McDaniel v. Navient Solutions, LLC (In re McDaniel)

• Decision Date: 24 September 2018
• Docket Number: Case No. 09-37480 KHT,Adversary No. 17-01274 KHT
• Citation: 590 B.R. 537
• Parties: IN RE: Byron Patterson MCDANIEL Jr. and Laura Paige McDaniel, Debtors. Byron Patterson McDaniel Jr. and Laura Paige McDaniel, Plaintiff, v. Navient Solutions, LLC, Defendant.
• Court: U.S. Bankruptcy Court — District of Colorado

590 B.R. 537

IN RE: Byron Patterson MCDANIEL Jr. and Laura Paige McDaniel, Debtors.Byron Patterson McDaniel Jr. and Laura Paige McDaniel, Plaintiff,

v.Navient Solutions, LLC, Defendant.

Case No. 09-37480 KHT

Adversary No. 17-01274 KHT

United States Bankruptcy Court, D. Colorado.

Signed September 24, 2018

Austin C. Smith, New York, NY, for Plaintiff.

Eric E. Johnson, Carla Martin, Denver, CO, for Defendant.

ORDER ON MOTION TO DISMISS AND MOTION TO STRIKE

Kimberley H. Tyson, United States Bankruptcy Judge

THIS MATTER comes before the Court on a Motion to Dismiss Plaintiffs' Claims Under Fed.R.Civ.P. 12(b)(6) and Motion to Strike Immaterial and Impertinent Matter Under Fed.R.Civ.P. 12(f) (the "Motion") (Docket # 8) filed by Defendant Navient Solutions, LLC ("Navient"), the Response (Docket # 10) filed by Debtors Byron Patterson McDaniel Jr. and Laura Paige McDaniel (together, "Plaintiffs" or "Debtors"), and Navient's Reply (Docket # 14). The Court heard oral argument on March 20, 2018 and has considered the pleadings, arguments, and supplemental authorities submitted. For the reasons stated herein, the Court denies the Motion.

I. JURISDICTION

This Court has jurisdiction of this proceeding pursuant to 28 U.S.C. §§ 1334 and 157. This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2). Navient consents to entry of final orders or judgments of the Bankruptcy Court in this matter.

II. BACKGROUND

On December 24, 2009, Plaintiffs filed a voluntary Chapter 13 case and plan, using the standard form (Case No. 09-37480, Docket # 2).

In their bankruptcy schedules, Plaintiffs listed debts to "Sallie Mae," described as "educational," and they also listed debts to "Great Lakes." (Case No. 09-37480, Docket # 1). Nevertheless, Plaintiffs did not check the box in Section V.E. of the plan indicating they had student loans. The Chapter 13 Trustee objected to the plan on several grounds, including the plan "ma[de] no provision for debtor's non-dischargeable student loan." Case No. 09-37480, Docket # 12.

On April 1, 2010, Plaintiffs filed an amended Chapter 13 plan (the "Plan"). This time, Plaintiffs indicated in Section V.E. of the Plan they had student loans and proposed to treat them "as an unsecured Class Four claim or as follows: deferred until end of plan." Case No. 09-37480, Docket # 25. The Court confirmed the Plan on May 4, 2010. Case No. 09-37480, Docket # 32.

A total of nine proofs of claim were filed by Sallie Mae entities and Great Lakes Higher Education Corp. Case No. 09-37480, Claims Register. The Great Lakes claims (Proofs of Claim Nos. 6 and 7) were subsequently assigned to Educational Credit Management Corp. and are based upon Federal Stafford Loans. At least five of the Sallie Mae claims (Proofs of Claim Nos. 25 through 29) were filed by or on behalf of Navient.

The Court entered an Order for Discharge of Plaintiffs on March 3, 2015, granting them a discharge under section 1328(a) of Title 11, United States Code ("Discharge Order"). Case No. 09-37480, Docket # 54.

On June 30, 2017, the Court granted Plaintiffs' motion to reopen their Chapter 13 case. Thereafter, Plaintiffs filed this adversary proceeding against Navient, requesting a declaratory judgment pursuant to 28 U.S.C. § 2201 and Fed.R.Bankr.P. 7001(9) that certain "Tuition Answer Loans" held by Navient are not excepted from discharge under 11 U.S.C. § 523(a)(8) and were, therefore, discharged upon entry of the Discharge Order. They also seek damages for alleged willful violations of the discharge injunction by Navient pursuant to 11 U.S.C. §§ 105 and 524.

III. PLAINTIFFS' CLAIMS

The Complaint contains general allegations concerning the history of changes to 11 U.S.C. § 523(a)(8) and Navient's alleged efforts to deceive "student debtors and subvert the orderly working of the bankruptcy courts ... [by] originating and servicing dischargeable consumer loans and disguising them as non-dischargeable student loans." Complaint, ¶ 1. Navient seeks to strike many of these general allegations.

Plaintiffs allege Section 523(a)(8)¹ , as originally enacted in 1978, prohibited discharge of federal student loans during the first five years of repayment absent undue hardship but "[t]hrough a series of amendments, which first lengthened and then eliminated the five-year non-dischargeability time frame, it has become increasingly difficult for debtors to attain discharges of their student loan debts." Complaint, ¶ 9. Prior to BAPCPA² , Section 523(a)(8) was "easy to apply because the exception to dischargeability was absolute. If a student loan was issued or guaranteed by the federal government, it was non-dischargeable absent a showing of ‘undue hardship.’ [However, t]his fueled the belief that all student loans are nondischargeable." Complaint, ¶ 13.

In 2005, the enactment of BAPCPA afforded limited protection to some private educational loan products "to the extent that such [lending] supplemented and mirrored federal student lending: money lent to eligible students at Title IV accredited schools solely for tuition, room, board, and books (‘Qualified Education Loans’)." Complaint, ¶ 11.

Plaintiffs allege Navient (formerly known as Sallie Mae or SLM Corporation) was not satisfied with the loan origination volume and restrictions associated with Qualified Educational Loans. Complaint, ¶ 12. Therefore, Navient created new loan products that are in essence dischargeable consumer loans, deceiving student borrowers by representing to them that "the Bankruptcy Code prohibited discharge of any loan made to any person for any educational purpose." Complaint, ¶ 16 and ¶ 12.³

The problem was made worse because Section 523(a)(8) is self-executing, and "thus its correct application relies on the good faith and honesty of creditors." Complaint, ¶ 14. "Importantly, the discharge order does not specifically state which loans, if any, are presumptively excepted from discharge. Rather, it states that the order does not discharge some debts, including ‘debts for most student loans.’ " Id.

Plaintiffs assert a creditor has the burden to prove its debt is encompassed by Section 523(a)(8) and is presumptively nondischargeable, then the burden shifts to the debtor to show undue hardship. Complaint, ¶ 15. "Absent an adversary proceeding, any educational debt not encompassed by section 523(a)(8) is automatically and as a matter of law discharged upon entry of the discharge order. Accordingly, it is left to the creditors to determine whether their particular educational loan is excepted from discharge by Section 523(a)(8) and, where confusion exists, seek clarity from the court. The creditor's good faith and the threat of sanctions are the only checks on compliance with discharge injunctions." Id.

In the Complaint, Plaintiffs also make specific allegations regarding the Tuition Answer Loans held by Navient. Plaintiffs allege the Tuition Answer Program is a direct-to-consumer loan product outside the confines of the financial aid office and in excess of the school's published "Cost of Attendance" ("COA"). Complaint, ¶ 17. From 2004-2007, Plaintiffs borrowed $107,467 in six (6) Sallie Mae Tuition Answer Loans. Complaint, ¶ 20. The total balance of these Tuition Answer Loans is now $245,264, "despite consistent monthly payments of more than $2,000 for several years." Complaint, ¶ 21.

Plaintiff Laura Paige McDaniel attended Lakeland College from 2004 to 2007. Complaint, ¶ 22. Her COA for qualified tuition and related expenses for each year was: $5,340 in 2004, $10,650 in 2005, $6,450 in 2006, and $6,390 in 2007, as reflected on Tuition Statements issued by Lakeland College to Ms. McDaniel attached to the Complaint as Exhibit A. Complaint, ¶ 23. Ms. McDaniel borrowed the COA in the form of federal student loans, as reflected on Federal Stafford Loan documentation attached to the Complaint as Exhibit C. Complaint, ¶ 24.

Plaintiffs borrowed an additional $107,467 through the Tuition Answer Loans, "made outside the financial aid office and [not] for qualified education expenses." Complaint, ¶ 25. Attached as Exhibit B to the Complaint are copies of loan applications and promissory notes for the Tuition Answer Loans. Id. The Tuition Answer Loans were not made solely for the COA and accordingly, were not "qualified education loans" as defined in Section § 523(a)(8)(B). Complaint, ¶ 26.⁴

Debtors listed the Tuition Answer Loans on their Bankruptcy Schedule F. Complaint, ¶ 27. Debtors made payments totaling $26,782 on the Tuition Answer Loans during their Chapter 13 bankruptcy case. Complaint, ¶ 28.

Navient was notified of the Discharge Order. Complaint, ¶ 30. Instead of charging the Tuition Answer Loans off, Navient demanded payments in violation of the Discharge Order and the Bankruptcy Code. Complaint, ¶ 32. Plaintiffs allege "owing to [Navient's] tactics, [P]laintiffs have repaid $37,460 on these discharged debts. These payments were not made ‘voluntarily’ but were made solely based on Defendant Navient's material misrepresentations regarding the legal status and character of the Tuition Answer Loans." Complaint, ¶ 33. Navient's "abusive, deceptive and harassing collection efforts" after entry of the Discharge Order "were made knowingly and willfully in violation of this Court's discharge orders and must be sanctioned." Complaint, ¶ 34.

IV. NAVIENT'S MOTION

Navient requests dismissal of the Complaint for failure to state a claim under Fed.R.Civ.P. 12(b)(6) ( Fed.R.Bankr.P. 7012(b) ). Navient also moves to strike certain allegations as immaterial and impertinent matter under Fed.R.Civ.P.12(f) (Fed.R.Bankr.P. 7012(b) ).

Navient asserts the confirmed Plan distinguished the Tuition Answer Loans from Plaintiffs' other dischargeable unsecured debts in Class Four and treated them "as non-dischargeable." Motion, p.16; see also Motion, p.17 ("[i]nstead of filing an adversary proceeding to seek a discharge of their loans, Debtors amended their [P]lan to expressly provide that their [Tuition Answer] Loans would not be discharged along...