Palpably angry, Bankruptcy Judge Martin Glenn of New York imposed $378,000 in contempt sanctions on a student loan servicer for ignoring court orders over five years and attempting to collect a discharged debt.
Judge Glenn rejected the servicer’s argument that contempt sanctions are available only after finding bad faith or willfulness. Instead, he said that the servicer’s “repeated disregard for multiple court orders is a sufficient basis to hold [the servicer] in contempt of court.”
“I do detect a growing dissatisfaction with the student loan industry and the bankruptcy exception to discharge, particularly in situations where there is apparent lack of ‘underwriting,’” Richard Carmody told ABI. He is a fellow of the American College of Bankruptcy and of counsel to Adams & Reese LLP, which maintains offices in Atlanta and Birmingham, Ala., among other locations.
Ignoring Orders and Notices for Five Years
Before reciting the facts, Judge Glenn began his September 8 opinion by observing how debtors sometimes suffer from “predatory tactics used by some loan servicers to collect on student loan debt and from the borrowers’ lack of resources to prevent such abuse, particularly when the borrower does not have an attorney.” The case at hand, he said, “evidences just such abuse” over “the last five years.”
The debtor borrowed almost $300,000 to finance his children’s educations. He filed a chapter 7 petition pro se along with a pro se complaint against the servicer in September 2015 to discharge the student loans. The U.S. Department of Education, the holder of the loans, later conceded that service of the summons and complaint on the servicer was sufficient.
The servicer was clearly aware of the suit because it sent the complaint to the DOE, which in turn forwarded the complaint to the U.S. Attorney.
When the servicer did not respond to the complaint, Judge Glenn entered a default judgment discharging the debt in March 2016. Over the ensuing years, he said that the servicer “simply ignored” multiple notices and orders regarding the default judgment. The servicer also attempted to garnish the debtor’s wages for failure to pay the discharged debt.
In early 2020, four years after the default judgment, the debtor filed a motion for contempt and enforcement of the discharge. Again, the servicer did not respond, nor did it appear at several hearings and conferences.
The First Sanctions
Judge Glenn entered an order to show cause, directing the servicer to explain why it should not be held in contempt. When the servicer ignored the OTSC, Judge Glenn sanctioned the servicer about $124,000 in April, representing the collection costs and interest the servicer had attempted to collect from the debtor.
Judge Glenn directed the servicer to pay the $124,000 to the clerk of the court.
When the servicer did not pay, Judge Glenn entered a second order to show cause on August 10, in view of the servicer’s “blatant disregard of the Court’s orders.” Reciting the facts and giving notice of the issues, the new, eight-page OTSC required the servicer to appear at the hearing and explain why it should not be sanctioned for about $417,000.
The Second Sanctions
Finally filing a notice of appearance and appearing at the hearing in August, the servicer admitted that it had been served and ignored multiple orders, according to Judge Glenn.
The servicer claimed that its inaction over five years resulted from “unintended procedural error.” Judge Glenn found “this cavalier excuse wholly satisfactory.” He found that the servicer’s “indifference” and “exploitative tactics” had “seriously prejudiced” the debtor.
Judge Glenn said that the servicer’s actions represented “gross negligence (or worse)” and “unquestionably warrants civil contempt.” Noncompliance with prior orders had “been shown by clear and convincing evidence,” he said.
In lieu of the $124,000 in sanctions he had previously imposed, Judge Glenn sanctioned the servicer for about $355,000. He directed the servicer to pay the $355,000 to the Department of Education, representing payment of the loans in full.
Judge Glenn found that the debtor had “suffered over the last five years as a result of negative credit ratings, aggravation, loss of sleep and worry, harassment, pain and suffering, in addition to contributing marital strain.” In compensation, he directed the servicer to pay $24,000 to the debtor and tell all credit reporting agencies that the debt was paid in full.
Palpably angry, Bankruptcy Judge Martin Glenn of New York imposed $378,000 in contempt sanctions on a student loan servicer for ignoring court orders over five years and attempting to collect a discharged debt.
Judge Glenn rejected the servicer’s argument that contempt sanctions are available only after finding bad faith or willfulness. Instead, he said that the servicer’s “repeated disregard for multiple court orders is a sufficient basis to hold [the servicer] in contempt of court.”
“I do detect a growing dissatisfaction with the student loan industry and the bankruptcy exception to discharge, particularly in situations where there is apparent lack of ‘underwriting,’” Richard Carmody told ABI. He is a fellow of the American College of Bankruptcy and of counsel to Adams & Reese LLP, which maintains offices in Atlanta and Birmingham, Ala., among other locations.
Ignoring Orders and Notices for Five Years
Before reciting the facts, Judge Glenn began his September 8 opinion by observing how debtors sometimes suffer from “predatory tactics used by some loan servicers to collect on student loan debt and from the borrowers’ lack of resources to prevent such abuse, particularly when the borrower does not have an attorney.” The case at hand, he said, “evidences just such abuse” over “the last five years.”