In re Ransom

• Decision Date: 27 December 2005
• Docket Number: Bankruptcy No. 97-06636.,BAP No. WW-05-1004-KSD.
• Parties: In re Kimberly RANSOM, Debtor. Sallie Mae Servicing Corporation, Appellant, v. Kimberly Ransom, Appellee.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit

336 B.R. 790

In re Kimberly RANSOM, Debtor Sallie Mae Servicing Corporation, Appellant, v. Kimberly Ransom, Appellee.

BAP No. WW-05-1004-KSD.

Bankruptcy No. 97-06636.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted on October 21, 2005 at Seattle, Washington.

Filed — December 27, 2005.

Appeal from the United States Bankruptcy Court for the Western District of Washington, Thomas T. Glover, J Christian C. Weinmann, Esq., Karr, Tuttle & Campbell, Seattle, WA, for Appellant.

John M. Hugg, Esq., Avantlaw, PLLC, Seattle, WA, for Appellee.

Before: KLEIN, SMITH, and DUNN,¹ Bankruptcy Judges.

OPINION

KLEIN, Bankruptcy Judge.

This is another attempt to use a chapter 13 plan to effect a "discharge-by-declaration" of student loan debt by ambush.

In Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee), 193 F.3d 1083 (9th Cir. 1999), the Ninth Circuit, leaving open a due process question, held that interest accrues on student loans postpetition and that confirmed chapter 13 plans bind creditors in a manner that may operate to discharge student loans.

Later, the Ninth Circuit resolved the open due process issue, ruling that a "confirmed plan has no preclusive effect on issues that must be brought by adversary proceeding, or were not sufficiently evidenced in a plan to provide adequate notice to the creditor." Enewally v. Wash. Mut. Bank (In re Enewally), 368 F.3d 1165, 1173 (9th Cir. 2004), cert. denied, 543 U.S. 1021, 125 S. Ct. 669, 160 L. Ed. 2d 497 (2004).

We accurately anticipated Enewally when we held that any discharge of student loans through a chapter 13 plan requires notice of the quality expected of the adversary proceeding that Federal Rule of Bankruptcy Procedure 7001 prescribes for making "undue hardship" dischargeability determinations under 11 U.S.C. § 523(a)(8). Educ. Credit Mgmt. Corp. v Repp (In re Repp), 307 B.R. 144 (9th Cir. BAP 2003).

This appeal illustrates how Pardee, Enewally, and Repp co-exist. Under Pardee, student loan interest continued to accrue but the terms of the confirmed chapter 13 plan barring the payment of interest bound the student loan creditor to apply all plan payments to principal. Under the analysis in Enewally and Repp, the accrued, unpaid interest was not discharged upon completion of the chapter 13 plan because there was no determination of "undue hardship" following notice of the quality attendant to an adversary proceeding.

We AFFIRM the fixing of the principal balance owed at the end of the plan but REVERSE the bar on later collecting interest.

FACTS

Appellee, Kimberly Ransom, filed a chapter 13 case in May 1997 that included $ 36,993.40 in student loan debt owed to appellant Sallie Mae Servicing Corporation ("Sallie Mae").

Her chapter 13 plan directed the trustee to pay secured debt arrearages and priority claims, and then to pay the "student loan debt which is non-dischargeable under 11 U.S.C. [§§] 523(a)(8) and 1328(a)(2)" in full before paying other unsecured creditors.

The order of confirmation recited that notice of the confirmation hearing was given pursuant to Federal Rule of Bankruptcy Procedure 2002(b), which requires 25-day notice of the hearing but which does not require that a copy of the plan be provided and does not require that such notice be directed to an agent for service of process. Although appellant later asserted that the plan was "provided" to Sallie Mae, it is conceded that the plan was neither served nor directed to a person at Sallie Mae upon whom a summons and complaint could be correctly served.

The 60-month plan was confirmed without objection in July 1997. The order confirming the plan was not appealed.

During the ensuing 60 months, Sallie Mae received plan payments totaling $ 11,417.78 on its $ 36,993.40 claim and did nothing else to collect the student loan debt.

Following completion of the plan, a discharge was entered that provided, in pertinent part: "the debtor is discharged from all debts provided for by the plan or disallowed under 11 U.S.C. [§] 502 except debt: . . . of the kind specified in paragraph (5), (8) [student loans] or (9) of 11 U.S.C. [§] 523(a)."

After Ransom received the discharge that expressly excluded student loan debt from its scope, Sallie Mae began sending billing statements showing a current balance of $42,222.39.

Ransom disputed the balance, contending that the following plan provision prohibited interest accrual during the life of the plan and forever barred collection of such interest:

Other Provisions Not Inconsistent With Title 11.

(a). Any allowed unsecured claims which are non-dischargeable under 11 U.S.C. [§] 523 (a)(8) and/or 11 U.S.C. [§] 1328(a)(2) shall be paid in full prior to any payments to other allowed unsecured claims dischargeable under [§] 523 or [§] 1328.

The Debtor believes that the principal loan amounts [creditors and acct. nos. omitted] and identified as "Student Loan" debts on Debtor's Schedule F comprise those debts which are nondischargeable under [§§] 523(a)(8) and/or 1328(a)(2). No post-petition interest on these claims shall accrue against either the debtor personally or her bankruptcy estate, and no post-petition interest shall be paid on the allowed claims of these creditors through the plan or otherwise.

Unable to resolve the matter informally, she had the case reopened and filed a motion to compel Sallie Mae to revise the outstanding balance by excluding all post-petition interest accrued during the 60-month life of the plan.

Ransom's specific request for relief was that Sallie Mae be ordered to adjust her balance to $ 25,500.24 to reflect the "stopping of interest during the five years of Ms. Ransom's plan and the $ 11,417.78 in principal payments."

Ransom's theory was that the plan provision permanently barring accrual and collection of interest on a nondischargeable student loan debt is not the same as a discharge. Relying only on incantation of "Pardee," "binding," and "res judicata," she articulated no distinction between permanent bar and discharge.

Sallie Mae countered that giving permanent effect to plan language providing for no accrual of post-petition interest would constitute a discharge that could not, as held in Repp, be done without a determination of "undue hardship" following notice of a nature and quality attendant to the adversary proceeding that Rule 7001 prescribes for making such determinations.

Granting the motion, the court permanently barred collection of interest attributable to the 60 months of the plan:

(1) Sallie Mae shall comply with the terms of Debtor's confirmed Chapter 13 Plan; (2) Sallie Mae shall reverse all interest accrued during the 60 month period of the plan; (3) Sallie Mae shall apply all payments made under the plan to debtor's principal balance; (4) Sallie Mae shall correct its statements and records regarding Debtor Kimberly Ransom's outstanding student loan balance; and (5) Such statements and records of Sallie Mae shall reflect a principal balance as of the date of discharge of $25,500.24.²

Without mentioning Enewally, the court merely rejected Repp as "skirting" Pardee.

JURISDICTION

Subject-matter jurisdiction was based on 28 U.S.C. §§ 1334 and 157(b)(2). We have jurisdiction under 28 U.S.C. § 158(a)(1).

ISSUES

1. Whether a permanent ban on accrual and collection of postpetition interest on student loan debt is equivalent to discharge of the interest obligation.

2. Whether accrual and collection of postpetition interest on student loan debt can be forever barred by a chapter 13 plan provision without an "undue hardship" determination under 11 U.S.C. § 523(a)(8) that is made following notice consonant with the adversary proceeding that Rule 7001 requires.

STANDARD OF REVIEW

Whether an order or plan provision operates as a discharge is a question of law to be reviewed de novo, and whether adequate due process notice was given in any particular instance is a mixed question of law and fact that we likewise review de novo. Repp, 307 B.R. at 148; GMAC Mortgage Corp. v. Salisbury (In re Loloee), 241 B.R. 655, 659 (9th Cir. BAP 1999).

DISCUSSION

We begin by focusing on the crucial issue of whether enforcement of the no-accrual-of-interest provision in the chapter 13 plan operates as a discharge of interest attributable to the 60-month life of the plan or not. Finding a de facto discharge, we turn to the question whether the plan was confirmed in circumstances that pass muster under the due process analysis prescribed by the Ninth Circuit in Enewally whenever the rules of procedure require an adversary proceeding. We conclude that the plan confirmation does not pass muster and that Sallie Mae cannot be permanently barred from collecting interest.

I

The key landmarks on the legal landscape regarding discharge of student loans are well-known and not in controversy.

Student loan obligations cannot be discharged in bankruptcy without a showing that repayment would cause "undue hardship" to the debtor and the debtor's dependents, as prescribed by 11 U.S.C. § 523(a)(8). Rifino v. United States (In re Rifino), 245 F.3d 1083, 1087 (9th Cir. 2001).

Post-petition interest on nondischargeable student loans is also nondischargeable. Bruning v. United States, 376 U.S. 358, 363, 84 S. Ct. 906, 11 L. Ed. 2d 772, 1964-2 C.B. 500 (1964); County of Sacramento v. Foross (In re Foross), 242 B.R. 692, 693 (9th Cir. BAP 1999); Pardee, 193 F.3d at 1085 n.4 (9th Cir. 1999), aff'g 218 B.R. 916, 919-21 (9th Cir. BAP 1998).

As a feature of what the Supreme Court has described as "greater procedural protection," Rule 7001(6) requires that an adversary proceeding be used to determine a student loan discharged as an "undue hardship." Fed. R. Bankr. P. 7001(6); Tenn. Student Assistance Corp. v. Hood, 541 U.S. 440, 451, 124 S. Ct. 1905, 158 L. Ed. 2d 764 (2004) ("Because student loan debts are not automatically dischargeable, however, the Federal Rules of Bankruptcy Procedure provide...