Benson v. Corbin (In re Corbin)

• Decision Date: 05 March 2014
• Docket Number: Bankruptcy No. 13–12480.,Adversary No. 13–01378.
• Citation: 506 B.R. 287
• Court: U.S. Bankruptcy Court — Western District of Washington
• Parties: In re Jessica L. CORBIN, Debtor. Sloan Benson, Plaintiff, v. Jessica L. Corbin, Defendant.

506 B.R. 287

In re Jessica L. CORBIN, Debtor.Sloan Benson, Plaintiff,

v.Jessica L. Corbin, Defendant.

Bankruptcy No. 13–12480.

Adversary No. 13–01378.

United States Bankruptcy Court,

W.D. Washington,

at Seattle.

Signed March 5, 2014.

David E. Crowe, Rohde & Van Kampen PLLC, Al Van Kampen, Seattle, WA, for Plaintiff.

Lee Grochmal, Grochmal & Fryer, P.C., Bellingham, WA, for Defendant.

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT

KAREN A. OVERSTREET, Bankruptcy Judge.

This matter came before the Court for hearing on December 11, 2013, on the Plaintiff's Motion for Partial Summary Judgment Finding Educational Loan is Non-dischargeable Debt Under 11 U.S.C. § 523(a)(8) (“Motion for Summary Judgment”, Dkt. No. 10) and the Defendant's Response to Plaintiff's Motion for Partial Summary Judgment and Cross Motion for Partial Summary Judgment (“Cross Motion”, Dkt. No. 12). David Crowe appeared for plaintiff Sloan Benson. Lee Grochmal appeared for defendant Jessica Corbin. The Court considered the arguments of counsel and the pleadings and files herein, including the Declaration of Sloan Benson in Support of Motion for Summary Judgment (“Benson Decl.”, Dkt. No. 11), the Declaration of Jessica Corbin (“Corbin Decl.”, Dkt. No. 13), and the plaintiff's Reply in Support of Motion for Partial Summary Judgment Finding Educational Loan is Non–Dischargeable Debt Under 11 U.S.C. § 523(a)(8) (“Reply”, Dkt. No. 14).

This case presents the important question of whether an obligation, held by a non-debtor co-signer of a student loan who paid off the student loan, is nondischargeable in the debtor's bankruptcy pursuant to 11 U.S.C. Section 523(a)(8)(A)(i) and (ii).¹ The facts are undisputed and both parties agree that the Court should resolve this matter on summary judgment.

I. FACTS

Plaintiff Sloan Benson was the vice president at Greenpoint Technologies, Inc. Debtor/defendant Jessica Corbin was employed at Greenpoint as a receptionist. Benson agreed to co-sign Corbin's application for a student loan from SLMC Corporation (“SLMC”) in May of 2007. SLMC, a federally insured lender, disbursed two $4,000 student loans to Corbin based upon the application (collectively, the “Loan”). See Benson Decl., Ex. A. Benson did not receive any consideration from Corbin for co-signing the Loan. Corbin used the proceeds of the Loan to fund her educational expenses at the University of Phoenix. Corbin left her employment at Greenpoint in March 2009.

In March 2011, SLMC contacted Benson, advised her that Corbin was delinquent on the Loan, and demanded payment. Benson made periodic payments to SLMC in order to avoid adverse effects on her own credit rating as a result of Corbin's default. Benson paid the Loan in full in the amount of $8,455.34 in November 2011. Benson then filed suit against Corbin in January 2012, based on payment of the Loan.² The state court entered a default judgment against Corbin for $8,455.34 (the “Judgment”). Benson Decl., Ex. E. The Judgment includes a finding of fact that “Benson cosigned the loan solely as an accommodation for the benefit of Corbin and received no proceeds or benefits from Corbin's loan.” Id., p. 2.

Benson did not contact Corbin before making payment to SLMC. As it turned out, Corbin was not actually delinquent, but rather, was in a period of forbearance while she continued to attend school. Corbin Decl., para 3 and attached Exhibits. Corbin argues that but for Benson's payment of the Loan, she would have had an opportunity to obtain additional forbearances and participate in payment plans which are now no longer available to her.

II. DISCUSSION

A. Standards on Summary Judgment

To prevail on a motion for summary judgment, the moving party must show by reference to pleadings, discovery, admissions, and affidavits, if any, that “there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Rule 56(a)(c), Fed.R.Civ.P.; Rule 7056. The moving party is entitled to a judgment as a matter of law if the nonmoving party has failed to make a sufficient showing on an essential element of its case with respect to which it has the burden of proof. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). See also In re Irizarry, 171 B.R. 874 (9th Cir. BAP 1994). In this case the parties have agreed that there are no disputed material facts, and that the Court should rule as a matter of law.

The party seeking to except a debt from discharge bears the burden of proving the elements of the applicable nondischarge section by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Courts construe exceptions to discharge strictly against a creditor and liberally in favor of the debtor. Id. at 286–87, 111 S.Ct. 654. In a case under Section 523(a)(8), the creditor bears the initial burden of proving the debt exists and that the debt is of the type excepted from discharge under the discharge exception for student loan debt; if the creditor meets its burden, the debt may only be discharged if the debtor establishes that repayment of the debt would constitute an undue hardship. 11 U.S.C.A. § 523(a)(8). In re Maas, 497 B.R. 863 (Bankr.W.D.Mich.2013).

B. Exceptions to Discharge Under 11 U.S.C. § 523(A)(8)

Pursuant to 11 U.S.C. § 523(a)(8), the following claims are excepted from discharge:

(A) (i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.

Section 523(a)(8) protects four categories of educational claims from discharge: (1) loans made, insured, or guaranteed by a governmental unit; (2) loans made under any program partially or fully funded by a government unit or nonprofit institution; (3) claims for funds received as an educational benefit, scholarship, or stipend; and (4) any “qualified educational loan” as that term is defined in the Internal Revenue Code. In re Rumer, 469 B.R. 553, 561 (Bankr.M.D.Pa.2012). Benson contends that she is entitled to summary judgment under subsections (i) and (ii) of Section 523(a)(8)(A).

1. Section 523(a)(8)(A)(i).

Section 523(a)(8)(A)(i) excepts from discharge debts that are “an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit or made under any program funded in whole or in part by a governmental unit or nonprofit institution.” Benson contends that because SLMC is a federally insured lender and the Loan was insured by a government unit, the Loan would be non-dischargeable pursuant to 523(a)(8)(A)(i) if it was being enforced against Corbin by SLMC. Although Benson does not have a formal assignment of the Loan from SLMC, she argues that as an accommodation party who has paid off the debt under RCW 62A.3–419(e), she is entitled to enforce the original Loan against Corbin with all the rights of the original lender, including any rights to except the Loan from discharge.

Pursuant to RCW 62A.3–419(e) “An accommodation party who pays the instrument is entitled to reimbursement from the accommodated party and is entitled to enforce the instrument against the accommodated party.” Plein v. Lackey, 149 Wash.2d 214, 221–222, 67 P.3d 1061 (2003). Whether a party is an accommodation party is a question of fact; the party asserting accommodation party status bears the burden of proof. Id. at 223, 67 P.3d 1061. In Plein v. Lackey, a promissory note was indorsed over to the accommodating party and the corresponding deed of trust was assigned to the accommodating party after he paid the original lender. Subsequently, the plaintiff, a junior lien holder, sued the accommodating party and argued that the deed of trust was void because the underlying debt was paid when the accommodating party paid the original lender. The court focused on the defendant's status as an accommodating party and not on the indorsement of the note and assignment of the deed of trust. The Plein v. Lackey court held that the accommodating party was entitled to enforce the deed of trust securing the accommodated note because he held rights to enforce the note and also rights to any security interest or other collateral that secured payment. Applying state law regarding accommodation to this case, Benson argues that once she paid the loan to SLMC she stepped into its shoes and could enforce all available rights, including the right to have the debt excepted from discharge under 523(a)(8)(A)(i).

Corbin counters that state law does not control on this issue and that under federal law, Benson did not acquire any right to assert the nondischargeability of the Loan even if she is subrogated to the rights of SLMC. Corbin relies on the decision of the Ninth Circuit Court of Appeals in National Collection Agency, Inc. v. Trahan, 624 F.2d 906, 907–908 (9th Cir.1980), in arguing that a subrogated party cannot assert the nondischargeability of the subrogated debt. Benson replies that subsequent to the Ninth Circuit's ruling in Trahan, courts in this circuit have chipped away at Trahan's broad ruling, citing In re Boyajian, 564 F.3d 1088, 1091 (9th Cir.2009), and In re Tooks, 76 B.R. 162, 164 (Bankr.S.D.Cal.1987). Benson asks this Court to limit Trahan's holding to cases under Section 523(a)(1), following the lead of the Tooks court.

In general, “subrogation is the substitution of one party in place of another with reference to a lawful claim, demand or right.... Subrogation places the party paying the loss or claim (the ‘subrogee’) in the shoes of the person who suffered the loss (‘the subrogor’). Thus, when the doctrine of subrogation applies, the...