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ICYMI: Student loans in bankruptcy January 2018 [Ayers]

February 16, 2018

The government wants its money. They will collect from you even though the only reason you owe the government is because of homophobia in the military.

Case info: Ayers v. U.S. Dep’t Def. (In re Ayers), 2018 WL 550582 (Bankr. W.D. Va Jan. 8, 2018)

Case opinion: Download.

TL;DR:  The government wants its money. They will collect from you even though the only reason you owe the government is because of homophobia in the military.

The government’s motion to dismiss: GRANTED IN PART.

Related:

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This case involves a lesbian who owes educational expenses to the federal government because of her sexual preference.

Let that sink in.

And while it does, let me explain how this situation came to be.

“Don’t Ask, Don’t Tell” & educational expenses

You see, it wasn’t that long ago where people who identified as LGBTQ could not openly serve in the United States military. Instead, if they wanted to serve their country, they had to hide their sexual orientation.

In 1993 that changed. The government softened its zero tolerance stance by adopting into law the “Don’t Ask, Don’t Tell” policy. The aim of this policy was to end the inquiry into the sexual preferences of service members.

President Clinton preparing to announce “Don’t Ask, Don’t Tell” policy.

Later, that policy was incorporated into the contracts of Air Force Reserve Officer Training Corps scholarship recipients. Under the contract, a scholarship recipient could be removed from the AFROTC program for homosexual conduct. And if that happened, the recipient would be required to repay all educational expenses expended on her behalf.1

That’s how a lesbian came to owe a debt for educational expenses to the federal government because of her sexual preference.

In 2005, Katherine Ayers signed a contract to participate in the AFROTC program. While in the program, Katherine began dating a woman. Rather than remaining silent about the relationship, Katherine told the commander of her program she was (a) a lesbian and (b) wanted to stay in the program.

Her desire to stay gave way to her sexual orientation. Katherine was removed from the program.

Years later, the government issued an administrative wage garnishment and tax refund offset to collect Katherine’s the $45 thousand in educational expenses she incurred while in the program.

Katherine responded to the government’s collection activities by filing a chapter 7 bankruptcy and then later filing an adversary proceeding.

In her adversary, Katherine asserts two main points:

  • The debt is dischargeable because it constitutes an undue hardship on her; and
  • The government’s decision to recoup the educational expenses is arbitrary and capricious2 and violates her right to both due process and equal protection under the 5th Amendment.

The government moved to dismiss her complaint, arguing:

  • The bankruptcy court lacked subject matter jurisdiction to hear the arbitrary and capricious claim; and
  • Katherine failed to state a claim upon which relief can be granted.

Let’s start with the toughest question to answer: does a bankruptcy court have jurisdiction to hear a personal injury tort claim?

What the court said

A bankruptcy court can adjudicate a personal injury tort claim if the claim has earmarks of a contract claim

Background. A bankruptcy court is a court of limited jurisdiction. What that means is that a bankruptcy court lacks authority to adjudicate all legal proceedings. It’s authority is limited. For instance, a bankruptcy court lacks authority to adjudicate wrongful death and personal injury tort claims.3

What does this have to do with Katherine’s claim?

When Katherine asserted the government acted arbitrarily and capriciously in recouping educational expenses from her, she asserted a personal injury tort claim. Because of that, the government, said, “Hey, you can make that argument. But this ain’t the right court. You need to make that argument in the district court.”

The court disagreed.

The subject matter jurisdiction question with personal injury tort claims is nuanced. Instead of automatically dismissing any personal injury tort claim, the court asks whether the claim has the “earmarks of a financial…or a contract claim.” If it does, the bankruptcy court has subject matter jurisdiction over the claim.

Katherine’s claim involves her personal rights. No doubt. But, according to the court, it also involves the contract between Katherine and the AFROTC program. But for that contract, Katherine wouldn’t owe the educational expenses the program is trying to recoup from her. Her claim has the earmarks of a contract claim.

The court denied the government’s motion to dismiss for lack of subject matter jurisdiction and then turned its attention to Katherine’s claim that the government’s decision to recoup the educational expenses is arbitrary and capricious.

If you’re reading this, it’s too late: a lesson on sovereign immunity

So when it comes to suing the federal government, the government has this force field of sorts.

The federal government's sovereign immunity is a force field of sorts

And what this force field does is block lawsuits that are filed more than 6 years after a final government act. This force field is known as sovereign immunity.4

Katherine’s arbitrary and capricious claim slams into that sovereign-immunity-force-field. Here’s how:

  • On June 4, 2008, Katherine was removed from the AFROTC program
  • On September 9, 2008, she appealed the removal decision to the Air Force
  • On October 15, 2008, the Air Force reviewed the decision and determined it was appropriate and consistent with similar actions throughout the AFROTC program.

The Air Force’s October 15 decision was the final government. Katherine filed her adversary almost 9 years later. Because of her delay, the statute of limitations on bringing a civil claim against the government had lapsed. Thus, Katherine’s claims are barred by the government’s sovereign immunity.

That’s the simple answer.

How the court there was a bit more complex. It involves breaking down the continuing claim/violations doctrine.

Understanding that doctrine is outside the scope of understanding education related debt in bankruptcy so I’m not going to break it down. Instead, let’s move on to the undue hardship claim.

You’re young, you ain’t sick, and you’re a Ph.D candidate?

Based on the adversary complaint, Katherine is young (33 years old), healthy (no alleged illnesses), and well-educated (enrolled in a Ph.D. program at Virginia Tech. Basically, Katherine is the exact opposite of someone with an undue hardship.

We don't believe your undue hardship claim. You need more people.

Rather than dismiss her undue hardship claim, the court gave her 21 days to amend her complaint to provide additional facts.

Impact

I can’t see this case having a direct impact on other student loan cases. This isn’t really a student loan case. It’s really a backdoor attempt by the debtor to try and revive the statute of limitations of her arbitrary and capricious claims.

The one thing I may use this case for is to support the proposition that educational benefit in 11 USC  §  523(a)(8)(A)(ii) means something other than loan.

The court referred to Katherine’s obligation to repay her educational expenses as a stipend and scholarship. And in discussing whether repayment of the debt was an undue hardship, the court said “[t]here is no question the debt at issue is an obligation “to repay funds received as an educational benefit, scholarship or stipend” within the scope of Section 523(a)(8).”

I acknowledge, this is a tenuous argument, but I’m not trying to win with it. Nope. All I’m doing is gathering examples of the types of debts courts have considered excepted from discharge under §  523(a)(8)(A)(ii).


  1. The contract contained a clause that stated: “I understand that homosexual conduct is grounds for disenrollment from AFROTC….I further understand that if I, at any time, am disenrolled from the AFROTC program as a result of homosexual conduct…I will be required to repay all educational expenses expended on my behalf to the maximum extent permitted by law.”

  2. 5 USC 706(2)

  3. 11 USC 157(b)(5).

  4. This is a rough explanation of sovereign immunity. A better one can be found here.

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