In re Taylor

• Court: U.S. District Court — Northern District of Alabama
• Citation: In re Taylor, 263 B.R. 139 (N.D. Ala. 2001)
• Decision Date: 21 May 2001
• Docket Number: No. Civ.A. 00-G-3151-E.,Civ.A. 00-G-3151-E.
• Parties: In re Jimmy Clark TAYLOR and Deborah Carter Taylor, Debtors. Deborah Taylor, Appellee, v. United States of America, Department of Education, Appellant.

263 B.R. 139 (2001)

In re Jimmy Clark TAYLOR and Deborah Carter Taylor, Debtors Deborah Taylor, Appellee, v. United States of America, Department of Education, Appellant.

No. Civ.A. 00-G-3151-E.

United States District Court, N.D. Alabama, Eastern Division.

May 21, 2001.

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COPYRIGHT MATERIAL OMITTED

Herbert H. Henry III, Acting U.S. Attorney, Richard E. O'Neal, U.S. Attorney's Office, Birmingham, AL, J. Christopher Kohn, Tracy J. Whitaker, U.S. Department of Justice, Civil Division, Washington, DC, David W. Ogden, United States Department of Justice-Civil Division, Washington, DC, S. Dawn Scaniffe, United States Department of Education, Office of the General Counsel, Washington, DC, Sheryl L. Floyd, U.S. Department of Justice, Washington, DC, for USA, Department of Education.

Harry P. Long, Anniston, AL, for Deborah Carter Taylor, Jimmy Clark Taylor.

MEMORANDUM OPINION

GUIN, District Judge.

INTRODUCTION AND STATEMENT OF ISSUES BEFORE COURT

The above-styled case is on appeal from the United States Bankruptcy Court for the Northern District of Alabama, Eastern Division on the order of the bankruptcy court by which it awarded Ms. Deborah Carter Taylor $12,000.00 in emotional distress damages and $31,723.97 in attorney fees against the United States of America Department of Education hereinafter Education.¹ The case is before this court on appeal on the following issues:

1) Whether 11 U.S.C. § 525(c) implicitly voids a lender\'s right under 11 U.S.C. § 365(e)(2)(B) to refuse post-petition to disburse funds due under a pre-petition loan agreement;

2) Whether Education\'s regulations which require a borrower who files a bankruptcy to reapply for an un-insured student loan and to show either extenuating circumstances or to provide a co-signor to overcome the adverse credit history of bankruptcy are equivalent to denial of the loan violating 11 U.S.C. § 525(c);

3) Whether a lender which denies a student loan on account of a prior loan delinquency, which unknown to the lender had been discharged in bankruptcy, violates 11 U.S.C. § 525(c) by failing to investigate and determine whether the delinquent debt had been discharged;

4) Whether 11 U.S.C. § 525(c) affords a private right of action for damages, and if not, whether the bankruptcy court\'s power under 11 U.S.C. § 105 supplies the missing substantive right of action;

5) Whether emotional distress damages are recoverable for violations of 11 U.S.C. § 525(c), especially where they are not corroborated by evidence of medical treatment;

6) Whether the bankruptcy court erroneously awarded plaintiff $12,000.00 in emotional distress damages as unsupported by the record and the case law;

7) Whether the bankruptcy court has jurisdiction to award attorney fees pursuant to the Equal Access to Justice Act; and 8) Whether the position of Education is substantially justified, especially where its statutory construction is "compelling" and is an "issue of first impression."

Discussion of each issue and pertinent governmental programs, regulations, and statutes will follow.

PLUS LOAN PROGRAM²

The enumerated issues before the court deal with provisions of and application of the Parent Loan for Undergraduate Students hereinafter PLUS program and related regulations as they relate to other federal statutes, particularly application of 11 U.S.C. § 525(c)(1) of the Bankruptcy Code. The Higher Education Amendments of 1992, 20 U.S.C. § 1078-2, provides, in part, the following:

(a) Authority to Borrow

(1) Authority and eligibility

Parents of a dependent student shall be eligible to borrow funds under this section in amounts specified in subsection (b), if —

(A) the parents do not have an adverse credit history as determined pursuant to regulations promulgated by the Secretary; and

(B) the parents meet such other eligibility criteria as the Secretary may establish by regulation, after consultation with guaranty agencies, eligible leaders, and other organizations involved in student financial assistance.

20 U.S.C. § 1078-2(a)(1)(A) & (B).

The Code of Federal Regulations defines "eligible borrowers" and "adverse credit history." A parent borrower such as Ms. Taylor is defined accordingly:

Parent borrower. (1) A parent borrower, is eligible to receive a PLUS Program loan, other than a loan made under § 682.209(e), if the parent —

(i) Is borrowing to pay for the educational costs of a dependent undergraduate student . . .

34 CFR § 682.201(b)(i).

The Regulations go on to define "adverse credit history" as follows:

(vii)(A) In the case of a Federal PLUS loan made on or after July 1, 1993, (if the parent) does not have an adverse credit history.

. . .

(C) Unless the lender determines that extenuating circumstances existed, the lender must consider each applicant to have an adverse credit history based on the credit report if —

1) The applicant is considered 90 or more days delinquent on the repayment of a debt;

2) The applicant has been the subject of a default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or writeoff of a Title IV debt, during the five years preceding the date of the credit report.

34 C.F.R. § 682.201(b)(vii)(C). Thus, only with extenuating circumstances would a person who was the subject of a bankruptcy discharge not have an adverse credit history.

11 U.S.C. § 525(c)(1)

Plaintiff has brought the instant case alleging violations of 11 U.S.C. § 525(c)(1). Section 525(c)(1) of the Bankruptcy Code states in pertinent part the following:

A governmental unit that operates a student grant or loan program and a person engaged in a business that includes the making of loans guaranteed or insured under a student loan program may not deny a grant, loan, loan guarantee, or loan insurance to a person that is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act. . . .

11 U.S.C. § 525(c)(1).

DEAR COLLEAGUE LETTER

Following enactment of the Bankruptcy Reform Act of 1994 which added 11 U.S.C. § 525(c)(1), Education issued a Dear Colleague Letter hereinafter DCL to guaranty agencies regarding possible changes to loan programs as a consequence of changes in the bankruptcy law. The DCL advised these agencies that PLUS applicants, among other applicants, continued to have an adverse credit history and were thus ineligible for the loans. Mitigating circumstances or the signature of a creditworthy endorser would rebut the negative inference suggested by the prior discharge.³

HISTORY OF CASE AT BAR

Ms. Taylor filed an adversary proceeding against Chase Manhattan Bank, N.A. hereinafter Chase on August 19, 1997, alleging a violation of 11 U.S.C. § 525(c)(1), pertinent portions of which have been previously set forth. Chase filed a motion to dismiss which the court denied on March 30, 1998. On November 11, 1998, Education filed a motion to intervene for the limited purposes of addressing certain legal issues. The court granted the motion to intervene on January 19, 1999. On March 25, 1999, plaintiff filed an amended complaint in which she alleged that both Chase and Education violated § 525(c)(1). She requested emotional distress damages and asserted that her complaint should be treated as a class action. The parties filed cross motions for summary judgment and defendants moved to dismiss the class action lawsuit. On June 22, 1999, the court denied Education's motion to dismiss and/or for summary judgment. In January 2000, Ms. Taylor and Chase entered into a settlement agreement in which Chase agreed to pay Ms. Taylor $12,000.000. Chase was subsequently dismissed as a co-defendant.

Trial was held May 11, 2000, and the court issued its decision granting Ms. Taylor $12,000.000 on June 26, 2000.⁴ Plaintiff submitted an application for attorney fees which the court granted, in part, after oral argument on August 8, 2000. Judgement was entered August 10, 2000. Education timely filed its appeal.

At trial, the following facts were stipulated by the parties:⁵

1) On June 26, 1996, Chase approved PLUS loan with disbursements scheduled for July 1996 and January 1997. The first disbursement was made.⁶

2) On or about November 7, 1996, plaintiff Deborah Cater Taylor filed the above-styled Chapter 7 case.⁷

3) As early as November 22, 1996, a determination that the loan was nondischargeable was made by the defendant or others pursuant to the defendant\'s orders or requirements.

4) Ms. Taylor has taken no action as of this date to obtain a determination that her debt to Chase was dischargeable under 11 U.S.C. § 523 or otherwise and said debt is excepted from discharge under 11 U.S.C. § 523(a)(8).

5) On January 7, 1997, a decision was made by the defendant, or others pursuant to defendant\'s instructions and requirements that the second disbursement approval of the promissory note signed prior to the filing of the bankruptcy was removed.⁸

6) On February 27, 1997, a discharge of the debtors was entered in the above-styled bankruptcy case.⁹

7) Prior to the debtor\'s bankruptcy plaintiff Deborah Carter Taylor entered into a promissory note for a loan from the Tennessee Student Assistance Corporation which was funded by Chase.

8) Said loan was for the purpose of assisting plaintiff\'s son with tuition and other expenses of attending Sewanee in Sewanee, Tennessee.

9) Said loan was approved by Chase by letter dated June 20, 1996.

10) On February 28, 1997, plaintiff was advised by Sewanee that Chase had canceled the second distribution of the loan because plaintiff was filing bankruptcy.¹⁰

11) On or about March 6, 1997, Ms. Taylor reapplied for a PLUS loan in the amount of Five Thousand Dollars ($5,000.00).

12) By letter dated March 17, 1997, plaintiff was requested to commence payments on the outstanding funding of the loan with the repayment period beginning on March 5, 1997, and the first payment in the amount of $65.90 due on April 13, 1997.

13) No additional financial information on the

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