Saturday, October 3, 2015

Discharging Student Loans in Oregon Bankruptcy Courts

This post is the first in a five-part Q&A series about discharging student loans in Oregon bankruptcy courts. The first post discusses the general rule that student loans cannot be discharged in bankruptcy. It explores the two categories of student loans subject to the general rule, and summarizes the Brunner undue hardship exception to the general rule.

The second, third, and fourth posts discuss the separate prongs of the Brunner undue hardship test, and highlight recent Oregon bankruptcy court opinions analyzing each prong. The fifth post discusses income-based repayment options, chapter 13 bankruptcy options, and how to handle student loan collector harassment, default, and collection lawsuits.

Q: Can my student loans be wiped out in bankruptcy?

A: Probably not.

The general rule that student loans cannot be discharged in bankruptcy is found in section 523(a)(8) of title 11 of the Bankruptcy Code, as revised in 2005. The section states that a bankruptcy discharge does not apply to any debt:

unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for--(A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or (B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.

The general rule is to be strictly construed in favor of debtors (people who file bankruptcy) and against student loan creditors. In re Riso, 978 F.2d 1151, 1154 (9th Cir. 1992).

Q: Is my debt considered a non-dischargeable student loan?

A: It depends who made the loan and for what purpose.

Not all educational debts are subject to the general rule of non-dischargeability. The general rule only applies to (A) obligations incurred for an educational benefit, scholarship, stipend or loan, incurred to the government or a nonprofit institution, and (B) qualified educational loans incurred to attend an educational institution eligible for aid under the Higher Education Act.

Category (A) includes debts incurred to attend apprenticeship programs funded by nonprofit institutions. In re Rosen, 179 B.R. 935 (Bankr. D. Or. 1995) (debt to union trust fund plumbing apprenticeship program not dischargeable).

Category (A) includes student loans guaranteed by non-profit institutions incurred by co-signors who received no direct educational benefit. In re Garelli, 162 B.R. 552 (Bankr. D. Or. 1994) (parents could not discharge co-signed student loans for daughter's educational benefit).

Category (B) does not include private student loans to attend a school that is not eligible to receive aid under Title IV. In re Nunez, 527 B.R. 410, 416 (Bankr. D. Or. 2015) (private loan owed to Key Bank to attend pilot school was discharged because the pilot school was not listed on the Department of Education's Federal School Codes Lists).

Q: Can I discharge my student loans under the undue hardship exception?

A: Only if you have minimal disposable income, no potential to increase your income in the future, and have made prior good faith efforts to repay your loans.

The general rule contains an exception: student loans that would impose an undue hardship on a debtor and the debtor's dependents can be discharged. Oregon bankruptcy courts use the Brunner test to determine whether the undue hardship exception is met. In order to discharge student loans in Oregon, debtors must demonstrate that:

1. They cannot, based on their current income and expenses, maintain a minimal standard of living for themselves or their dependents if required to repay the student loans.

2. Additional circumstances exist which make it likely that the state of affairs satisfying the first prong will persist for a significant portion of the repayment period.

3. They have made good faith efforts to repay the student loans.

These Brunner prongs will be discussed in detail in the blog posts to come.

Michael Fuller is a partner at Olsen Daines in Portland, Oregon and a consumer law adjunct professor at Lewis & Clark Law School.

Friday, August 28, 2015

Wells Fargo Seeks Sanctions against Consumer Law Firm; Loses on Appeal

Yesterday marked the second time in a month the Ninth Circuit issued an opinion concerning attorney sanctions under 28 U.S.C. § 1927.

See prior post: Frivolous Ninth Circuit Bankruptcy Appeal Results in Sanctions

On Thursday, the Ninth Circuit held that 28 U.S.C. § 1927 does not allow imposition of sanctions against law firms, only individual attorneys.

Read the entire opinion here.

The appeal involved the firm of Kaass Law, which had represented a consumer in a lawsuit against Wells Fargo.

Wells Fargo sought sanctions after Kaass Law's attorney filed a baseless complaint accusing the bank and 9 other companies of improper credit reporting. For whatever reason, Wells Fargo did not obtain sanctions against the firm's attorney personally, and did not seek sanctions pursuant to the court's inherent authority, instead relying solely on 28 U.S.C. § 1927.

28 U.S.C. § 1927 allows imposition of sanctions against "any attorney" who unreasonably and vexatiously multiplies the proceedings in a case.

The trial court granted Wells Fargo's motion for sanctions and Kaass Law appealed.

The Ninth Circuit Court of Appeals panel reversed the trial court. The panel reasoned that while sanctions might be available against a law firm pursuant to a trial court's inherent authority, the language of 28 U.S.C. § 1927 only applies to attorneys.


Michael Fuller is a partner at Olsen Daines PC in Portland, Oregon and an adjunct professor of consumer law at Lewis & Clark Law School.

Wednesday, August 5, 2015

Frivolous Ninth Circuit Bankruptcy Appeal Results in Sanctions

Yesterday the Ninth Circuit Court of Appeals sanctioned a former ski resort developer and his bankruptcy attorney for filing a frivolous appeal.

The appeal stemmed from an unsuccessful motion to disqualify the Montana judge overseeing the developer's bankruptcy case. After the motion was denied, the developer, Timothy Blixseth, and his bankruptcy attorney, Michael Flynn, appealed to the Ninth Circuit.

The Ninth Circuit denied the appeal in 2014, and subsequently issued an order to show cause why the two shouldn't be sanctioned for filing a frivolous appeal.

Federal Rule of Appellate Procedure 38 and 27 U.S.C.  § 1927 permit imposition of sanctions against appellants and their attorneys for filing meritless appeals.

The Ninth Circuit ordered the two men to pay $500 damages each, plus reimbursement of the attorney fees and costs incurred defending against their appeal.

The Court reasoned that Blixseth failed to backup his accusations "with even a shred of credible evidence" and Flynn had a "propensity for distortion" that breached his duty of candor in dealing with the Court.

Click here to read the full order.


Michael Fuller is a partner at Olsen Daines PC in Portland, Oregon and an adjunct professor of consumer law at Lewis & Clark Law School.

Tuesday, July 21, 2015

National Mortgage Settlement Not Property of Bankruptcy Estate, 9th Cir. BAP Rules

The Ninth Circuit Bankruptcy Appellate Panel recently denied a trustee's motion to seize a settlement payment received by an Arizona consumer after bankruptcy.

Almost 6 years after filing chapter 7 bankruptcy, Arizona consumer Carrie Neidorf received a $31,250 settlement check from Bank of America.

The check was part of a national mortgage servicing settlement between banking regulators and certain financial institutions reached in February 2012. The settlement concerned widespread illegal foreclosure tactics by each of the nation's largest mortgage servicers.

The bankruptcy judge ultimately denied the trustee's motion to seize Neidorf's settlement payment, and the trustee appealed. On appeal, the trustee was represented by Michael Paul Lane and the consumer was represented by her bankruptcy attorney, Neeley Law Firm PLC.

The appellate panel determined that the trustee could not meet his burden to prove the settlement payment was property of the estate. The panel reasoned that the debtor was entitled to participate in the settlement based on illegal foreclosure activities occurring only after she filed bankruptcy.

Read the entire case opinion here.


Michael Fuller is a partner at Olsen Daines PC in Portland, Oregon and an adjunct professor of consumer law at Lewis & Clark Law School.

Monday, July 13, 2015

9th Cir. Allows Second Mortgage Strip Off in Chapter 20 Bankruptcy

Last week, the Ninth Circuit Bankruptcy Appellate Panel ruled that consumers can wipe out second mortgage liens in so-called 'chapter 20' bankruptcy.

Read the full opinion, In re Boukatch, here.

The term 'chapter 20' means a consumer who files chapter 13 bankruptcy within four years after receiving a discharge of debts in chapter 7 bankruptcy.

The Bankruptcy Code generally allows consumers to strip off second mortgage liens in chapter 13 bankruptcy, so long as their homes are worth less than they owe on their first mortgages. See 11 U.S.C. §§ 506(a) and 1322(b).

However, the Arizona bankruptcy judge in the Boukatch case denied the consumers' motion to strip lien because they recently received discharge in chapter 7 and thus were not eligible for discharge in chapter 13.

The panel reversed the Arizona bankruptcy judge and held the consumers could strip their second mortgage lien in chapter 13, regardless of discharge eligibility.

After reviewing the statutory language in Title 11, the panel reasoned that chapter 20 lien stripping should be allowed because "nothing in the Bankruptcy Code prevents it."

The Ninth Circuit's Boukatch opinion joins the "growing consensus of courts" across the country to allow chapter 20 lien stripping.

The Ninth Circuit includes consumers in Alaska, Arizona, California, Idaho, Montana, Nevada, and Oregon.


Michael Fuller is a partner at Olsen Daines PC in Portland, Oregon and an adjunct professor of consumer law at Lewis & Clark Law School.

Monday, June 15, 2015

SCOTUS Denies "Fees on Fees" for Bankruptcy Estate Professionals

Today the U.S. Supreme Court decided that professionals employed by bankruptcy estates are not entitled to reimbursement for time spent defending their fee applications.

See related post: Supreme Court to Resolve Bankruptcy "Fees on Fees" Issue

Today's opinion, Baker Botts v Asarco, involved law firms hired by the estate of a bankrupt copper mining company to prosecute fraudulent transfer claims.

The law firms successfully sued various entities on behalf of the mining company and obtained several billion dollars for the estate.

The bankruptcy judge compensated the firms over $124 million for their time spent prosecuting the case, including over $5 million for time spent defending their fee applications over the mining company's objection.

The Supreme Court affirmed the Court of Appeals for the Fifth Circuit in holding that the sections 327(a) and 330 of the Bankruptcy Code do not permit compensation for time spent defending fee applications.

The Court recognized that the American Rule traditionally requires each party to pay their own attorney fees, absent specific Congressional intent to the contrary. The Court reasoned that Congress could have provided for "fees on fees" for bankruptcy professionals, as it did in section 110(i)(1)(C) for the U.S. trustee, but chose not to.

Written by Michael Fuller.


Michael Fuller is a partner at OlsenDaines in Portland, Oregon and an adjunct consumer law professor at Lewis & Clark Law School.

Fuller's boutique banking law practice focuses on bankruptcy enforcement under the automatic stay and discharge injunction.

Wednesday, May 20, 2015

9th Circuit Reverses FDCPA Judgment on Excessive Interest Claim

By Michael Fuller, The Underdog Lawyer ®

Last week the 9th Circuit Court of Appeals ruled in favor of a debt collector by reversing summary judgment against it on an FDCPA claim for allegedly collecting excessive interest.

In May 2012, a consumer received a collection letter demanding she pay a dental debt of $3,144, plus 10% interest.

The consumer sued the collector under the FDCPA, claiming the demand for 10% interest was not permitted under her contract or California law.

The district court later entered summary judgment in favor of the consumer, reasoning that California Civil Code did not allow collection of prejudgment interest without first obtaining a judgment.

The Ninth Circuit panel disagreed and reversed the district court. The panel's opinion, Diaz v. Kubler Corp., interpreted California law to allow prejudgment interest without a judgment, so long as the debt amount was calculable on a particular day.