Juber v. Conklin (In re Conklin)
| Decision Date | 26 August 2019 |
| Docket Number | Case No. 18-30263,Adversary Proceeding No. 18-3026 |
| Citation | 606 B.R. 664 |
| Court | U.S. Bankruptcy Court — Western District of North Carolina |
| Parties | IN RE: Liana Sue CONKLIN, Debtor. Kevin Juber and Linda Juber, Plaintiffs, v. Liana Sue Conklin, Defendant. |
Heather W. Culp, Essex Richards, P.A., Bonnie Keith Green, The Green Firm, PLLC, Heather Culp, Charlotte, NC, for Plaintiffs.
David R. Badger, David R. Badger, P.A., Richard B. Fennell, James, McElroy & Diehl, PA, Charlotte, NC, for Defendant.
FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER GRANTING JUDGMENT TO THE DEFENDANT
This case involves uncommon factual circumstances and the application of a deceptively simple statutory scheme that raises as many questions as it answers. The facts epitomize how the best of intentions can get off track and how a simple, personal loan made between two parties can lead to a complicated dispute over the dischargeability of that debt when one of the parties later files for bankruptcy. Based on the facts and testimony presented at trial, the court concludes that the funds that Kevin and Linda Juber (the "Jubers") loaned their son's then-fiancé, Liana Conklin (the "Debtor"), to enable her to pay off her private student loans, constitute a dischargeable debt that the Debtor may treat as a general unsecured claim in her Chapter 13 plan.
1. Despite the fact that this matter came on for trial, the parties were largely in agreement about the facts. Nonetheless, the landscape in which this dispute arose and the factual nature of the loan at issue are crucial to this court's ultimate determination regarding the dischargeability of the debt.
2. The Debtor's story begins much like any other college student. The Debtor began attending college at the University of New Haven in the fall of 2009. Transcript of Trial at 102, Juber v. Conklin, No. 18-3026 (Bankr. W.D.N.C. Apr. 1, 2019), ECF No. 40 [hereinafter Transcript ]. The Debtor financed her studies with student loans from the Department of Education; private student loans from three different loan providers (the "Three Original Loans"); other grants; and scholarships from the university. Transcript of Deposition of Liana Sue Conklin at 12, Juber v. Conklin, No. 18-3026 (Bankr. W.D.N.C. July 23, 2018), ECF No. 8. While at the university, the Debtor began dating the Jubers' son, Christopher "Kip" Juber (the "Jubers' Son"). Transcript at 102. In the spring of 2013, the Debtor graduated from college, id. at 11, and she and the Jubers' Son became engaged in December of 2014. Transcript at 103.
3. Around the time of the engagement, and after the Debtor graduated, the Jubers learned about the nature and extent of the Debtor's Three Original Loans. Transcript at 10–11. At trial, Mr. Juber testified that he and his wife were concerned because "[o]nce Christopher and [the Debtor] became engaged" they would form a household "and any incomes both had would, effectively, be contributing to that household." Transcript at 13. The Jubers "always tried to ... position [their] children to start somewhat free of debt in order to be able to afford a house, or just not have a lot of financial burden over them." Transcript at 11. To that end, Mr. Juber inquired about the specifics of the Three Original Loans, ultimately sparking a conversation about the parents helping both their son and the Debtor with the loans. Transcript at 105–06. The Jubers' Son first discussed the details of the offer with his parents, Transcript at 107, and ultimately brought the Debtor into the conversation through a phone call amongst the four of them. Transcript at 13–14, 108–09. This call took place approximately one month after the couple became engaged. Transcript at 13, 106. It was during this phone conversation that the Jubers explained their plan to assist the couple. Transcript at 13–16. The Debtor did not approach the Jubers about providing this loan or suggest that she was unable to make her payments on the Three Original Loans. Transcript at 106–08. In fact, according to Mr. Juber, the Debtor had a history of making her payments on the Three Original Loans without difficulty. Transcript at 54. It was upon the Jubers' suggestion that the Debtor and the Jubers' Son considered allowing his parents to pay off the loans. Transcript at 107–08, 137.
4. The Jubers' offer to the Debtor was twofold. First, the Jubers planned to activate their home equity line of credit (the "HELOC") to pay off the Three Original Loans. Transcript at 108. The Jubers understood that the weighted average of the interest rates on the Three Original Loans was around 9.5% while the interest rate on the HELOC was only 1.99%. Transcript at 12. The Jubers believed that by paying off the Debtor's Three Original Loans with the HELOC, the Debtor and their son would benefit from the lower interest rate and be able to have a lower principal balance when they married. Transcript at 13, 16. In return, the Jubers asked the Debtor to agree to pay $500 biweekly until they decided to sell their home (the "Oral Loan"). Transcript at 18. The Jubers planned to sell their home in the near future and would ultimately need to pay off the HELOC prior to closing. Transcript at 19-20, 31. As such, at the end of this roughly twelve-month term, the Jubers understood that the Debtor and their son, together, would refinance the remaining principal, albeit significantly reduced by the Oral Loan. Transcript at 12, 18. Specifically, this transaction would occur after the Debtor and the Jubers' Son wed, and the Jubers assumed that their son would need to cosign on the debt. Transcript at 19, 44.
5. Throughout the trial, the parties testified that the purpose of the Oral Loan was to allow any net income that either the Debtor or the Jubers' son earned during the course of that year to be committed to paying off the principal of the loan. Transcript at 16, 108. Mr. Juber testified that he was "not in the business of providing loans," Transcript at 68, and the couple's pending engagement was "100%" the reason he offered the loan to the couple. Transcript at 20. He wanted the couple to have a stable financial situation as they began their married life together. Transcript at 75.
6. The parties never contemplated the fate of the Oral Loan in the event that the engagement of the Debtor and the Jubers' Son fell through. Alas, the Debtor called off the engagement in November of 2015, Transcript at 126, which triggered a litany of email exchanges between the Debtor, the Jubers, and the Jubers' Son about how to handle the Oral Loan after the engagement ended, see Plaintiffs' Exs. 6–9, 13–14, 16–18, 21–22, 26–32. Mr. Juber explained that payment of the Debtor's student debts would "no longer ... be affecting [the Juber's] [S]on's household, [so they] wanted to try and just distance [themselves]." Transcript at 36–37.
7. To that end, the Jubers asked the Debtor to sign a written promissory note for the debt she owed pursuant to the Oral Loan. Transcript at 53–54; see Plaintiffs' Ex. 11. The Jubers, the Debtor, and the Debtor's parents exchanged multiple versions of a promissory note via email correspondence. Transcript at 38–54; see Plaintiffs' Exs. 7–14, 16–18, 26–32. On more than one occasion, the email records reveal that the Debtor sought advice from her parents, Transcript at 143–48, and requested changes in the proposed promissory note's terms from the Jubers, see Plaintiffs' Exs. 6–13, 14, 16, 17, 18, 21, 22, 26–32. The Jubers honored each of the Debtor's requests. Transcript at 38–50; see Plaintiffs' Exs. 7, 10–13, 26–28, 30, 32. Interestingly, the first version of the proposed promissory note included a provision that referred to the "educational purposes" of the Three Original Loans. Transcript at 94; Plaintiffs' Ex. 7. However, the final version of the promissory note (the "Promissory Note"), which was attached to the Jubers' proof of claim, neither made reference to the loan as an educational loan, a student loan, or a Qualified Education Loan nor suggested that the Oral Loan had any educational purpose. Plaintiffs' Ex. 12. Mr. Juber testified that he was not familiar with the term "Qualified Education Loan" when he asked the Debtor to sign the Promissory Note. Transcript at 68–69, 81.
8. The terms of the Promissory Note were different than the terms of the Oral Loan. Under the Promissory Note, the Debtor would repay the Jubers over a ten-year term at an interest rate of 9.5%, the weighted average interest rate of the Three Original Loans. Transcript at 85; Plaintiffs' Exs. 12–13. The Promissory Note contained signatory lines for both the Debtor and the Debtor's parents but was only signed by the Debtor and was neither cosigned nor secured by any of the Debtor's collateral. Transcript at 55, 143; Plaintiffs' Ex. 12.
9. The Debtor made relatively timely payments under the Promissory Note for two years following its execution. Transcript at 56–57; 59–60. During those two years, the Jubers did not prepare or send to the Debtor copies of IRS Form 1098-E, the declaration of interest paid on a student loan that student loan providers issue to borrowers. Transcript at 63–64. In fact, the Jubers did not prepare these forms until their bankruptcy counsel instructed them to do so when they filed this adversary proceeding. Id. The Debtor made full payments to the Jubers under the Promissory Note through January 2018. Transcript at 59.
10. On February 20, 2018, the Debtor filed a Chapter 13 bankruptcy petition. The Jubers commenced this adversary proceeding on April 25, 2018 seeking to classify the Debtor's indebtedness, as represented by the Oral Loan and the subsequent Promissory Note, as nondischargeable debt incurred as a refinance of a qualified education loan under § 523(a)(8) of the Bankruptcy Code and § 221(d) of the Internal Revenue Code.
11. When the Debtor commenced her case on February 20, 2018, she...
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