Circuit Considers Certain Private Student Loans May Be Discharged Under Section 523(a)(8)(A)(ii) | Jones Day

On July 15, 2021, a three-judge panel of the United States Court of Appeals for the Second Circuit was held at Homaidan c. Sallie Mae, Inc., et al. that the private student loans at issue were not subject to the discharge exemption provided for in section 523(a)(8)(A)(ii) of the Bankruptcy Code for “obligation[s] to repay funds received as an educational benefit. In the following bankruptcy court case, the lender and the defendant administrator (hereinafter, the “lender”) requested the dismissal of an adversarial proceeding brought by a debtor in Chapter 7 bankruptcy alleging that the lender violated a bankruptcy discharge order by accepting repayment of private student loans that were in fact discharged because they covered more than eligible educational expenses. The defendant argued that the loans were exempt from discharge. The bankruptcy court considered the exemption from discharge for “obligation[s] to repay funds received as an educational benefit” under Section 523(a)(8)(A)(ii) of the Bankruptcy Code and concluded that it “does not encompass all debts related to education”, including the student loans at issue. It therefore denied the defendant’s motion to dismiss. The Second Circuit granted the interlocutory appeal and affirmed.

The Second Circuit decision

Like the bankruptcy court, the Second Circuit relied heavily on the plain language of the relevant statute, which exempts from discharge, among other things, “the obligation[s] repay funds received as an educational benefit, scholarship or stipend.” Decision at 9; see also 11 USC § 523(a)(8)(A)(ii). The defendant lender’s only assertion in its motion to dismiss was that the private student loan granted to the plaintiff was an “educational benefit” under Section 523(a)(8)(A)(ii). However, the defendant reserved the right to respond to the plaintiff’s allegations that the loans were not “eligible student loans[s]” under section 523(a)(8)(B) at a later time in the litigation.

The Second Circuit concluded that Section 523(a)(8)(A)(ii) cannot be read to include “loans” where that specific word has been used in related provisions and specifically absent from the sub. -applicable part. The court also noted that it could not adopt the defendant’s expansive interpretation of the provision – “under which any loan is non-repayable under section 523(a)(8)(A) ( ii) if it was used for further education -[as it] would attract virtually all student loans under the exemption. According to the court, this would wrongly render the section 523(a)(8)(A)(i) and 523(a)(8)(B) exemptions meaningless. Thus, the term “educational benefit” was limited by the court to align with the terms “scholarship” and “allowance” also specified in Section 523(a)(8)(A)(ii). on motion to dismiss, the court did not rule on whether the plaintiff’s loan had in fact been discharged in his bankruptcy and returned the case to the bankruptcy court for further proceedings .

Impact on future litigation

The Second Circuit’s decision does not fully clarify the rules surrounding the discharge of student loans. Indeed, the court did not consider whether the private student loans at issue were “qualifying student loans[s]”and therefore not subject to release under 523(a)(8)(B) hardship.” In Thelma G. McCoy v. United States, a plaintiff recently sought a writ of certiorari from the U.S. Supreme Court to resolve a divided circuit regarding the proper test to assess “undue hardship.” However, in June 2021, the Court denied the motion, leaving the split circuit intact and opening the door to inconsistent rulings.

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