STUDENT LOAN OF $5,909 BECOMES $80,290 BECAUSE OF FRIVOLOUS APPEAL BY DEBTOR

Student loans are not dischargeable in bankruptcy. That is the general rule. Some debtors may qualify to discharge student loans if they can satisfy a three-prong test proven in an adversarial proceeding. But what happens if debtor refuses to acknowledge that a student loan is not dischargeable despite a bankruptcy court judgment saying so and he appeals that judgment? It depends if the appeal is frivolous or meritorious.

In Re Busson-Sokolik, Chapter 7 debtor and his attorney were found to be jointly and severally liable for sanctions of $30,971. The sanctions were imposed for the frivolous pursuit of an appeal. The 7th Circuit Court of Appeals found that the debtor’s numerous procedural errors constituted abuse and warranted the imposition of sanctions.

In April, 2005, the Milwaukee School of Engineering sued the debtor to recover the unpaid balance on his student loan and obtained a default judgment of $5,909. In June 2005, debtor filed for Chapter 13 relief. The case was converted to Chapter 7 in May 2006 and in August 2006 he filed an adversary case seeking to discharge the student loan. The bankruptcy court ruled that the debt was not excepted from discharge, and determined that the debtor owed $16,248 including costs and attorney fees.

Debtor appealed. Delays in filing resulted in series of motions alleging misconduct on both sides. The district court denied the debtor’s motion for sanctions, and granted the school’s motion for costs and fees under Rule 8020, finding that the debtor’s appeal was frivolous. The court affirmed the bankruptcy court’s ruling and ordered the debtor and his attorney to pay $80,290 to the school. Thus, a student loan of $5,909 became a non-dischargeable debt of $80,290.

The debtor and his attorney appealed. Debtor argued that there was no student loan. In other words, he refused to admit that the loan was a student loan despite a bankruptcy court ruling saying that it was a student loan. Talk about being hard- headed. While it is true that in America you have the right to disagree, the exercise of that right may cost you a lot of money.

The 7th Circuit said that it did not find the debtor’s argument to be compelling. The court applied the “duck” test. If it walks like a duck, quacks like a duck and swims like a duck, it must be a duck. “We find the following facts established below relevant to our inquiry into the purpose of the MSOE loan: (a) MSOE is a school; (2) The loan was part of a package that included scholarship and grant money toward completion of the debtor’s education at MSOE; (3) The promissory note for the loan was signed while the debtor was a student at MSOE; (4)The debtor had to be a student to be eligible for the loan he received from MSOE; and (5) The MSOE loan money was deposited into the debtor’s student account at MSOE, an account presumably he would not have had if he were not a student. Together these facts establish that the loan was part of a program specifically designed by the school to provide financial support to students working to complete their education. Under the purpose-driven test this court has adopted, there is no question that the loan was educational. As a result, we affirm the finding that 11 U.S.C. 523(a)(8) bars the debtor from discharging his debt to MSOE in bankruptcy because the debt resulted from an educational loan,” the court said.

 In determining that the debtor and his attorney should be sanctioned, the District Court determined that the appeal, “as litigated, was frivolous.” “Motions were filed by appellant without any basis in the rules, deadlines were ignored, procedural requirements were dismissed as unnecessary and duplicative filings and objections were made thereby making it impossible for appellee to minimize its costs in this action,” the court said. “Attorney for debtor should go back to law school and retake the bar exam,” the court added.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than four thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.