Matter of Bruce, Bankruptcy No. 78 B 3500.
| Decision Date | 27 February 1980 |
| Docket Number | Bankruptcy No. 78 B 3500. |
| Citation | 3 BR 77 |
| Parties | In the Matter of Geneva BRUCE, Bankrupt. BOARD OF TRUSTEES OF SOUTHERN ILLINOIS UNIVERSITY, Plaintiff, v. Geneva BRUCE, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Alan Kawitt, Chicago, Ill., for debtor.
Shari R. Rhode, Carbondale, Ill., for plaintiff.
This cause comes on to be heard upon a motion for summary judgment of the Board of Trustees of Southern Illinois University that the student loan debt owed to it by Geneva Bruce be held non-dischargeable under Section 17a of the Bankruptcy Act.1 The reasoning of the opinion will go somewhat beyond the contentions of the parties in their pleadings, arguments and briefs in order that the principles enunciated here may serve as a basis for decision in other student loan dischargeability proceedings under the same and other federal student loan programs which are pending before this court. The facts in the case are not in dispute and follow the common familiar pattern of other student loan cases around the country; the details will be described after a general discussion of the nature of the broad problem and the approaches made to its solution by other courts.
Of a wide variety of federally supported student assistance programs for veterans and non-veterans there are two which are of particular significance to bankruptcy courts because of the frequency with which the former students have sought to have their loans discharged in bankruptcy proceedings:
A brief description of those two assistance programs may facilitate an understanding of the decisions which have been reported to date and of the wide variation in the results in those cases. The National Defense Education Act in broad terms provided that educational institutions or their affiliates or foundations could create funds of which 10% of the capital had been supplied by the institution and 90% by the federal government to make student loans on a revolving basis at 3% interest repayable in equal annual installments over ten years, with repayment commencing nine months after the student ceased receiving one-half of normal full time instruction. Repayment could be delayed for up to three years because of service in the Armed Forces, the Peace Corps or Vista.4 Up to 50% of the debt could be cancelled by teaching in needy schools. The debt was cancelled by the death or permanent disability of the former student.
Part B of the Higher Education Act of 1965 established a more comprehensive program which has had a broader impact because the annual funding has been six times as large as that of the direct National Defense loan program. The principal distinguishing feature between Higher Education Act, Part B loans and those granted as National Defense Student loans is that the latter were direct loans by an educational institution or an affiliate, whereas the Higher Education Act, Part B loans originally followed the format of unsecured personal loans by banks, savings and loan associations, credit unions, and other commercial institutions at a 7% interest rate and guaranteed or insured by the federal government. Repayment began from nine months to one year after cessation of at least half of full-time instruction and had tolling features similar to those of the direct loans. The guaranteed loans also were cancelled by death or permanent disability of the former student. The following tables demonstrate one of the reasons that certain of the courts have felt that the student debts were contingent and unascertainable. The tables show the percentage of the debt which would be cancelled by employment in the respective types of teaching or service in the Armed Forces.
CANCELLATION OF DEBT FOR SERVICE
TEACHING
Elementary Pre-School Handicapped Members of
School School Armed Forces
1st year 15% 15% 15% 12½%
2nd year 15 15 15 12½
3rd year 20 15 20 12½
4th year 20 15 20 12½
5th year 30 15 30 -
6th year - 15 - -
7th year - 10 - -
____ ____ ____ _____
Maximum 100% 100% 100% 50%
A loan which came into default for nonpayment would have to remain in default for 120 days before application could be made by the lender for reimbursement by the federal government upon its loan or guarantee. A feature of the guarantee which has caused the intermediate state authorities to increase their collection efforts against defaulted loans is that the federal government reimbursed 100% of the defaulted debt if the losses of that authority were 4% or less; 90% of the defaulted debt if the losses were between 5% and 9%; and 80% of the defaulted debt if the losses were above 9% of the debt then subject to repayment.
In 1976 § 439 of the Higher Education Act of 1965 (as amended, hereinafter § 439A)5 was amended to provide that on and after September 30, 1977, loans that were insured or guaranteed would not be dischargeable in bankruptcy for five years after repayment of the loan became due, except for reasons of undue hardship on the former student or his dependents. That non-dischargeability feature did not apply to direct loans made under the National Defense Education Act (except in the Northern District of Ohio6). Before considering the impact of that amendment upon insured and guaranteed loans we will consider loans of that type up to September 29, 1977 and direct loans up to September 30, 1979.
For bankruptcy purposes, student loans were essentially the same as any other unsecured debt until September 29, 1977 for insured and guaranteed loans and until September 30, 1979 for direct loans. The problems which will be discussed in this opinion relate largely to the status of insured and guaranteed loans from September 30, 1977 to November 6, 1978, and from November 6, 1978 to August 14, 1979, focusing on the issue of dischargeability of such debts. The provability and allowability issues remained constant throughout.
The leading case for the proposition that a student loan is not dischargeable because it is not provable is New York v. Wilkes,7 in which the reasoning was:
1. § 17 of the Bankruptcy Act provides in part:
"a. A discharge in bankruptcy shall release a bankrupt from all of his provable debts, whether allowable in full or in part . . . 8;
2. § 63 of the Bankruptcy Act provides in part:
9
3. § 57 of the Bankruptcy Act provides in part:
10
4. § 63 of the Bankruptcy Act also provides in part:
"d. Where any contingent or unliquidated claim has been proved, but, as provided in subdivision d of section 57 of this Act, has not been allowed, such claim shall not be deemed provable under this Act.11
The New York Court of Appeals reasoned that the debt which was owed by Wilkes could not be ascertained as a definite amount because nothing would be payable if the student should die or become permanently disabled and also because portions of the debt might be cancelled if he should become a teacher in areas specified as being needy; there was no telling whether he would teach, and if so, where and for how long. The court found that the amount of the debt could not be ascertained nor estimated and held the debt not to be dischargeable because not provable and allowable. Wilkes was followed by a District Court in Mills.12 Wilkes was followed in Evans13 and Kirch14 by Bankruptcy Courts.
In re Crisp,15 with opinion written by Judge Augustus Hand, is the most respected of the rebuttals of Wilkes, with somewhat different facts but the same principles. Crisp was a poor person who had incurred hospital expenses of $10,180.82 in a Connecticut hospital. A Connecticut statute required hospital billing to be based upon ability to pay, and Crisp was billed $1,623.65, which he later sought to have discharged in bankruptcy. The statute provided also that there could be additional billings up to the total expense in the event that the former patient should become able to pay more in the future. The Court found the debt provable under § 63a(4) of the Bankruptcy Act as an open account and as an obligation based upon an implied contract. A number of bankruptcy court cases have followed similar reasoning, including Hayman,16Jones,17Mwongozi,18Thomas,19Vittek,20 and Woodard.21In re Mwongozi has received the most critical acclaim. § 63a(1) has been mentioned several times as a satisfactory conduit, and Woodard found that as a claim for anticipatory breach of an executory contract the debt was provable under § 63a(9).
In every instance the loan is evidenced by one or more promissory notes, and the amount currently owed is specific. The only questions which are open are:
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