Case info: Wiley v. Wells Fargo Bank, N.A. (In re Wiley), 2017 WL 6550418 (Bankr. D. Maine Dec. 21, 2017)
Case opinion: Download
TL;DR: First, just because the loan documents say a nonprofit guaranteed the loan doesn’t mean a nonprofit funded the loan program. Second, like every court has said for the past 2 years, a loan isn’t an educational benefit. Finally, a loan ain’t a qualified education loan unless it was solely for the cost of attendance.
Wells Fargo’s motion for summary judgment that the loans were excepted from discharge: denied.
- What is a qualified education loan
- Powerful guide on how to discharge student loans in bankruptcy
- Student loans in bankruptcy: the amendments
Just because you say its an education loan don’t mean I can’t discharge it
Back in 2006, 2007, Jeffrey Wiley got a certificate in some golf course management program offered by a local school. The program didn’t offer students federal financial aid, so Jeffrey paid for it with $18 thousand in loans from Wachovia Bank.
Let’s talk about the loans real quick. First, the terms of the loans said that a nonprofit institution, The Education Resources Institute (TERI), guaranteed the loans. Here’s what that guarantee meant: if Jeffrey ever defaulted on the loan, TERI would make sure Wachovia was paid what it was owed and then TERI would have the right to sue Jeffrey. Second, a few years after Jeffrey got the loans, Wachovia merged with Wells Fargo. As a result of the merger, Wells Fargo now owned Jeffrey’s loans.
For a while, Jeffrey paid what he could. But in 2016, his debts became too much and he filed a chapter 7 bankruptcy case. After he got a discharge, Jeffrey filed an adversary proceeding under procedural rule 4007 to get a determination that the loans were discharged with his other debts.
Jeffrey’s discharge argument was straight-forward: the loans weren’t excepted from discharge because he didn’t use the loans to pay qualified education expenses at an eligible institution. Wells Fargo moved for summary judgment arguing the loans were excepted from discharge under 11 USC § 523(a)(8)(A)(i)1, (ii)2, and § 523(a)(8)(B)3.
What the court said
Wells Fargo, you lose, at least for now, under all the sections of § 523(a)(8) you cited.
Whether the loan program was funded by a nonprofit
Wells Fargo argued that TERI’s guarantee of the loan meant the loan program was funded by a nonprofit. It offered two pieces of evidence in support:
- It’s bald statement that the loans were guaranteed (“Trust us judge. The loans are guaranteed by a nonprofit.”); and
- The loan terms that contained a preprinted acknowledgement that the loan was made under a program funded by a nonprofit.
The court looked at that evidence and rejected it like LeBron on Tiago Splitter in the Finals.
Whether a loan is an educational benefit
Here, the court looked at Wells Fargo and was like:
Over the past 2 years, bankruptcy courts across these United States have all agreed that § 523(a)(8)(ii) doesn’t protect a loan. It protects conditional grants of money like scholarships and stipends. In support, the court cited almost every other bankruptcy court that has spelled out why a loan isn’t an educational benefit:
- Nunez v. Key Ed. Res. (In re Nunez), 527 B.R. 410 (Bankr. D. Ore. 2015)
- Institute of Imaginal Studies v. In re Christoff (In re Christoff), 510
B.R. 876 (Bankr. N.D. Cal. 2014)
- Campbell v. Citibank, N.A., (In re Campbell), 547 B.R. 49 (Bankr. E.D.N.Y. 2016)
- In re Meyer, 2016 WL 3251622 (Bankr. N.D. Ohio June 6, 2016)
- In re Essangui v. SLF V-2015 Trust (In re Essangui), 573 B.R. 614 (Bankr. D. Md. 2017)
Whether the loans are qualified education loans
Here, the court looked at the evidence and was like:
You see, whether a loan is a qualified education loan involves answering yes to a whole bunch of questions. For instance:
- Was Jeffrey a taxpayer when he borrowed the loans?
- Did the amount of those loans exceed his cost of attendance?
- Was he an eligible student at the time he borrowed the loans?
- Was the school eligible to receive federal financial aid at the time he borrowed the loans?
There wasn’t enough evidence before the court for it to answer any of those questions. So the court did the only thing it could do:
What’s the impact
I love this opinion. It helps me. You see, last summer, I filed an adversary proceeding in the bankruptcy court for the Eastern District of Missouri to determine the dischargeability of some loans a client borrowed from Chase while she was at St Louis Community College.
Basically, she borrowed about $30 thousand during a semester when it cost her less than $1700 to go to school.
(Yeah, I know. I said the same thing.)
We’re fighting against National Collegiate Student Loan Trust4, who is making the same arguments as Wells Fargo.
Whether we win or not, remains to be seen. But this case helps. It’s another court who accepted that a loan is not an educational benefit within the meaning of § 523(a)(8)(A)(ii).
This court did another valuable thing by announcing, “The existence of a guarantee from a nonprofit institution is not, by itself, enough.” You see, § 523(a)(8)(i) protects a loan from discharge if it was made under a loan program funded by a nonprofit. Funded and guaranteed mean different things. So to say a loan program was guaranteed by a nonprofit, tells you nothing about whether it was funded by a nonprofit.