Busson-Sokolik v. Milwaukee School of Engineering

Citation: 635 F.3d 261Docket: Nos. 08-4317, 09-4009, 10-1456

Court: Court of Appeals for the Seventh Circuit; February 9, 2011; Federal Appellate Court

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Dustin Busson-Sokolik's appeal arises from the Eastern District of Wisconsin's affirmation of the Bankruptcy Court's findings regarding a $3,000 student loan from the Milwaukee School of Engineering (MSOE) obtained in 1999. The courts concluded that this loan is a non-dischargeable debt under the Bankruptcy Code and that MSOE is entitled to collect costs and attorney’s fees associated with the bankruptcy proceedings, as stipulated in the promissory note signed by Busson-Sokolik. Additionally, the district court denied Busson-Sokolik's motion for sanctions against MSOE while imposing sanctions on Busson-Sokolik and his attorney, Chomi Prag. 

Busson-Sokolik attended MSOE from September 1999 to May 2000 and signed a promissory note agreeing to repay the loan amount along with any necessary collection costs. After defaulting, MSOE obtained a judgment in state court for unpaid sums totaling $5,909.63. In June 2005, Busson-Sokolik filed for Chapter 13 bankruptcy, later converting it to Chapter 7. He listed MSOE as a creditor and subsequently filed an adversary complaint regarding the dischargeability of the debt. The bankruptcy court ruled the debt as non-dischargeable, determining Busson-Sokolik owed MSOE a total of $16,248.78, including fees and costs.

Busson-Sokolik's appeal was marked by delays and motions alleging misconduct from both parties. His motion for sanctions against MSOE was denied, while MSOE’s request for costs and fees based on the frivolous nature of Busson-Sokolik’s appeal was granted. The district court affirmed the bankruptcy court’s ruling, awarding MSOE $80,290.15, with Busson-Sokolik and Prag jointly responsible for a portion of the judgment, and Busson-Sokolik solely liable for the remainder. They have appealed this decision.

The dischargeability of Busson-Sokolik’s loan from the Milwaukee School of Engineering (MSOE) hinges on whether it falls under the non-dischargeable debts outlined in 11 U.S.C. § 523(a)(8). This section exempts certain educational debts from discharge in bankruptcy, specifically those made or guaranteed by governmental units or nonprofit institutions, unless repaying them would cause undue hardship. Both the bankruptcy and district courts ruled that the MSOE loan is non-dischargeable under § 523(a)(8)(A), a conclusion that is upheld here.

The analysis focuses on § 523(a)(8)(A), despite the parties not clearly delineating whether to consider § 523(a)(8)(A)(i) or (ii). It is undisputed that MSOE is a 501(c)(3) nonprofit entity. Busson-Sokolik contends that the funds provided do not constitute a loan; however, the court finds this argument unpersuasive. For a loan, there must be a contract, a transfer of funds, and an agreement for repayment. The existence of a promissory note from October 1999 for a $3,000 loan supports the assertion that these elements are met.

Busson-Sokolik also questions whether the loan qualifies as 'educational.' The court adopts a 'purpose' test, as established in In re Murphy, which focuses on the intent behind the loan rather than how the funds were used. This approach is consistent with the objectives of § 523(a)(8)(A) and aims to prevent debtors from misusing educational funds while allowing legitimate use to remain non-dischargeable. Thus, the determination is based on whether the loan was provided to support the borrower’s education rather than the specific application of the funds.

Key facts relevant to the MSOE loan include: 1) MSOE is an educational institution; 2) the loan was part of a financial package for Busson-Sokolik’s education, including scholarships and grants; 3) the promissory note was signed while he was a student; 4) student status was required for loan eligibility; and 5) the loan funds were deposited into his student account at MSOE. These facts collectively demonstrate that the loan was intended to support educational pursuits. Consequently, under the court's purpose-driven test, the loan qualifies as educational, affirming that 11 U.S.C. § 523(a)(8) prohibits Busson-Sokolik from discharging the debt in bankruptcy.

Regarding the collection of costs and attorney’s fees, the bankruptcy court's award to MSOE is supported by the contractual obligation in the promissory note, which stipulates that Busson-Sokolik agreed to pay reasonable collection costs, including attorney’s fees. Although the American Rule generally prevents prevailing litigants from recovering attorney’s fees unless a statute or contract allows for it, the note serves as an enforceable contract under nonbankruptcy law that permits such recovery. The court affirms this award, noting that no provisions in the Bankruptcy Code prohibit the enforcement of the contract for attorney’s fees. Additionally, Busson-Sokolik's argument regarding the merger doctrine was deemed waived, as he failed to raise it in his initial brief.

The court affirms the district court's finding that the merger issues were waived, citing that waiver occurs when an issue is not adequately raised in lower court proceedings. The appellant, Busson-Sokolik, failed to provide any evidence that the merger doctrine was addressed in the bankruptcy court, focusing instead on the 'American rule' regarding attorney's fees. The court emphasizes that it is within its discretion to consider exceptions to waiver only under 'exceptional circumstances,' which are not present here. Busson-Sokolik’s claim that the bankruptcy court awarded attorney’s fees based on an unenforceable contract is rejected, as the court finds the contract valid and the fees reasonable, with no meaningful challenge to the amount awarded. The merger argument was first raised in a reply brief, rendering it waived twice: first for not being presented in the bankruptcy court and second for being introduced inappropriately at the reply stage. The district court correctly granted the motion to strike these arguments. Additionally, the court reviews Busson-Sokolik's claims regarding sanctions against MSOE and sanctions imposed on him and his attorney for abuse of discretion, without finding error in the district court's decisions.

Abuse of discretion occurs when a court acts contrary to the law or reaches an unreasonable result. Under Fed. R. Bankr. P. 9011, an attorney may face sanctions for submitting documents for improper purposes, frivolous claims, unsupported allegations, or unwarranted denials. A motion for sanctions, like that filed by Busson-Sokolik against MSOE, is governed by a 21-day safe harbor provision, which requires the opposing party to be given an opportunity to withdraw contested statements. Busson-Sokolik conceded he failed to provide MSOE with this opportunity, leading to the denial of his motion for sanctions by Chief Judge Clevert, a decision upheld by the court.

In a separate matter, sanctions were imposed against Busson-Sokolik and his attorney Chomi Prag for filing a frivolous appeal under Fed. R. Bankr. P. 8020. Chief Judge Clevert found that their appeal lacked merit, citing multiple procedural violations, including filing motions without basis, ignoring deadlines, and making duplicative filings. His determination that the appeal was frivolous was supported by the appellants' reliance on waived doctrines and misstatements in the record. The court found no error in the imposition of sanctions against Busson-Sokolik and Prag.

Busson-Sokolik and his attorney had the option to appeal to the district court, but their appeal was deemed to have been litigated in a manner that approached frivolity. Although there was no evidence suggesting bad faith in the appeal itself, bad faith is just one factor in determining the appropriateness of sanctions under Fed. R. Bankr. P. 8020. The failure to comply with the safe harbor provision of Fed. R. Bankr. P. 9011 prevented the courts from addressing the substantive merits of the appeal. Despite the procedural errors being significant and well-documented, the court concluded that the sanctions awarded by Chief Judge Clevert were a reasonable exercise of discretion. However, the court found that the total amount of sanctions awarded was excessive and reduced it by half, recognizing that while attorney's fees are necessary for deterrence, they should not financially devastate the appellant, especially considering Busson-Sokolik's status as a student in bankruptcy. As a result, Busson-Sokolik and his attorney are jointly liable for $30,971.25, while Busson-Sokolik is solely responsible for $18,347.65, which includes a previous judgment and interest. The remaining fee award of $30,971.25 was vacated. The court affirmed that despite Busson-Sokolik's claim that no funds changed hands, the loan money credited to his student account constituted a valid loan. The standard of review for imposing sanctions in bankruptcy cases is "abuse of discretion."

An appeal is considered frivolous when the outcome is clear or when the appellant's arguments lack merit, as established in Flaherty v. Gas Research Inst. Even if some appealable issues exist, misconduct by the appellant can render the appeal frivolous, as seen in Dungaree Realty, Inc. v. United States. In evaluating a Fed. R. Bankr. P. 8020 motion, several factors must be considered, including the appellant's bad faith, the meritlessness of the arguments, and whether the arguments properly address the appeal's issues. Additional considerations include the failure to support arguments with authority, the citation of irrelevant authority, unsubstantiated factual claims, bare legal conclusions, and misrepresentation of the record. The district court awarded $61,942.50 in attorney's fees related to the appeal, documented by MSOE and submitted to Chief Judge Clevert on May 14, 2009, for work performed from June 16, 2007, to May 14, 2009, at a rate of $225 per hour.