not Stafford loans (Dkt. 45). It appears 2 Navient’s predecessor’s own accounts of LAWLOANS in 2008 are 3 contradictory. 4 On the evidence presented, unlike Pilcher or Mader, Navient 5 has not proven as a matter of law that LAWLOANS was a program 6 funded in whole or part by a nonprofit or government entity at 7 the time Teran took out the Bar Loan. The MSJ as to the Program 8 Section must be denied. 9 D. 11 U.S.C. § 523(a)(8)(B) 10 Section 523(a)(8)(B) (hereafter referred to as the 11 “Qualified Loan Section”) excepts from discharge “any other 12 educational loan that is a qualified education loan, as defined 13 in section 221(d)(1) of the Internal Revenue Code of 1986 [26 14 USC § 221(d)(1)], incurred by a debtor who is an individual.” 15 From the plain language of the Internal Revenue Code 16 (“IRC”), the Bar Loan is not a qualified education loan as a 17 matter of law. In reaching the conclusion that the Bar Loan is 18 not a qualified education loan, a nesting doll of special terms 19 under the IRC must be defined. 20 1. Qualified Education Loan 21 The IRC defines a qualified educational loan as “any 22 indebtedness incurred by the taxpayer solely to pay qualified 23 higher education expenses . . . which are attributable to 24 education furnished during a period during which the recipient 25 was an eligible student.” IRC § 221(d)(1) (emphasis added). 26 2. Qualified Higher Education Expense 27 The IRC defines qualified higher education expenses as 28 “the cost of attendance . . . at an eligible educational -11- 1 institution, reduced by the sum of . . . [other scholarships, 2 income, and loans].” IRC § 221(d)(2) (emphasis added). 3 3. Eligible Educational Institution 4 The IRC defines an eligible educational institution as one 5 which meets specific attendance, accreditation and course 6 offering standards under 20 U.S.C. § 1088 and is also eligible 7 for federal funding under Title IV of Higher Education Act, 20 8 U.S.C. §§ 1070 et seq. 9 4. Eligible Student 10 The IRC defines an eligible student as one who is “enrolled 11 or accepted for enrollment in a degree, certificate, or other 12 program . . . leading to a recognized educational credential at 13 an institution of higher education that is an eligible 14 institution . . ..” 26 U.S.C. § 25A(b)(3); 20 U.S.C. § 15 1091(a)(1). 16 5. The Bar Loan is Not a Qualified Educational Loan 17 Navient argues that the Bar Loan is a qualified educational 18 loan because its terms required that (1) Teran be a student at 19 an eligible educational institution at the time he applied for 20 the Bar Loan; (2) he had to graduate from that institution prior 21 to the disbursement of funds; and (3) the funds disbursed were 22 less than the cost of attendance at that institution minus his 23 other loans and income. These requirements set by Navient do 24 mimic the definitions of an eligible educational institution, 25 eligible student, and qualified higher education expenses. 26 However, the attempts of Navient to mimic the terms that are 27 crucial to a qualified educational loan do not transform the Bar 28 Loan into a qualified educational loan. Teran was not an -12- 1 eligible student when he received the Bar Study funds, and the 2 funds were specifically meant to pay bar prep expenses, not to 3 pay the cost of attendance at his law school. 4 The loan was meant for a bar prep program and for living 5 expenses while preparing for the bar. BarBri does not meet the 6 attendance, accreditation, or course offering standards of an 7 eligible educational institution. The loan money is further 8 attributable to education that Teran would undertake while he 9 was not an eligible student. 10 The Bar Loan is not a qualified educational loan under the 11 Qualified Loan Section as a matter of law, and summary judgment 12 must be granted in favor of Teran. 13 IV. DISPOSITION AND FURTHER PROCEEDINGS 14 For the foregoing reasons, summary judgment should be 15 GRANTED in favor of Teran as to the Qualified Loan Section and 16 DENIED as to the Program Section. Before it enters any order on 17 these matters, the court will conduct a status conference on 18 February 25, 2022 at 11:00 a.m. to discuss further proceedings 19 including whether Navient wishes to provide further factual 20 support for nondischargeability under the Program Section. 21 **END OF MEMORANDUM DECISION** 22 23 24 25 26 27 28 -13- 1 COURT SERVICE LIST

2 ECF Recipients 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -14-