Murphy v. Pennsylvania Higher Education Assistance Agency & Educational Credit Management Corp.

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_______________

m 01-10516

_______________

IN THE MATTER OF:

DANIEL G. MURPHY,

Debtor.

DANIEL G. MURPHY,

Appellant,

VERSUS

PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY

and

EDUCATIONAL CREDIT MANAGEMENT CORPORATION,

Appellees.

_________________________

Appeal from the United States District Court

for the Northern District of Texas

_________________________

March 5, 2002

Before SMITH and DEMOSS, Circuit Judges, Education Credit Management Corporation

and LAKE, District Judge.* (“ECMC”) is a non-profit Minnesota

corporation that provides financial assistance

JERRY E. SMITH, Circuit Judge: to students enrolled in higher education

programs. ECMC holds nine promissory notes

Daniel Murphy borrowed approximately executed by Murphy.1 As of March 15, 2000,

$55,000 in federally guaranteed loans to attend Murphy owed ECMC $64,178.54.

institutions of higher learning. Shortly after

receiving and L.L.M. degree, he filed for Pennsylvania Higher Education Assistance

chapter 7 bankruptcy. The bankruptcy court Agency (“PHEAA”) is a government agency

held that 11 U.S.C. § 523(a)(8) bars him from organized under the laws of Pennsylvania, that

discharging any of those loans in bankruptcy, provides financial assistance to students en-

because he obtained them to finance his rolled in higher education programs. PHEAA

education and signed promissory notes holds a promissary note dated July 5, 1996 for

reflecting that purpose. The district court federal Stafford loans totaling $18,5000. The

affirmed, and, finding no error, we also affirm. parties stipulated that Murphy spent $7,000 on

tuition and related expenses and $11,500 on

I. other living expenses; as of March 10, 2000,

Murphy matriculated at Michigan State he owed PHEAA $22,472.40.

University in 1986 and graduated in 1990. He

then attended Thomas M. Cooley Law School Murphy filed and obtained a consumer

for three years and received his J.D. degree. chapter 7 discharge, then filed an adversary

In 1997, he obtained an L.L.M. from Wayne proceeding against PHEAA and ECMC, al-

State University. He financed his education leging that the portion of the student loans

through approximately $55,000 in student spent on living expenses was nondischarge-

loans issued under the Federal Family able. The bankruptcy court granted summary

Education Loan Program “(FFELP”), 20 judgment in favor of PHEAA and ECMC.

U.S.C. §§ 1071 et seq.

II.

Murphy describes a uniform procedure for The Bankruptcy Code prevents former

receiving the loans: He appeared at the students from discharging educational loans in

financial aid office, discussed his needs, and bankruptcy. 11 U.S.C. § 523(a)(8). Courts

signed a promissory note. The lender have divided over whether students who use a

disbursed the loan to the school, which portion of their student loans for room, board,

withheld tuition and expenses and gave and living expenses can discharge that portion

Murphy the remainder for discretionary

spending. Murphy used the money to

purchase a car, housing, and food and to pay 1

The notes reflect the following dates and

fraternity dues and other ordinary living amounts: (1) May 3, 1993, $7,500; (2) April 18,

expenses. 1994, $8,500; (3) October 4, 1994, $4,500;

(4) April 17, 1995, $2,834; (5) April 17, 1995,

$3,334; (6) August 22, 1995, $5,666; (7) August

*

District Judge of the Southern District of 22, 1995, $6,666; (8) May 3, 1993, $4,000; and

Texas, sitting by designation. (9) April 18, 1994, $5,500.

2

of the debt in bankruptcy. Some courts have nondischargeability. In other words, it is the

held that when the lender makes the loan purpose, not the use, of the loan that controls.

available for educational purposes, no part of Treating FFELP guaranteed loans uniformly,

the loan can be discharged in bankruptcy, re- regardless of actual use, is true to the text and

gardless of the actual use.2 Other courts have will prevent recent graduates from reneging on

held that when the student spends the money manageable debts and will preserve the sol-

on noneducational items and services, that vency of the student loan system.

portion can be discharged.3 We conclude that

the text of the Bankruptcy Code, the Federal A.

Family Education Loan Program (“FFELP”), We review the bankruptcy and district

and Murphy’s promissory notes support court’s interpretation of § 523(a)(8) de novo.4

That section explains that a discharge “does

not discharge an individual debtor from any

2

Constr. Equip. Fed. Credit Union v. Roberts debtSS”

(In re Roberts), 149 B.R. 547, 551 (C.D. Ill. 1993)

(finding it unnecessary to remand to apportion loan for an educational benefit overpayment

proceeds spent on educational expenses and living or loan made, insured or guaranteed by

expenses); In re Pelzman, 233 B.R. 575, 580 a governmental unit, or made under any

(Bankr. D.D.C. 1999) (finding that university’s program funded in whole or in part by a

extension of credit for room and board fell within governmental unit or nonprofit

the scope of an educational loan); Stevens Inst. of institution, or for an obligation to repay

Tech. v. Joyner (In re Joyner), 171 B.R. 762, 764- funds received as an education benefit

65 (Bankr. E.D. Pa. 1994) (finding that room, scholarship or stipend, unless excepting

board, and other living expenses serve an

such debt from discharge under this

educational purpose and refusing to find that por-

paragraph will impose an undue

tion dischargeable); United States Dep’t of Health

and Human Servs. v. Vretis (In re Vretis), 56 B.R. hardship on the debtor and the debtor’s

156, 157 (Bankr. M.D. Fla. 1985) (finding that sti- dependents.

pend that provided for rent and living expenses was

not dischargeable). 11 U.S.C. § 523(a)(8). The section exempts

“educational . . . loan[s] made, insured or

3

Ealy v. First Nat’l Bank (In re Ealy), 78 B.R. guaranteed by a governmental unit.” The plain

897, 898 (Bankr. C.D. Ill. 1987) (finding portion language suggests two limitsSSthe adjective

of loan that student used to purchase truck, pay off

wife’s car, and pay for other miscellaneous

expenses dischargeable in bankruptcy); United

4

States Dep’t of Health & Human Servs. v. Brown We review a bankruptcy court’s legal

(In re Brown), 59 B.R. 40, 43 (Bankr. W.D. La. conclusions de novo. Texas Lottery Comm’n v.

1986) (instructing government to separate portion Tran (In re Tran), 151 F.3d 339, 342 (5th Cir.

of stipend spent on tuition and books from portion 1998). Summary judgment decisions and statutory

spent on rent and living expenses); Dep’t of Mental interpretation questions are legal findings that we

Health, State of Missouri v. Shipman (In re review de novo. Samson v. Apollo Resources,

Shipman), 33 B.R. 80, 82 (Bankr. W.D. Mo. Inc., 242 F.2d 629, 633 (5th Cir.) (statutory

1983) (discharging stipend partially because the interpretation), cert. denied, 122 S. Ct. 63 (2001);

debtor spent the proceeds on rent and living Herman v. Holiday, 238 F.3d 660, 663 (5th Cir.

expenses). 2001) (summary judgment).

3

“educational” and the requirement that a attending school full-time.5

governmental or nonprofit body make or

guarantee the loan. In the alternative, Murphy argues that the

phrase “educational benefit” modifies both

At first cut, PHEEA’s and ECMC’s loans overpayment and loan. He infers that the re-

satisfy these two limits. PHEEA and ECMC sulting phrase “educational benefit loan” re-

made the loans to Murphy pursuant to a quires not only that the lender intend that the

federal statute that provides for educational funds go towards educational purposes but

loans; the government also insured the loans also that the borrower spend the funds on

against Murphy’s default. tuition or books. For three reasons, Murphy’s

interpretation is strained, at best.

Murphy insists, however, that we should

read another limit into § 523(a)(8). He First, the word “educational,” rather than

contends that students may discharge the “educational benefit,” modifies “loan.” When

portion of their educational loans not spent or Congress amended § 523(a)(8) in 1990, it

tuition or books. He points to cases holding replaced “educational loan” with “educational

that “[t]he test for determining whether a loan benefit overpayment or loan.”6 Courts have

is a student loan is whether the proceeds of the interpreted the phrase “educational benefit

loan were used for ‘educational purposes.’” overpayment” to include a category of

E.g., In re Ealy, 78 B.R. at 898 (citations governmental programs that pay students for

omitted). None of these cases considers a loan the anticipated cost of future tuition.7 After

made pursuant to a federal student loan

statute, but Murphy would have us extend 5

their reasoning. He variously argues that the In re Pelzman, 233 B.R. at 580; In re Joyner,

171 B.R. at 764-65.

word “educational” or phrase “educational

benefit” permits students to discharge the por- 6

Before the 1990 amendments, § 523(a)(8)

tion of student loan proceeds spent on living excluded from discharge “an educational loan

or social expenses. made, insured or guaranteed by a governmental

unit, or made under any program funded in whole

The textual hook for Murphy’s argument is or in part by a governmental unit or nonprofit in-

puzzling; he reads too much into the adjective stitution.” 11 U.S.C. § 523(a)(8) (1988). To

“educational.” Section 523(a)(8) does not ex- expand § 523(a)(8)’s scope, the 1990 amendments

pressly state that only loans “used for tuition” added the categories of (1) overpaying a grant and

are nondischargeable. Nor does it define edu- (2) scholarship funds or stipends. Crime Control

cational loans as excluding living or social ex- Act of 1990, Pub. L. No. 101-647, § 3621(a), 104

penses. Barth v. Wis. Higher Educ. Corp. (In Stat. 4964, 4964-65 (1990). See Santa Fe Med.

re Barth), 86 B.R. 146, 148 (Bankr. W.D. Servs., Inc. v. Segal (In re Segal), 57 F.3d 342,

348-49 (3d Cir. 1995).

Wis. 1988) (“The language of section

523(a)(8) does not refer to whether the debtor 7

“An ‘educational benefit overpayment’ is an

or anyone else derived educational benefits.”). overpayment from a program such as the GI Bill

Loans for room and board facilitate an under which where students receive periodic

education and meet expenses incidental to payments while they are enrolled in school, but if

the students receive payments after they have left

(continued...)

4

the 1990 amendments, courts continued to (Merriam-Webster 3d ed. 1986).9 If

examine loans to determine whether they were “educational benefit ” modifies both

“educational loans”;8 no court has suggested “scholarship” and “stipend,” then Murphy’s

that the word “benefit” should reduce the interpretation of the phrase “educational

scope of covered loans. benefit” would eliminate a core meaning of the

word “stipend.” If the second “educational

Additionally, § 523(a)(8)’s second use of benefit” modifies only the word “scholarship”

the word “educational benefit” before and not the word “stipend,” then it is difficult

“stipend” creates a serious problem for Mur- to understand why the second invocation of

phy’s interpretation. The section employs a “educational benefit” should have more limited

parallel structure when describing another type scope than does the first.

of nondischargeable debt as arising from “an

education benefit scholarship or stipend.” In other words, why would Congress have

placed the phrase “educational benefit” before

“Stipend” is defined in part as “a regular two separate series of items in the same

allowance paid to defray living expenses; esp. paragraph and intended for it to modify

a sum paid to a student under the terms of a different elements in each series? The

fellowship or scholarship.” WEBSTER’S THIRD inclusion of the word stipend proves either

NEW INTERNATIONAL DICTIONARY at 2245 that “educational benefit” includes living

expenses or that it describes only the type of

overpayment and not the type of loan.

Finally, even if we were to interpret

7 § 523(a)(8) to require an “educational benefit

(...continued)

loan,” Murphy does not explain why that

the school, that is an educational benefit

overpayment.” College of Saint Rose v. Regner phrase requires us to look to use rather than

(In re Renshaw), 229 B.R. 552, 556 & n.7 (BAP purpose. All Stafford loans are intended to

2d Cir. 1999), aff’d, 222 F.3d 82 (2d Cir. 2000). convey educational benefits, and a grant of

New Mexico Inst. of Mining and Tech. v. Coole living expenses enables a student to attend

(In re Coole), 202 B.R. 518, 519 (Bankr. D.N.M. school full-time, which certainly has

1996); Alibatya v. New York Univ. (In re educational benefits. We now turn to the

Alibatya), 178 B.R. 335, 338 (Bankr. E.D.N.Y. FFELP to examine the unique features of loans

1995); Johnson v. Va. Commonwealth Univ. (In re made pursuant to that federal statute.

Johnson), 222 B.R. 783, 786 (Bankr. E.D. Va.

1998).

8

E.g., In re Renshaw, 229 B.R. at 559-60

9

(characterizing question as whether debtor received Other dictionaries contain even broader de-

an “educational loan” and not an “educational finitions of “stipend.” BLACK’S LAW DICTIONARY

benefit loan”); Shaffer v. United Student Aid at 1426 (West Deluxe 7th ed. 1999) (“A salary or

Funds (In re Shaffer), 237 B.R. 617, 618 (Bankr. other regular, periodic payment.”); XVI OXFORD

N.D. Tex. 1999) (same); In re Pelzman, 233 B.R. ENGLISH DICTIONARY 713 (Oxford 2d ed. 1989)

at 576-77 (same); In re Alibatya, 178 B.R. at 338 (“A fixed periodical payment of any kind, e.g. a

(“The term ‘educational’ is merely an adjective pension or allowance . . . . Also . . . to keep in

describing ‘loan.’”). stipend, to defray the maintenance of.”).

5

B. statutes interact coherently and harmonious-

The FFELP includes living expenses in its ly. 11 If Congress defined living expense al-

loans to full-time students for educational pur- lowances as serving an educational purpose in

poses. First, the FFELP contemplates that stu- the student loan statutes, we should assume it

dents can use federal loans to finance a full- also interpreted those living expense

time education. The statute distinguishes be- allowances as having an educational purpose in

tween students who take heavier course loads the Bankruptcy Code.

and those who take lighter loads.10 Permitting

students to take out loans for living expenses The evidence in this particular case

enables them to attend school full time. confirms that Murphy borrowed money for

living expenses as part of his broader effort to

Second, the FFELP calculates the “costs of obtain an education. In the promissory notes,

attendance” by including allowances for “room he acknowledged that he was borrowing the

and board,” 20 U.S.C. § 1097ll(3), money for educational purposes.12 He later

“miscellaneous personal expenses,” 20 U.S.C.

§ 1087ll(2), and child care, 20 U.S.C.

§ 1087ll(8). The FFELP’s need analysis as- 11

E.g., Pierce v. Underwood, 487 U.S. 552,

sumes that loans must cover a full-time stu- 561-63 (1988) (interpreting phrase “justified to a

dent’s living expenses so that he has the time high degree” in the Equal Access to Justice Act as

and energy to study and attend classes. having the same meaning as the same phrase

contained in other statutes and the Federal Rules of

Murphy argues that the Bankruptcy Code Civil Procedure); Lorillard v. Pons, 434 U.S. 575,

and not the FFELP should define discharge- 584 (1978) (looking to judicial interpretation of

identical terms in other statutes).

able and nondischargeable loans. First,

§ 523(a)(8) has a direct link to the Higher Ed- 12

The PHEAA note provides that the loans

ucational Act, because Congress originally in- were (1) issued under the Federal Stafford Loan

cluded it in the educational act and only later Program and (2) governed by the Higher Education

moved it to the Bankruptcy Code. In re Ship- Act of 1965, 20 U.S.C. § 1070. Murphy rep-

man, 33 B.R. at 82. Second, we should resented on the borrower certification of the note

attempt to give horizontal coherence to the that (1) he must return all loan proceeds not rea-

United States Code and ensure that different sonably attributed to educational expenses for the

cost of attendance on at least a half-time basis; and

(2) the total amount of loans received under the

10

As an initial condition for insurance note would not exceed his maximum eligibility

eligibility, a student must take half of the courses under the Higher Education Act of 1965. The

necessary for full-time enrollment. 20 U.S.C. amount of the PHEAA loans corresponded exactly

§ 1077(a). The need analysis then includes larger to the “cost of attendance” certified by Wayne

living expense allowances for full-time students State University on the note.

and smaller living expense allowances for part-time

or correspondence students. 20 U.S.C. § 1087ll(4) The ECMC note also included a “borrower

(withholding room and board and personal certification” that Murphy would “immediately

expenses from less than half-time students); 20 repay any loan proceeds that cannot reasonably be

U.S.C. § 1087ll (limiting the room and board costs attributed to educational expenses for attendance

of correspondence students to any necessary on at least a half-time basis at the certifying

residential training). (continued...)

6

testified that he borrowed the funds to support create two perverse effects: (1)

his full-time attendance. When a federal Dischargeability would reward irresponsible

student loan statute authorizes the loan, the student borrowers and punish responsible

student signs an agreement to spend the funds borrowers; and (2) the federal government

on educational expenses, and the government would have to pay out more to cover the costs

guarantees the loan, then the loan should be of defaulting students’ loans. Murphy’s

nondischargeable. interpretation would create the type of absurd

result that even rigid textualists seek to

C. avoid.15

Permitting students to discharge student

loans in bankruptcy because the student spent Murphy argues that private lenders

the money on social uses, alcohol, or even currently receive the benefit of governmental

drugs would create an absurd result. Students guarantees on these loans, so these lenders

who used the loan proceeds to finance an edu- have an incentive to expand the scope of “edu-

cation would retain the burden of paying them cational loans.” Perhaps. If so, then the gov-

even after a chapter 7 discharge; irresponsible ernment has the judicial remedy of suing pri-

students who abused the loans would gain the vate lenders directly and the legislative remedy

benefits of discharge. Courts have emphasized of redefining the needs analysis of the FFELP.

two purposes when analyzing § 523(a)(8): (1)

preventing undeserving debtors from abusing

educational loan programs by declaring The potential windfalls of private lenders do

bankruptcy immediately after graduating;13 and not provide a persuasive reason for us to

(2) preserving the financial integrity of the loan rewrite § 523(a)(8). Doing so would affect

system.14 Murphy’s interpretation would the private lenders only indirectly, because the

governmental insurers, rather than private

lenders, would bear the burden of the loss.

12

(...continued) This remedy also would create perverse

school.” incentives for student borrowers, squarely at

odds with the only purposes that Congress has

13

In re Segal, 57 F.3d at 348-49

(acknowledging that § 523(a)(8) was enacted to

14

“remedy abuses of the educational loan system by (...continued)

restricting the ability of a student to discharge an taxpayers.”); In re Alibatya, 178 B.R. at 340

educational loan by filing for bankruptcy shortly (citing a Senate Report, House Report, and Senator

after graduation”); Andrews Univ. v. Merchant (In DeConcini’s statement).

re Merchant), 958 F.2d 738, 740 (6th Cir. 1992)

15

(citing a House report and floor statement by E.g., Green v. Bock Laundry, 490 U.S. 504,

Senator DeConcini). 527 (1999) (Scalia, J., concurring) (“I think it

entirely appropriate to consult all public materials,

14

In re Renshaw, 222 F.3d at 86-87 (“Congress including the background of Rule 609(a)(1) and the

enacted § 523(a)(8) because there was evidence of legislative history of its adoption, to verify that

an increasing abuse of the bankruptcy process that what seems to us an unthinkable disposition . . .

threatened the viability of educational loan was indeed unthought of, and thus to justify a

programs and harm to future students as well as departure from the ordinary meaning of the word

(continued...) ‘defendant.’”).

7

ascribed to the FFELP.

Because the bankruptcy and district courts’

interpretation of § 523(a)(8) best comports

with the text of the Bankruptcy Code and

FFELP, the judgment is AFFIRMED.

8