Campbell v. Citibank, N.A. (In re Campbell)

Citation: 547 B.R. 49Docket: Case No. 14-45990-CEC; Adv. Pro. No. 15-01038-CEC

Court: United States Bankruptcy Court, E.D. New York; March 24, 2016; Us Bankruptcy; United States Bankruptcy Court

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Lesley Campbell seeks a court ruling that her $15,000 Bar Exam Loan, borrowed from Citibank, N.A. in April 2009, is dischargeable in bankruptcy. Citibank and The Student Loan Corporation, as defendants, have filed a motion to dismiss under Fed. R. Civ. P. 12(b)(6). Campbell's amended complaint includes five claims: counts one and two request a determination of dischargeability and a declaratory judgment that the loan is dischargeable, based on the argument that it does not qualify as an "educational benefit" under 11 U.S.C. § 523(a)(8)(A)(ii). The court denies the defendants' dismissal for these counts, ruling the loan is dischargeable. However, it grants the defendants' motion to dismiss counts four, six, and seven, which seek damages for violations of the Truth in Lending Act, fraudulent misrepresentation, and unjust enrichment, respectively, as these claims do not meet legal standards. The court establishes jurisdiction under 28 U.S.C. § 1334(b) and notes that this is a core proceeding. The legal standard for a motion to dismiss requires the complaint to present sufficient factual allegations to support a plausible claim. The court will analyze each claim separately.

Section 523(a)(8) of the Bankruptcy Code stipulates that certain educational debts are not dischargeable unless doing so would cause undue hardship. Specifically, it addresses two categories of debts: (A)(i) educational loans made or guaranteed by a governmental unit or nonprofit, and (A)(ii) obligations to repay funds received as educational benefits. The defendants acknowledge that the Bar Loan does not fall under exceptions (A)(i) or (B) concerning qualified education loans. The plaintiff does not claim the Bar Loan is dischargeable due to undue hardship under the Brunner standard. The core issue is whether the Bar Loan qualifies as an "educational benefit" under section 523(a)(8)(A)(ii). Courts must interpret the statute based on its text and context, avoiding a narrow reading that could lead to absurd outcomes. Statutory language should be understood within the broader framework of the Bankruptcy Code, ensuring coherence among its provisions. Exceptions to discharge must be clearly articulated and interpreted narrowly against creditors. Some courts have broadly defined "educational benefit" to include any education-related loan, but such an interpretation would undermine the specific provisions outlined in section 523(a)(8).

Cases cited by Defendants that do not address the issue of nondischargeable obligations under Section 523(a)(8)(A)(ii) are deemed unpersuasive. This section identifies three categories of nondischargeable obligations: repayment of funds received as an educational benefit, scholarship, or stipend. The rule of noscitur a sociis suggests that these terms share a similar meaning, indicating that “educational benefit” should not be interpreted as a loan, particularly since “loan” is explicitly mentioned elsewhere in the statute. Each term in 11 U.S.C. 523(a)(8)(A)(ii) relates to conditional grants. Legislative history supports this interpretation, tracing back to the 1990 inclusion of “educational benefit” following the 8th Circuit's ruling in U.S. Dep’t of Health & Human Servs. v. Smith. In that case, a medical student was required to repay grant funds due to his failure to meet service conditions. While the lower courts initially found no “loan” existed, the 8th Circuit reversed this, recognizing that the obligation to repay grant funds could be classified as a loan under specific circumstances. The 1990 amendments to the Bankruptcy Code explicitly included obligations to repay funds received as educational benefits, emphasizing their nondischargeable nature similar to student loans, as outlined during congressional hearings.

For-profit lenders claimed that loans for educational purposes should be exempt from discharge under the amended 11 U.S.C. 523(a)(8). Bankruptcy courts evaluated whether loans from for-profit trucking schools qualified as “obligations to repay funds received as an educational benefit.” Generally, courts ruled that for-profit lenders could not invoke 11 U.S.C. 523(a)(8), highlighting a statutory interpretation issue. If the court accepted the plaintiff's argument that the final phrase of the subsection should be read independently, it would overshadow the earlier provisions, rendering the exceptions for governmental entities and nonprofits meaningless. The court emphasized that the third provision has a clear meaning, protecting only obligations tied to educational benefits, not all educational loans. An example of such an obligation includes conditional grants requiring repayment under specific circumstances. Circuit courts have suggested that equating “benefit” with “loan” is inappropriate. Congress's amendments to section 523(a)(8) aimed to prevent abuses and extend protection from educational loans to educational benefits. The 2005 BAPCPA amendments introduced a separate subsection for “an obligation to repay funds received as an educational benefit, scholarship, or stipend,” but did not alter the meaning of “educational benefit.” The interpretation of subsections should not nullify the existing provisions. The case In re Baiocchi was cited to argue that BAPCPA expanded the range of educational benefit obligations, but it involved a conditional grant, not commercial loans, thus not broadening the definition of “educational benefit” in 11 U.S.C. 523(a)(8)(A)(ii).

After the debtor graduated and secured employment within two years of receiving tuition reimbursement, her employer initiated legal action for repayment of those funds. The bankruptcy court was tasked with determining whether this reimbursement obligation fell under the discharge exception outlined in 11 U.S.C. 523(a)(8)(A)(ii). Citing the precedent set in In re Burks, which deemed similar conditional grants nondischargeable, the court ruled that the reimbursed tuition, tied to the debtor's continued employment, was also nondischargeable. The court noted that the addition of subsection 11 U.S.C. 523(a)(8)(A)(ii) reflects an expansion of the types of organizations that can offer nondischargeable educational benefits, as opposed to altering the definition of "educational benefit" itself. 

Subsequent interpretations of the statute indicate that the category of nondischargeable educational benefits has broadened post-2005 amendments, no longer limited to governmental or nonprofit institutions. Specifically, while 11 U.S.C. 523(a)(8)(A)(i) maintains a requirement for loans to be from governmental or nonprofit sources, 11 U.S.C. 523(a)(8)(A)(ii) does not impose such a restriction. The court also addressed the implications of this broader interpretation, asserting that treating all educational loans as nondischargeable would render 11 U.S.C. 523(a)(8)(B) redundant. 

The court ultimately rejected the notion that the language changes in 11 U.S.C. 523(a)(8) should be viewed as an expansion of educational benefit obligations. Disparate conclusions from the Baiocchi and Nunez cases regarding the nondischargeability of obligations under 11 U.S.C. 523(a)(8)(A)(ii) were noted, with the court emphasizing that the term "educational benefit" in this provision should not encompass consumer loans, such as the Bar Loan in question. Therefore, it was unnecessary to resolve whether the Nunez court's requirement for a governmental or nonprofit link to nondischargeable obligations was valid, given that the Bar Loan did not qualify as an "educational benefit."

The court found that the Bar Loan from Citibank does not qualify as an “educational benefit” under 11 U.S.C. 523(a)(8)(A)(ii), referencing In re Skipworth, which similarly categorized such loans but failed to consider the implications of broadly interpreting “educational benefit.” Defendants argued that the loan's non-dischargeability could be established without such a broad interpretation, claiming that the requirement for the borrower to be a law student suffices. However, this reasoning could apply to many private loans to students and does not transform a consumer credit transaction into an “educational benefit.” Legislative history indicates that 11 U.S.C. 523(a)(8) was designed to protect government education loan programs, which is not relevant to for-profit consumer loans like the Bar Loan. The loan is classified as a consumer credit application assessed through credit scoring, contrasting with government loans that often do not consider credit scores. Consequently, the court denied Defendants' motion to dismiss counts one and two of the Complaint.

Regarding counts four (Truth in Lending Act violation), six (fraudulent misrepresentation), and seven (unjust enrichment), these claims are deemed property of the bankruptcy estate and must be asserted by the Chapter 7 Trustee unless abandoned. A Report of No Distribution does not constitute abandonment. The Truth in Lending Act claims are also found to be baseless and thus appropriate for dismissal on the merits. Specifically, in the Truth in Lending Act claim, the Plaintiff alleges that the Defendants misrepresented the terms by claiming the Bar Loan is nondischargeable, when it is, in fact, dischargeable.

Defendants did not make any representations to Plaintiff regarding the dischargeability of the promissory note titled “Master Student Loan Promissory Note.” Although Plaintiff claims that the title implies such a representation, the note itself does not mention dischargeability in bankruptcy, only stating that bankruptcy constitutes an event of default. This interpretation conflicts with 11 U.S.C. 523(a)(8), which specifies conditions under which student loans may be excepted from discharge. The title alone does not indicate that the Bar Loan falls under these provisions or confirm its dischargeability status in bankruptcy. Consequently, Plaintiff's failure to establish a misrepresentation by Defendants leads to the dismissal of her Truth in Lending Act claim.

Regarding the claim of fraudulent misrepresentation, Plaintiff must prove she relied on a misrepresentation that the Bar Loan was nondischargeable. However, since a nondischargeable loan is inherently less favorable, it is implausible that she relied on such a representation when borrowing. Therefore, this claim is also dismissed due to insufficient factual allegations.

For the unjust enrichment claim under New York law, Plaintiff must show that Defendants benefited at her expense, and that restitution is warranted. Plaintiff alleges that Defendants profited from selling the Bar Loan on the secondary market based on its purported nondischargeability. However, she does not claim to have conferred a direct benefit on Defendants, as the enrichment was allegedly at the expense of a third-party purchaser. Thus, this claim is dismissed as well.

An unjust enrichment claim allows for damages limited to the restitution of amounts improperly received by the defendant. Such damages focus on compensating the plaintiff, while restitution aims to prevent the defendant's unjust enrichment by returning wrongfully held gains to the plaintiff. In this case, the plaintiff did not allege that the defendants received any funds from her; instead, she claimed damages due to legal and financial burdens arising from the defendants' misrepresentation. This claim does not satisfy the requirements for unjust enrichment, leading to the granting of the defendants' motion to dismiss this claim. The court denied the motion to dismiss regarding counts one and two of the complaint but granted it for counts four, six, and seven, resulting in their dismissal. Additionally, a typographical error regarding the loan amount of $15,900 was acknowledged, with the correct amount being $15,000, disbursed in April 2009. Revisions to 11 U.S.C. 523(a)(8) in the 1990s are noted but do not affect the interpretation of "educational benefit."