In re Schlehr

• Decision Date: 31 January 2003
• Docket Number: Bankruptcy No. 00-42503-13.,Bankruptcy No. 01-22835-13.,Bankruptcy No. 01-52327-13.,Bankruptcy No. 01-41640-13.
• Citation: 290 B.R. 387
• Court: U.S. Bankruptcy Court — District of Montana
• Parties: In re Gerald M. SCHLEHR, d/b/a Southside Welding & Machine, Kimberly D. Schlehr, h/i/i Kimberly D. Burton, Debtors. In re Teresa Young, a/k/a Teresa Davidson, a/k/a Terry Young, a/k/a Teresa S. Young, Debtors. In re Stanley E. Jarvar, Barbara J. Kramer-Jarvar, a/k/a Barbara J. Kramer, a/k/a Barbara Jarvar, Debtors. In re Edward Robert Hayes, Patricia Ann Hayes, Debtors.

290 B.R. 387

In re Gerald M. SCHLEHR, d/b/a Southside Welding & Machine, Kimberly D. Schlehr, h/i/i Kimberly D. Burton, Debtors.

In re Teresa Young, a/k/a Teresa Davidson, a/k/a Terry Young, a/k/a Teresa S. Young, Debtors.

In re Stanley E. Jarvar, Barbara J. Kramer-Jarvar, a/k/a Barbara J. Kramer, a/k/a Barbara Jarvar, Debtors.

In re Edward Robert Hayes, Patricia Ann Hayes, Debtors.

Bankruptcy No. 00-42503-13.

Bankruptcy No. 01-41640-13.

Bankruptcy No. 01-52327-13.

Bankruptcy No. 01-22835-13.

United States Bankruptcy Court, D. Montana.

January 31, 2003.

D. Randy Winner, Great Falls, MT, for Gerald M. Schlehr and Kimberly D. Schlehr.

E. June Lord, Great Falls, MT, for Teresa Young.

Daniel S. Morgan, Missoula, MT, for Edward B. Hayes and Patricia Ann Hayes.

Robert D. Drummond, Great Falls, MT, trustee.

MEMORANDUM OF DECISION

RALPH KIRSCHER, Bankruptcy Judge.

At Butte in said District this 31st day of January, 2003.

Hearings in the four above-captioned Chapter 13 cases were consolidated by Stipulation approved by this Court on June 27, 2002, for the purpose of hearing the Trustee's objections to Proofs of Claim filed in each of the four cases by Educational Credit Management Corporation ("ECMC"). The consolidated hearing on the Trustee's objections was held at Great Falls after due notice on September 26, 2002. The Chapter 13 Trustee Robert G. Drummond appeared in support of his objections. ECMC was represented by attorney Steven M. Johnson ("Johnson"). Dan Fisher ("Fisher"), associate attorney with ECMC in St. Paul, Minnesota, appeared and testified. By stipulation between the parties, Exhibits ("Ex.") 1, 2, 3, H-1, H-2, Y-1, Y-2, S-1, S-2, S-3, S-4, and S-5, were admitted into evidence. Ex. KJ-1 through KJ-9 were admitted on the condition that any illegible pages therein will be substituted¹. At the completion of the parties' cases-in-chief the Court closed the record and granted the parties time to file briefs, after which these matters would be deemed submitted and taken under advisement. The parties' briefs have been filed² and reviewed by the Court, together with the record and applicable law. These matters are ready for decision.

This Court has jurisdiction over these four Chapter 13 cases under 28 U.S.C. § 1334(a). The pending objections are core proceedings under 28 U.S.C. § 157(b)(2)(B) involving allowance or disallowance of claims against the estate. The Trustee and ECMC stipulated that the issues in these four cases with respect to the Trustee's objections are identical. At issue is whether the Trustee has satisfied his burden of proof under F.R.B.P. 3007 and 11 U.S.C. § 502(a) to overcome the prima facie effect of ECMC's Proofs of Claim by operation of F.R.B.P. 3001(f), and produced proof negating the facts alleged in ECMC's claims that the collection costs included therein by operation of federal statute and regulation should be allowed. For the reasons set forth below, the Court concludes that the Trustee has failed to satisfy his burden of proof, and the Trustee's objections to ECMC's Proofs of Claim in these four Chapter 13 cases each will be overruled. This memorandum contains the Court's findings of fact and conclusions of law.

The background facts shown by the court files are not in dispute. Case No. 00-42503-13 was commenced by Gerald M. Schlehr and Kimberly D. Schlehr ("Kimberly") (together "Schlehrs") on October 3, 2000, when they filed their Chapter 13 petition and schedules. At Schedule F Schlehrs list a student loan in the amount of $8,180.59 owed to MHESAC. On November 16, 2000, ECMC filed Proof of Claim No. 4 asserting an unsecured, nonpriority claim in the total amount of $21,393.64. The attachments to ECMC's claim show two loans owed by the Debtor Kimberly in the amounts of $8,800.33 and $12,593.31, respectively. The attachments list principal, interest accrued to the petition date, and "Collection Costs (pursuant to 34 C.F.R. § 682.410(b)(2)) and unpaid fees" in the amounts of $1,346.04 for one loan and $1,926.14 for the other. Also attached is a letter to ECMC dated November 6, 2000, from the Montana Guaranteed Student Loan Program assigning its rights to Kimberly's loans to ECMC. The Trustee filed an objection to ECMC's Proof of Claim on May 6, 2002, on the grounds ECMC did not file an application for compensation with this Court for the $3,172.18 in "collection costs" in compliance with F.R.B.P.2016. The Trustee's objection argues that there is no way he, the Debtors or the Court can determine what is included in the collection costs or how they were calculated. The Trustee's objection requests that the Court deny ECMC's Proof of Claim to the extent it includes the collection costs.

Case No. 01-41640-13 was commenced by Teresa Young ("Young") on May 25, 2001. At Schedule F Young lists three student loans owed to MHESAC ($2,829.05), MT Guaranteed Student Claims Management ($2,413.20), and Superior Credit Service ($3,201.84). On September 14, 2001, ECMC filed Proof of Claim No. 14 asserting an unsecured, nonpriority claim in the total amount of $4,802.48. The attachments to Claim No. 14 include an itemization of principal, interest, and collection costs claimed as in Case No. 00-42503-13 pursuant to 34 C.F.R. § 682.410(b)(2) in the amount of $915.60. Also attached is a letter to ECMC from the United States Department of Education assigning its rights to Young's student loans to ECMC. The Trustee filed an objection to ECMC's Proof of Claim on April 25, 2002, which was sustained by Order entered May 9, 2002, when ECMC failed to respond. Subsequently, after ECMC filed a response the Trustee withdrew his objection on May 23, 2002, but then filed another objection to ECMC's Proof of Claim No. 14 on June 3, 2002, on the grounds ECMC did not file an application for compensation for the $915.60 in collection costs in compliance with F.R.B.P.2016. The Trustee's objection argues that he cannot determine the costs included or the formula ECMC used, and that ECMC failed to provide required documentation of the student loan. The Trustee's objection requests that the Court deny ECMC's Proof of Claim No. 14.

Case No. 01-53527-13 was commenced by Stanley E. Jarvar and Barbara Kramer-Jarvar ("Barbara") (together "Jarvars") on November 23, 2001. One debt listed on Schedule F is in the amount of $26,153.00 owed to OSI with the description ("Ref: GLHEC"). On January 24, 2002, ECMC filed Proof of Claim No. 3 asserting an unsecured, nonpriority claim in the total amount of $28,874.97, including attachments showing two loans owed by Barbara listing principal, interest accrued to the petition date, and collection costs and unpaid fees pursuant to 34 C.F.R. § 682.410(b)(2) in the amounts of $4,207.05 and $1,077.38. Also attached are eight Stafford loan applications and promissory notes signed by Barbara to Great Lakes Higher Education Corporation ("GLHEC"). The Trustee filed an objection to Proof of Claim No. 3 on May 22, 2002, on the grounds ECMC did not file an application for compensation for the $4,207.05 in collection costs in compliance with F.R.B.P.2016. The Trustee's objection argues that there is no way he, the Debtors or the Court can determine what is included in the collection costs or how they were calculated. The Trustee's objection contends the collection costs are unreasonable, but does not specify whether he wants ECMC's entire claim disallowed or just the collection costs.

Case No. 01-22835-13 was commenced by Edward Robert Hayes and Patricia Ann Hayes ("Patricia") (together "Hayes") on September 20, 2001. Hayes' Schedule F lists no student loans. On January 17, 2002, ECMC filed Proof of Claim No. 13 asserting an unsecured, nonpriority claim in the total amount of $8,614.47. The attachments to the claim list principal, interest, and collection costs pursuant to 34 C.F.R. § 682.410(b)(2) and unpaid fees in the total amount of $8,614.47 owed by Patricia, of which collection costs are stated as $1,763.87. Also attached is a letter to ECMC from the United States Department of Education assigning its rights to Patricia's student loan to ECMC. The Trustee filed an objection to Proof of Claim No. 13 on May 2, 2002, on the grounds ECMC did not file an application for compensation for the $1,763.87 in collection costs in compliance with F.R.B.P.2016 or attach a copy of the promissory note. The Trustee's objection argues that there is no way to determine how the collection costs were determined and whether they contain attorney's fees, collection agency charges, court costs, or any unauthorized expenditures. The Trustee's objection requests that the Court deny ECMC's Proof of Claim No. 13 to the extent it includes unidentified fees.

The stipulated exhibits include all the missing promissory notes. Ex. H-1 is a promissory note executed by Patricia on 5/26/82 for a student loan in the amount of $2,500.00³. Ex. S-1, S-2, S-3, and S-4 are promissory notes signed by Kimberly to the Montana Guaranteed Student Loan Program between 1987 and 1991⁴. ECMC's Proof of Claim No. 3 filed in Case No. 01-53527-13 already included eight Stafford loan promissory notes signed by Barbara to GLHEC. Ex. KJ-1, KJ-2, KJ-3, KJ-4, KJ-5, KJ-6, KJ-7 and KJ-8 are additional copies of the same notes.⁵ Ex. Y-1 is a promissory note signed by Young on 4/22/88 for a PLUS/SLS loan through Bank of Montana⁶.

Fisher testified that ECMC is a guaranty agency under the Higher Education Act of 1964, with 400 employees. Fisher explained that a guaranty agency is a middleman between an original lender of a student loan and the Department of Education. If a borrower defaults on a student loan, the guaranty agency by law reimburses the original lender. Then, the guaranty agency has an obligation under federal regulation to attempt to collect from the borrower. ECMC's secondary function is to process bankruptcy cases for the U.S. Department of Education ("DOE") and other guaranty agencies through a charter with the DOE and...