Inst. of Imaginal Studies v. Christoff (In re Christoff)

• Decision Date: 27 March 2015
• Docket Number: BAP No. NC–14–1336–PaJuTa.,Adversary No. 13–3186.,Bankruptcy No. 13–10808.
• Citation: 527 B.R. 624
• Parties: In re Tarra Nichole CHRISTOFF, Debtor. Institute of Imaginal Studies dba Meridian University, Appellant, v. Tarra Nichole Christoff, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

527 B.R. 624

In re Tarra Nichole CHRISTOFF, Debtor.Institute of Imaginal Studies dba Meridian University, Appellant

v.Tarra Nichole Christoff, Appellee.

BAP No. NC–14–1336–PaJuTa.

Bankruptcy No. 13–10808.

Adversary No. 13–3186.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted on Feb. 19, 2015.

Filed March 27, 2015.

Scott D. Schwartz of Rust, Armenis & Schwartz, P.C., San Francisco, CA, argued for Appellant Institute of Imaginal Studies d/b/a Meridian University.

Lindsay R. Torgerson of Wine Country Family Law & Bankruptcy Office, Cloverdale, CA, argued for Appellee Tarra Nichole Christoff.

Before: PAPPAS, JURY, and TAYLOR, Bankruptcy Judges.

OPINION

PAPPAS, Bankruptcy Judge.

This appeal raises an important issue of first impression concerning the scope of the exception to discharge for student debts in bankruptcy. Creditor Institute of Imaginal Studies d/b/a Meridian University (“Meridian”) appeals the summary judgment of the bankruptcy court determining that the debt owed to Meridian by chapter 7¹ debtor Tarra Nichole Christoff (“Debtor”) was not excepted from discharge pursuant to § 523(a)(8)(A)(ii). Based upon the plain language of the Bankruptcy Code, we AFFIRM.

I. FACTS²

A. Relationship of the Parties.

Meridian is a for-profit California corporation which operates a private university licensed under California's Private Post Secondary Education Act of 2009, Cal. Educ.Code § 94800, et seq. If a graduate of Meridian fulfills other post-graduate requirements, the graduate may obtain a license from California to practice as an independent, unsupervised psychologist.

Debtor applied for admission to Meridian in 2002. Meridian agreed to admit Debtor and offered her $6,000 in financial aid to pay a portion of the tuition for that school year. Under this arrangement, Debtor did not receive any actual funds from Meridian, but instead she received a tuition credit. Debtor signed an enrollment agreement acknowledging Meridian's offer to “finance” $6,000 of the tuition, and she signed a promissory note in favor of Meridian evidencing her obligation. The promissory note provided that the debt for the tuition credit was to be paid by Debtor in installments of $350 per month after Debtor completed her course work or withdrew from Meridian. Interest accrued on the unpaid balance of the note at nine percent per annum, compounded monthly.

In 2003, Debtor submitted a similar application, and Meridian granted her a financial aid award of $5,000 for that school year. As before, Debtor signed a promissory note for $5,000. Again, Debtor did not receive any funds but instead received a tuition credit. The promissory note contained payment terms identical to those in the prior note.

Debtor completed her course work at Meridian, and Debtor's note payments began in October 2005. After making several payments on the notes, in 2009, Debtor sought a deferral of her payments for a period of one year. Meridian granted the extension. Also in 2009, Debtor withdrew from Meridian without completing her dissertation, a requirement for obtaining her degree.

After the extension expired, Debtor did not pay the amounts due under the two promissory notes. Thereafter, Meridian unsuccessfully attempted to collect the balance due from Debtor. Eventually, Meridian and Debtor agreed to submit Meridian's claims to arbitration under a provision in the enrollment agreement. In July 2012, an arbitrator ordered Debtor to pay Meridian the unpaid balance due on the promissory notes, $5,950, plus accrued interest.

B. The Bankruptcy Case and Adversary Proceeding.

Debtor filed a chapter 7 bankruptcy petition on August 19, 2013. Debtor listed Meridian in schedule F as an unsecured, nonpriority creditor. Meridian commenced an adversary proceeding against Debtor seeking a determination by the bankruptcy court that the debt owed by Debtor to Meridian was excepted from discharge pursuant to § 523(a)(8).

On April 30, 2014, Meridian filed a motion for summary judgment. In its motion, Meridian conceded that Debtor's debt did not qualify for an exception to discharge under either § 523(a)(8)(A)(i) or (a)(8)(B).³ However, it argued that the debt was excepted from discharge under § 523(a)(8)(A)(ii). Debtor disputed that this Code provision applied to her debt to Meridian.⁴ The parties appeared at a motion hearing on May 30, 2014, presented their arguments, and the bankruptcy court took the issues under advisement.

On June 11, 2014, the bankruptcy court entered a Memorandum Decision in which it held that Debtor's debt to Meridian did not qualify for an exception to discharge under § 523(a)(8)(A)(ii). Inst. of Imaginal Studies dba Meridian Univ. v. Christoff (In re Christoff), 510 B.R. 876, 884 (Bankr.N.D.Cal.2014). In making this ruling, the bankruptcy court noted that the question raised by the motion was an issue of first impression in the Ninth Circuit following enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).⁵ After a thorough review of amended § 523(a)(8) and the cases addressing the issue, the bankruptcy court concluded:

[b]ecause Debtor's obligations under applicable documents were to pay the amount under the [p]romissory [n]otes, and thereafter the arbitration award, but did not flow from ‘funds received’ either by her as the student or by Meridian from any other source, the debt is not covered by [§ 523(a)(8)(A)(ii) ] and is therefore eligible for discharge in Debtor's discharge.

In re Christoff, 510 B.R. at 884.

Interpreting the “funds received” requirement in § 523(a)(8)(A)(ii), the bankruptcy court explained that “Meridian simply agreed to be paid the tuition later ... [i]t did not receive any funds, such as from a third party financing source.” Id. at 879. The bankruptcy court therefore concluded that, while the transactions between Debtor and Meridian were clearly loans, § 523(a)(8)(A)(ii) does not extend to loans but, instead, grants an exception to discharge for “an obligation to repay funds received.” Id. at 879. The bankruptcy court observed that BAPCPA had amended the prior version of § 523(a)(8) and had created a “newly separated [§ 523(a)(8)(A)(ii), which] refers to an ‘obligation to repay funds received as an educational benefit, scholarship[,] or stipend,’ without reference to educational loans or any other kind of loan.” Id.

Meridian filed a notice of appeal concerning the Memorandum Decision on June 26, 2014. The bankruptcy court, on July 2, 2014, entered an order granting summary judgment in favor of Debtor and denying Meridian's motion for summary judgment; it also entered a judgment incorporating these rulings. On July 11, 2014, Meridian filed an amended notice of appeal to include the order and judgment entered by the bankruptcy court.

II. JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.

III. ISSUE

Whether the bankruptcy court erred in holding that the Meridian debt was not excepted from discharge under § 523(a)(8)(A)(ii) because it was not an obligation for “funds received.”

IV. STANDARDS OF REVIEW

We review a bankruptcy court's grant of summary judgment de novo. The President & Bd. of Ohio Univ. v. Hawkins (In re Hawkins), 317 B.R. 104, 108 (9th Cir. BAP 2004), aff'd, 469 F.3d 1316 (9th Cir.2006) ; Thorson v. Cal. Student Aid Comm'n (In re Thorson), 195 B.R. 101, 103 (9th Cir. BAP 1996) (citing Jones v. Union Pac. R.R. Co., 968 F.2d 937, 940 (9th Cir.1992) ). According to Civil Rule 56, made applicable to adversary proceedings in Rule 7056, summary judgment is appropriate if there is a showing “that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Civil Rule 56(a); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A trial court, in the exercise of its discretion, may grant a summary judgment for a nonmovant pursuant to Civil Rule 56(f)(1).

“We review de novo the bankruptcy court's application of the legal standard in determining whether a student loan debt is dischargeable.” Educ. Credit Mgmt. Corp. v. Jorgensen (In re Jorgensen), 479 B.R. 79, 85 (9th Cir. BAP 2012) (citing Rifino v. United States (In re Rifino), 245 F.3d 1083, 1087 (9th Cir.2001) ). “To the extent the bankruptcy court interpreted statutory law, we review the issues of law de novo.” In re Thorson, 195 B.R. at 103.

V. DISCUSSION

A. Arguments of the Parties.

Meridian argues that the bankruptcy court erred when it interpreted § 523(a)(8)(A)(ii) to require that actual funds be received by a debtor in order for a debt to qualify for an exception to discharge under that provision. According to Meridian, “funds received,” as that language is used in § 523(a)(8)(A)(ii), is the equivalent to “loans” received by the debtor, as described in the other provisions of § 523(a)(8). To support this argument, Meridian cites to McKay v. Ingleson, 558 F.3d 888 (9th Cir.2009), and to Johnson v. Mo. Baptist Coll. (In re Johnson), 218 B.R. 449 (8th Cir. BAP 1998), a decision cited and relied upon by the Ninth Circuit in McKay. Meridian argues that the bankruptcy court erred in distinguishing these cases because those decisions determined that a “loan” under § 523(a)(8) required no funds to be transferred to a debtor. Meridian argues that since the terms “loan” and “funds received” are synonymous as used in § 523(a)(8), McKay and In re Johnson control the outcome in this case.

Debtor points to the difference in the language employed by Congress to delineate what types of student debts are excepted from discharge under § 523(a)(8). While § 523(a)(8)(A)(i) and (B) indeed make “loans” nondischargeable in bankruptcy, absent undue hardship, § 523(a)(8)(A)(ii) applies to a different type of debt: a debtor's “obligation to repay funds received as an educational benefit, scholarship, or stipend [.]” Because Congress did not refer to “loans” in this subsection of the Code, Debtor...