Student-loan Dischargeability Does the Doctrine of Laches Apply

Journal Issue

Jul/Aug 2004

Column Name

Journal HTML Content

Over the last three decades, Congress has
attempted to make the collection of defaulted student loans easier and
their
dischargeability more difficult. To this effect, the Education
Amendments of 1976, §439A (EA), was passed.<a href="#2" name="2a">2</a>

Section 439A, later codified at 11 U.S.C. §523(a)(8), provided that
student loans were not dischargeable in
bankruptcy unless failure to discharge the debt would cause an undue
hardship on the debtor or their dependents.<a href="#3" name="3a">3</a>
Section 439A was a reaction to the rapid increase in the number of
bankruptcies filed by recent college graduates
who were not in financial distress, but still filed bankruptcy for the
purpose of discharging their student loans.<a href="#4" name="4a">4</a>

Despite the intended difficulty §523(a)(8) was meant to create
by preventing discharge of student loan obligations,
defaults still continued to rise. Collection efforts were hindered by
divergent federal and state statutes of
limitations.<a href="#5" name="5a">5</a>
Congress, apparently finding that "[s]tatutes of limitation find their
justification in necessity and
convenience rather than in logic,"<a href="#6" name="6a">6</a> acted to normalize student-loan collection
statute-of-limitations provisions.

Standardization of the divergent statute of limitations was
accomplished in The Consolidated Omnibus Budget
Reconciliation Act of 1985 (COBRA).<a href="#7" name="7a">7</a> COBRA provided that, "[n]otwithstanding
any provision of state law that
would set an earlier deadline for filing suit..."<a href="#8" name="8a">8</a> "the United States could file
suit to recover on defaulted student
loans"<a href="#9" name="9a">9</a> "until
[six] years following the date on which the loan [wa]s assigned to the
Secretary [of Education]."<a href="#10" name="10a">10</a>

Congress again amended the statute-of-limitations provision in
1991.<a href="#11" name="11a">11</a>
Legislators commented that the complete
elimination of a statute-of-limitations provision resulted in
"[s]ubstantial additional collections of defaulted
guaranteed student loans..."<a href="#12" name="12a">12</a> At the request of the administration and
pursuant to the Higher Education Technical
Amendments Act of 1991 (HETA), Congress removed the statute of
limitations on an interim basis<a href="#13" name="13a">13</a> and later
eliminated the statute of limitations altogether as codified in 20
U.S.C. §1091(a).<a href="#14" name="14a">14</a> Congress further strengthened
the recovery provisions of HETA by making the amendments effective as if
enacted by COBRA of 1985.<a href="#15" name="15a">15</a> "As a
necessary consequence of th[is] express retroactivity clause, actions
that had become time-barred after the enactment
of COBRA...were revived."<a href="#16" name="16a">16</a> Therefore, regardless of when a student
loan default had occurred, the loans again
became subject to collection efforts.

Debtors—confronted with the retroactivity clause of
§1091(a) and a delay by the government in initiating the
recovery of their defaulted loans—have attempted several indirect
novel theories in an attempt to escape collection
efforts. Debtors have alleged that the retroactivity clause violates the
Fourteenth Amendment's guarantee of due
process and equal protection.<a href="#17" name="17a">17</a> This argument has been rejected because
"[i]t is within the power of Congress to
enact such revivals because the repeal of a statute of limitations on
personal debts does not deprive a debtor of
property in violation of...due process..."<a href="#18" name="18a">18</a>

Debtors have attempted to maneuver around the retroactivity clause by
arguing that it is inapplicable due to lack of
consideration or because of the ex post facto effect of the
clause. Courts have rejected both arguments. In rejecting
the consideration argument, one court found that "[f]ailure of
consideration is the legal claim that a person did not
get something of value in exchange for his promise to pay. In a student
loan case, what the student got from the
lender was money, and its value is unquestionable."<a href="#19" name="19a">19</a> The invocation of the ex
post facto clause has similarly been
rejected because "[the] prohibition applies only to criminal or penal
measures that are applied retroactively."<a href="#20" name="20a">20</a>

Debtors attempting a direct challenge to the retroactivity clause
have used a laches argument. In an effort to use
laches, debtors argue that due to the unreasonable or negligent delay by
the government in its collection efforts,
their student loans should no longer be recoverable. A debtor attempting
to use the laches doctrine faces several
difficulties. First, student loan debts are presumptively
nondischargeable pursuant to 11 U.S.C. §523(a)(8).<a href="#21" name="21a">21</a> Thus,
the obligee of a student loan debt does not have to take any action for
their debt to be preserved, and the obligor is
faced with the task of establishing that the loans prove an undue
hardship, thus negating the presumption of
nondischargeablity.<a href="#22" name="22a">22</a> Second, the retroactivity clause appears
to allow the student loan obligee to take no action to
effectuate recovery, regardless of how long the loan has been
outstanding, even if no efforts to collect the loan or to
notify the obligor of a default have been undertaken.

Third, the application of laches "is generally inapplicable against
the government."<a href="#23" name="23a">23</a> This traditional rule
"originated from notions of royal privilege, but in modern times has
been consistently attributed to the public
policy of preserving public rights and property against the negligence
of public officers."<a href="#24" name="24a">24</a> The circuits are nearly
unanimous in holding that "the doctrine of laches may not be asserted
against the United States when it is acting in
its sovereign capacity to enforce a public right or to protect the
public interest..."<a href="#25" name="25a">25</a>

The lone abstention from this majority is the Federal Circuit. In
S.E.R., Jobs for Progress Inc. v. United States,<a href="#26" name="26a">26</a>
the S.E.R. court created a limited exception to the
sovereign-immunity doctrine, holding that "laches cannot
ordinarily be invoked as a defense to legal claims where a statute of
limitations is normally available to preclude the
recovery of state claims, unless the offended party has been
unmistakably prejudiced by the delay in the assertion of
the claim."<a href="#27" name="27a">27</a>
S.E.R.'s exception, possibly allowing use of the laches doctrine
where "the government brings an
action on a contract"<a href="#28" name="28a">28</a> was carved out pursuant to Public Law
89-505, was later codified at 28 U.S.C. §2415,
which was the former applicable statute covering student loan statute of
limitations.<a href="#29" name="29a">29</a>

However, "Congress's retroactive elimination of all statutes of
limitations for actions to recover defaulted loans
appears to indicate precisely the opposite intent...[t]hat is, by
retroactively eliminating all statutes of limitation and
reviving claims previously time-barred...Congress sought to erase
obstacles that the government might encounter in
collecting defaulted loans."<a href="#30" name="30a">30</a> The codification of 20 U.S.C.
§1091(a) abrogates S.E.R.'s. applicability in the
context of student loan default collections.

Fourth, all the circuits that have reviewed the retroactivity clause
of §1091(a) have rejected the laches defense,
holding instead that the retroactivity clause "eliminates all limitation
defenses for collection of student debts."<a href="#31" name="31a">31</a> In
United States v. Sullivan,<a href="#32" name="32a">32</a> the Ninth Circuit Court of Appeals held
that "there is no statute of limitations
preventing the collection of...student loan debt [and even if laches
applied, the debtor] failed to demonstrate
[material] prejudice."<a href="#33" name="33a">33</a> Likewise, the Fifth Circuit Court of
Appeals in United States v. Lawrence<a href="#34" name="34a">34</a> held that the
retroactivity clause "extends to eliminate the equitable defense of
laches."<a href="#35" name="35a">35</a>

Several district courts facing these same
questions have also held that the laches defense, due to Congress's
creation of the retroactivity clause, is
inapplicable.<a href="#36" name="36a">36</a>

Nevertheless, even assuming the laches defense still applies, and
despite Congress's apparent abrogation, a debtor
would still need to establish that there was an unreasonable delay in
bringing the enforcement action and the delay
caused material prejudice.<a href="#37" name="37a">37</a> Of the courts that have discussed the
application of laches, only one has found that the
government's attempt to recover student loan obligations was
time-barred.<a href="#38" name="38a">38</a> In
United States v. Rhodes,<a href="#39" name="39a">39</a> the
court, faced with a 17-year-old student loan debt in which the original
lender and the school the debtor attended had
dissolved and the original records had all been destroyed, found that
material prejudice had been clearly
established.<a href="#40" name="40a">40</a>

The court, applying laches, barred the government's claim. Other courts
not presented with the
compelling factual circumstances present in Rhodes have not
accepted the laches defense.<a href="#41" name="41a">41</a>

A debtor faced with a student loan obligation, where the timeliness
of the government's collection efforts is called
into question, is better served by foregoing the laches defense. The
S.E.R. decision, while factually supporting at
least the possibility of using laches, was made pursuant to 24 U.S.C.
§2415. 20 U.S.C. §1091(a), and by its
express terms negates §2415 and, consequently, the S.E.R.
decision, thus eliminating the laches defense.

Even if the clear and unequivocal language of §1091(a) is
ignored, as the district court in Rhodes chose to do, the
standard for applying laches is still exceptionally high. The obligee
has to show both that the government's delay
was unreasonable and that as a result of the delay, material prejudice
has resulted. Only the Rhodes court, faced with
unusual facts limited to that case, has found that the debtor met the
unreasonableness and material prejudice burden. The decision in

Rhodes, though factually compelling, is singularly unique and
unsupported by §1091(a). Unless a
debtor has a set of extremely extenuating factual circumstances and is
before a court willing to ignore the clear
statutory language of §1091(a), a debtor would be better served
crafting an argument pursuant to §523(a)(8)'s
undue-hardship test and avoiding the laches argument.<a href="#42" name="42a">42</a> The obvious congressional
intent and the wording and
judicial application of §1091(a) make clear that the laches defense
is statutorily abrogated.<a href="#43" name="43a">43</a>

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> Law clerk to Hon.
Arthur B. Briskman, U.S. Bankruptcy Judge for the Middle District
of Florida. The views expressed herein are solely those of the author.
The author would like to thank Creighton Miller for his assistance. <a href="#1a">Return to article</a>

<a name="2">2</a> See Education
Amendments of 1976, Pub.L. No. 94-482, 90 Stat. 2081, 2141 (codified at
20 U.S.C. §1087-3 (1976) (repealed 1978)). <a href="#2a">Return to
article</a>

<a name="3">3</a> See Campbell,
Andrew M., "Bankruptcy Discharge of Student Loan on Ground of Undue
Hardship Under §523(A)(8)(B) of Bankruptcy Code of 1978," 144
A.L.R. Fed. 1 (2004).
The Act also allowed a discharge of student loans if "the debt became
due more than five years before the date of the filing of the bankruptcy
petition." The five-year wait
period was eliminated when §523(A)(8)(B) was adopted into the
Bankruptcy Code of 1978. <a href="#3a">Return to article</a>

<a name="4">4</a> See Id. <a href="#4a">Return to article</a>

<a name="5">5</a> The Higher Education Act
of 1965 §484A did not have an express statute-of-limitations
provision. Instead, 28 U.S.C. §2415(a), which articulates time for
commencing actions
brought by the United States, provided a six-year statute of
limitations; see, also, former 20 U.S.C. §1091a(a)(4)(C) of
the Higher Education Act of 1965 §484A, stating, "[T]he
attorney general may file suit for collection of the amount due from a
borrower on a loan...until six years following the date on which the
loan is assigned, transferred or referred
to the secretary..." <a href="#5a">Return to article</a>

<a name="6">6</a> Chase Securities Corp.
v. Donaldson, 325 U.S. 314, 65 S.Ct. 1142, 89 L.Ed. 1628 (1945). <a href="#6a">Return to article</a>

<a name="7">7</a> The Consolidated Omnibus
Budget Reconciliation Act of 1985 (COBRA), Pub.L. No. 99-272, 100 Stat.
82 (1986), effective April 7, 1986. <a href="#7a">Return to article</a>

<a name="8">8</a> Id. <a href="#8a">Return to article</a>

<a name="9">9</a> United States v.
McLaughlin, 7 F.Supp.2d 90, 91 (D. Mass. 1998). <a href="#9a">Return
to article</a>

<a name="10">10</a> See The Higher
Education Act of 1965 §484A (formerly codified at 20 U.S.C.
§1091a(a)(4)). <a href="#10a">Return to article</a>

<a name="11">11</a> See The Higher
Education Technical Amendments of 1991(HETA), Pub.L.No. 102026, 105
Stat. 23 (1991). <a href="#11a">Return to article</a>

<a name="12">12</a> 137 Cong. Rec. H1808-02
(Mr. Ford). Rep. Ford and others were concerned that if the statute of
limitations for collection and offsets of student loan obligations
against tax
refunds, nearly $180 million "already collected through tax refund
offsets [may have to be returned] and that an additional $64.2 million
per year [would not be collected]." <a href="#12a">Return to article</a>

<a name="13">13</a> See HETA
§3(a)-(c), Pub.L. No. 102-26, 105 Stat. 123 (1991). <a href="#13a">Return to article</a>

<a name="14">14</a> See HETA
§3(c), Pub.L. No. 102-325, §1551, 106 Stat. 448, 838 (1992);

see, also, 20 U.S.C. §1091(a), stating, "Notwithstanding any
other provision of statute, regulation or
administrative limitation, no limitation shall terminate the period
within which suit may be filed, a judgment may be enforced or an offset,
garnishment or other action
initiated or taken." <a href="#14a">Return to article</a>

<a name="15">15</a> See HETA
§3(c), Pub.L. No. 102-325, §1551, 106 Stat. 448, 838 (1992).
"The amendments originally applied only to "actions pending on or after
the date of enactment of
[HETA]..." See Pub.L.No. 102-325, §1551, 106 Stat. 448
(1992). However, when the interim status was removed from the amendment,
it became retroactively applied to the
COBRA of 1985. <a href="#15a">Return to article</a>

<a name="16">16</a> McLaughlin, 7
F.Supp.2d at 91; see, e.g., United States v. Phillips, 20 F.3d
1005, 1007 (9th Cir. 1994); United States v. Hodges, 999 F.2d
341, 341-42 (8th Cir. 1993); United
States v. Glockson, 998 F.2d 896, 896-97 (11th Cir. 1993). <a href="#16a">Return to article</a>

<a name="17">17</a> See, e.g., United
States v. Dwelley, 59 F.Supp.2d 115, 118 (D. Me. 1999) (rejecting
due process violation claim). <a href="#17a">Return to article</a>

<a name="18">18</a> McLaughlin, 7
F.Supp.2d at 91, quoting United States v. Hodges, 999 F.2d at
342; see, also, Sibley v. U.S. Department of Education, 913
F.Supp. 1181, 1188-89 (N.D. Ill. 1995)
(finding that "...retroactive repeal of a limitations period applicable
to monetary debts does not violate due process. [citation omitted]
Statutes of limitations are legislatively
created defenses, not constitutionally protected 'property,' and thus
are subject to legislative amendments, including retroactive appeals.").

<a href="#18a">Return to article</a>

<a name="19">19</a> United States v.
Durbin, 64 F.Supp.2d 635, 637 (S.D. Tex. 1999); see, also, United
States v. Davis, 817 F.Supp. 926 (M.D. Ala. 1993) (finding that
student received the loan and
"that [the court could not say that] her failure to receive an education
was not her own fault."). <a href="#19a">Return to article</a>

<a name="20">20</a> United States v.
Dwelley, 59 F.Supp.2d 115, 119 (D. Me. 1999). <a href="#20a">Return
to article</a>

<a name="21">21</a> 11 U.S.C.
§523(a)(8) states that "[a] discharge under...this title does not
discharge...any debt for an education benefit overpayment or loan
made...unless excepting such debt
from discharge under this paragraph will impose an undue hardship on the
debtor and the debtor's dependents." See, also, committee notes
to §523(a)(8), stating, "[t]his provision
is intended to be self-executing, and the lender or institution is not
required to file a complaint to determine the non-dischargeability of
any student loan." <a href="#21a">Return to article</a>

<a name="22">22</a> For more on the
standard for proving undue hardship pursuant to 11 U.S.C.
§523(a)(8), see Gaumer, Craig Peyton, "Chaos in the Courts:
The Meaning of 'Undue Hardship' in 11
U.S.C. §523(a)(8) and the Argument for Establishing a Uniform
Federal Standard," ___ Am. Bankr. J. ____ (2004). <a href="#22a">Return
to article</a>

<a name="23">23</a> United States v.
Rhodes, 788 F.Supp. 339, 342 (E.D. Mich. 1992). <a href="#23a">Return to article</a>

<a name="24">24</a> S.E.R., Jobs for
Progress Inc. v. United States, 759 F.2d 1, 7 (Fed. Cir. 1985);
see, also, Guaranty Trust Co. v. United States, 304 U.S. 126,
132, 58 S.Ct. 785, 788, 82 L.Ed.
1224 (1938); United States v. 93 Court Corp., 350 F.2d 386, 388
(2d. Cir. 1965). <a href="#24a">Return to article</a>

<a name="25">25</a> See United States v.
Menatos, 925 F.2d 333 (9th Cir. 1991); Bostwick Irrigation
District v. United States, 900 F.2d 1285 (8th Cir. 1990); United
States v. St. John's General
Hospital, 875 F.2d 1064 (3rd Cir. 1989); United States v.
Popovich, 820 F.2d 134 (5th Cir. 1987); United States v. Hughes
House Nursing Home Inc., 710 F.2d 891 (1st Cir. 1983);

Cassidy Comm'n. Co. v. United States, 387 F.2d 875 (10th Cir.
1967). <a href="#25a">Return to article</a>

<a name="26">26</a> S.E.R., 759 F.2d
1. <a href="#26a">Return to article</a>

<a name="27">27</a> Id. at 8. <a href="#27a">Return to article</a>

<a name="28">28</a> Id. at 7. <a href="#28a">Return to article</a>

<a name="29">29</a> The Federal Circuit
Court of Appeals in S.E.R. stated that "the clear purpose of
Congress...was to promote fairness to parties defending against state
government contract and
tort claims notwithstanding whatever prejudice might accrue thereby to
the government as a result of the negligence of its officers."
S.E.R. at 8. <a href="#29a">Return to article</a>

<a name="30">30</a> United States v.
Davis, 817 F.Supp. 926, 929 (M.D. Ala. 1993); aff'd., 17 F.3d
1439 (11th Cir. 1994). <a href="#30a">Return to article</a>

<a name="31">31</a> United States v.
Lawrence, 276 F.3d 193, 196 (5th Cir. 2001); see, also, Millard
v. United Student Aid Funds, 66 F.3d 252 (9th Cir. 1995); United
States v. Phillips, 20 F.3d 1005
(9th Cir. 1994); United States v. Glockson, 998 F.2d 896 (11th
Cir. 1993). <a href="#31a">Return to article</a>

<a name="32">32</a> United States v.
Sullivan, 2003 WL 21418500 (9th Cir. 2003). <a href="#32a">Return to
article</a>

<a name="33">33</a> Id. at 1. <a href="#33a">Return to article</a>

<a name="34">34</a> United States v.
Lawrence, 276 F.3d 193 (5th Cir. 2001). <a href="#34a">Return to
article</a>

<a name="35">35</a> Id. at 196. <a href="#35a">Return to article</a>

<a name="36">36</a> See United States v.
McLaughlin, 7 F.Supp.2d 90 (D. Mass. 1998) (noting the court might
have considered laches if a "special hardship" had been present);

United States v.
Smith, 862 F.Supp. 257 (D. Ha. 1994); United States v.
Wright, 850 F.Supp. 965 (D. Utah 1993); United States v.
Davis, 142 B.R. 293 (D. Ind. 1992). <a href="#36a">Return to
article</a>

<a name="37">37</a> See, e.g.,
S.E.R., 759 F.2d 1. <a href="#37a">Return to article</a>

<a name="38">38</a> In United States v.
Zue, 704 F.Supp. 535 (D. Vt. 1988), the court held that the
government's student loan collection case could be barred by laches.
However, Zue was decided
prior to Congress's allowance of the retroactivity clause. <a href="#38a">Return to article</a>

<a name="39">39</a> United States v.
Rhodes, 788 F.Supp. 339 (E.D. Mich. 1992). <a href="#39a">Return to
article</a>

<a name="40">40</a> Id. at 343. <a href="#40a">Return to article</a>

<a name="41">41</a> See, e.g., Sibley v.
U.S. Dept. of Education, 913 F.Supp. 1181 (N.D. Ill. 1995)
(rejecting reliance on laches and finding that the "facts here present
neither an unreasonable
delay...nor harm or prejudice to [the defendant] caused by the passage
of time..."); United States v. Robbins, 819 F.Supp. 672 (E.D.
Mich. 1993) (rejecting laches defense
because the "government acted in a sufficiently timely manner to bar
laches against it..."); United States v. Zue, 704 F.Supp. 535 (D.
Vt. 1988) (rejecting laches defense under
prior six-year statute of limitations, stating, "[t]he only delay that
defendant has alleged was the university's assignment of the loan to the
government, and during this time the
university was actively pursing various means of collection. No
prejudice to the defendant, therefore, has been shown..."). <a href="#41a">Return to article</a>

<a name="42">42</a> See Gaumer at
22, supra. <a href="#42a">Return to article</a>

<a name="43">43</a> See Lawrence at
276 F.3d 193. <a href="#43a">Return to article</a>

Journal Authors

Kristopher E. Aungst

Journal Date

Thursday, July 1, 2004 - 12:00

Bankruptcy Rule

2004