A bankruptcy court decision from Idaho seems to stand for the idea that educational loans obtained to earn a professional degree will not qualify as arising from “commercial or business activities” unless the debtor becomes the owner of a business not long after obtaining the degree.
The debtor in the Idaho case was precluded from pursuing reorganization under Subchapter V because her student loans weren’t commercial or business debt and she was mostly an employee before filing in chapter 11.
However, the May 2 opinion by Chief Bankruptcy Judge Joseph M. Meier of Boise, Idaho, says that for debt to qualify for Subchapter V, it need not have arisen from the business that the debtor was conducting at filing.
The Student Loan Debt
The debtor had been an addiction counselor. Aiming to increase her income and provide more comprehensive services for her patients, she decided to attend medical school. After obtaining her medical degree and serving a residency, the debtor practiced medicine as an employee for several organizations over a space of 13 some years before bankruptcy. More than 10 years after obtaining her medical degree, the debtor opened her own practice for the first time, but it failed within a year. She was an employee at the time of filing.
The debtor filed a chapter 11 petition and elected to proceed under Subchapter V. By that time, the debtor’s student loan debt, all obtained for the medical degree, had grown from $325,000 to almost $650,000 with interest. The student loans were substantially more than half of the debtor’s total debt.
The U.S. Trustee objected to confirmation of the debtor’s chapter 11 plan, arguing that the debtor was not entitled to proceed under Subchapter V. According to the objection, the student loan debt did not arise from “commercial or business activities.”
What Are Business Debts?
In his opinion on May 2, Judge Meier said that the plan met all of the prerequisites for confirmation, aside from eligibility for Subchapter V.
Section 1182(1)(A) governs eligibility. It says that a person is eligible for Subchapter V if the person is engaged in business or commercial activity and has debts not exceeding $7.5 million. The section goes on to provide that “not less than 50 percent of” the debt must have arisen “from the commercial or business activities of the debtor.”
The U.S. Trustee conceded that the debtor was engaged in commercial or business activities on the petition date and that the debt did not exceed the ceiling for Subchapter V. If the student loans were commercial debt, more than half of the debt would have arisen from business activities.
With regard to eligibility and plan confirmation, Judge Meier said that the outcome would turn on whether the student loan debt was derived from commercial or business activities.
The debtor won a notable, preliminary skirmish. Judge Meier decided that the debt and the commercial activities need not be contemporaneous. He said, “[I]t would be rare for all of a debtor’s commercial or business debts to have been incurred on or around the petition date.”
Furthermore, the debt need not have arisen from the business that the debtor was conducting on the filing date. Judge Meier explained:
Congress left open the possibility that the commercial or business activities which gave rise to the debt might be different from the commercial or business activities the debtor was engaged in on the day the petition was filed.
Are Student Loans Commercial Debt?
Having decided that debt from years earlier was not disqualifying in itself, Judge Meier turned to the next question: Was the debtor was engaged in commercial or business activities on the filing date?
There was no disagreement, because the U.S. Trustee admitted that the debtor was engaged in business on the filing date. Judge Meier also said it was “not realistic” for the debtor to have opened her own practice after completing her residency.
Next, Judge Meier inquired as to “whether the debts arose from the Debtor’s commercial or business activities.” He framed the question as whether there must be a “nexus” between the “Debtor’s medical school student loan debt and the commercial or business activity she engaged in while she operated her own practice.” The case law, he said, “goes both ways.”
Judge Meier cited Bankruptcy Judge Thomas B. McNamara of Denver for the idea that the debt and the commercial activity must be contemporaneous. See In re Ikalowych, 629 B.R. 261, 275–76 (Bankr. D. Colo. 2021). To read ABI’s report on Ikalowych, click here.
To decide whether the student loan debt arose from business activity, Judge Meier adopted the approach taken by Bankruptcy Judge Benjamin A. Kahn of Durham, N.C., who said that a debtor is engaged in business and commercial activity when the debtor is participating in the purchasing or selling of goods or services for a profit. See In re Blue, 630 B.R. 179, 189 (Bankr. M.D.N.C. May 7, 2021). To read ABI’s report on Blue, click here. See also In re Johnson, 2021 WL 825156 at *7–8 (Bankr. N.D. Tex. March 1, 2021). To read ABI’s report on Johnson, click here.
Judge Meier said it was “hard to conceive . . . that the debt incurred to attend medical school fully ten years before opening a business can be construed as ‘purchasing or selling of goods or services for a profit.’”
Although attending medical school “could potentially be construed” as purchasing goods or services, Judge Meier said that “such an interpretation would be a stretch.” He added:
The Debtor’s education had nothing to do with buying, selling, financing, or using goods, rather it gave Debtor the opportunity, as a person, to practice a profession.
For Judge Meier, it was “germane” that the
Debtor did not operate a private business before going to medical school and did not operate a business after obtaining her medical degree until more than a decade had passed. Rather, she was a student who hoped to gain employment following the conclusion of her studies and had aspirations of opening her own practice at some future time.
Judge Meier quoted Bankruptcy Judge Thomas P. Agresti of Erie, Pa., for saying that employment by someone else “would [not] be understood as thereby engaging in a commercial or business activity.” In re Rickerson, 636 B.R. 416, 426 (Bankr. W.D. Pa. 2021). To read ABI’s report on Rickerson, click here.
“Here,” Judge Meier said, “the gap between incurring the debt and actually engaging in any sort of commercial or business activity as an owner is simply too great to find that the student loans at issue arose from Debtor’s commercial or business activities.” He therefore denied confirmation, holding that the “Debtor’s student loans do not qualify as business debts, rendering her ineligible to proceed as a Sub V debtor.”
Caveats
Judge Meier ended the opinion by narrowing the holding. He did “not foreclose all debt which arises prior to a business opening, [because] supplies, product, and a space for the business often must be acquired prior to the actual opening.”
Nor did Judge Meier “announce any sort of per se rule that student loan debt can never qualify as debt arising from commercial or business activities to satisfy Sub V eligibility.” In the case before him, though, the student loan debt, “incurred over ten years prior to opening the medical practice, is simply too far removed for Debtor to qualify for Sub V relief.”
A bankruptcy court decision from Idaho seems to stand for the idea that educational loans obtained to earn a professional degree will not qualify as arising from “commercial or business activities” unless the debtor becomes the owner of a business not long after obtaining the degree.
The debtor in the Idaho case was precluded from pursuing reorganization under Subchapter V because her student loans weren’t commercial or business debt and she was mostly an employee before filing in chapter 11.
However, the May 2 opinion by Chief Bankruptcy Judge Joseph M. Meier of Boise, Idaho, says that for debt to qualify for Subchapter V, it need not have arisen from the business that the debtor was conducting at filing.