In re Lewis

• Decision Date: 05 November 2007
• Docket Number: No. 06-35255.,06-35255.
• Citation: 506 F.3d 927
• Parties: In re James LEWIS, Debtor, James Lewis, Plaintiff-Appellant, v. United States Department of Education, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

506 F.3d 927

In re James LEWIS, Debtor James Lewis, Plaintiff-Appellant, v. United States Department of Education, Defendant-Appellee.

No. 06-35255.

United States Court of Appeals, Ninth Circuit.

Submitted September 26, 2007.^*

Filed November 5, 2007.

D. Bernard Zaleha, Attorney at Law, Boise, ID, for the plaintiff-appellant.

Amy S. Howe, Assistant United States Attorney, Boise, ID, for the defendant-appellee.

Appeal from the United States District Court for the District of Idaho; Ralph R. Beistline, District Judge, Presiding. D.C. Nos. CV-05-00034-S-BLW, Adv. # 04-6060.

Before: B. FLETCHER, ANDREW J. KLEINFELD, and RONALD M. GOULD, Circuit Judges.

BETTY B. FLETCHER, Circuit Judge:

Appellant James Lewis seeks review of a final judgment issued by the United States District Court for the District of Idaho in favor of appellee United States Department of Education ("Department"). The bankruptcy court held and the district court affirmed that a congressional amendment to the law governing the dischargeability of a student loan obligation in bankruptcy may be retroactively applied to an obligation incurred prior to the date the law was changed. Whether the district court correctly ruled that the retroactive amendments govern appellant's student loans is the single issue of law before this court on appeal. Appellant's central argument is that he had a right to rely on the statute of limitations in effect at the time he incurred his obligation because (a) the statute of limitations was an implicit term of the contract he signed, (b) his contract created a property right to discharge his student loans after the prescribed statutory period, and (c) any government action to impair his contractual right violates his Fifth Amendment right to due process.¹

We reject his challenge. Bankruptcy is a legislatively created benefit, not a right, that Congress may alter or withhold at its discretion. It did exactly that in 1998 when it amended 11 U.S.C. § 523(a)(8)(A) to eliminate, retroactively, the dischargeability of student loans such as appellant's that have been in repayment for seven years or more. Congress left in place an undue hardship exception to nondischargeability, which appellant does not claim. Through its power to legislate on bankruptcies, Congress has the power to impair contractual obligations, even retroactively, and appellant has no superseding right to a discharge in bankruptcy.

BACKGROUND

Appellant Lewis obtained a student loan September 5, 1984, and executed a promissory note to secure it in the amounts of $2,500.00 in order to attend Platt College in San Diego, California. Lewis later obtained two additional loans, executing one promissory note in the amount of $2,625.00 dated May 25, 1988 and one in the amount of $4,000.00 dated December 3, 1988, both in order to attend Musicians Institute in Hollywood, California. Lewis agreed to the terms of the promissory notes, which were, in relevant part, to repay the loans including accrued interest.² The California Student Aid Commission guaranteed all the loan obligations. Appellee Department reinsured the loans under loan guaranty programs authorized under Title IV-B of the Higher Education Act of 1965, 20 U.S.C. §§ 1071-1087-4.³ Lewis defaulted on each of his three loan obligations.⁴ Due to these defaults, the guarantee agency paid to the lender claims in the amounts of $2,243.02, $2,776.73 and $5,964.39. Under the terms of its reinsurance agreement, Appellee Department reimbursed the guarantor, which was unable to collect the amounts due and assigned its right and title to the loans to the Department on August 25, 1997.

Congress has sought progressively to limit the instances in which student loan debts may be discharged in bankruptcy. In 1998, Congress amended 11 U.S.C. § 523(a)(8)(A), which had provided that student loans in repayment for seven years were eligible for discharge.⁵ See Higher Education Amendments of 1998, Pub.L. No. 105-244, § 971, 112 Stat. 1581, 1837 (1998). The 1998 Amendments repealed the safe harbor provision "with respect to [student loans in bankruptcy] cases commenced under Title 11, United States Code, after the date of enactment of this Act." Id. at § 971(b). The only remaining exception to nondischargeability is through a showing of undue hardship, which is not at issue in this case. Lewis filed a petition for voluntary bankruptcy discharge under Title 11, Chapter 7 on November 30, 2003.⁶

Lewis filed an adversary proceeding on February 27, 2004 in bankruptcy court against the Department seeking a declaratory judgment that his obligation to repay his student loans was discharged. The bankruptcy court dismissed Lewis' complaint upon the Department's motion for summary judgment holding that the version of 11 U.S.C. § 523(a)(8) in effect on the date the bankruptcy petition was filed, not the version of the statute that was in effect on the date the student loans were made, controlled. The district court affirmed the bankruptcy court's decision. Lewis timely appealed to this court pursuant to Federal Rules of Appellate Procedure 4(a)(1) and 26(a).

The bankruptcy court had jurisdiction pursuant to 28 U.S.C. § 1334(b). The district court had jurisdiction to hear the appeal from the bankruptcy court under 28 U.S.C. § 158(a). This court has jurisdiction under 28 U.S.C. § 1291.

DISCUSSION

1. The 1998 Amendments Apply to Appellant's Loans Retroactively.

Since October 7, 1998 when Congress amended federal bankruptcy law to eliminate 11 U.S.C. § 523(a)(8)(A), student loans over seven years in repayment, dischargeable in bankruptcy at the time appellant entered the loan, can no longer be discharged. Appellant filed his voluntary Chapter 7 bankruptcy discharge petition on November 20, 2003, six years after the effective date of the 1998 Amendments.

Appellant argues that his loans are dischargeable because the version of Section 523(a)(8)(A) in effect when he signed his promissory note, which had provided that student loans in repayment for seven years were eligible for discharge, became part of his contract. Accordingly, appellant contends that he is contractually entitled to a discharge of his student loans in bankruptcy. To support his argument, appellant recites Supreme Court jurisprudence explaining that "the laws which subsist at the time and place of the making of a contract ... enter into and form a part of it, as if they were expressly referred to or incorporated in its terms." Von Hoffman v. City of Quincy, 4 Wall. 535, 71 U.S. 535, 550, 18 L.Ed. 403 (1866). He then argues that the D.C. Circuit has applied this principle in the student loan context. Relying on Armstrong v. Accrediting Council for Continuing Educ. and Training, Inc., 168 F.3d 1362 (D.C.Cir.1999) appellant argues that subsequent enactments of Congress that impair benefits cannot be applied retroactively when those contracts were entered into in reliance upon prior statutes. The district court rejected these arguments, calling the cases cited by Lewis "neither apropos, controlling, nor persuasive." Dist. Ct. Op. at 8.

We review de novo the district court's decision on an appeal from a bankruptcy court. See, e.g. In re Raintree Healthcare Corp., 431 F.3d 685, 687 (9th Cir.2005). First, the statute in question in Armstrong, the Holder Rule,⁷ does not deal with Congress' power to create uniform bankruptcy laws and is therefore not relevant to this case. Moreover, the Armstrong court elected not to apply the Holder Rule retroactively because Congress expressly exempted student loans from the rule. Armstrong, 168 F.3d at 1368. In this case, statutory language indicates congressional intent to remove the statute of limitations for all cases filed after October 7, 1998. See Higher Education Amendments of 1998, Pub.L. No. 105-244, § 971(b), 112 Stat. 1581, 1837 (1998). Moreover, Von Hoffman and other general contract law cases cited by appellant simply do not support his claim. Appellant fails to address why his case should be an exception to the generally strict enforcement by bankruptcy courts of the effective date of the 1998 Amendments. See, e.g. In re McCormick, 259 B.R. 907 (8th Cir. BAP (Mo.), 2001) (holding that the seven year rule to discharge a debtor's student loans was unavailable to her because she filed her bankruptcy petition two months after the effective date of the 1998 Amendments, and the only option available to discharge her student loans was a showing of undue hardship). We hold that appellant's loans are controlled by the 1998 Amendments.

2. The Bankruptcy Clause Provides Congress With the Authority to Retroactively Impair Appellant's Contract.

Appellant argues that the Fifth Amendment due process clause imposes essentially the same restraint on the impairment of contracts as does the Contract Clause⁸ (citing Northwestern Nat. Life Ins. Co. v. Tahoe Regional Planning Agency, 632 F.2d 104, 106 (9th Cir.1980)). The district court held that while that may be true in some instances, the enacting legislation under the Bankruptcy Clause, Art. 1, § 8, cl. 4 of the U.S. Constitution controls in this instance. Relying on Wright v. Union Central Life Ins. Co., 304 U.S. 502, 516, 58 S.Ct. 1025, 82 L.Ed. 1490 (1938), the district court reasoned that Lewis' student loan contract "was made subject to constitutional power in the Congress to legislate on the subject of bankruptcies impliedly written into the contract between Lewis and the original lender." Dist. Ct. Op. at 3.

This court, reviewing the district court's decision de novo, applies the presumption of constitutionality accompanying congressional acts to the 1998 Amendments.⁹ To overcome the presumption, appellant debtor must show a violation of a constitutionally protected right or privilege. In re Simon, 311 B.R. at 645 (citing In re Golden, 16 B.R. 585, 587 (Bankr.S.D.Fla., 1981)). In this case, appellant alleges a violation of his Fifth Amendment right to due process. The questions w...