In Re: Kielisch v. Educational Credit Management
| Decision Date | 07 May 2001 |
| Docket Number | No. 00-2187,No. 00-2188,00-2187,00-2188 |
| Citation | 258 F.3d 315 |
| Parties | (4th Cir. 2001) In Re: KURT CARL KIELISCH; In Re:JEAN RENEE KIELISCH,Debtors. KURT CARL KIELISCH; JEAN RENEE KIELISCH, Plaintiffs-Appellees, v. EDUCATIONAL CREDIT MANAGEMENT CORPORATION, Defendant-Appellant. UNITED STATES OF AMERICA, Amicus Curiae. In Re: DAVID RUFUS LAWRENCE; ELIZABETH LAWRENCE, Debtors. DAVID RUFUS LAWRENCE; ELIZABETH LAWRENCE, Plaintiffs-Appellees, v. EDUCATIONAL CREDIT MANAGEMENT CORPORATION, Defendant-Appellant. UNITED STATES OF AMERICA, Amicus Curiae. Argued: |
| Court | U.S. Court of Appeals — Fourth Circuit |
Appeals from the United States District Court for the Eastern District of Virginia, at Norfolk. Raymond A. Jackson, District Judge; Robert G. Doumar, Senior District Judge.
(CA-00-148-2, BK-91-26981-DHA, AP-99-2122, CA-00-401-2, BK-93-22290-DHA, AP-99-2187)
COUNSEL ARGUED: Rand Lewis Gelber, Rockville, Maryland, for Appellant. Mark Simon Davies, Appellate Staff, Civil Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Amicus Curiae. Tom Cain Smith, Jr., Virginia Beach, Virginia; James Lawrence Pedigo, Jr., Norfolk, Virginia, for Appellees. ON BRIEF: Stuart E. Schiffer, Acting Assistant Attorney General, Helen F. Fahey, United States Attorney, Robert M. Loeb, Civil Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Amicus Curiae.
Before WILKINSON, Chief Judge, and WILLIAMS and MOTZ, Circuit Judges.
Reversed by published opinion. Judge Williams wrote the opinion, in which Chief Judge Wilkinson and Judge Motz joined.
This consolidated appeal, which involves the cases of Kurt and Jean Kielisch and David and Elizabeth Lawrence (collectively, the Debtors), requires us to resolve whether their creditor, Educational Credit Management Corporation (ECMC), is precluded from applying Chapter 13 plan payments from the Debtors' bankruptcy estates to postpetition interest on their nondischargeable student loan debts. The bankruptcy courts in the Debtors' cases each held that ECMC violated 11 U.S.C.A. S 502(b)(2) (West 1993) by applying the Debtors' Chapter 13 plan payments to post-petition interest, and the district courts each affirmed. Because we conclude that creditors are not precluded from applying bankruptcy estate payments to accrued postpetition interest on nondischargeable student loan debts, we reverse.
On December 9, 1991, Kurt and Jean Kielisch submitted a Chapter 13 petition for relief pursuant to the United States Bankruptcy Code. On February 21, 1992, Great Lakes Higher Education Guaranty Corporation (Great Lakes) filed proofs of claim for the Kielisches' student loans, one in the amount of $10,743.15 for Kurt Kielisch and one in the amount of $12,204.42 for Jean Kielisch. The proofs of claim included only principal and prepetition interest. On March, 30, 1992, the Kielisches filed an amended Chapter 13 plan, replacing the December 1991 plan. The amended plan, which was confirmed on June 12, 1992, provided that "the accepted unsecured claims of Great Lakes Higher Education, in the amounts of $12,095.35 and $10,629.00, will be paid in full through the Trustee." (J.A. at 46.) Pursuant to the amended plan, the trustee paid Great Lakes $10,887.63 for Kurt Kielisch and $12,956.43 for Jean Kielisch, and on June 6, 1997, the bankruptcy court entered an order discharging the Kielisches.1
After the discharge, ECMC, the assignee of the Kielisches' student loans, pursued collection efforts against them. ECMC asserted that, notwithstanding the payments made under the amended plan and the discharge order, its claims were never fully paid because postpetition interest continued to accrue during the pendency of the Chapter 13 proceedings. ECMC also argued that it was proper to apply plan payments first to accrued postpetition interest before principal and that, as a result, the Kielisches still owed a substantial amount on their loans. The Kielisches, in response to ECMC's claims, filed a complaint in bankruptcy court to determine the dischargeability of their student loan debt and the proper application of plan payments to that debt.
After a hearing, the bankruptcy court held that although ECMC was entitled to postpetition interest on the nondischargeable student loans, it was improper to apply any of the plan payments to postpetition interest. Accordingly, the bankruptcy court required ECMC to recalculate and reapply the payments received by Great Lakes from the estate to determine what amount of postpetition interest on the loans, if any, remained unpaid. The bankruptcy court left it to the parties to determine the extent to which ECMC's claim has been satisfied.
On January 31, 2000, ECMC filed a notice of appeal to the district court. The district court, after reviewing the briefs and the record and without oral argument, affirmed the bankruptcy court's decision.
On May 4, 1993, David and Elizabeth Lawrence filed a Chapter 13 bankruptcy petition. Listed in their schedules was student loan debt consisting of two promissory notes. These notes were held by American Student Loan Assistance (ASLA) and Consumers Bank and were subsequently transferred to the guarantor, ECMC, which now holds the notes. In their Chapter 13 plan, which was confirmed July 13, 1993, the Lawrences provided for their student loans as follows:
The debtors shall pay 100% of the following student loans inside their Chapter 13 Plan, as they are nondischargeable in Chapter 7; American Student Loan Assistance = $2,851.00. Consumer's Bank = $2,818.00.
(J.A. at 187.) These amounts included only principal and prepetition interest. The Lawrences' Chapter 13 trustee thereafter began making payments to ASLA according to the plan.2 The trustee paid the entire $2,851.00 to ASLA as provided in the plan and proof of claim, and, on October 16, 1998, the bankruptcy court discharged the Lawrences. The case was closed on October 23, 1998, but the bankruptcy court reopened the case on November 16, 1999, at the request of the Lawrences, to determine the dischargeability of their debt to ECMC as assignee of the ASLA and Consumers Bank notes.
After a hearing, the bankruptcy court held that although ECMC was entitled to recover from the Lawrences accrued post-petition interest on its claims, 11 U.S.C.A. S 502 barred it from applying payments made under the Chapter 13 plan to postpetition interest. The bankruptcy court left it to the parties to determine to what extent ECMC's claim had been satisfied, based upon the court's ruling. On March 27, 2000, ECMC appealed to the district court, which affirmed the bankruptcy court's decision. After ECMC appealed the orders relating to both the Kielisches and Lawrences, we consolidated both cases for appeal.3
The sole issue on appeal is whether the lower courts properly determined that ECMC was precluded from applying the Debtors' Chapter 13 plan payments to post-petition interest on the Debtors' nondischargeable student loans. In re Deutchman , 192 F.3d 457, 459 (4th Cir. 1999) (internal citations omitted). Whether the application of plan payments to postpetition interest on nondischargeable student loans violates S 502 is a question of law that we review de novo.
We begin our analysis with a review of the relevant statutory provisions. "Under the Guaranteed Student Loan Program the federal government serves as guarantor of unsecured student loans and subsidizes interest payments on those loans." Student Loan Mktg. Assoc. v. Riley, 104 F.3d 397, 400 (D.C. Cir. 1997). Pursuant to 11 U.S.C.A. S 523(a)(8) (West 1993 & Supp. 2001), government-guaranteed student loans are nondischargeable in bankruptcy proceedings absent a showing of undue hardship.4 Section 523(a)(8) provides,
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt-. . . .
(8) for 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 for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents . . . .
11 U.S.C.A. S 523(a)(8). Thus, under S 523(a)(8), the Debtors "remain[ ] personally responsible" for their nondischargeable student loan debts, and those debts "pass or ride through the bankruptcy unaffected and are a postbankruptcy liability of the former debtor." In re Cousins, 209 F.3d 38, 40 (1st Cir. 2000) (internal quotation marks omitted).
Section 523(a)(8) "was enacted to prevent indebted college or graduate students from filing for bankruptcy immediately upon graduation, thereby absolving themselves of the obligation to repay their student loans." In re Hornsby, 144 F.3d 433, 436-37 (6th Cir. 1998). The nondischargeability of student loans originally applied only to Chapter 7 bankruptcies and not Chapter 13 bankruptcies. This provided debtors seeking to discharge student loan debt an incentive to file Chapter 13 plans because courts permitted borrowers to discharge their student loan debts under Chapter 13 without a showing of undue hardship. See In re Klein, 57 B.R. 818, 820 (9th Cir. B.A.P. 1985) (). In 1990, Congress responded by...
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