Inst. of Imaginal Studies v. Christoff (In re Christoff) (B.A.P. 9th Cir., 2015)
Inst. of Imaginal Studies v. Christoff (In re Christoff) (B.A.P. 9th Cir., 2015): Held that debtor who was contractually obligated to pay a student loan, but did not actually receive funds, could discharge that contract obligation. May be case of first impression. Facts: Meridian is a for-profit California corporation which operates a private university licensed under California’s Private Post Secondary Education Act of 2009, Cal. Educ. Code § 94800, et seq. If a graduate of Meridian fulfills other post-graduate requirements, the graduate may obtain a license from California to practice as an independent, unsupervised psychologist.
Debtor applied for admission to Meridian in 2002. Meridian agreed to admit Debtor and offered her $6,000 in financial aid to pay a portion of the tuition for that school year. Under this arrangement, Debtor did not receive any actual funds from Meridian, but instead she received a tuition credit. Debtor signed an enrollment agreement acknowledging Meridian’s offer to “finance” $6,000 of the tuition, and she signed a promissory note in favor of Meridian evidencing her obligation. The promissory note provided that the debt for the tuition credit was to be paid by Debtor in installments of $350 per month after Debtor completed her course work or withdrew from Meridian. Interest accrued on the unpaid balance of the note at nine percent per annum, compounded monthly.
The bankruptcy court held the obligation discharged. On appeal, the 9th Cir. BAP held that under § 523(a)(8)(A)(ii), a student loan debt was excepted from discharge only for loans in which funds were actually received by the debtor.
Section 523(a)(8)(A)(ii) plainly provides that a bankruptcy discharge will not impact “an obligation to repay funds received as an educational benefit, scholarship, or stipend.” It is undisputed that the agreements between Meridian and Debtor constitute an “obligation to repay” “educational benefits” provided by Meridian to Debtor. However, § 523(a)(8)(A)(ii) requires more.
To except a debt from discharge under this subsection, the creditor must demonstrate that the debtor is obliged to repay a debt for “funds received” for the educational benefits. The phrase “funds received” has been interpreted by the BAP, in an opinion which was as adopted by the Ninth Circuit as its own, to require “that a debtor receive actual funds in order to obtain a nondischargeable benefit.” In re Hawkins, 317 B.R. at 112 (emphasis added); accord In re Oliver, 499 B.R. 617, 625 (Bankr. S.D. Ind. 2013) (holding under § 523(a)(8)(A)(ii), “[i]n order to be obligated to repay funds received, [the] [d]ebtor had to have received funds in the first place.”)
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Tetzlaff v. Educ. Credit Mgmt. Corp. (7th Cir., 2015) HELD: Evidence of debtor’s paydown of one student loan is not evidence of good faith in regard to another loan for which no payments were made.
Seventh Circuit Court of Appeals held that the bankruptcy court was not required to consider Tetzlaff’s payments to Florida Coastal as evidence of a good faith effort to repay Educational Credit, as his Florida Coastal debt was not included in the discharge action. Furthermore, as the bankruptcy court noted, it seems that Tetzlaff repaid his debt to Florida Coastal largely because he needed the school’s cooperation in releasing his diploma and transcript. Thus, Tetzlaff was motivated by certain incentives to pay down his Florida Coastal debt that do not apply to the repayment of his debt held by Educational Credit.
Therefore, Seventh Circuit Court of Appeals declined to hold that the bankruptcy court erred when it refused to consider the repayment of debt not included in the loan discharge proceeding before it in making a determination of good faith under the Brunner test. Further, we affirm the bankruptcy court’s conclusion that Tetzlaff has not made a good faith effort to pay down his student loan debt.
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HELD: Hardship found were debtors’ status affected by current economic realities
Court says ” … Brunner framework is an unfortunate relic.”
Johnson v. Sallie Mae (Bankr. Kan. 2015)
In this case the court found hardship where the debtors were in good health and had college degrees (wife was actually 1 course away from a degree in biology), but had been unable to get employment with sustainable income, the expenses listed by the debtors were unrealistically low, their cars together were 40 years old, the debtors had made good faith efforts to pay the loans, had they had three minor children, and there was a recession.
Saying it would be ” … wrong to leave debtors in virtual lifetime servitude,” the court found hardship, and said –
“The Court takes judicial notice of the Great Recession and the lumbering recovery of the United States’ economy and slow growth since 2008. Debtors’ projected expenses make no provision for the unexpected yet inevitable occurrences, in particular those associated with raising three young children. While such unexpected events impose additional hardship on any debtor, the resulting hardship on these Debtors would be undue because they would be incapable of affording essential expenses and deprived of the ability to maintain a minimal lifestyle if forced to repay the Loan.”
“…a substantial percentage of Americans may not be able to buy homes and automobiles, start businesses, invest in capital ventures, educate their children, or save for a secure and dignified retirement because they are overly burdened with debt incurred in completing their postsecondary educations.”
∗Robert C. Cloud and Richard Fossey, Facing the Student-Debt Crisis: Restoring the Integrity of the Federal Student Loan Program, 40 J.C. & U.L. 467, 495 (2014), citing to Jayne O’Donnell, Consumer Protection Chief Talks About Student Loans, USA Today, Aug. 15, 2013
McFarland v. Gen. Electric Capital Corp. (In re: Int’l Mfg. Grp., Inc.)
McFarland v. Gen. Electric Capital Corp. (In re: Int’l Mfg. Grp., Inc.), 538 B.R. 22 (Bankr. E.D. Cal. 2015), the Bankruptcy Court for the Eastern District of California denied defendant General Electric Capital Corporation’s (GECC’s) FRCP Rule 9 [FRBP Rule 7009] Motion to Dismiss Bankruptcy Trustee’s Adversary Proceeding Complaint against GEEC, for failure to plead fraud with the specificity required by Rule 9. Trustee’s Complaint alleged that GECC had received 2 million dollars (4 transfers of $500,000 each made by Olivehurst Glove Manufacturers, LLC, an entity which had been substantively consolidated into the IMG bankruptcy case) from the bankruptcy debtor, International Manufacturing Group, Inc. (IMG), and that those 4 transfers were in furtherance of the bankruptcy debtor’s Ponzi scheme. considered the sufficiency of a complaint alleging fraudulent transfers in the Ponzi scheme context. Defendant General Electric Capital Corporation (GECC) moved to dismiss the complaint of the plaintiff and trustee, Beverly McFarland.) Per Rules 9(b) and 12(b)(1), all allegations pleaded in the Complaint must be accepted as true. The court denied GECC’s Motion to Dismiss Trustee’s Complaint.
First, the Bankruptcy Court ruled that the Complaint’s allegations were sufficient to establish the transfers were made with actual intent to defraud creditors, as required in cases alleging actual fraudulent transfers. Specifically, the complaint alleged that each of the transfers were made in furtherance of IMG’s Ponzi scheme, when it alleged that the principal of IMG, caused the transfers to appease GECC, in order to prolong the duration of the scheme by: (1) avoiding any adverse final judgment or findings of fact in litigation, (2) preventing knowledge of IMG’s various fraudulent schemes, and (3) otherwise enabling IMG to remain in operation and for the fraud to continue. The court found these allegations sufficient to state a claim of actual fraudulent intent.
Second, the Bankruptcy Court ruled that even though the Complaint on its face properly alleged actual intent, (rendering the Ponzi Scheme presumption unnecessary), it found that in any case, that the Ponzi scheme presumption also applied. The Ponzi Scheme presumption, when it applies, permits a presumption of actual intent to defraud in all transactions in furtherance of a Ponzi scheme. The court found the trustee adequately alleged sufficient connections between the Ponzi scheme and the payments to GECC, triggering the presumption.
Comment: Courts are not friendly to alleged Ponzi schemes, and are unlikely to throw a Complaint alleging Ponzi scheme out on a pleading sufficiency technicality.