Ayers v. U.S. Dep't of Def. (In re Ayers)

• Decision Date: 08 January 2018
• Docket Number: Case No. 17–70928,Adv. Proc. No. 17–07035
• Parties: IN RE: Katherine Elizabeth Ruth AYERS, Debtor. Katherine Elizabeth Ruth Ayers, Plaintiff, v. United States Department of Defense and United States Department of the Treasury, Defendants.
• Court: U.S. Bankruptcy Court — Western District of Virginia

581 B.R. 168

IN RE: Katherine Elizabeth Ruth AYERS, Debtor.

Katherine Elizabeth Ruth Ayers, Plaintiff,

v.United States Department of Defense and United States Department of the Treasury, Defendants.

Case No. 17–70928

Adv. Proc. No. 17–07035

United States Bankruptcy Court, W.D. Virginia, Roanoke Division.

Signed January 08, 2018

Mark S Lewis, Southwest Virginia Legal Aid Society, Christiansburg, VA, for Plaintiff.

Mary Beth Niday, U.S. Attorney's Office, Roanoke, VA, for Defendants.

MEMORANDUM OPINION

Paul M. Black, UNITED STATES BANKRUPTCY JUDGE

This Adversary Proceeding was filed by the Debtor, Katherine Elizabeth Ruth Ayers ("Debtor"), against the United States Department of Defense ("Defense") and the United States Department of the Treasury ("Treasury")(collectively "Defendants") seeking a declaration that her debt to the Defense listed on Schedule F of her petition is dischargeable under 11 U.S.C. § 727 or alternatively that any such debt excepted from discharge under 11 U.S.C. § 523(a)(8) constitutes an undue hardship on the Debtor and should be discharged. The Debtor also asserts that the Defendants' actions are arbitrary and capricious and that no reason exists for disparate treatment of the Debtor and seeks declaratory judgment that the Defendants' decision to recoup certain expenses is in violation of 5 U.S.C. § 706(2) and her right to due process and equal protection under the Fifth Amendment of the Constitution. In response, the Defendants filed a Motion to Dismiss Complaint pursuant to Rule 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure. The Debtor filed a response to the Motion to Dismiss as well as a Motion to Amend Complaint. The Court conducted a hearing on these motions on December 4, 2017, the parties fully briefed the issues and the matter is ripe for resolution. For the reasons stated below, the Court will grant the Defendants' Motion to Dismiss in part and deny the Debtor's Motion to Amend the Complaint.

FACTUAL BACKGROUND

The Debtor enlisted in the United States Air Force ("USAF" or "Air Force") in July 2002. Complaint ¶ 6. She was stationed at Minot Air Force Base from December 2002 until August 2005, during which time she began an intimate relationship with another woman. Id. at ¶ 7–8. Prior to 1993, the Defense prohibited homosexual persons from serving on active duty, but in 1993 a new policy was adopted into law called "Don't Ask, Don't Tell" ("DADT") which directed that the military not seek out information about a member's sexual preference. Id. at ¶ 10, 11. On May 17, 1994, Deputy Defense Secretary John Deutch issued a directive that Service secretaries could seek recoupment of Reserve Officer Training Corps ("ROTC") scholarships when there were violations of military law, but would not seek recoupment from those disenrolled for homosexuality. Id. at ¶ 12. In 2005, the Debtor applied for and was selected to participate in a scholarship program ("SOAR") to become a commissioned officer. Id. at ¶ 13–14. Under that program, she enrolled at Miami University in Ohio and was assigned to Detachment 640 of USAF ROTC. Upon entering this program, she signed an agreement setting out the terms and conditions of her participation in SOAR. Id. at ¶ 16. The Air Force Reserve Officer Training Corps Contract ("AFROTC") provides as follows:

Unless otherwise indicated ..., disenrollment from AFROTC for failure to meet any of the below-listed standards may subject me ... to recoupment by the Air Force of funds expended on my education to the maximum extent permitted by law. In the event of my disenrollment, the decision to ... pursue recoupment, or release me from my obligations under this contract is within the sole discretion of the Secretary of the Air Force....

a. ... I understand that in order to remain in the AFROTC program, I must meet or exceed all military, academic, and medical retention standards prescribed by law and Air Force instructions. Failure to meet applicable retention standards may result in my dismissal from the AFROTC program....

e. ... I understand that homosexual conduct is grounds for disenrollment from AFROTC.... I further understand that if I, at any time, am disenrolled from the AFROTC program as a result of homosexual conduct, as defined above, I will be required to repay all educational expenses expended on my behalf to the maximum extent permitted by law.

AFROTC, Complaint, Attachment 4, pp. 2–3.

While at Miami University, the Debtor began a relationship with a woman that turned into a long-term relationship. Id. at ¶ 17. By memorandum dated April 2, 2008, the Debtor advised the Commander of Detachment 640 that she was a lesbian and requested to continue in the ROTC program. Id. at ¶ 19. The Debtor was then disenrolled from ROTC, effective June 11, 2008, for "failure to maintain military retention standards when she admitted to homosexual ideations." Id. at ¶ 21. The USAF then initiated recoupment procedures against the Debtor to recover funds expended under the ROTC/SOAR program because of her disenrollment. Id. at ¶ 23. The Debtor appealed that decision, but the USAF turned down her appeal. Id. at ¶ 24, 25. The Debtor remained at Miami University after she was disenrolled from ROTC and obtained her Bachelor's degree in 2009. She later obtained a Master's Degree from the University of North Carolina–Greensboro in 2011 and in 2014 enrolled in graduate school at Virginia Polytechnic Institute and State University ("Virginia Tech"). Id. at ¶ 26–28.

On October 14, 2014, the Treasury, on behalf of the Defense, issued a Wage Garnishment Order against the Debtor's wages from Virginia Tech for a total debt of $45,000.00. Id. at ¶ 33. In August 2015, the Debtor applied for a loan from USAA Federal Savings Bank in the amount of $21,345.00, which she intended to use to pay part of the ROTC/SOAR debt, but was declined. Id. at ¶ 36. The Debtor then requested debt forgiveness because of financial hardship, but this was not granted. Id. at ¶ 37. After receiving assistance from Senator Tim Kaine in December 2015, the Debtor received a letter from the Defense Finance and Accounting Service stating that $7,117.03 had been paid on the debt directly by the Debtor, plus other payments of $133.00 from the Treasury Offset Program and $2,176.03 from a private collection agency, leaving her with a current balance due of $32,756.67. Id. at ¶ 40; Complaint, Attachment 21. A second Wage Garnishment Order was issued to Virginia Tech on February 29, 2016 and under the tax refund offset program, the Debtor's tax refund of $742.00 was withheld and applied to the ROTC/SOAR debt. Id. at ¶ 41–42. The Debtor asserts that she has no current or anticipated income to continue payments on this debt as her sole income is her salary as a graduate teaching assistant, which she asserts barely suffices to provide the bare necessities of life. Id. at ¶ 43.

On July 13, 2017, the Debtor filed a petition under Chapter 7 of the Bankruptcy Code in this Court. The Debtor filed an amended Schedule E/F on August 16, 2017 listing three debts: a contractual debt to the Defense in the amount of $45,565.91; a student loan debt to the Department of Education in the amount of $107,818.00; and a credit card debt to USAA Savings Bank in the amount of $2,869.00. The Debtor then filed this Adversary Proceeding on September 13, 2017 asserting that the Defendants' decision to recoup the debt owed to the Defense because of her disenrollment based solely on her sexual preference was arbitrary and capricious, that she was treated differently than other similarly situated persons in violation of her rights to due process and equal protection, and that the debt should be discharged.

Specifically, in Count One of the Complaint, the Debtor alleges that she was involuntarily disenrolled from ROTC because she was a lesbian, that the Defendants are pursuing recoupment against her for her ROTC/SOAR expenses and that no reason exists for the differing treatment of the Debtor and those disenrolled ROTC participants against whom recoupment was not pursued. Therefore, the Debtor alleges that the Defendants' actions are arbitrary, capricious or otherwise not in accordance with the law under 5 U.S.C. § 706(2) and asks the Court to enter declaratory judgment stating that the Defendants' decision to recoup the expenses is in violation of Section 706(2), that she is being treated differently than other similarly situated former ROTC participants with no articulated reason; permanently enjoin the Defendants from attempting to recoup these expenses and award costs and attorney's fees under 28 U.S.C. § 2412. In Count Two, the Debtor asks the Court to find that her disenrollment from ROTC and recoupment of expenses are based solely on her sexual preference and in violation of her right to due process and equal protection under the Fifth Amendment to the Constitution. Count Three seeks a declaratory judgment discharging the ROTC/SOAR expenses under Section 727 and that the Defendants be permanently enjoined from recoupment of the expenses, plus an award of costs and attorney's fees. Count Four states that the Debtor has attempted to repay the expenses, that she has no current or anticipated income with which to pay the recoupment of expenses, that such recoupment will cause great hardship to her and asks the Court to hold those expenses dischargeable under Section 523(a)(8).

The Defendants filed a Motion to Dismiss the Debtor's Complaint under Federal Rule of Civil Procedure 12(b)(1) and 12(b)(6), incorporated into adversary proceedings by Federal Rule of Bankruptcy Procedure 7012(b). The Defendants assert that Counts One and Two of the Complaint should be dismissed under Rule 12(b)(1) because the Court lacks subject matter jurisdiction to hear these claims as they are barred by the statute of limitations under 28 U.S.C. § 2401 and are personal injury torts under 28 U.S.C. § 157(b)(5). The Defendants then assert that Counts Three and Four should be...