Thursday, February 26, 2009

Ninth Circuit Affirms Oregon Bankruptcy Court that "Student Account and Deferment Agreement" Is a Nondischargeable "Loan" Under Section 523(a)(8)

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

McKay v. Ingleson

Ninth Circuit Court of Appeals, Case No. 07-35362
February 23, 2009

"[W]hether a student’s financial arrangement with the university she attended constituted a nondischargeable educational loan under [§ 523(a)(8) of the] Bankruptcy Code."


The Ninth Circuit Panel held that the debt was dischargeable by comparing the terms of a written agreement memorializing the debt with the ordinary and dictionary meanings of the term "loan," by determining that in the agreement the "value of the actual benefit received" was sufficiently clear and it "sufficiently articulate[d] definite repayment terms," and finally that a "loan" need not include either an exchange of money or the repayment of "a sum certain."

McKay filed a Chapter 7 bankruptcy (pre-BAPCPA) listing Vanderbilt University as creditor under a “Graduate and Professional Student Account and Deferment Agreement” (“Agreement”). Neither she nor the University sought a determination of the dischargeability of the obligation under that Agreement. She received a discharge. About two years later, Vanderbilt University retained an attorney, John Ingleson, to collect the balance on the Agreement, resulting in a default judgment in the amount of $38,250.53 against McKay. This represented tuition, housing, dining charges for one term, plus less than $2,500 on a "Flexible Spending Account" of miscellaneous purchases, and late fees and collection costs.

Shortly thereafter McKay reopened her bankruptcy case and filed an adversary proceeding against the University and Ingleson, asking for a determination that the debt to the University had been discharged and alleging violation of the discharge injunction of § 524. Bankruptcy Judge Trish Brown granted summary judgment in favor of the University and Ingleson, and the U.S. District Court Judge Garr King affirmed. McKay appealed (apparently only as to Ingleson.)

The Statute

11 U.S.C. § 523(a)(8), as applicable to this pre-BAPCPA case, made non-dischargeable a “loan . . .made under any program funded in whole or in part by a . . .nonprofit institution.”

(This language is all still in the statute after BAPCPA, but there is additional language which may well have affected this opinion. See the addition of subsection § 523(a)(8)(B) stating in part: "any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code.")

The Agreement

The Ninth Circuit Panel provided only a few snippets of the Agreement:
After reciting that the parties “desire the convenience of deferring payment for . . . educational services,” the Agreement states that the “[s]tudent, as purchaser of the educational services,” would be billed monthly. “Any balances not paid by the end of each calendar month [would] be assessed a late fee of one and one-half (1.5%) percent per month.” The Agreement further states that "[a]ll amounts deferred are due not later than” a specific date close to the end of each semester.
The unpublished U.S. District Court opinion below also noted that the "Agreement provides for recovery of attorney fees and collection costs incurred in collection of unpaid balances due under the Agreement," and made clear that debtor executed this Agreement.

The Rationale
In determining whether the Agreement was a "loan" the Ninth Circuit Panel focused on the following:
1) The "ordinary meaning of such term": Even accepting McKay's argument that "the Agreement is a revolving credit account (specifically, a credit card) rather than a loan," "revolving credit accounts are considered loans in everyday parlance."
2) Dictionary definition of "loan": "[s]omething lent for the borrower's temporary use on condition that it or its equivalent be returned."
3) Money is not necessarily exchanged between lender and borrower, such as in the "creation of debt by a credit to an account with the lender upon which the debtor is entitled to draw immediately."

The Panel then primarily relied on an Eighth Circuit BAP opinion Johnson v. Mo. Baptist Coll. (In re Johnson), 218 B.R. 449, (B.A.P. 8th Cir. 1998). There the debtor attended classes without prepayment of the tuition but rather with a promise to pay for that tuition later. This promise was memorialized by a promissory note. The BAP reasoned that "the College was, in effect, 'advancing' funds or credits to [debtor's] student account," and she "drew upon these advances through immediate class attendance." The BAP determined that the lack of money changing hands was "immaterial."

The Ninth Circuit asserted that the "Johnson court’s analysis is persuasive, and we find no relevant differences between the Agreement here and the arrangement in Johnson."

The debtor raised a number of arguments that the Agreement did not constitute a "loan," none of which the Ninth Circuit found "persuasive":
1) "[T]he loan payment must 'reflect the value of the benefit actually received, rather than some other ill defined measure of damages or penalty'.”: The Court agreed with this principle but ruled that "the cost of tuition, housing, board, and various other items and fees were readily available to her, and the amount she was required to repay was determined by the costs of these items."
2) "[T]o constitute a loan, the Agreement would have had to sufficiently articulate definite repayment terms.": Again, the Court agreed with debtor's principle, but determined that the Agreement's statement that " '[a]ll amounts deferred are due not later than' a specific date close to the end of each semester" was sufficient to meet that principle.
3) "[T]he loan agreement did not indicate a sum certain": The Court responded that while this may be "one of the factors that may be considered in determining whether a loan exists," "[w]e are not convinced that a loan requires a sum certain."

Local Connections
Ninth Circuit opinions come relatively rarely from the Oregon bankruptcy court. This one involved a 2003 Chapter 7 case filed on behalf of the debtor by Gary L Marcy of Snyder & Associates; in 2003 Terrance J. Slominski, Slominski & Associates reopened the case and filed the adversary proceeding on debtor-plaintiff's behalf, as well as filed the appeal to the District Court and then to the Ninth Circuit. Tara Schleicher of Farleigh Wada Witt, was attorney for Vanderbilt University in the adversary proceeding and the appeal to the District Court. David B. Gray of Swensen & Gray was attorney for John Ingleson in the adversary proceeding and both appeals. Oral argument before the Ninth Circuit panel was in Portland on December 10, 2008, with Circuit Judges Diarmuid F. O’Scannlain, Susan P. Graber and Jay S. Bybee, with Judge O'Scannlain writing the opinion for the panel.


In my opinion, the Ninth Circuit panel's 7-page opinion is not persuasively written. For example, the opinion relies heavily on the Eighth Circuit's Johnson opinion but provides very little about the terms of the financial agreement there before stating summarily that there were "no relevant differences." What little Judge O'Scannlain's opinion does provide about the agreement in Johnson, for example that it included a promissory note, made is sound more like a "loan" than the terms in the present case. It would appear that this case's lack of any conventional promissory note language clearly stating a debt and a commitment to repay it is a significant difference which merited attention. In addition it was at least bad form in the recitation of the facts to call the financial arrangement at issue a loan when whether or not it should be so characterized is what needed to be determined. District Court Judge Garr King's unpublished opinion of two years ago is just slightly longer but is much better written, cites better authorities, and presents the rationale more convincingly.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
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