September 28, 2021

Volume XI, Number 271

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September 27, 2021

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Second Circuit Follows Other Recent Circuit Opinions Re: Private Student Loan Discharge

The Second Circuit has followed the lead of the Tenth and Fifth Circuits in affirming a bankruptcy court ruling regarding private student loans under 11 U.S.C. § 523(a)(8). In Homaidan v. Navient, et al., the court ultimately held that the exception to discharge language – “an obligation to repay funds received as an educational benefit, scholarship, or stipend” – does not cover private student loans. This follows similar results from the Tenth Circuit and Fifth Circuit.

Background

Homaidan took out over $12,000 in student loans from Sallie Mae Inc., Navient’s predecessor in interest. After graduating, Homaidan filed for Chapter 7 bankruptcy in the Eastern District of New York and obtained a discharge order. The order did not specify which debts were discharged and only noted that some “common types of debts” including “[d]ebts for most student loans” were not dischargeable in a Chapter 7 proceeding. Later, Homaidan paid the loans in full “under the mistaken belief that he had a legal obligation to do so.” In 2017, he reopened his bankruptcy case to seek a determination of whether the loans were discharged and filed an adversary proceeding.  After Navient had filed a motion to dismiss, the bankruptcy court held that “both by its terms and read in context, [$523(a)(8)(A)(ii)] does not sweep in all education-related debt.”

Court’s Statutory Interpretation

The question before the court was whether the private student loans at issue constituted “an obligation to repay funds received as an educational benefit” to be excepted from discharge under § 523(a)(8)(A)(ii). Navient contended that the loan agreement at issue was an “obligation to repay funds” that were obtained for the purposes of education, making them an “educational benefit.” The court disagreed, stating that the phrase “an obligation to repay funds received as an educational benefit” would be “an unconventional way to discuss a loan,” as the bankruptcy court had put it.  According to the court, “if Congress had intended to except all educational loans from discharge under § 523(a)(8)(A)(ii), it would have done so in such stilted terms” and “there are educational benefits that students may become obligated to repay—such as conditional grants—which fit the statutory text more naturally.”

The court went on to assess and reject Navient’s other statutory interpretation arguments, pointing out that Congress had used the word “loan” in other spots in § 523(a)(8) and that an expansive reading offended the canon of surplusage by swallowing up other sections of § 523(a)(8). It took further space to detail the “evolution” of § 523(a)(8) with the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act to show that the focused section was not a catch-all for educational loans.

The court ultimately landed on the narrower interpretation that “§ 523(a)(8)(A)(i) covers government and nonprofit-backed loans and educational benefit overpayments; § 523(a)(8)(A)(ii) covers scholarships, stipends, and conditional education grants; and § 523(a)(8)(B) covers private loans made to individuals attending eligible schools for certain qualified expenses.” In closing, it stated that “[e]ducational benefit” is “best read to refer to conditional grant payments similar to scholarships and stipends.”

As the McDaniel and Crocker cases before it, the Second Circuit’s Homaidan opinion reflects the growing trend permitting a debtor to discharge certain private student loans. Private student lenders and servicers should be aware of this latest chapter and prepare for similar challenges.

© 2021 Bradley Arant Boult Cummings LLPNational Law Review, Volume XI, Number 207
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About this Author

Keith S. Anderson Financial Services Attorney Bradley Arant Boult Cummings law Firm Birmingham Alabama
Partner

Keith Anderson has wide-ranging experience across multiple jurisdictions and concentrates his practice on representing financial institutions in the financial services industry, as well as representing employers in employment matters.

His financial services practice includes representing financial institutions, mortgage lenders and servicers, student loan lenders and servicers, auto-finance lenders in defensive litigation throughout the country. Keith has handled causes of action and advised on matters including TILA, RESPA, HOEPA, FDCPA, FCRA,...

205.521.8714
Alex Dugan Bradley Lawyer Mortgage Servicing
Partner

Alex Dugan regularly represents financial services and mortgage company clients with compliance matters, including risk management and remediation, state investigations, regulatory compliance, and operational implementation of legal guidelines. Alex’s practice focuses on the bankruptcy compliance and regulatory concerns that her clients face. She is also a member of the firm's Auto Finance and Payment Systems industry teams.

With this experience and perspective, Alex provides daily guidance to clients on bankruptcy-related regulatory and compliance matters, supervises large-scale...

615.252.4638
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