RIOS RODRIGUEZ et al v. SALLIE MAE et al

OCR transcription for search; preserved printed pages are authoritative

i
* dase:05-00101-ESL Doc#:49 Filed:03/09/07 Entered:03/09/07 16:24:14 Desc: Main

10

11

12

13

14

15

16

V7

18

19

20

21

22

23

24

25

26

AO Taxutnenticat
(Rev. G82) rion S
G
P

Document Page 1 of 14

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO

IN RE: : CASE NO. 95-06061
LUIS ROJAS SANTIAGO and CHAPTER 13
ESTHER HERNANDEZ MARTINEZ,
Debtors
LUIS ROJAS SANTIAGO, et al., : ADV. NO. 05-00140
Plaintiffs
Vv.
SALLIE MAE SERVICING, et al.
Defendants
IN RE: : CASE NO. 98-15422
MARIA T. RIOS RODRIGUEZ, : CHAPTER 13
Debtor :
MARIA T. RIOS RODRIGUEZ, : ADV. NO. 05-00101
Plaintiff .
v.

SALLIE MAE SERVICING, et al.,

Defendants

OPINION AND ORDER
This case is before the court upon the motion to dismiss filed by defendant
Educational Credit Management Corporation (““ECMC”) and the debtors’ opposition

thereto in the Rojas Santiago case, and ECMC’s motion for summary judgment and

TU

‘ q ase:05-00101-ESL Doc#:49 Filed:03/09/07 Entered:03/09/07 16:24:14 Desc: Main
Document Page 2 of 14
debtor’s opposition thereto filed in the Rios Rodriguez case. At issue in both cases is

1 whether interest accrues post-petition on the balance of a federally-insured student loan

; where the claim is paid in full through the chapter 13 plan.

° Background

4

5 Rojas Santiago case

6 Debtors filed this adversary proceeding on June 15, 2005, seeking actual and

7 punitive damages, costs and attorneys fees, for alleged violations by the defendants of the

8 discharge injunction, 11 U.S.C. § 1327. Debtors filed a petition under chapter 13 of the

° Bankruptcy Code on October 11, 1995. They included Sallie Mae Servicing (“Sallie
. Mae”) as an unsecured creditor on schedule F, On November 22, 1995, Sallie Mae filed
2 an unsecured proof of claim in the amount of $2,625.00. Debtors amended plan was
13 confirmed on April 26, 1996; it provided for full payment of Sallie Mae’s proof of claim
14 (dkt. #11). Sallie Mae did not file an objection to the confirmation of debtors’ plan. On
8 May 17, 2001, the chapter 13 trustee entered a final report and account indicating that the
; proofs of claim in the confirmed plan were paid in full (dkt. #21). According to debtors,
18 Student Loan Marketing Association, acting on behalf of Sallie Mae, received payments
19 totaling $2,665.61 between June 11, 1996 and May 14, 1998 from the chapter 13 trustee.
20 On July 23, 2001, the court entered an order granting debtors a discharge and closing the
21 case.
% Approximately two and a half years after the entry of discharge, debtors received a
; letter from Sallie Mae notifying that their student loan was in default, referring to the
95 student loan debt which was included in the confirmed chapter 13 plan. According to
26 5

(Rev. B/62

' ase:05-00101-ESL Doc#:49 Filed:03/09/07 Entered:03/09/07 16:24:14 Desc: Main
Document Page 3 of 14
debtors, they have received collection letters and bills and harassing phone calls from
1 Sallie Mae. Further, debtors allege that ECMC has made collection efforts on behalf of
2 Sallie Mae for this debt, including sending a collection letter. As a result, debtors filed
, this adversary proceeding.
ECMC filed a motion to dismiss on August 4, 2005 (dkt. #9). They argue that the
6 complaint should be dismissed because it fails to state an actionable claim for violation of
7 the Bankruptcy Code. According to ECMC, its handling of debtors’ student loan was in
8 accordance with 11 U.S.C. §523(a)(8), and therefore it is not liable to debtors for any
° damages. ECMC argues that the complaint should be dismissed because, pursuant to the
" statutory framework governing the treatment of student loans in bankruptcy, such loans
; are non-dischargeable in bankruptcy under § 523(a)(8) of the Code unless excepting them
13 from discharge would impose an undue hardship on the debtor; however, since pursuant
14 to § 502(b)(2) of the Code claims can only include pre-petition interest and principal,
1 interest continues to accrue during the pendency of the bankruptcy proceeding and the
" debtor remains personally liable for it. According to ECMC, debtors’ have not sought a
; determination that the balance owed on their student loans should be discharged for
19 undue hardship; therefore, ECMC pursued collection efforts to recover the remaining
20 balance of the student loan existing as a result of accrued post-petition interest.
21 Rios Rodriguez case
22 Maria Rios Rodriguez (“Rios Rodriguez’’) and Ramona Viera (“Viera”) filed this
; adversary proceeding on April 21, 2005, seeking actual and punitive damages, costs and
2
95 attorneys fees, for alleged violations by the defendants of the discharge injunction, 11
26 3
AQ 72
(Rev. 8/82)

itase:05-00101-ESL Doc#:49 Filed:03/09/07 Entered:03/09/07 16:24:14 Desc: Main
Document Page 4 of 14

U.S.C. § 1328. Rios Rodriguez filed a petition under chapter 13 of the Bankruptcy Code
{ on November 13, 1998. Rios Rodriguez obtain two student loans during the course of her
2 studies, one on December 19, 1991, for which Viera was a co-debtor, and another on
3 August 21, 1979. She included Sallie Mae Loan Servings (sic) Center (“Sallie Mae”)! as
’ an unsecured creditor for two student loans in the amounts of $1,621.03 and $2,521.11;
5
; she also included the U.S. Department of Education as an unsecured creditor for a student
7 loan in the amount of $900.00, Sallie Mae filed two proofs of claim on January 8, 1999,
8 no. 3 in the amount of $1,621.03 and no. 4 in the amount of $2,521.11. ECMC filed two
° proofs of claim regarding the aforementioned student loans; claim no. 7 was filed on
0 January 22, 1999 in the amount of $3,966.59, and claim no. 9 was filed on February 22,
; 1999 in the amount of $771.36. Debtors plan, dated November 9, 1998, was confirmed
13 on January 28, 1999; it provided for full payment of Sallie Mae’s claims. Sallie Mae did
14 not file an objection to the confirmation of debtors’ plan. On February 3, 2004, the
15 chapter 13 trustee entered a final report and account indicating that the proofs of claim in
a the confirmed plan were paid in full (dkt. #21).
: Since May 3, 2004, debtor has received letters from ECMC and Sallie Mae
49 notifying that her student loan is in default and requesting its payment; said collections
20 efforts have extended to Viera, co-debtor on one of the student loans. Plaintiffs also
21 allege they have received harassing telephone calls from defendants.
22 ECMC filed a motion for summary judgment on June 10, 2005 (dkt. #9). They
23
24

‘Sallie Mae was an unsecured creditor of Rios Rodriguez by virtue of two student loans
25 obtained by her, one of which was guaranteed by Guillermina Torres Santana.
26 4

(Bev. 2)

AO 72
(Rev. 8/82)

q

10
rr
12
13
14
15
16
17
18
19
20
a
29
23
24
25

26

ASe:05-00101-ESL Doc#:49 Filed:03/09/07 Entered:03/09/07 16:24:14 Desc: Main

Document Page 5 of 14

argue that neither the chapter 13 plan nor the discharge order contained language
indicating that excepting post-petition interest on debtor’s student loans would impose an
undue hardship on the debtor and/or her dependents. According to ECMC, student loans
are nondischargeable and, absent proven hardship, pass through bankruptcy unaffected as
to the debtor’s personal liability for them. Further, ECMC argues, said loans continue to
accrue interest post-petition during the pendency of the bankruptcy procedure and debtor
is personally liable for the total amount of said debt.

Debtor filed a reply to the motion for summary judgment on September 7, 2005
(dkt. #19). She argues that ECMC’s claims were paid in full pursuant to the chapter 13
plan and ECMC is bound by the terms of the plan and cannot now claim any additional
payments.

On September 13, 2005, ECMC filed a motion clarifying the relationship between
ECMC and Sallie Mae (dkt. #20), It indicates that ECMC is a successor guarantor of
certain student loans where the borrower has filed a bankruptcy petition pursuant to the
Federal Family Education Loan Program under the U.S. Department of Education under
20 U.S.C. § 1071 and 34 C.F.R. § 682.100. In the present case, ECMC was a successor
guarantor via assignment of debtor’s student loans from Great Lakes Higher Education
Corporation (“GLHEC”) and New York Higher Education Services Corporation
(“NYHESC”), the original guarantors of the loans. Sallie Mae was the original lender of
the loan guaranteed by GLHEC, which was assigned to ECMC on August 17, 1998, and,
subsequent to debtor’s discharge, was re-purchased by Sallie Mae. Washington Mutual

Bank was the original lender of the loan guaranteed by NYHESC, which was assigned to

diase:05-00101-ESL Doc#:49 Filed:03/09/07 Entered:03/09/07 16:24:14 Desc: Main
Document Page 6 of 14
ECMC on January 22, 1999, and, subsequent to debtor’s discharge, was re-purchased by

1 Washington Mutual Bank.

2 Subsequently, ECMC responded to debtor’s reply to their motion for summary

° judgment on October 3, 2005 (dkt. #24), ECMC requests that plaintiffs’ complaint be

| dismissed because it does not currently hold any student loan of debtor, said loans having

6 been re-purchased by the original lenders.

7 On October 27, 2005, Sallie Mae filed a motion indicating that it had retained

8 ECMC’s counsel and is adopting the motion filed by ECMC as its own (dkt. #26).

9 ECMC and Sallie Mae filed another motion for summary judgment on March 6,
. 2006 (dit. #40), They detail service of process issues which arose, and were resolved, in
2 the case, and adopt the prior motion for summary judgment (dkt. #9) and statement of
13 uncontested material facts (dkt. #10) filed on June 10, 2005.

14 Discussion
"s Standard for Granting a Motion to Dismiss
"° Motions to dismiss are governed by Federal Rule of Civil Procedure 12(b)(6),
: which provides that a defense of “failure to state a claim upon which relief can be
19 granted” to a claim for relief may be presented by motion before the filing of a responsive
20 pleading.
a1 For the purposes of the motion fo dismiss, “(1) the complaint is construed in the
22 light most favorable to the plaintiff, (2) its allegations are taken as true, and (3) ail
; reasonable inferences that can be drawn from the pleading are drawn in favor of the
96 pleader.” Federal Practice and Procedure § 1357 at 417, citing Viera-Marcano v.
26 6
(ew 882)

* q

10
11
12
13
14
15
16
17
18
19
20
21
22
23

24

25

26

A072
(Rev. 8/82)

ase:05-00101-ESL Doc#:49 Filed:03/09/07 Entered:03/09/07 16:24:14 Desc: Main

Document Page 7 of 14

Ramirez-Sanchez, 224 F. Supp. 2d 397 (D.P.R. 2002). See also, Correa-Martinez v.

Arrillaga-Belendez, 903 F.2d 49, 51 (1* Cir. 1990). The plaintiff must set forth “factual
allegations, cither direct or inferential, regarding each material element necessary to

sustain recovery under some actionable theory.” Id., citing Gooley v. Mobil Oil Corp.,

851 F.2d 513, 514 (1* Cir. 1988). See also, LaChapelle v. Berkshire Life Insurance
Company, 142 F.3d 507, 508 (1* Cir. 1998) (In determining a motion to dismiss under
Rule 12(b)(6), the court must “determine whether the complaint, so read, limns facts
sufficient to justify recovery on any cognizable theory.”’)

“[A] complaint should not be dismissed for failure to state a claim unless it
appears beyond doubt that the plaintiff can prove no set of facts in support of his claim
which would entitle him to relief.” Federal Practice and Procedure § 1357 at 571,

quoting Conley v. Gibson, 355 U.S. 41, 78 S. Ct. 99, 2 L.Ed2d 80 (1957); see also, In re

Diamond, 346 F.3d 224 (1* Cir. 2003); Leopoldo Fontanillas, Inc. v. Luis Ayala Colon

Sucesores, Inc., 283 F.Supp.2d 579 (D.P.R. 2003); Eastern Food Services, Inc, v.

Pontifical Catholic University of Puerto Rico Service Association, Inc., 222 F. Supp. 2d

131, 134 (D.P.R. 2002), Therefore, “the question on a motion to dismiss under Rule
12(b)(6) is whether in the light most favorable to the plaintiff, and with every doubt
resolved in the pleader’s behalf, the complaint states any legally cognizable claim for
relief.” Id. at 640. Because a dismissal terminates an action at the carliest stages of the
litigation, without a developed factual basis for decision, the court must carefully balance

the rule of simplified civil pleading against the need for something more than conclusory

allegations. Washington Legal Foundation vy. Massachusetts Bar Foundation, 993 F.2d

tase:05-00101-ESL Doc#:49 Filed:03/09/07 Entered:03/09/07 16:24:14 Desc: Main
Document Page 8 of 14

an

962, 971 (1* Cir. 1993). The court will not accept unsupported conclusions or

1 interpretations of the law. Id.
2 Summary Judgment Standard
: Rule 56 of the Federal Rules of Civil Procedure, made applicable to this
proceeding by Rule 7056 of the Federal Rules of Bankruptcy Procedure, provides that
6 summary judgment should be entered “if the pleadings, depositions, answers to
7 interrogatories, and admissions on file, together with the affidavits, if any, show that there
8 is nO genuine issue as to any material fact and that the moving party is entitled to a
Q judgment as a matter of law.” Fed. R. Bankr. P. 7056; see also, In re Colarusso, 382 F.3d
° 51 (1* Cir. 2004), citing Celotex Corp. y. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548,
; 91 L.Ed.2d 265 (1986).
13 “The summary-judgment procedure authorized by Rule 56 is a method for
14 promptly disposing of actions in which there is no genuine issue as to any material fact or
15 in which only a question of law is involved.” 10A Wright and Miller, Federal Practice
" and Procedure § 2712 (3d ed. 1998). “Rule 56 provides the means by which a party may
: pierce the allegations in the pleadings and obtain relief by introducing outside evidence
19 showing that there are no fact issues that need to be tried.” Id. Summary judgment is not
20 a substitute for a trial of disputed facts; the court may only determine whether there are
21 issues to be tried, and it is improper if the existence of a material fact is uncertain. Id.
22 Summary judgment is warranted where, after adequate time for discovery and
* upon motion, a party fails to make a showing sufficient to establish the existence of an
24
95 element essential to its case and upon which it carries the burden of proof at trial.
26 8

AO 72
(Rev. 8/82)

" @ase:05-00101-ESL Doc#:49 Filed:03/09/07 Entered:03/09/07 16:24:14 Desc: Main
Document Page 9 of 14

Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The moving party must "show that

1 there is no genuine issue as to any material fact and that the moving party is entitled to
2 judgment as a matter of law." Fed. R. Civ. P. 56(c).
3 For there to be a "genuine" issue, facts which are supported by substantial
: evidence must be in dispute thereby requiring deference to the finder of fact.
3
6 Furthermore, the disputed facts must be "material" or determinative of the outcome of the
7 litigation, Hahn v. Sargent, 523 F.2d 461, 464 (1st Cir. 1975), cert. denied, 425 U.S. 904
8 (1976). When considering a petition for summary judgment, the court must view the
9 evidence in the light most favorable to the nonmoving party. Poller v. Columbia
" Broadcasting Systems, Inc., 368 U.S. 464, 473 (1962); Daury v. Smith, 842 F.2d 9, 11
" (1st Cir. 1988).
12
43 The moving party invariably bears both the initial as well as the ultimate burden
14 in demonstrating its legal entitlement to summary judgment. Adickes v. Kress & Co.,
15 398 U.S. 144, 157 (1970). See also Lopez v. Corporacién Azucarera de Puerto Rico, 938
6 F.2d 1510, 1516 (1st Cir. 1991). It is essential that the moving party explain its reasons
. for concluding that the record does not contain any genuine issue of material fact in
19 addition to making a showing of support for those claims for which it bears the burden of

20 trial. Bias v. Advantage International, Inc., 905 F.2d 1558, 1560-61 (D.C. Cir. 1990),

21 cert, denied, 498 U.S. 958 (1990).
22 The moving party cannot prevail if any essential element of its claim or defense
23

requires trial. Lépez, 938 F.2d at 1516. In addition, the moving party is required to
24

demonstrate that there is an absence of evidence supporting the nonmoving party's case.
25
26 9

AO 72
(Rev. 8/82)

(| ase:05-00101-ESL Doc#:49 Filed:03/09/07 Entered:03/09/07 16:24:14 Desc: Main
Document Page 10 of 14
Celotex, 477 U.S. at 325. See also, Prokey v. Watkins, 942 F.2d 67, 72 (1st Cir. 1991);
| Daury, 842 F.2d at 11. Inits opposition, the nonmoving party must show genuine issues
2 of material facts precluding summary judgment; the existence of some factual dispute
° does not defeat summary judgment. Kennedy v. Josepthal & Co., Inc., 814 F.2d 798, 804
(Ist Cir. 1987). See also Kauffman v. Puerto Rico Telephone Co., 841 F.2d 1169, 1172
8 (Ist Cir. 1988); Hahn, 523 F.2d at 464. A party may not rely upon bare allegations to
7 create a factual dispute but is required to point to specific facts contained in affidavits,
8 depositions and other supporting documents which, if established at trial, could lead to a
9 finding for the nonmoving party. Over the Road Drivers, Inc. v. Transport Insurance Co.,
° 637 F.2d 816, 818 (1st Cir. 1980). |
; The moving party has the burden to establish that it is entitled to summary
13 judgment; no defense is required where an insufficient showing is made. Lépez, 938 F.2d
14 at 1517. The nonmoving party need only oppose a summary judgment motion once the
15 moving party has met its burden. Adickes, 398 U.S. at 159.
" Dischargeability of Student Loans in Bankruptcy
: In Chapter 13, all debts that arose before the date of the order of relief that are not
19 excepted from discharge pursuant to section 523 and are paid in accordance with the
20 confirmed chapter 13 plan are discharged upon the completion of the plan. 11 U.S.C.
21 § 1328(a). Pursuant to section 523(a)(8) of the Bankruptcy Code, student loans which are
22 made, insured or guaranteed by the government are nondischargeable in bankruptcy
; proceedings unless excepting them from discharge will impose an undue hardship on the
95 debtors and his or her dependents. 11 U.S.C. § 523(a)(8); Smith v. ECMC, 2005 WL
26 10
AO 72
(Rov, 8/82)

C

10
1
12
13
14
15
16
WV
18
19
20
21
22
23
24
25

26

AQ 72
(Rev, 8/82)

ase:05-00101-ESL Doc#:49 Filed:03/09/07 Entered:03/09/07 16:24:14 Desc: Main

Document Page 11 of 14

1322991 (BAP 1* Cir.); In re Savage, 311 B.R. 835, 838-89 (BAP 1* Cir. 2004).
Nondischargeable debts pass through bankruptcy unaffected and are a post-bankruptcy
liability of the former debtor for which they remain personally responsible. In re Cousins,
209 F.3d 38, 40 (1" Cir. 2000). The debtors herein have not requested an exception from
discharge based upon hardship, so any amount of their student loans not paid through the
plan is not dischargeable.
Post-Petition Accrual of Interest on Student Loans

Although the amount claimed by ECMC in their proof of claim - the balance due
on the student loans plus interest accrued as of the date of the petition - was paid in full
through the debtors’ chapter 13 plan, ECMC argues that interest continued to accrue post-
petition on the unpaid balance throughout the bankruptcy case and is now due and non-
dischargeable.

If student loan debt and pre-petition interest on said debt is included in the chapter
13 plan, then the student loan debt may be paid in full through the life of the plan;
however, the debtor cannot propose to pay, and the creditor cannot claim, post-petition
interest on student loan debt under 11 U.S.C. § 502. Inre Girard, 243 B.R. 894, 897

(Bankr, M.D. Ala. 1999); see alse Inre Sprolito, B.R. ,2006 WL 3895066

(Bankr. D.P.R. September 15, 2006) (student loan creditor is prohibited by § 502(b)(2)
from including unmatured, post-petition interest in proof of claim). Section 502(b0(2)
“only prohibits creditors form filing claims for unmatured interest against the bankruptcy

estate. It does not address whether a creditor may recover such interest from the debtor

personally after bankruptcy.” In re Boone, 215 B.R. 386, 388 (Bankr. §.D. Ill. 1997).

at

C

10
14
12
138
14
15
16
17
18
19
20
21
22
23
24
25

26

AQ 72
(Rev. 8/82)

ase:05-00101-ESL Doc#:49 Filed:03/09/07 Entered:03/09/07 16:24:14 Desc: Main

Document Page 12 of 14

In Bruning v. United States, 376 U.S. 358, 84 S.Ct. 906, 11 L-Ed.2d 772 (1964),

the Supreme Court of the United States held that since tax liabilities were non-
dischargeable under the Bankruptcy Act, interest on such debts continues to accrue post-
petition. The Court in Bruning “distinguished between denial of post-petition interest
against the bankruptcy estate on a nondischargeable debt and the accrual of interest on a
nondischargeable debt during the pendency of the bankruptcy to be collected from the
debtor after the bankruptcy proceeding is completed.” In re Cousins, 209 F.3d 38, 40 n. 1
(1* Cir. 2000), quoting Leeper v. Pennsylvania Higher Educ. Assistance Agency, 49 F.3d
98. 101 (3d Cir. 1995) (emphasis added). Said treatment was extended to non-

dischargeable student loans’ in Cousins, wherein the First Circuit Court of Appeals held

that debtors remain liable for post-petition interest on a non-dischargeable pre-petition
debt. Accordingly, “even a 100% plan cannot pay off a nondischargeable interest bearing
student loan.” Sprolito; see also, In re Boone, 215 B.R. 386 (Bankr. S.D.IIL 1997)
(holding that interest continues to accrue post-petition on debtor’s non-dischargeable
student loan debt during the pendency of her chapter 13 case and she remains personally
liable for the same, even though she paid the full amount of the creditor’s claim through
her chapter 13 plan). Since student loans are nondischargeable, interest that accrues on
them post-petition, even if the loans themself and pre-petition interest thereon are paid
through the plan, is nondischargeable and the debtor must pay it after the plan is complete

and he has been discharged of his other debts. Girard, 243 B.R. at 897.

“{S}tudent loans under § 1328(a) and tax liabilitics under § 1228(a) receive identical
treatment under Bruning.” 209 F.3d at 42 fn. 1.

12

Gase:05-00101-ESL Doc#:49 Filed:03/09/07 Entered:03/09/07 16:24:14 Desc: Main
Document Page 13 of 14

While the main purpose behind the Bankruptcy Code was to ensure that a debtor
{ receives a fresh start by discharging his pre-petition debts and, as a result, exceptions to
2 discharge are construed narrowly, there are several important policy reasons behind
Congress’ exception of student loans from discharge in bankruptcy, including rescuing

the student loan program from insolvency and preventing abuse of the system. In re

Murphy, 257 B.R. 72, 76 (Bankr. N.D, Ala. 2000). “These same policy concerns which
7 persuaded Congress to declare student loans non-dischargeable also dictate that

8 postpetition interest on these loans survive bankruptcy.” Id.

10

11

12
13
14
15
16
17
18
19
20
21
22
23
24

25

26 13

AO 72
(Rev. 8/82)

10
tt
12
13
14
15
16
17
18
19
20
24
20
23
24
25

26

AQ 72
(Rev. 8/82)

Glase:05-00101-ESL Doc#:49 Filed:03/09/07 Entered:03/09/07 16:24:14 Desc: Main

Document Page 14 of 14

Conclusion

The court finds that interest continues to accrue post-petition on non-
dischargeable student loans and the debtor remains personally liable for the same, even
when the student foan creditor’s claim for the balance due and pre-petition interest is paid
in full through the chapter 13 plan. Accordingly, ECMC’s motion to dismiss adversary
proceeding no. 05-00140 is granted, and their motion for summary judgment in adversary
proceeding no. 05-00101 is granted. Additionally, Sallie Mae’s motion for summary
judgment in adversary proceeding no. 05-00101 is granted. ECMC and Sallie Mae may
proceed to collect interest which accrued on the unpaid balance of debtor’s student loans
during the course of their chapter 13 case

SO ORDERED.

In San Juan, Puerto Rico, this 7 day of March, 2007.

QUE 8. LAMOUTTE
.S. Bankruptcy Judge

14