T I Federal Credit Union v. Delbonis

Decision Date02 October 1995
Docket NumberNo. 95-1702,95-1702
Citation72 F.3d 921
Parties, 28 Bankr.Ct.Dec. 348, 106 Ed. Law Rep. 33, Bankr. L. Rep. P 76,725 T I FEDERAL CREDIT UNION, Plaintiff, Appellee, v. John Carl DELBONIS, Defendant, Appellant. . Heard
CourtU.S. Court of Appeals — First Circuit

Theodore J. Koban, Attleboro, MA, for appellant.

Paul F. Lorincz, Attleboro, MA, with whom Coogan, Smith, Bennett, McGahan, Lorincz & Jacobi, were on brief, for appellee.

Before Torruella, Chief Judge, Bownes, Senior Circuit Judge, and Stahl, Circuit Judge.

BOWNES, Senior Circuit Judge.

This appeal by defendant-appellant John Carl DelBonis, a chapter 7 debtor, concerns the dischargeability of educational loans under 11 U.S.C. Sec. 523(a)(8). The District Court for the District of Massachusetts reversed a bankruptcy court order granting DelBonis summary judgment. Debtor's appeal from that decision asks us to do two things: reverse the district court's holding that federal credit unions are nonprofit organizations and hold that educational loans issued to him by creditor-appellee TI Federal Credit Union are, therefore, dischargeable in bankruptcy. We deny both requests.

Instead, we affirm the result achieved by the district court--that debtor's loans are nondischargeable--and elect not to reach the issue of federal credit unions' nonprofit status. Because our conclusion that federal credit unions qualify as government units within the meaning of 11 U.S.C. Sec. 523(a)(8) provides a sufficient legal basis for upholding the district court's order, we reserve the issue of whether such organizations qualify as nonprofit organizations within the meaning of that statute for another day. Jurisdiction of this appeal stems from 28 U.S.C. Sec. 158(d).


Financial difficulties caused defendant-appellant John Carl DelBonis ("DelBonis") to file for bankruptcy under Chapter 7 of the Bankruptcy Code on September 20, 1993. DelBonis's Chapter 7 application, which he filed in the Eastern District of Massachusetts, listed, inter alia, educational loans he obtained on behalf of his wife and children as debts to be discharged. The loans, from which DelBonis obtained no direct personal benefit and on which he is the sole obligor, were acquired from the Texas Instrument Federal Credit Union, ("TIFCU") while DelBonis was employed at Texas Instruments, Inc. DelBonis's employment with Texas Instruments, Inc., one of nine institutional members of TIFCU, terminated in November, 1992.

Chartered on May 9, 1960, pursuant to the Federal Credit Union Act, 12 U.S.C. Sec. 1751 et seq., TIFCU is a federal credit union and has its principal place of business in Attleboro, Massachusetts. Like most federal credit unions, TIFCU provides a variety of credit, savings, and financial counseling services to its members. Loans--educational; home equity; residential real estate; and member business--however, represent TIFCU's primary investment. Cf. National Credit Union Administration, Office of Examination and Insurance, Federal Credit Union Handbook 11 (1988). Because TIFCU is a federal credit union, its loan activities are heavily regulated by the National Credit Union Administration ("NCUA"). See generally 12 C.F.R. Ch. VII (1-1-95 Edition). NCUA exists within the executive branch of the federal government and was established in 1970 to "prescrib[e] rules and regulations for the organization and operation of federal credit unions...." Federal Credit Union Handbook, supra, at 2.

DelBonis took out his first educational expense loan with TIFCU on December 27, 1985, for the sum of $3,500.00. TIFCU advanced the loans as part of a special educational loan program. The program, which was not federally guaranteed, had several attractive features. It made loans at low interest rates, gave borrowers longer repayment periods, and allowed loans to be aggregated in maximum amounts greater than those permitted under personal loan programs.

One of the most appealing features of TIFCU's educational loan program was that it enabled borrowers to simultaneously borrow additional funds and refinance outstanding balances on previous loans. DelBonis took advantage of this feature on numerous occasions. Under the requirements of the loan program, the proceeds from each transaction were paid directly to the educational institution DelBonis specified.

During the period spanning December 27, 1985 to January 4, 1991, DelBonis turned to TIFCU sixteen times for assistance in meeting his family's educational needs. Each time TIFCU responded by granting him the funds he requested. In fact, TIFCU advanced a total of $43,114.87 in loan proceeds on DelBonis's behalf. DelBonis ultimately asked and was permitted to consolidate these loans into a single promissory note for $39,064.46, payable over ten years, with interest at 9.6% per annum. A principal balance of $32,618.27 is currently due on that amount.


On December 3, 1993, nine months after DelBonis filed for Chapter 7 bankruptcy and, thereby, sought to avoid repayment of his loan debt, TIFCU initiated a bankruptcy court adversary proceeding. TIFCU requested a determination as to whether 11 U.S.C. Sec. 523(a)(8) rendered the educational loans issued to DelBonis nondischargeable in bankruptcy. TIFCU argued that its status as a nonprofit required a finding of nondischargeability under the statute.

Six months after the adversary proceedings began, the parties submitted an Agreed Statement of Fact to the bankruptcy court. That document included the erroneous stipulation that "TIFCU is not a governmental unit...." Agreed Statement of Fact at 2. DelBonis filed a motion for summary judgment on June 6, 1994, almost immediately after the Agreed Statement of Fact was filed with the bankruptcy court. His summary judgment motion raised two issues bearing on 11 U.S.C. Sec. 523(a)(8)'s applicability in this case: 1) whether TIFCU is a nonprofit institution; and 2) whether debtor's loans became due within the seven-year period prescribed by 11 U.S.C. Sec. 523(a)(8).

The bankruptcy court granted summary judgment on the first issue and, based on its analysis, did not reach the second issue. The bankruptcy court found that "loans incurred to educate members of a debtor's family qualify as educational loans within the meaning of 11 U.S.C. Sec. 523(a)(8)." In re Delbonis, 169 B.R. 1, 2 (Bankr.D.Mass.1994). It ruled, however, that federal credit unions are not nonprofit organizations entitled to Section 523(a)(8) protection because they are comprised of member-shareholders and are authorized to issue dividends to such members. Id. The bankruptcy court found that nonprofit organizations do not possess such characteristics. Id. at 3-4. The bankruptcy court acknowledged that TIFCU's suit raised a novel issue of law and, therefore, denied debtor's requests for fees and costs. Id. at 4.

TIFCU appealed the bankruptcy court's decision on June 28, 1994 and filed a Motion to Amend the Agreed Statement of Fact on the ground that it included a stipulation erroneously denying TIFCU's legal status as a government unit. The bankruptcy court denied TIFCU's Motion to Amend on July 11, 1994. TIFCU subsequently filed a new Notice of Appeal challenging both the bankruptcy court's summary judgment order and denial of the Motion to Amend the Agreed Statement of Fact.

On appeal, the district court reversed the bankruptcy court's grant of summary judgment. It held that federal credit unions qualify as nonprofit organizations under Section 523(a)(8) and issued a detailed opinion outlining the legal and policy-based justifications for such a classification. Id. at 5. Our decision in La Caisse Populaire Ste. Marie v. United States, 563 F.2d 505 (1st Cir.1977), defining a credit union as "a democratically controlled, cooperative, nonprofit society organized for the purpose of encouraging thrift and self-reliance among its members ...," was cited as support for the district court's reversal. Id. at 4-5 (quoting La Caisse Populaire Ste. Marie v. United States, 563 F.2d 505, 509 (1st Cir.1977)). La Caisse held that state credit unions are entitled to general income tax exemption under Section 501(c)(14)(A) of the Internal Revenue Code. Because the ground on which it based its decision independently warranted a finding that debtor's loans are nondischargeable, the district court deemed it unnecessary to "reach the question whether [the bankruptcy court judge] should have allowed the appellant's motion to amend its agreed statement of facts regarding ... [TIFCU's] status as a federal instrumentality." Id. at 5.


Resolution of this case, as the following discussion reveals, requires us to consider a gaggle of statutes and statutory issues. Questions about the status of federal credit unions implicate the Federal Credit Union Act, 12 U.S.C. Sec. 1751 et seq., bankruptcy law, and the federal income tax code. See 26 U.S.C. Sec. 501. Because the possibilities for confusion run high, we think it important to clearly set out the terms of 11 U.S.C. Sec. 523(a)(8), the statute on the basis of which TIFCU initiated the adversary proceeding. In relevant part, 11 U.S.C. Sec. 523(a)(8) provides:

(a) A discharge under section 727, 1141, 1228(a), 1228(b) or 1328(b) of this title does not discharge an individual debtor from any debt--

(8) for an educational benefit overpayment or loan made, insured or guaranteed by a government unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless--(A) such loan, benefit, scholarship, or stipend overpayment first became due more than 7 years (exclusive of any applicable suspension of the repayment period) before the date of the filing of the petition; or (B) excepting such debt from discharge under this paragraph will impose an un-due hardship...

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