VT Student Assistance Corp. v. Zeichner

VT Student Assistance Corp. v. Zeichner  (97-095); 167 Vt. 616; 708 A.2d 1351

[Filed 12-Mar-1998]


                                 ENTRY ORDER

                       SUPREME COURT DOCKET NO. 97-95

                             FEBRUARY TERM, 1998


Vermont Student Assistance
Corporation                     }     APPEALED FROM:
                                }
                                }
     v.                         }     Chittenden Superior Court
                                }
Walter Zeichner                 }
                                }     DOCKET NO. S0896-95CnC


               In the above-entitled cause, the Clerk will enter:


       Plaintiff Vermont Student Assistance Corporation (VSAC) appeals from a
  Chittenden Superior Court order which held that plaintiff's attempt to
  collect unpaid student loans from defendant Walter Zeichner was barred by
  the doctrine of res judicata because the loans had been previously
  discharged in a Chapter 7 proceeding in federal bankruptcy court.  We
  disagree and reverse.

       The facts of this case are not in dispute and have been stipulated to
  by the parties. Defendant incurred three separate student loans between
  1977 and 1984.  These student loans went into repayment in May of 1985. 
  Defendant made approximately two-thirds of these payments before executing
  a loan consolidation promissory note to plaintiff in March of 1988. The
  first payment on this note came due on May 1, 1988.  On August 18, 1993,
  defendant filed for bankruptcy protection under Chapter 7 of the United
  States Bankruptcy Code.  Defendant listed his student loan as one of his
  debts.  Neither plaintiff nor defendant initiated an adversary proceeding
  to specifically discharge defendant's obligations under the consolidation
  loan or the original student loans.  A final decree of bankruptcy was
  issued by the United States Bankruptcy Court on December 16, 1993.

       On July 14, 1995, plaintiff filed suit in Chittenden Superior Court
  claiming that defendant had defaulted on his consolidated student loan and
  that he owed plaintiff $17,495.43 on the principal and $4,220.32 in
  interest.  The parties filed cross-motions for summary judgment, and the
  trial court granted defendant's motion for summary judgment on the ground
  that plaintiff's claim was barred by the doctrine of res judicata because
  defendant's loan had been previously discharged by the United States
  Bankruptcy Court.  This appeal followed.

       Plaintiff's main argument is that defendant's student loan was not
  discharged in bankruptcy and consequently the trial court erred in
  dismissing plaintiff's claim.  Discharges in bankruptcy are governed by the
  provisions of 11 U.S.C.A. § 727 (Supp. 1997).  Subsection (b) of § 727
  states that a general discharge under § 727(a) releases the debtor from all
  debts "[e]xcept as provided in section 523."  Section 523 provides that "a
  discharge under section 727 . . . of this title does not discharge an
  individual debtor from any debt" which falls into one of nine specified
  exceptions, one of which is educational loans.  Section 523(a)(8)
  specifically provides that a discharge does not release a debtor from
  liability for an educational loan made by a governmental unit or a
  nonprofit institution of higher education, unless -

 

       (A) such loan, benefit, scholarship, or stipend overpayment first
  became due more than 7 years (exclusive of any applicable suspension of the
  repayment period) before the date of the filing of the petition; or

       (B) excepting such debt from discharge under this paragraph will
  impose an undue hardship on the debtor and the debtor's dependents.

  11 U.S.C.A. § 523(a)(8) (Supp. 1997).

       Therefore, the bankruptcy court cannot discharge a student loan unless
  one of the two conditions listed in § 523(a)(8) is present.  The mere fact
  that a debt is listed in the schedule of debts is not determinative of the
  dischargeability of the debt.  Bankruptcy Rule 1007(a) requires the debtor
  to submit a list of creditors and makes no judgments about which are
  dischargeable, if any.  See Massachusetts Higher Educ. Assistance Corp. v.
  Taylor, 459 N.E.2d 807, 811 (Mass. 1984).

       Because these student loans are not discharged automatically under §
  523(a)(8), it is unnecessary for the creditor to appear at the bankruptcy
  proceedings and file a complaint that the loans should not be discharged. 
  Congressional intent with respect to the operation of § 523(a)(8) is very
  clear: "[T]his provision [§ 523(a)(8)] is intended to be self-executing and
  the lender or institution is not required to file a complaint to determine
  the nondischargeability of any student loan".  S. Rep. No. 95-989, 95th
  Cong., 2d Sess. 79 (1978), reprinted in 1978 U.S.C.C.A.N. 5865.

       Defendant argues that more than seven years have passed between the
  payment date of the original loans and the filing of the bankruptcy
  petition so that the loan debt was dischargeable under § 523(a)(8)(A).  He
  contends, and the trial court concluded, that by merely providing plaintiff
  with a notice of bankruptcy and listing the original loan repayment dates
  he put plaintiff on notice that the educational loan may be discharged.  As
  a result, he argues, plaintiff had the opportunity and responsibility to
  litigate the issue in the bankruptcy court and, failing to do so,
  plaintiff's claim is now barred by res judicata.

       Defendant's position shifts the procedural burdens applicable to the
  bankruptcy court. If defendant wanted his educational loan discharged, he
  bore the burden of filing a complaint in bankruptcy court to establish that
  one of the exceptions contained in § 523(a)(8) applied.  See Bankr. Rules
  4007(a), 4007(e), 7003, 11 U.S.C.A. (West 1984); see also In re Gustafson,
  111 B.R. 282, 285 (9th Cir. 1990) (student loans are presumptively
  nondischargeable until a complaint is brought to determine dischargeability
  based on one of the two exceptions to § 523(a)(8)).  Defendant failed to
  take this step.  In order to establish one of the exceptions to §
  523(a)(8), there must be an adversary proceeding with findings made by the
  court.  See Indiana University v. Canganelli, 501 N.E.2d 299, 301 (Ill.
  App. Ct. 1986) (determination of dischargeability of debt by bankruptcy
  court is initiated by filing a complaint in bankruptcy court and conducting
  an adversary proceeding); New York State Higher Educ. Serv. Corp. v.
  Williams, 475 N.Y.S.2d 206, 208 (N.Y. Civ. Ct. 1984) (there being no proof
  that bankruptcy court made findings regarding exceptions to § 523(a)(8),
  the exceptions are inapplicable).  Here, the bankruptcy court made
  absolutely no findings regarding whether the exceptions to § 523(a)(8)
  applied in this case because defendant failed to seek the findings.  By
  failing to file a complaint, § 523(a)(8) became self-executing and
  defendant's student loan was not discharged. See Canganelli, 501 N.E.2d  at
  301.

       We do not agree that the doctrine of res judicata gave defendant a de
  facto discharge even though the debt was not actually discharged.  Although
  plaintiff could have litigated the

 

  dischargeability of the loan in the bankruptcy court, its claim is
  precluded in the superior court only if it "should have" litigated it.  See
  Lamb v. Geovjian, 165 Vt. 375, 380, 683 A.2d 731, 734 (1996).  Since it was
  under no obligation to initiate the adversary proceeding in the bankruptcy
  court, res judicata does not apply.


       Reversed and remanded




                              BY THE COURT:



                              _______________________________________
                              Jeffrey L. Amestoy, Chief Justice

                              _______________________________________
                              John A. Dooley, Associate Justice
     
                              _______________________________________
                              James L. Morse, Associate Justice

                              _______________________________________
                              Denise R. Johnson, Associate Justice

                              _______________________________________
                              Marilyn S. Skoglund, Associate Justice