BAP: Bankruptcy Court Erred when it Held that the Debt was an “Educational Benefit” and Declined to Rule on Dischargeability under § 523(a)(8)

BAP: Bankruptcy Court Erred when it Held that the Debt was an “Educational Benefit” and Declined to Rule on Dischargeability under § 523(a)(8)

Chapter 7 Debtor argues that her educational debt owed to  Turnstile Capital Management LLC (“Turnstile”) is not covered by § 523(a)(8). The bankruptcy court declined to consider her argument concerning one of the categories of debt and held that her debt was included in the category of an “educational benefit” under § 523(a)(8)(A)(ii).

Detbor  attended St. Matthew’s University School of Medicine (“SMU”) in Grand Cayman, Cayman Islands. In order to fund her education and pay for the costs of attending SMU, Ms. Kashikar signed an application and promissory note with Student Loan Xpress. Turnstile’s predecessor in interest2 directly disbursed the funds to SMU.

There is no dispute that Debtor attended classes at SMU for the purposes of obtaining a degree and learning about medicine. However, Ms. Kashikar did not complete her education at SMU. She returned to the United States, but could not transfer any of her SMU credits.

Detbor filed her chapter 7 petition. She scheduled her student loan on Schedule F in the amount of $73,804. She received a standard discharge on or around November 10, 2014. On April 14, 2015, Debtor filed an adversary complaint seeking a determination that the loan (the balance of which had grown to $74,968.74) was discharged under § 523(a)(8). The complaint is very brief. After identifying the parties and describing the loan, it alleges that:

Since the purpose of the loan(s) in question were not for an, “eligible education institution” as defined by 26 U.S.C. 221(d)(1) and (2), the subject loan(s) are not, “qualified education loan(s)” under 11 U.S.C. 523(a)(8)(B), and therefore not subject to the student loan general exception to discharge found at 11 U.S.C. 523(a)(8). Accordingly, the loan(s) alleged in Paragraph 4 were discharged on November 12, 2014, when Plaintiff/debtor obtained her discharge in the underlying bankruptcy case.

Defendant denied that the debt was discharged.

The bankruptcy court said that it would not decide whether § 523(a)(8)(A)(i) covered the loan because the complaint only mentioned § 523(a)(8)(B) and Defendant had no opportunity to address or produce evidence regarding subsection (A)(i). However, the court decided to consider § 523(a)(8)(A)(ii) because the facts concerning that subsection were undisputed and Turnstile had an opportunity to fully brief the issues (in connection with subsection (B)). The court extensively examined the conflicting case law and sided with the cases adopting an “expansive reading” of the phrase “educational benefit” in § 523(a)(8)(A)(ii). It held that “a tuition payment made by a third-party lender to a school on behalf of a debtor creates ‘an obligation to repay funds received as an educational benefit.’” Accordingly, the court concluded that Detbor’s loan was excepted from discharge. The bankruptcy court entered its judgment in favor of Defendant, and Debtor timely appealed

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