In a case of first impression for the Ninth Circuit BAP, the court held that student loan debts can be denied a discharge under § 523(a)(8)(A)(ii) only if the debtor actually received funds from the plaintiff.  Institute of Imaginal Studies dba Meridian University v. Tarra Nichole Christoff (In re Christoff), 2015 WL 1396630.  The court reached its conclusion based on the plain language of the statute.

In Christoff, the debtor enrolled in Meridian University and received in her first year a financial aid package which provided her with a tuition credit but under which she did not receive any actual funds.  The debtor signed a promissory note to repay the tuition credit in monthly installments after she completed her coursework or withdrew from the institution.  She received a similar financial aid package for her second of study.  The debtor failed to make all payments required under her promissory notes and eventually filed a chapter 7 bankruptcy petition.  Meridian filed an adversary proceeding seeking denial of the discharge of its debt under 11 U.S.C. § 523(a)(8)(A)(ii). 

Sec. 523(a)(8)(A)(ii) provides that, unless for hardship, a debt is not dischargeable if it constitutes “an obligation to repay funds received as an educational benefit, scholarship, or stipend.”  The dispute in Christoff centered on the “funds received” language of the statute.  Without question, the debtor received no funds from Meridian.  The transaction involved the granting of a tuition credit in the debtor’s two years of study with the debtor signing promissory notes to repay the amount of those credits after she completed her coursework or withdrew from the university. The bankruptcy court held the debt was dischargeable because the plain language of the statute required the debtor to receive funds, and the debtor had not received any funds from Meridian.  The BAP affirmed.

Meridian argued that the phrase “funds received” should be construed as the equivalent of the word “loan” as described in the other two subsections of 523(a)(8).  The debtor argued that, by using the phrase “funds received” in § 523(a)(8)(A)(ii), Congress intended to restrict the denial of a discharge for student debts to for-profit universities to those instances where the debtor receives actual funds.  The BAP agreed.  The court began its analysis by noting that any construction begins with the language of the statute, stating that the words of the Bankruptcy Code “must be read in their context and with a view to their place in the overall statutory scheme.”   Further, the provisions of § 523 are to be strictly construed in favor of debtors.  The BAP relied heavily on the Ninth Circuit’s decision in Hawkins v. Franchise Tax Bd. Of Cal., 769 F.3d 622 (9th Cir. 2014) and its interpretation of the pre-BAPCPA provisions on student loan debt.  In Hawkins, the debtor entered into an agreement with Ohio University agreeing to practice medicine for five years after licensure in exchange for admittance to the university’s medical school.  The agreement contained a liquidated damages provision in the event she breached the requirement that she practice medicine in Ohio for five years.  The debtor promptly moved to California following her graduation. After the university sued her to obtain a judgment on the liquidated damages provision, the debtor filed a chapter 7 petition.  The Ninth Circuit concluded the liquidated damages was not an educational loan stating “while an educational loan need not include an actual transfer of money . . . to [the] debtor, in order for it to fall within the definition of . . . § 523(a)(8), the loan instrument must sufficiently articulate definite repayment terms and the repayment obligation must reflect the value of the benefit actually received [by the debtor] rather than some other ill-defined measure of damages or penalty.”  More importantly, the BAP relied on the Ninth Circuit’s language in Hawkins that the liquidated damages were dischargeable “because the plain language of this prong of the statute requires that a debtor receive actual funds in order to obtain a nondischargeable educational benefit.” 

As a result, since the provisions of the statute are to be construed narrowly, and because the plain language of the statute refers to “funds received” by the debtor, the BAP affirmed the ruling of the lower court that the debtor was dischargeable because the tuition credits were not “funds received” by the debtor.