As a prudential matter and not for lack of jurisdiction, the Fifth Circuit held that the district where a bankruptcy case was pending is the only district that can enforce a discharge injunction. The appeals court all but declared that bankruptcy courts may not conduct countrywide class actions regarding the discharge of debts.
The appeals court even went so far as to raise a question about the ability of a bankruptcy court to enforce a discharge granted by another court in the same district.
Nonetheless, student loan debtors won a victory because the Fifth Circuit became the first appeals court to rule that private student loans can be discharged without proving “undue hardship,” which is virtually impossible in the Fifth Circuit. The appeals court rejected the notion that 2005 amendments to Section 523(a)(8)(A)(ii) made private student loans nondischargeable.
Debtors Win in Bankruptcy Court
A debtor in Texas had received a chapter 7 discharge. His liabilities included a loan to fund preparation to take the bar examination, but the loan was not part of a governmental loan program.
A different debtor had obtained a chapter 7 discharge in Virginia. The Virginia debtor had received a loan from the same lender to finance courses at an unaccredited technical school.
After discharge, the lender made frequent calls to the two debtors demanding payment on the student loans. The Texas debtor responded by filing suit in the Texas bankruptcy court seeking a declaration that the debt was discharged and a judgment holding the lender in contempt of the discharge injunction.
After the Virginia debtor joined as a plaintiff in the same adversary proceeding, they filed an amended complaint to certify a nationwide class and declare that private loans, like theirs, were dischargeable. The lender replied with a motion for summary judgment, contending that the Texas bankruptcy court had no jurisdiction to interpret and enforce a discharge injunction from another district.
The bankruptcy court denied the lender’s motion and declared that the debtors’ private loans had been discharged under Section 523(a)(8). The bankruptcy court had not certified a class, however.
The bankruptcy court authorized an interlocutory appeal and a direct appeal to the Fifth Circuit. The Fifth Circuit accepted the direct appeal.
Don’t Enforce Another Court’s Discharge
On the question of whether a bankruptcy judge may enforce a discharge granted in another district, Circuit Judge Leslie H. Southwick said the closest authority was a Fifth Circuit opinion saying that a bankruptcy court “may” have jurisdiction over claims in other cases in the same district.
In the case on appeal, the bankruptcy judge had reasoned that a bankruptcy court could enforce a discharge injunction from elsewhere, because the injunction is statutory and did not result from an order crafted by another judge. In other words, no purpose would be served by forcing a debtor to return to the issuing court.
In his October 21 opinion, Judge Southwick required more than the bankruptcy court’s reasoning, unsupported by authority, to overcome the conclusions he would reach based on contempt jurisprudence and the relevant statutes, present and former.
Principally, Judge Southwick focused on 1970 legislation amending Section 14 of the former Bankruptcy Act. That statute permitted an order of discharge to be registered in another district. It then allowed a court in another district to enforce the discharge in the same manner as the court in the issuing district. In other words, the Texas court could have enforced the Virginia discharge under the 1970 law.
The l970 law was repealed with the adoption of the Bankruptcy Code, but the Bankruptcy Rule that replaced the 1970 statute did not authorize enforcement in another district “in like manner.” The omission, Judge Southwick said, “gives weight” to the notion that discharge enforcement in another district is “prohibited.”
Next, Judge Southwick dealt with the current statute, 28 U.S.C. § 1963, which allows judgments issued by bankruptcy courts for “recovery of money or property” to be registered in other districts and enforced there. He said that Section 1963 does not allow another district to enforce an injunction, citing the Wright, Miller & Kane treatise.
In sum, Judge Southwick said that the “most direct support” for enforcing a foreign discharge came from the 1970 statute, which, he said, “is no more.” Likewise, current Bankruptcy Rule 4004(f) contains no provision allowing “in like manner” enforcement in the district in which the discharge order was registered.
Next, Judge Southwick dealt with the idea that enforcing discharge is only the enforcement of a statute, not another judge’s injunction. In response, he said that the Second, Seventh, Ninth and Eleventh Circuits only allow the issuing court to enforce discharge injunctions through contempt.
Judge Southwick did not follow the Eleventh Circuit and find a jurisdictional bar to enforcement of discharge from another district. Instead, he rested the decision on prudential grounds. The debtors’ arguments, he said, were insufficient to “allow an exception from the usual rules” permitting only the issuing court to enforce an injunction.
Judge Southwick therefore reversed the bankruptcy judge’s enforcement of the Virginia debtor’s discharge.
Noting that the bankruptcy court had not yet certified a class, Judge Southwick went on to say that he was “highly dubious” about a nationwide class. On remand, he left it for the bankruptcy court to decide whether there was power to enforce a discharge issued by another court in the same district.
Dischargeability of Private Student Loans
The lender argued that the private student loans were “an obligation to repay funds received as an educational benefit, scholarship, or stipend” under Section 523(a)(8)(A)(ii). Judge Southwick noted the conspicuous absence of the word “loan” in that subsection when it is included in other subjections defining nondischargeable student loans.
The words “benefit, scholarship, or stipend,” he said, imply money that was granted, not loaned, Judge Southwick said. If those words subsumed all student loans, then the other subsections in (a)(8) would be surplusage, he said.
The lender cited cases holding that any funds received for an educational purpose, including private loans, are nondischargeable. The lender conceded, however, that there has been increasing caselaw since 2015 holding that private student loans are dischargeable. No circuit has ruled on the subject in a precedential holding, Judge Southwick said.
Judge Southwick affirmed the ruling that private student loans are dischargeable. The notion that the 2005 amendments made all student loans nondischargeable, he said, “is not only unsupported by the text, it is unsupported by some of [the lender’s] authorities.”
Judge Southwick went on to say that Section 523(a)(8)(A)(ii) results in the nondischargeability of “educational payments that are not initially loans but whose terms will create a reimbursement obligation upon the failure of conditions of the payments.”
Observations
State courts have concurrent jurisdiction to decide whether a debt was discharged. If a state court in another state can enforce a discharge, why would a federal court in that state lack similar power?
What if a debtor moves to another state after discharge? To enforce the discharge, must the debtor sue, perhaps thousands of miles away, in his or her former hometown? Or will the precedential rule bend by allowing a debtor to enforce the discharge in his or her hometown, whether or not it was the venue of the bankruptcy case?
Assume that a state court had personal jurisdiction over a debtor in a state different from the one where the debtor filed bankruptcy. If the lender were to sue for collection of the debt, the debtor could raise the discharge as a defense and seek an injunction. But what if there were diversity, allowing the debtor to remove the suit to federal court? Would the debtor be barred from enforcing the discharge injunction if the district was not the one where he or she had filed bankruptcy, even though the debtor could have sought an injunction in state court?
And if the suit remained in state court, could the debtor raise a class counterclaim?
Could a debtor circumvent Judge Southwick’s holding by filing suit only for a declaration about discharge, while seeking neither an injunction against collection nor contempt?
Judge Southwick’s opinion gives reason for considering an amendment to Bankruptcy Rule 4004(f) by allowing a debtor to enforce discharge anywhere. If it was possible in 1970, why can’t it be now?
As a prudential matter and not for lack of jurisdiction, the Fifth Circuit held that the district where a bankruptcy case was pending is the only district that can enforce a discharge injunction. The appeals court all but declared that bankruptcy courts may not conduct countrywide class actions regarding the discharge of debts.
The appeals court even went so far as to raise a question about the ability of a bankruptcy court to enforce a discharge granted by another court in the same district.
Nonetheless, student loan debtors won a victory because the Fifth Circuit became the first appeals court to rule that private student loans can be discharged without proving “undue hardship,” which is virtually impossible in the Fifth Circuit. The appeals court rejected the notion that 2005 amendments to Section 523(a)(8)(A)(ii) made private student loans nondischargeable.
Debtors Win in Bankruptcy Court
A debtor in Texas had received a chapter 7 discharge. His liabilities included a loan to fund preparation to take the bar examination, but the loan was not part of a governmental loan program.
A different debtor had obtained a chapter 7 discharge in Virginia. The Virginia debtor had received a loan from the same lender to finance courses at an unaccredited technical school.