(Reuters) – A New York-based federal appeals court on Thursday said that private student loans are not protected from discharge in bankruptcy.
In a 21-page decision, a three-judge panel of the 2nd U.S. Circuit Court of Appeals upheld U.S. Bankruptcy Judge Elizabeth Stong’s refusal to dismiss a lawsuit against student loan servicer Navient Solutions LLC accusing it of violating a prior court order discharging a borrower’s loans.
George Carpinello of Boies Schiller Flexner, who represented the borrower, said in an interview on Thursday that the decision is significant for people who might have wanted to seek bankruptcy relief to address their student loan debt but felt they couldn’t because they assumed their private loans would not be dischargeable.
“What’s really egregious about this is Navient has been telling people for years that their loans are non-dischargeable, when in fact they are dischargeable,” he said.
After graduating from Emerson College, the borrower, Hilal Homaidan, filed for Chapter 7 bankruptcy in New York and obtained a discharge in 2009 of his loans. But the discharge order was unclear about whether it applied to Homaidan’s two private loans, which totaled $12,567, according to the decision. Navient, succeeding Sallie Mae as the loan servicer, sought repayment of them in any case.
Homaidan paid the loans back, but in 2017 reopened his bankruptcy case to file a putative class action against Navient accusing it of a pattern of demanding repayment on loans that were discharged in bankruptcy. Navient moved to dismiss the case, saying the loans could not be thrown out under a provision of bankruptcy law that prevents a borrower from discharging “an obligation to repay funds received as an educational benefit.”
Navient, represented by McGuireWoods, argued that those words encompass not only government loans but private student loans as well, while Homaidan argued that it only applies to a narrow group of conditional grant payments.
In the decision, penned by Circuit Judge Dennis Jacobs and joined by Judges Denny Chin and William Nardini, the court agreed with the bankruptcy court’s finding that the language of the “educational benefit” provision is “an unconventional way to discuss a loan.” The court said that if Congress intended to protect all educational loans from discharge, “it would not have done so in such stilted terms.”
The 5th and 10th U.S. Circuit Courts of Appeals have issued similar rulings on private student loans.
Navient said in a statement that the appeal relates only to one aspect of the case and it will continue presenting defenses on other matters in the case.
“We recognize that some student borrowers face long-term financial challenges, and this is why, for several years, Navient has recommended bankruptcy reform that would allow federal and private student loans to be dischargeable in bankruptcy after making a good-faith effort to repay,” Navient said.
Earlier this year, Navient defeated an attempt by a handful of student loan borrowers to push it into an involuntary bankruptcy.
The case is Hilal K. Homaidan v Sallie Mae, Inc. et al., U.S. 2nd Circuit Court of Appeals, No. 20-1981.
For Homaidan: George Carpinello, Adam Shaw, Robert Tietjen and Jenna Smith of Boies Schiller Flexner, Austin Smith of Smith Law Group, Lynn Swanson and Peter Frieberg of Jones Swanson Huddell & Daschbach and Jason Burge of Fishman Haygood
For Navient: Thomas Farrell and Elizabeth Sieg of McGuireWoods