Schultz v. U.S. Dep't of Educ. (In re Schultz)
| Citation | 615 B.R. 834 |
| Decision Date | 11 February 2020 |
| Docket Number | Bankruptcy Case No. 13-31042,Adversary Proceeding No. 19-03031 |
| Parties | IN RE: William Arnold SCHULTZ, Debtor. William Arnold Schultz, Plaintiff, v. U.S. Department of Education, Defendant. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of Minnesota |
Becky A. Moshier, Owner Moshier Law Office, PLLC, St. Paul, MN, Austin C. Smith, Smith Law Group, New York, NY, U.S. Trustee, Minneapolis, MN, for Debtor.
ORDER DISMISSING THE COMPLAINT AND DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
Plaintiff William Arnold Schultz ("Debtor") commenced this adversary proceeding against Defendant U.S. Department of Education ("ED") on April 1, 2019. The Debtor sought a discharge of student loan debts pursuant to 11 U.S.C. § 523(a)(8). Dkt. No. 30. ED answered on October 16, 2019, raising the affirmative defense of failure to state a claim upon which relief can be granted and thereafter moved to dismiss the case. Dkt. Nos. 40; 43. ED argued that since the Debtor entered into a new postpetition consolidated loan after the bankruptcy case was filed paying the prepetition loans, the postpetition consolidated loan cannot be discharged in bankruptcy as postpetition loans are not discharged under the bankruptcy code. Dkt. No. 43. The Debtor disagreed and requested summary judgment in his favor because of a settlement he made with a private student loan lender. Dkt. No. 50. The complaint is dismissed and the Debtor's motion for summary judgment is denied for the reasons stated below.
The Debtor filed for bankruptcy on March 7, 2013. Petition, In re Schultz, No. 13-31042 (Bankr. D. Minn. Mar. 7, 2013), Dkt. No. 1. In Schedule F of the Debtor's Petition, the Debtor listed over $180,000.00 in "educational debt" from 31 sources. Id. at 15-22. The Debtor received a discharge on June 12, 2013, and was informed, "Most, but not all, types of debts are discharged if the debt existed on the date the bankruptcy case was filed" and "most student loans" are not discharged. Order Discharging Debtor, In re Schultz, No. 13-31042 (Bankr. D. Minn. June 12, 2013), Dkt. No. 9. On July 1, 2014, the Debtor executed a Federal Direct Consolidation Loan Application and Promissory Note and the consolidated loan was disbursed on September 5, 2014. Dkt. Nos. 43; 30 at 5 (). The Debtor apparently owes $203,326.93 as a result of the consolidation and interest. Dkt. Nos. 43; 30 at 3.
On April 19, 2016, the Debtor commenced an adversary proceeding against Navient Solutions, Inc. Complaint, Schultz v. Navient Solutions, Inc. (In re Schultz), No. 13-31042, Adv. No. 16-03042 (Bankr. D. Minn. Apr. 19, 2016), Dkt. No. 1. The Debtor alleged, among other things, that $25,000.00 in student loans made to the Debtor by Navient Solutions Inc. were dischargeable because they were not "qualified education loans" or that the loans should be discharged for imposing an undue hardship. Amended Complaint, Schultz v. Navient Solutions, Inc. (In re Schultz), No. 13-31042, Adv. No. 16-03042 (Bankr. D. Minn. Aug. 2, 2016), Dkt. No. 17 at 4, 8. The Court granted partial summary judgment in favor of the Debtor finding that the loans at issue did not qualify as governmental loans or nondischargeable governmental guaranteed loans under 11 U.S.C. § 523(a)(8)(A), but denied the Debtor's motion for summary judgment on the issue of whether 11 U.S.C. § 523(a)(8)(B) applied (which provides certain other types of education loans are nondischargeable). PDF With Audio Attachment, Schultz v. Navient Solutions, Inc. (In re Schultz), No. 13-31042, Adv. No. 16-03042 (Bankr. D. Minn. Dec. 13, 2016), Dkt. No. 48. The parties settled the case and stipulated to dismissal of the adversary proceeding with prejudice prior to a trial and without the Court ruling on the merits concerning the applicability of 11 U.S.C. § 523(a)(8)(B) and undue hardship. Stipulation of Dismissal, Schultz v. Navient Solutions, Inc. (In re Schultz), No. 13-31042, Adv. No. 16-03042 (Bankr. D. Minn. Feb. 17, 2017), Dkt. No. 53.
The Debtor commenced this adversary proceeding against ED on April 1, 2019 seeking a discharge of more than $200,000.00 in student loan debts held by ED pursuant to 11 U.S.C. § 523(a)(8). Dkt. Nos. 1; 30. After finally being properly served, ED answered on October 16, 2019, raising the affirmative defense of failure to state a claim upon which relief can be granted. Dkt. No. 40. ED moved to dismiss the case on November 25, 2019, citing Fed. R. Civ. P. 12(b)(1) and (6) for lack of subject matter jurisdiction and failure to state a claim upon which relief can be granted.
ED asserts that the complaint should be dismissed because the Debtor consolidated his student loans on or about July 1, 2014, for $173,438.11, with the consolidated loan disbursed on September 5, 2014, both of which occurred after the Debtor filed for bankruptcy and received a discharge. Id. at ¶ 13; Dkt. No. 43. ED argued that the prepetition loans were paid when the Debtor's loans were consolidated into a new consolidated loan postbankruptcy and, therefore, the consolidated loan at issue could not be discharged by the bankruptcy proceeding as a bankruptcy discharge only discharges prebankruptcy debts. Dkt. No. 43.
The Debtor disputed that consolidation of his loans created "a new loan obligation" because the consolidated loan has "the same terms, conditions and benefits" of his student loans prior to the consolidation. Dkt. No. 50 at 1-2. He also argued the consolidated loan is not a "new loan" because it is "Federally insured pursuant to [ 20 U.S.C.] § 1074." Id. at 3. The Debtor further argued the consolidated loan is not a "new obligation" because the ownership of his student loans did not change after consolidation. As a result, he argued the debt owed to ED was not paid in full or discharged and is, therefore, a prepetition continued liability to ED. Id. at 4.
In his memorandum in response to the motion to dismiss, the Debtor included a motion for summary judgment. Id. at 6. He argued that "when the Court ruled" in Schultz v. Navient Solutions, Inc. that his private student loans were nondischargeable, "they also ruled in favor of his federal loans to be dischargeable under [ 11 U.S.C.] § 523." Id. at 7. He argued the "all-or-nothing approach" applied by the Eighth Circuit dictates that his public loans be forgiven if his private loans were previously forgiven. Id. at 6-7.
A hearing on the motion to dismiss and the Debtor's motion for summary judgment was held on December 18, 2019. At that point, the deadline for completion of discovery had passed with a trial scheduled for January 30, 2020. See Dkt. No. 26. ED clarified that it was not challenging the Court's jurisdiction to decide whether the student loan debts were prepetition or postpetition debts, but instead that the Court would lack jurisdiction to discharge the student loan obligations if the Court found they are postpetition debts. Dkt. No. 51. The Debtor stated that he is not presently paying any amount on his consolidated loan in accordance with his repayment plan. Id. The Court requested ED supplement the record (which included incomplete documents) with additional information regarding the student loans and consolidation to address which loans were consolidated.
ED filed an amended declaration with exhibits on December 20, 2019. Dkt. No. 52. The Court permitted the Debtor to respond to the amended declaration by January 10, 2020. The Debtor did not dispute the veracity of ED's amended declaration or the attached exhibits as stated by the Debtor in his response filed on December 26, 2019 and at a hearing on January 15, 2020. Dkt. Nos. 53; 59.
The amended declaration shows that the Debtor executed a Federal Direct Consolidation Loan Application and Promissory Note on July 1, 2014, for $56,061.84 and $117,376.27. Id. at 4, ¶ 10. The loan was disbursed on September 5, 2014, at an interest rate of 5.625%. Id. In a letter confirming consolidation of the loans, sent to the Debtor on September 5, 2014, the Debtor was informed, "Funds have been forwarded to the loan holders/servicers listed to pay off your previous loans." Id. at 43. The letter lists 41 loans including: unsubsidized and subsidized federal Stafford loans; direct plus graduate loans; unsubsidized and subsidized direct loans; and, federal Perkins loans. Id. at 44-45. The balances were included in the consolidated loan. Id. The loan holders and servicers of the 41 loans included Grand Canyon University, Augsburg College, Hamline University, Santa Fe University of Art and Design, Great Lakes Educational Loan Services, Sallie Mae Loan Servicing Center, the Department of Education, and New Mexico Educational Assistance Foundation. Id. at 44-45.
The Debtor acknowledged in the Federal Direct Consolidation Application and Promissory Note that he agreed "to pay to the ED all sums disbursed under the terms of this Note to pay off my prior loan obligations, plus interest and other charges and fees that may become due as provided in this Note," and he understood "that ED will send funds to the holders of the loans that I want to consolidate to pay off those loans." Id. at 8, ¶ 25. The Promissory Note indicates that the interest rate of the consolidated loan would be "based on the weighted average of the interest rates of the loans being consolidated" but would not exceed 8.25%. Id. at 10. In addition, the Debtor...
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