Educ. Credit Mgmt. Corp. v. Pulley

Decision Date30 April 2015
Docket NumberNo. 3:14cv00864–HEH.,3:14cv00864–HEH.
Citation532 B.R. 12
CourtU.S. District Court — Eastern District of Virginia

James C. Joyce, Jr., Roanoke, VA, pro se.

Kevin Allan Lake, McDonald Sutton & Duval PLC, Richmond, VA, for Appellee.


(Affirming in Part, Vacating and Remanding in Part)

HENRY E. HUDSON, District Judge.

This appeal from the United States Bankruptcy Court for the Eastern District of Virginia (the Bankruptcy Court) presents novel issues arising during the administration of a debtor's Chapter 13 reorganization plan. Despite the unique factual setting, the underlying subject, student loan debt, is not uncommon to bankruptcy litigation. Here, the student loan debtor is Jenny L. Pulley (Pulley) and the lender is Bank of America (“BoA”). ACS Educational Services, Inc. (“ACS”) serviced Pulley's student loans, and Educational Credit Management Corporation (ECMC) guaranteed the loans.

On October 4, 2006, Pulley filed a voluntary Chapter 13 petition in the Bankruptcy Court. The Bankruptcy Court confirmed Pulley's Chapter 13 reorganization plan, which included her student loans, on December 28, 2006. The confirmed 60–month reorganization plan provided that all unsecured creditors, including BoA, were entitled to 71.81% of the debt underlying their proof of claim.1 During the administration of Pulley's confirmed plan, however, ACS, the authorized agent for BoA's proof of claim, both refunded numerous payments sent by Pulley's Trustee, and represented that it would no longer accept payments from Pulley's Trustee. Pulley's Trustee then ceased making payments on her student loans short of the 71.81% provided for in the plan. Pulley received her discharge in the bankruptcy case on February 3, 2012, and the case was administratively closed on February 24, 2012.

Pulley filed the underlying post-discharge adversary proceeding in the Bankruptcy Court after ACS, for reasons unclear from the record, sought to recoup $23,083.17 due on her BoA student loans. In Count I, Pulley requested that the Court estop BoA, ACS, and ECMC from collecting 71.81% of her student loans because that amount would have been paid during her bankruptcy case if not for ACS's negligence. In Count II, Pulley sought a discharge or credit of $5,949.03 for payments that ACS actually retained during the pendency of her bankruptcy case. The Bankruptcy Court determined that both BoA, as holder of Pulley's student loans note, and ECMC, as guarantor of Pulley's student loans, were bound by ACS's decision to refund payments, and its representations to Pulley's Trustee that payments would no longer be accepted. The Court then held that BoA, ACS, and ECMC were estopped from collecting 71.81% or $16,154.66 of Pulley's student loans because, but for ACS's actions, that amount would have been paid during the administration of the 60–month reorganization plan.

ECMC now appeals the Bankruptcy Court's Judgment Order equitably estopping them from collecting $16,154.66 or 71.81% of Pulley's student loans.2 ECMC challenges the Bankruptcy Court's: (1) subject matter jurisdiction over Pulley's claims, post-petition interest, and collection costs; (2) authority to equitably relieve Pulley of paying student loans without a finding of undue hardship; and (3) decision binding ECMC, not merely as assignee of BoA loans, but as guarantor of Pulley's student loans. Both ECMC and Pulley have filed memoranda supporting their respective positions (ECF Nos. 4, 6, 7). The Court held oral argument on April 6, 2015.


The facts and procedural history in this case are not disputed. Between July, 2004 and August, 2005, Pulley received $22,496.40 in student loans from BoA to pay for her education. (Proof of Claim 7–1, Ex. 2.) While BoA was the lender on each of these loans, ECMC was guarantor and ACS serviced the loans. On October 4, 2006, Pulley filed a voluntary petition for Chapter 13 bankruptcy. (Pulley's Chapter 13 Voluntary Petition, Ex. 16.) On October 30, 2006, ACS filed a proof of claim 7–1 for Pulley's student loans which represented that Pulley owed $22,496.40 toward the loans. (Proof of Claim 7–1.) The Bankruptcy Court confirmed Pulley's Chapter 13 reorganization plan on December 28, 2006 (the “Confirmed Plan”). (Ch. 13 Final Report at 1, Ex. 6.) Pursuant to the confirmed plan, Pulley was to pay all unsecured creditors, including Bank of America, 71.81% on their claims. (R. at 34.) On or about March 21, 2007, the Trustee began making payments in accordance with the plan. (Verified Statement of Trustee at ¶ 10, Ex. 7, “V.S. of Trustee.”) Payments related to Pulley's BoA student loans were tendered to ACS. (Id. ) Between March, 2007 and June, 2009, ACS retained payments from the Trustee totaling $5,949.03. (Id. at ¶ 11.) Several checks sent by the Trustee to ACS are included in the record, and indicate that from July, 2008 through July, 2009, ACS returned uncashed checks to the Trustee with correspondence such as “unable to locate the account with information given,” “unable to locate on ACS system,” and “ACS no longer services this account.” (ACS Refunded Checks, Ex. 8.)

The Trustee explains that, sometime in the middle to latter part of 2009, ACS communicated to his office that it would either not accept further payments or return any future payments related to Pulley's claim. (V.S. of Trustee at ¶ 17.) Thereafter, the Trustee stopped making payments to ACS to defray Pulley's student loans and subsequently withdrew Proof of Claim 7–1 as paid in full. (Id. at ¶¶ 18–19.) Pulley contends that she was never made aware of the Trustee's decision to cease payments to ACS or ACS's refund of the aforementioned payments. (R. at 12.) The Trustee argues that ACS's actions were the sole reason that 71.81% or $16,154.66 was not paid on Pulley's BoA student loans during the administration of her confirmed plan. (Id. at ¶ 20.) Pursuant to Title 11 U.S.C. § 1328, Pulley received her discharge in the bankruptcy case on February 3, 2012.4 (R. at 9.) Her Trustee filed his final report on February 21, 2012, certifying that the estate had been fully administered, and that all administrative matters for which a trustee is responsible had been completed. (Chapter 13 Final Report at 3.) Pulley's bankruptcy case was therefore administratively closed on February 24, 2012. (R. at 9.) At the time of filing of the immediate adversary complaint, ACS was seeking $23,083.17 in repayment for Pulley's BoA student loans.5 (Id. at 13.)

The Bankruptcy Court reopened Pulley's Bankruptcy proceedings for the purpose of permitting her to file the post-confirmation adversary proceeding underlying this appeal. (Id. at 9.) Pulley requested that the Bankruptcy Court: (1) enjoin or equitably estop BoA, ACS, and ECMC from collecting on her student loan debt based upon their purported negligence in handling tendered payments; and (2) discharge or credit Pulley $5,949.03 for the payments actually retained by ACS. (Id. at 13.) On October 2, 2014, the Bankruptcy Court held a trial in which ECMC did not enter an appearance and concluded that ECMC, as guarantor and successor-in-interest to BoA, was enjoined from collecting amounts in excess of $6,347.04, which accounts for the amount remaining on proof of claim 7–1 after deducting the 71.81% allotted in Pulley's confirmed plan. (Id. at 32–34.) The Court also found that ACS received and retained $5,949.03 from Pulley's Trustee. (Id. at 33.)

The central dispute before the Court is whether the Bankruptcy Court may equitably relieve or discharge Pulley's student loans without a finding of undue hardship. Pivotal questions interwoven within this controversy are: (1) the Bankruptcy Court's subject matter jurisdiction over Pulley's claims, as well as her student loans' post-petition interest and collection costs; and (2) whether ECMC is foreclosed from seeking reimbursement from Pulley as guarantor of her student loans.


The standard of review applied by this Court, albeit well-settled, depends upon whether Pulley's adversary proceeding is core or non-core. “If the proceeding is a core proceeding, the district court [ ] review[s] the bankruptcy court's factual determinations for clear error and its legal conclusions de novo. Humboldt Express Inc. v. Wise Co. (In re Apex Express Corp.), 190 F.3d 624, 630 (4th Cir.1999). “If the proceeding is non-core, the district court [ ] undertake[s] a de novo analysis of both the factual findings to which [the appellee] objected and the law.” Id.


ECMC presents the following five issues on appeal:

1. Whether the Bankruptcy Court had subject matter jurisdiction to decide the amount of the student loans debt remaining after the Plaintiff's bankruptcy discharge was entered?
2. Whether the Bankruptcy Court had the authority to estop BoA, ACS, and ECMC from pursuing unpaid portions of Pulley's student loans without a finding of undue hardship?
3. Whether any portion of Plaintiff's student loans debt can be discharged without a Ending of undue hardship as that term is used in 11 U.S.C. § 523(a)(8) and the cases construing the same?
4. Whether the Bankruptcy Court properly applied the doctrine of equitable estoppel to prevent ECMC from collecting the full balance of Plaintiff's student loans debt after her bankruptcy discharge?
5. Whether ECMC as guarantor of the loans was and is bound by the actions in the underlying bankruptcy case of the Lender, Defendant Bank of America, and servicing agent, Defendant ACS?

Because the Bankruptcy Court's subject matter jurisdiction and authority to estop creditors from seeking repayment of student loans are dispositive of the case, they are the focal point of the Court's analysis.

A. Bankruptcy Court's Subject Matter Jurisdiction over Pulley's Claims

Pulley filed this adversary proceeding in response to ACS seeking $23,083.17 in student loan repayments after she received her...

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