Leeper v. Pennsylvania Higher Educ. Assistance Agency, (PHEAA), s. 94-3372

• Decision Date: 23 January 1995
• Docket Number: 94-3373,Nos. 94-3372,s. 94-3372
• Citation: 49 F.3d 98
• Parties: , 32 Collier Bankr.Cas.2d 1833, 98 Ed. Law Rep. 30, Bankr. L. Rep. P 76,392 Lisa LEEPER; William Leeper; Dwight Webster and Della Webster, Appellants, v. PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY, (PHEAA), Student Loan Service Center; Gary J. Gaertner, Trustee. . Submitted under Third Circuit LAR 34.1(a)
• Court: U.S. Court of Appeals — Third Circuit

Page 98

49 F.3d 98

63 USLW 2548, 32 Collier Bankr.Cas.2d

1833, 98 Ed. Law Rep. 30,

Bankr. L. Rep. P 76,392

Lisa LEEPER; William Leeper; Dwight Webster and Della

Webster, Appellants, v. PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY, (PHEAA),

Student Loan Service Center;

Gary J. Gaertner, Trustee.

Nos. 94-3372, 94-3373.

United States Court of Appeals,

Third Circuit.

Submitted under Third Circuit

LAR 34.1(a)

Jan. 23, 1995.

Decided Feb. 27, 1995.

Edward A. Olds, Olds & Innamorato, Pittsburgh, PA, for appellants.

K. Kevin Murphy, Penn. Higher Educ. Assistance Agency, Harrisburg, PA, for appellee.

Before: SLOVITER, Chief Judge, LEWIS and ROSENN, Circuit Judges.

OPINION OF THE COURT

SLOVITER, Chief Judge.

This appeal presents an issue of law: whether interest can accrue after the filing of a Chapter 13 bankruptcy petition on a nondischargeable student loan. The bankruptcy court held that debtors would remain liable for the amount of the post-petition interest that accrued on the unpaid principal of the student loan. The district court affirmed. This appeal presents what appears to be an issue of first impression for the courts of appeals as to which, unfortunately, we have found no helpful legislative history.

I. FACTS AND PROCEDURAL HISTORY

Appellants Della and Dwight Webster ("the Websters") filed a Chapter 13 bankruptcy petition on March 25, 1992. ¹ Lisa and William Leeper ("the Leepers") filed a bankruptcy petition on July 28, 1992. Their Chapter 13 plans have been confirmed and are currently in place.

The Pennsylvania Higher Education Assistance Authority ("PHEAA") is an unsecured creditor of both the Websters and the Leepers. Both the Websters and the Leepers borrowed money from PHEAA to attend college under the guaranteed student loan program. When the Leepers and the Websters filed for bankruptcy, PHEAA filed claims with the bankruptcy court for the principal amounts owing on the respective loans at the time of the bankruptcy petitions plus all pre-petition interest. Portions of the amounts paid pursuant to their two Chapter 13 plans are being applied to the PHEAA claims.

Neither the Websters nor the Leepers will be able to repay their student loan debts in full during the course of their Chapter 13 plans. Pursuant to 11 U.S.C. Sec. 1328 (1988 &

Supp. II 1990), which references 11 U.S.C. Sec. 523(a)(8) (1988 & Supp. II 1990), debts for student loans such as those guaranteed by PHEAA are excepted from discharge in Chapter 13 bankruptcy proceedings unless they fall within a hardship exception or unless they matured seven years before the commencement of the bankruptcy case. ² The parties agree that unless one of the two exceptions applies, PHEAA will be able to collect the balance of the amount owing on its bankruptcy claims at the end of the sixty-month bankruptcy period for each of the debtors

In addition, PHEAA intends to accrue interest on the unpaid principal balance of the loans while the two Chapter 13 bankruptcy cases are pending and intends to collect that interest after the plans are completed. Thus, after their plans were confirmed both the Leepers and the Websters (hereafter "the debtors") initiated adversary proceedings in the bankruptcy court against PHEAA, invoking the bankruptcy court's core jurisdiction under 28 U.S.C. Sec. 157 (1988). Each complaint sought an order from the bankruptcy court declaring (1) that PHEAA is not entitled to accrue post-petition interest during the pendency of the Chapter 13 proceedings, and (2) that payments made to PHEAA under the Chapter 13 plans be applied only to the principal balances of the loans.

In its answers to the complaints, PHEAA conceded that all plan payments made by the debtors should be applied only to their bankruptcy claims, which include the outstanding principal balances of the loans and all pre-petition interest. PHEAA maintained, however, that it is entitled to accrue post-petition interest on the unpaid principal balance of the student loan debts during the pendency of the Chapter 13 plans.

After the two cases were consolidated and the parties filed cross-motions for summary judgment, the bankruptcy court granted summary judgment in favor of PHEAA. The bankruptcy court relied primarily upon Bruning v. United States, 376 U.S. 358, 84 S.Ct. 906, 11 L.Ed.2d 772 (1964), in concluding that post-petition interest may accrue on a nondischargeable student loan debt during the pendency of a Chapter 13 bankruptcy proceeding, although it ordered that all of the debtors' payments during the course of the plan should be applied to the principal balances and the pre-petition interest. The court declined to address the debtors' claim that the accrual of post-petition interest would impose an undue hardship on the debtors under 11 U.S.C. Sec. 523(a)(8)(B). The court determined that the hardship claim would not be ripe for review until the debtors have completed all payments under the Chapter 13 plans. That determination is not before us in this appeal.

The district court entered an order affirming the bankruptcy court's decision, essentially adopting the reasoning of the bankruptcy court. The debtors appeal.

We have jurisdiction over the debtors' appeal pursuant to 28 U.S.C. Sec. 158(d) (1988). Because the only issues presented in this appeal involve the proper interpretation of the Bankruptcy Code, our review is plenary. See In re Roth American, Inc., 975 F.2d 949, 952 (3d Cir.1992); see also In re Abbotts Dairies, 788 F.2d 143, 147 (3d Cir.1986).

II. DISCUSSION

A.

Under the Bankruptcy Code, creditors are not entitled to include unmatured (or

"post-petition") interest as part of their claims in the bankruptcy proceedings. See 11 U.S.C. Sec. 502(b)(2) (1988); see also Sexton v. Dreyfus, 219 U.S. 339, 344, 31 S.Ct. 256, 257, 55 L.Ed. 244 (1911) (noting that this rule is derived from a fundamental principle of the English bankruptcy system). This longstanding rule is designed to assure that no creditor gains an advantage or suffers a loss due to the delays inherent in liquidation and distribution of the estate. American Iron & Steel Mfg. Co. v. Seaboard Air Line Ry., 233 U.S. 261, 266, 34 S.Ct. 502, 504, 58 L.Ed. 949 (1914); see also In re Hanna, 872 F.2d 829, 830-31 (8th Cir.1989). The prohibition against claims for post-petition interest generally applies even in instances where the claims are based upon underlying debts that are not dischargeable. See, e.g., City of New York v. Saper, 336 U.S. 328, 337-38, 69 S.Ct. 554, 559-60, 93 L.Ed. 710 (1949); see also In re JAS Enterprises, Inc., 143 B.R. 718, 719 (Bankr.D.Neb.1992)

In Bruning v. United States, 376 U.S. 358, 84 S.Ct. 906, 11 L.Ed.2d 772 (1964), the precedent of most significance for the issue before us, the Supreme Court distinguished between denial of post-petition interest against the bankruptcy estate on a nondischargeable debt and the accrual of interest on a nondischargeable debt during the pendency of the bankruptcy to be collected from the debtor after the bankruptcy proceeding is completed. Id. at 362-63, 84 S.Ct. at 908-09. In Bruning, a taxpayer who had been discharged from bankruptcy challenged the IRS's contention that it was entitled to collect post-petition interest on a nondischargeable tax debt after the conclusion of the taxpayer's bankruptcy. The taxpayer based his argument on the traditional rule barring creditors from claiming post-petition interest from the bankruptcy estate, a rule now codified in 11 U.S.C. Sec. 502(b)(2). The Bruning Court, in a unanimous opinion authored by Chief Justice Warren, upheld the IRS's position.

The Court's reasoning is directly applicable to the issue before us. Because Congress made the tax debt nondischargeable, it "clearly intended that personal liability for unpaid tax debts survive bankruptcy." Bruning, 376 U.S. at 361, 84 S.Ct. at 908. The Court then stated that it did not have any "reason to believe that Congress had a different intention with regard to personal liability for the interest on such debts." Id. The Court reasoned that "[i]n most situations, interest is considered to be the cost of the use of the amounts owing a creditor and an incentive to prompt repayment and, thus, an integral part of a continuing debt." Id. at 360, 84 S.Ct. at 908. Thus, the Court concluded, if a tax debt was nondischargeable, post-petition interest on that debt would also be nondischargeable. Id. at 363, 84 S.Ct. at 909. The Court held that the policy reasons for denying post-petition interest from the bankruptcy estate, which it described as "the avoidance of unfairness as between creditors" and "the avoidance of administrative inconvenience," were not applicable to an action brought against the debtor personally. Id. at 362-63, 84 S.Ct. at 908-09.

While Bruning was decided prior to the enactment of the Bankruptcy Code, it has been applied by other courts of appeals to cases arising under the Code. See Burns v. United States (In re Burns), 887 F.2d 1541, 1543 (11th Cir.1989) (specifically addressing the issue of whether the Bruning holding survived the enactment of the Bankruptcy Code of 1978 and answering affirmatively); In re Hanna, 872 F.2d at 830-31 (same); see also Bradley v. United States, 936 F.2d 707, 709-10 n. 3 (2d Cir.1991) (declining to reach the issue, but acknowledging that "the weight of authority" permits accrual of interest on nondischargeable tax debts during a bankruptcy); Paulson v. United States (In re Paulson), 152 B.R. 46, 49-51 (Bankr.W.D.Pa.1992) (concluding that the Bruning rule applies to actions arising under the Bankruptcy Code).

In addition, while Bruning involved the accrual of post-petition interest on a nondischargeable tax debt, its reasoning has been applied to other types of nondischargeable debts. See In re Fullmer, 962 F.2d 1463, 1468 (10th Cir.1992) (applying Bruning to post-petition interest on a nondischargeable tax penalty); In re Burns, 887 F.2d at 1543 (same); In re Brace, 131 B.R....