Thursday, August 9, 2012

Student Loan may not be pursued where lender's Proof of Claim was disallowed by the Bankruptcy Court.

Hann v. Educational Credit Management Corporation (BAP 1st Cir. August 7, 2012)( Before Judges Hillman, Feeney and Hoffman, Opinion by Hoffman).*

This is a First Circuit Bankruptcy Appellate decision handed down on August 7, 2012.  I do not have the case citation yet, but the decision will be published and is available on the BAP web site.
See link below:

The Chapter 13 debtor averred she paid her loan in full, pre-petition. Thus, she objected to the lender's proof of claim filed in the chapter 13 bankruptcy case. The Bankruptcy Court set a hearing for the debtor's objection to the lender's proof of claim, which the lender did not attend. The Bankruptcy Court sustained the debtor's objection to claim and fixed the amount at $zero.

The debtor successfully completed her Chapter 13 plan and received a discharge of debts (an order of discharge).  Thereafter the Chapter 13 case closed, the lender tried to collect the student loan, post-discharge, taking the position that the alleged balance due was not discharged, as student loans are non-dischargeable. Lender argued that while they were not paid under the debtor's Chapter 13 plan, they could still pursue the debt, post-discharge.

Hann reopened her bankruptcy case to sue the lender for attempting to collect a discharged debt, including counts for damages and attorney fees. Lender unsuccessfully argued that the Chapter 13 disallowance of the lender's claim did not extinguish a non-dischargeable debt and thus did not collaterally estop subsequent collection of the debt.

Lender unsuccessfully argued that in addition to disallowance of the claim in the bankruptcy case, that the debtor should have filed an adversary proceeding to determine the debt to be non-dischargeable.  The debtor's position was, why would she file suit on a debt that was zero?

The Bankruptcy Court found for the debtor and also awarded the debtor her legal costs and fees as sanction against the lender for violating the discharge injunction.

Lender appealed.

The BAP held that the claims allowance process in the bankruptcy case was to determine the amount and validity of debt. The BAP disagreed with the lender's position that in context of claims allowance, the bankruptcy court determines only what the estate will pay and cannot bind creditors post-discharge. The bankruptcy court's order disallowing a claim is a final order and to be given preclusive effect.

BAP AFFIRMED the Bankruptcy Court.

* Colleague Richard Gaudreau represented the debtor, and was aided by Mary Stewart, Mark Cornell and Peter Wright in the preparation for oral argument - kudos!

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