Affirming the district court and the late Bankruptcy Judge Joseph M. Meier of Boise, Idaho, the Ninth Circuit held in a nonprecedential opinion that student loans to obtain a professional degree are not “business” debts making a debtor eligible for Subchapter V of chapter 11 when the debtor didn’t have plans to own her own business after graduation.

The individual debtor had taken down $325,000 in loans to attend medical school. By the time she filed a petition under Subchapter V, the debt had grown to $650,000 with interest. The student loans amounted to almost 60% of her secured and unsecured debt.

Deciding that the debtor was not eligible for Subchapter V, Bankruptcy Judge Meier held that the loans had not arisen from commercial or business activities. In re Reis, 22-00517, 2023 BL 148604 (Bankr. D. Idaho May 02, 2023). To read ABI’s report, click here. The district court affirmed. Reis v. Garvin (In re Reis), 23-00279, 2024 BL 313941 (D. Idaho June 20, 2024). To read ABI’s report, click here.

The debtor appealed, to no avail.

In a per curiam opinion on February 26, the Ninth Circuit explained that debtors are eligible for Subchapter V only if they then had not more than $7.5 million in secured and unsecured debt, “not less than 50 percent of which arose from the commercial or business activities of the debtor.” Section 1182(1)(A) (2022).

The panel explained that the appeal only concerned whether the student loans were classified as arising “from the commercial or business activities of the debtor.” The panel characterized the debtor as contending that the loans were business debts “because her medical degree was a required step in order to own and operate a medical practice.”

Although today’s Section 101(51)(D) does not define “business or commercial activities,” the panel said it “is exceptionally broad.” However, the panel said that the debtor’s argument was “particularly unconvincing looking at the totality of the circumstances.”

The panel pointed out that the debtor did not own her own medical practice until 10 years after graduating and incurring the debt. The opinion goes on to cite the record as “not indicat[ing] that [the debtor] had a concrete plan to open her own medical practice either at the time she took out the student loans or in the years immediately following her graduation from medical school.”

“Under these circumstances,” the panel upheld the lower courts, saying, “we cannot conclude that the record below was such that it demanded the bankruptcy court find that her student loan debt did indeed arise from commercial or business activity.”

Observations

The panel did not close the door entirely to characterizing student loans for professional degrees as business debts. In a footnote, the panel said, “We assume without deciding that debts incurred before opening a business, including student loan debt, could qualify as debt arising from commercial or business activities.”

This writer reads the opinion as concluding that the bankruptcy court had found that the loans, as a fact, were not business debts. The panel quoted the Supreme Court: “[W]here there are two permissible views of the evidence, the factfinder’s choice between them cannot be clearly erroneous.” Anderson v. City of Bessemer City, 470 U.S. 564, 574 (1985).

As this writer reads the record, there were no disputed issues of fact in bankruptcy court. Rather, the bankruptcy court arguably reached a legal conclusion based on undisputed facts.

If there were mixed questions of law and fact, U.S. Bank NA v. Village at Lakeridge LLC, 583 U.S. 387 (March 5, 2018), comes into play. For the unanimous Court, Justice Elena Kagan said that drawing the line between legal or factual conclusions “all depends” on whether the work of the appellate court is “primarily legal or factual.” Id. at 396. To read ABI’s report on Lakeridge, click here.

Assuming that the bankruptcy court’s work was “primarily” legal in drawing legal conclusions based on undisputed facts, the appellate court could have undertaken de novo review of the bankruptcy court’s legal conclusions based on undisputed facts.

Even applying de novo review, the Ninth Circuit panel could have agreed with the legal conclusion and upheld the lower courts.