Amicus Curiae Brief — Tennessee Student Assistance Corporation v. Hood

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No. 02-1606 OFFICE OF THE CLERK

IN THE

Supreme Court of the Anited States

TENNESSEE STUDENT ASSISTANCE CORPORATION,

Petitioner,

PAMELA L. HOOD,

Respondent.

ON WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

BRIEF OF THE NATIONAL ASSOCIATION OF

CONSUMER BANKRUPTCY ATTORNEYS AS

AMICUS CURIAE IN SUPPORT OF RESPONDENT

JOHN RAO

NATIONAL CONSUMER LAW CENTER

77 Summer Street, 10th Floor

Boston, MA 02110

’ (617) 542-8010

HENRY J. SOMMER*

*Counsel of Record

MILLER, FRANK & MILLER

21 South 12th Street, Suite 640

Philadelphia, PA 19107

(215) 242-8639

Counsel for Amici Curiae

BATEMAN & SLADE, INC. BOSTON, MASSACHUSETTS

TABLE OF CONTENTS

TABLE OF AUTHORITIES. ...........:.cscceeeeeeeeeeeeeeeseeeeees iil

STATEMENT OF INTEREST OF AMICUS CURIAE .... 1

SUMMARY OF ARGUMENT .........-..:eceeeeereeeereeeeeeeseess 3

ARGUMENT. .........c0ccecceeceeceeceeeeeeeceeeeeeeeseneesnenenseeeseses 5

I. BARRING BANKRUPTCY COURTS

FROM MAKING UNDUE

HARDSHIP DETERMINATIONS

WILL LEAVE STUDENT LOAN

DEBTORS WITHOUT AN

EFFECTIVE REMEDY. ..........0::0:eeeeeeeees )

A. State Guaranty Agencies

Need Not Rely Upon

Conventional Collection

Methods And Consequently

Rarely File State Court

Actions To Collect Student

LAGIEB. ..cocccccccceccsscccccvecscseseccscsees 6

B. The Extra-Judicial Debt

Collection Procedures Used

By Student Loan Guaranty

Agencies Do Not Afford

Bankruptcy Debtors A

Meaningful Opportunity To

Enforce Federal

Bankruptcy Law. .........::0eseeeeee 11

C. Unlike Guaranty Agencies

And State Courts, Federal

Bankruptcy Courts Are

Uniquely Positioned And

Qualified To Make Student

Loan Dischargeability

DOCCTEREMIARIONS. .......cccccccccsecess 15

D. Federal And State

Repayment And Discharge

Options Are Not A

Substitute For A

Bankruptcy Undue

Hardship Discharge. ............... 20

Il. THE COURT’S RULING ON THE

ABROGATION ISSUE SHOULD

NOT ALTER A STUDENT LOAN

DEBTOR’S RIGHT TO ENFORCE

THE UNDUE HARDSHIP

PROVISIONS OF THE

BANKRUPTCY CODE BY

SEEKING PROSPECTIVE RELIEF

AGAINST STATE OFFICERS. ............. 22

CTITRRAIINIGS occecesecsesncseessstssiiiiibssiianesimeeneeialiiaainnnnnnnnnn 28

TABLE OF AUTHORITIES

CASES:

Alden v. Maine, 527 U.S. 706, 119 S.Ct. 2240,

144 L.Ed.2d 636 (1999) .........ccccceeeeeeeeees 10, 23

Board of Governors v. MCorp Financial, Inc,

502 U.S. 32, 116 L.Ed 2d 358 (1991) ......... 13n

Bosarge v. U.S. Dept. of Education, 5 F.3d 1414

(11th Cir. 1993), cert. denied,

EE IE ocncscenssngsesnsesoscoveosvecces 8,9

Brunner v. New York State Higher Educ. Servs.

Corp., 831 F.2d 395 (2d Cir. 1987) ............ 19n

Edelman v. Jordan, 415 U.S. 651, 94 S.Ct. 1347,

SP GE ERED ccccccsccccccccececcvcees 24, 25n

Ex Parte Young, 209 U.S. 123, 28 S.Ct. 441,

ERE Ee ERED soscccccccccccecoccccceveseeees passim

Goulet v. Educ. Credit Mgmt. Corp., 284 F.3d 773

I ts icdtncccteesersococsososcesccosors 19n

Green v. Mansour, 474 U.S. 64, 106 S.Ct. 423,

PEE EET DB GREENE cccccccccocccscvcccsccosccocscecs 24

Grogan v Garner, 110 U.S. 1945, 111 S.Ct. 654,

109 L. Ed. 2d 308 (1991) .o.cccccccscecscseseseseeeeees 20

Idaho v. Coeur d’Alene Tribe of Idaho,

521 U.S. 261, 117 S.Ct. 2028,

138 L.Ed.2d 438 (1997) .........ccccceceeeeeeees 23, 27

In re Agnew, 144 F.3d 1013 (7th Cir. 1998) ........... 27

In re Andresen, 232 B.R. 127

BME s ED Gite BOOED cvcccccccscccscesccccscvcccccsceses 17

In re Benner, 156 B.R. 631

(Bankr. D. Minn. 1993) ........0..cc ccc cccceeceee eee 16

In re Bentley, 266 B.R. 229

(B.A.P. lst Cir. 2001) 2.0.0... ccccccceceeeeeeeeeees 16

In re Brightful, 267 F.3d 324 (3rd Cir. 2001) ........ 19n

In re Bugos, 288 B.R. 435

(Bankr.E.D.Va. 2003) .............ccccccceeceeeueeeeeeee 18

In re Chandler, 210 B.R. 898

(Bankr. D.N.H. 1997) .0........cccccccccceceececeeeeenes 16

In re Cheney, 280 B.R. 648

" Rs CN SEINE tecrcetertnsnitntepmecintcinctedinmenemines 22

In re Cox, 186 B.R. 744

Gamer. N.D. Pim. 1996) ....cccccccoscccccsccccssccesees 16

In re Ekenasi, 325 F.3d 541 (4th Cir. 2003) ........ 19n

In re Ellett, 254 F.3d 1135 (9th Cir. 2001),

cert. denied, Goldberg v. Ellett,

934 U.S. 1127, 122 S.Ct. 1064,

351 L.Ed. G6B (ZOO) .....cccccccccccccccccccssecees 27

In re Ford, 269 B.R. 673

OS roe 22

In re Grigas, 252 B.R. 866

EEN MPUUTUEEs: CUNT inncnindinensdibiaesiniiiiiiidmasatess 17

In re Hinkle, 200 B.R. 690

(Bankr. W.D. Wash. 1996) ...............0....ccc0ee. 17

In re Holland, 230 B.R. 387

GSUP UE GENIE ecuntodsesscsecenenconenatacees 24n

In re Hornsby, 144 F.3d 433 (6th Cir. 1998) .......... 17

In re Janc, 251 B.R. 525

(Bankr. W.D. Mo. 2000) ...............:.00+ 24n-25n

In re Kahl, 240 B.R. 524

(Banker. E.D. Pa. 1999) ...........cccccsecescesereseees 27

In re Kapsin, 265 B.R. 778

(Bankr.N.D.Ohio May 29, 2001) ................06 18

In re Kopf, 245 B.R. 731

(Bankr. D. Me. 2000) ..............:eeeeeeeeeees 21, 21in

In re Morrell, 218 B.R. 87

(Bankr. C.D. Cal. 1997) ........::ccceeeeeeeeeeeeeenees 27

In re Morris, 277 B.R. 910

(Bankr.W.D.Ark. 2002) ........-.:cccceeeeeeeeeeeeeeees 17

In re Myers, 280 B.R. 416

(Bankr.S.D.Ohi0 2002) ........-..cceeeceeeeeeeeeeneees 17

In re Rifino, 245 F.3d 1083 (9th Cir. 2001),

cert. denied sub nom., Nowland v. U.S.,

S34 U.S. G27 (QOO]) .........eerrccccccccrscrecsereeees 19n

In re Saulter, 133 B.R. 148

(Bankr. W.D. Mo. 1991) .........:ccceeeeeeeeeeeeeeeees 16

In re Schmitt, 220 B.R. 68

(Bankr. W.D. Mo. 1998) ............:06006 16, 17, 27

In re Simmons, 288 B.R. 737

(Bankr.D.N.D. Tex. 2003) ..........:ccceeeeeceeeerees 16

In re Snyder, 228 B.R. 712

(Bankr.D.Neb. 1998) ............:c:ceeeeeeeeees 19, 24n

In re Strickland, 181 B.R. 598

(Bankr. N.D. Ala. 1995) ..........:ccceeeeeneeeeeeeeeees 16

In re Tucker, 159 B.R. 325

SL TG SEED TEED tccndnnteresemniadininainiadenens 16

In re Williams, 253 B.R. 220

SES WEE UNE: SEEMED ccancnccescccecsncnctensesse 16

Katchen v. Landy, 382 U.S. 323, 86 S.Ct. 467,

Se & ff Ee 15, 15n

Kawaauhau v. Geiger, 118 S.Ct. 974 (1998) ............. 1

Local Loan Co. v. Hunt, 292 U.S. 234,

54 S.Ct. 695, 78 L.Ed. 1230 (1934) .............. 20

Long v. Educ. Credit Mgmt. Corp., 322 F.3d 549

SEIMEI, SEMIN ° caidipeiesiaissiaisdiimiiasisiinmiibineaiendeas 19n

Maryland v. Antonelli Creditors’ Liquidating Trust,

123 F.3d 777 (4th Cir. 1997) .................008 24n

Pennhurst State School & Hosp. v. Halderman,

465 U.S. 89, 104 S.Ct. 900,

og eee 23

Quern v. Jordan, 440 U.S. 332, 99 S.Ct. 1139,

7 ek Ff, eee 24, 25n

San Rafael Baking Co. v. Northern Calif. Bakery

Drivers Sec. Fund, 219 B.R. 860

Aah Se Es GDUINEED ciinidedectsnandcnctnncenanenenines 13n

Seminole Tribe of Florida v. Florida,

517 U.S. 44, 116 S.Ct. 1114,

BDO LEE. De BSS (1DBG) ...cccccccccccccccccseses 23, 26

State of Texas v. Walker, 142 F.3d 813

(Sth Cir. 1998), cert. denied,

EE TRS UII auincccnnsantuddotadimmenesenion 24n

aa = _ -€ -— oe

— ee le eC;

vii

Student Loan Marketing Ass'n. v. Riley,

104 F.3d 397 (D.C. Cir. 1997), cert. denied,

Be UE, De GOD =ctctccecccccensrscsscnccessssnssses 5,6

Sunrise Development, Inc. v. FDIC, 33 F.3d 106

fs | ene 13n

CONSTITUTIONAL PROVISIONS, CODES,

REGULATIONS AND RULES:

United States Constitution

BEBE, BD secccccccscnscccvesceccsvesccssscescescesnsessnses 26

United States Code

BD cenenccsnncnsssnscnssesesincinarvnmanemmnnssenntiins 25n

BD BINED cconcenccoccocsccscccessvscocescsscscssosssos passim

BD BBRITTIAA, .n.cccccccsccccccscocccesccecccccssescosccsesees 12

BD BEIND ccccccccccnccscccscccccssvconscoccnssenscsccoosonessos 25n

BB URGE, BO ccceccncccssccccsccscnscesessvsensccssssesnes 14

BG CEE. Be Be ccceccccscnnccccccecsececcosenssnsesscsss 16

D2 U.BA.C. © LBBB .ncocccccccsccccssscsccccecseseces 15

22 UB.C. © ASABE ..cccccccccsccsceese 15, 16, 16n

A 13n

BD U.B.C. B UOTE ..ccccccceceseccecesescccsescosesccsss 6n

BO UBA.G. 8 ROTTER acccccsccsccnccsccccsccccsccscsssceseses 5

DD UDG. B BEFGID wccccceccccccccescccccesccssescoscossees 6

BD UB... B BE FTID ccccccecccsccccccescscesscssecscess 22n

BD UGG. © BD cccceccccccccccccccccecsccesccssscesescese 6

BD UGG. B BETO. cccecccccccccccsccccccsesescccessscess 22n

BD UBAG. B BGT .ncccccccccccsccccsccsccsesescsseses 25n

BD U.B.C. B DDL ..cccccccccccccccscccsesccescccesecess 9

BO U.B.C. 8 1GBGR ...ccccccccesccsccscsccscsccsccccscosccees 7

20 U.S.C. & 1ODSala) ........cccccescccrccccecccecscoseeees 7

QO U.S.C. § 1ODSEMAMS) ........ccrccccccccccocccecceees 11

20 U.S.C. § 1095alb) ........cccccccscscssesesceseseeees 14

ORI, 0 ID aiisctittitetnreencttensinnestinieens 7n

pS 26n

28 U.S.C. § 1334 (b) .....cccccccccccseseseseseeceeeees 12n

“Tp 9

31 U.S.C. § 3716(c)(3)(A) fii) ....eccccccccceeeceeeeeeeees 9

31 U.S.C. § 3720A(A) ..ccccccccccecececseseseeeeevevecseee 8

|), ? je 10

Code of Federal Regulations

31 CLF.R. § 285.4(€) ...ccccccccccccecescscscsceeeeeseeees on

“Tt | 13, 13n

I 13n

NN ELT REL: 13

34 C.F.R. § 30.33(d)(3) ....cccccccccccceseseseeserees 14n

ES 20n

94 CLF.R. § 682.402 ........cccccccccccecececcssesscee: 21n

34 C.F.R. § 682.402(k) oooccccccccccccscseseseeseeees 25n

34 C.F.R. § 682.410(b)(1) o.c.cccccccecsceeeeceeeeeees on

34 C.F.R. § 682.410(b)(2) ..cccccccccccceceeeeeeeeees 20n

34 C.F.R. § 682.410(b)(6)(i) ....ccccececeececeeeeeeees 7

34 C.F.R. § 682.410(b)(6)fii) .....c.cccccceeecseeees 8,9

34 C.F.R. § 682.410(b)(6)fiii) oo... ce ccecceecceeeeeee. 8

34 C.F.R. § 682.410(b)(6)fiv) ....cccccccccceceeeeeeeee. 8

34 C.F.R. § 682.410(b)(8) o...ccccccccccececeeceeseeseees 7

34 C.F.R. § 682.410(b)(9)fi)(A) ..cececccceeeeees 7, 7n

34 C.F.R. § 682.410(b)(9)fi)(E) o....ecccccecceeeeee. 11

34 C.F.R. § 682.410(b)(9)fi)(J) .ccccccccececeeceeee. 13

34 C.F.R. § 682.410(b)(9)(i)(M) ......cccceceeee. lin

34 C.F.R. § 685.209(a)(2)(i) ..ecccccccceceeecseeees 22n

34 C.F.R § 685.209(C)(5) .occccccccceceseeceeeceeeeeees 22

Federal Regulations

59 Fed. Reg. 22,474, 22,475, Comment 75

RR oes 13, 14n

61 Fed. Reg. 49382 (Sept. 19, 1996) ............ 6n

Federal Rules of Bankruptcy Procedure

BR TINS ceccesecnsrseceneseseniseccessessansevesssinensens 15n

BRD GF caneccecsescccscsscnnssssncsevesscsssiecsenens 27n

MISCELLANEOUS:

Collier on Bankruptcy (15 ed. rev.) ............. 25n, 27n

H.R. Rep. No, 595, 95th Cong. lst Sess. 43-50

PROT GD ccecccccecscccosovcssevessovecssseesonevevessnccnssesoose 26

Pub. L. 102-SB9, & SlUpla) ......crccccccrcresrevcccccccccrevecevens 8

http: / /www.ed.gov/ offices /OSFAP/DCS/forms

/Request.For. Hearing.pdf ...............:0.00008 lin

http: / /www.ed.gov/ offices /OSFAP/DCS/awg.

I wcecessunsveceievesdinsansonetesectnasicccstnnmnsssonesins 12n

http: / /www.collections.sfa.ed.gov/contractors/

pcanew/awg/AWG_Hearings_Process.

TD « coccsntenienninininsmeneiinininaidenianeneiit 12n

ee eee ee

—_— -_-

STATEMENT OF INTEREST OF AMICUS CURIAE '

Incorporated in 1992, the National Association

of Consumer Bankruptcy Attorneys (“NACBA”) is a

non-profit organization of more than 1,200 consumer

bankruptcy attorneys nationwide. Member attorneys

and their law firms represent debtors in an estimated

300,000 bankruptcy cases filed each year. NACBA is

the only national association of attorneys organized

for the specific purpose of protecting the rights of

consumer bankruptcy debtors.

NACBA’s corporate purposes include education

of the bankruptcy bar and the community at large on

the uses and misuses of the consumer bankruptcy

process. Additionally, NACBA advocates nationally on

issues that cannot adequately be addressed by

individual member attorneys. NACBA has filed amicus

curiae briefs in various appellate courts seeking to

protect the rights of consumer bankruptcy debtors,

including briefs filed in this Court. See, e.g.,

Kawaauhau v. Geiger, 118 S.Ct. 974 (1998).

The NACBA membership has a vital interest in

the outcome of this appeal. NACBA members primarily

represent individual low- and moderate-income wage-

earners. These debtors and their families have a great

need to know that they can determine the scope of

their bankruptcy discharges within the ambit of their

bankruptcy cases and obtain, as Congress intended,

speedy, inexpensive, and effective enforcement of their

federal bankruptcy rights from the federal bankruptcy

court. They simply do not have the funds to pay for

! All parties to this case have consented to the filing of this

brief, and letters indicating consent have been submitted

contemporaneously. No counsel for any party authored this brief

in whole or in part, and no person or entity other than amicus

cunae, their counsel, or their members made a monetary

contribution to the preparation of this brief.

litigation in courts other than the court in which they

have already filed a bankruptcy case.

Additionally, NACBA is gravely concerned about

the potential for the effective loss of discharge rights

by consumer debtors. If a state is permitted to avoid

litigation during the bankruptcy case and proceed in

violation of a debtor’s discharge in another court or by

using extra-judicial administrative collection

procedures, debtors could lose valuable rights simply

because they are no longer able to _ obtain

representation. After the conclusion of the

bankruptcy case, when consumer debtors are no loner

represented by their bankruptcy attorneys, many

debtors do not understand the significance of post-

bankruptcy court or administrative actions against

them, or the fact that they must reassert their

bankruptcy rights, or even exactly what those rights

are.

Most importantly, NACBA believes it is

important to preserve the principle that states, like

other governmental entities, are bound by the

bankruptcy laws and should not be able to ignore

them. Even if this Court concludes that a state’s

immunity from suit on sovereignty grounds places

limitations on retrospective relief for state violations of

the Bankruptcy Code, those limitations should not be

expanded into a new and unfounded doctrine that

would also prevent the prospective relief which has

long been available under principles established by

this Court.

SUMMARY OF ARGUMENT

By asserting immunity from suit based on state

sovereignty grounds, the Petitioner seeks to shield

itself from a bankruptcy court determination that the

Respondent’s student loan is subject to discharge.

The Petitioner suggests that abrogation is unnecessary

because student loan bankruptcy dischargeability can

be raised as a defense in some future state-initiated

collection action. However, it is the experience of

NACBA members that student loan guaranty agencies

rarely file court collection actions. This is because

guaranty agencies are armed with extra-judicial

collection tools that are as effective, if not more

effective, than traditional state court collection

remedies.

Unlike ordinary creditors, guaranty agencies

can garnish wages, intercept tax refunds and seize

retirement or other government benefits without

bringing a court action, and can do so unhampered by

state exemption laws, statutes of limitation, or other

state and federal law collection _ restrictions.

Importantly, a guaranty agency that is determined to

avoid an undue hardship’ dischargeability

determination after a debtor has filed bankruptcy can

simply elect not to bring a state court action and

instead rely exclusively upon non-judicial collection

procedures. And the _ extra-judicial collection

procedures used by guaranty agencies do not afford

bankruptcy debtors a meaningful opportunity to

obtain a dischargeability determination or otherwise

enforce federal bankruptcy law. Thus, the inability of

debtors to obtain a timely bankruptcy court

dischargeability ruling would effectively mean that the

Bankruptcy Code right to a student loan hardship

discharge will exist without a remedy.

The entire bankruptcy jurisdictional scheme

evidences Congressional intent that all matters related

to the bankruptcy case be decided expeditiously and

inexpensively in the federal bankruptcy courts.

Consumer bankruptcy debtors simply do not have the

resources to litigate in multiple courts. or

administrative agencies to protect their rights, and

requiring them to do so would cause the effective loss

of the rights Congress intended them to have.

Moreover, a contemporaneous. determination of

student loan dischargeability is necessary for the

proper administration of the bankruptcy case itself.

Since debtors often have student loan obligations

owing to more than one lender or state guaranty

agency, or they may have taxes and other obligations

owing to different states, a central forum such as the

bankruptcy court must be available for resolution of

all debts of the debtor in order to avoid inconsistent

and inequitable results.

Finally, regardless of the outcome of the

abrogation issue in this case, amicus requests that

this Court ensure that debtors retain an effective

remedy to enforce federal bankruptcy law. In recent

opinions, this Court has reaffirmed the vitality of the

Ex Parte Young doctrine, which permits suits for

prospective declaratory and injunctive relief against

state officers to prevent them from violating federal

law. This doctrine remains an important tool for

vindicating the Supremacy Clause’s dictates that state

officials are bound by federal law. Amicus urges this

Court to broadly reaffirm the use of the Young

doctrine generally in bankruptcy cases and specifically

in proceedings brought to enforce the right to a

student loan discharge under § 523(a)(8).

See

)

ARGUMENT

I. BARRING BANKRUPTCY COURTS FROM

MAKING UNDUE HARDSHIP

DETERMINATIONS WILL LEAVE STUDENT

LOAN DEBTORS WITHOUT AN EFFECTIVE

REMEDY.

Student loan debts are often excepted from the

discharge that an individual debtor obtains upon

completion of a bankruptcy case. Congress has

provided, however, that the discharge shall apply to

student loan obligations that impose an undue

hardship on the debtor and the debtor’s dependents.

The Petitioner contends that barring debtors from

obtaining an undue hardship determination during a

bankruptcy case will not prejudice debtors as they can

seek compliance with federal bankruptcy law when

sued in state court. The Petitioner disingenuously

describes this opportunity to obtain an undue

hardship determination in some future state court

collection action as an “appropriate and fully adequate

remedy.” (Petitioner’s Brief, p. 30). On the contrary,

because of the unique way in which student loans are

collected through the use of extra-judicial procedures,

barring debtors from obtaining a timely bankruptcy

court ruling on undue hardship will effectively mean

that this right exists without a remedy.

Student loan guaranty agencies such as the

Petitioner in this case serve as “intermediaries for the

federal government.” Student Loan Marketing Ass'n. v.

Riley, 104 F.3d 397, 400 (D.C. Cir. 1997), cert. denied,

522 U.S. 913 (1997). Although the federal government

is the ultimate guarantor of student loans, state

guaranty agencies initially carry out that role by

entering into guaranty agreements with private

lenders who originate student loans. If a student loan

goes into default, the guaranty agency will in the first

instance reimburse the lender. 20 U.S.C. § 1075(b).

If the guaranty agency is then unable to collect on the

debt, it may file a claim with the Department of

Education for reimbursement. 20 U.S.C. § 1078(c).

However, the ability of a guaranty agency to obtain

federal interest payments and reimbursement under

the federal guarantee is “contingent on compliance

with elaborate procedures that control every aspect of

the loan, from the initial explanation to the borrower

to the dunning methods employed if the loan falls

delinquent.” Student Loan Marketing Ass’n. v. Riley,

104 F.3d at 400; see also 20 U.S.C. § 1080.

Importantly, these procedures virtually always permit

the guaranty agency to collect student loans without

resort to the court system.

A. State Guaranty Agencies Need Not

Rely Upon Conventional Collection

Methods And Consequently Rarely File

State Court Actions To Collect

Student Loans.

In recognition that guaranty agencies serve as a

proxy for the federal government in collecting loans

that ultimately are debts to the federal government,

Congress ceded to guaranty agencies the unusual

power to use extra-judicial means to collect student

loans.2 Such authority outside of the student loan

area is generally held only by the federal government

and its agencies, and is not available to a guaranty

2 A guaranty agency must deposit virtually all payments

and earnings arising from its guaranty program into a reserve

fund. 34 C.F.R. § 682.410(b)(1). The assets that comprise the

reserve fund of a guaranty agency, and any assets purchased with

such funds, are deemed to be the property of the United States.

20 U.S.C. § 1072(g). For this reason, the Department of Education

considers guaranty agencies to be fiduciaries to the Department in

administering reserve funds. See 61 Fed. Reg. 49382 (Sept. 19,

1996)(*...guaranty agency’s role is best characterized as that of a

trustee holding money for the benefit of another.”).

agency under state law. The Department of Education

regulations strongly encourage guaranty agencies to

collect student loans using these extra-judicial

procedures, and in fact effectively relegate court

actions to the status of a collection procedure of last

resort.

A guaranty agency must engage in collection

activities on a student loan that is in default after it

has paid a default claim to the lender. 34 C.F.R. §

682.410(b)(6)(i). The Higher Education Act and the

Department of Education’s regulations equip the

guaranty agency with three primary collection tools

that do not involve the filing of a court action: the

agency may initiate proceedings to effect an

administrative wage garnishment, to intercept a

federal tax refund, and to offset payments or benefits

by the federal government to the borrower.

1. Administrative Wage Garnishment. The

Higher Education Act authorizes the Department of

Education and guaranty agencies to garnish student

loan borrowers’ wages without obtaining a court order

or otherwise initiating a court proceeding. 20 U.S.C. §

1095a. The guaranty agency may garnish up to 10

percent of a student loan borrower’s “disposable pay.””

20 U.S.C. § 1095a; 34 C.F.R. § 682.410(b)(9)(i)(A).

Student loan garnishments by guaranty agencies may

proceed even in_ states that prohibit wage

garnishments or restrict their use under applicable

state law. 20 U.S.C. § 1095a(a)(student loan

garnishment requirements are allowed “notwith-

standing any provisions of State law”); 34 C.F.R. §

682.410(b)(8)(regulatory provisions permitting non-

judicial procedures preempt state law).

3 Disposable pay is defined as pay “remaining after the

deduction of any amounts required by law to be withheld.” 20

‘US.C. § 1095a(e); 34 C.F.R. § 682.410(b)(9)(i)(A).

Guaranty agencies are required to initiate

administrative wage garnishments against all eligible

student loan borrowers. 34 C.F.R. § 682.410(b)(6)(iii).

The only exception to this requirement arises if the

agency determines that the borrower has no wages

that can be garnished or the agency determines that

the borrower has sufficient attachable assets or

income that is not subject to administrative wage

garnishment, and that the use of litigation would in

this event be more effective in collecting the debt. 34

C.F.R. § 682.410(b)(6)(iv).

2. Tax Intercept. State guaranty agencies are

also granted the right to collect student loan debts by

using the federal tax intercept program. Federal law

requires a tax refund intercept when a debt is owed to

a federal agency, including a debt administered by a

third party acting as an agent for the federal

government. 31 U.S.C. § 3720A(a). The Department

of Education delegates to guaranty agencies the

authority to initiate intercepts for loans held by the

guaranty agency. State guaranty agencies must

attempt to intercept tax refunds each year that the

loan remains in default. 34 C.F.R. § 682.410(b)(6)(ii).

As under the administrative wage garnishment

procedure, state laws that could conceivably limit

application of the tax intercept program, such as state

exemption laws, are preempted. See Bosarge v. U.S.

Dept. of Education, 5 F.3d 1414 (11th Cir. 1993), cert.

denied, 512 U.S. 1226 (1994). All federal tax refunds

are subject to intercept, including a refund payable to

* Prior to a legislative change in 1992 allowing interception

of debts owed to agents of the federal government, authorization to

intercept student loans held by guaranty agencies was

accomplished by the guarantors assigning the loans to the United

States prior to interception. See subsec (a), Pub. L. 102-589,

§ 3(1).

a low-income borrower under the Earned Income Tax

Credit program. Bosarge, 5 F.3d at 1420.

3. Administrative Benefit Offset. In 1996,

Congress further strengthened the debt collection

powers of federal agencies through enactment of the

Debt Collection Improvement Act. Federal government

agencies were given the authority to offset formerly

exempt federal benefits to collect debts owed to the

government, such as student loans. 31 U.S.C. § 3716.

The statute authorizes offset of federal benefits

payable to a student loan borrower such as those

provided under the Social Security Act, the Black

Lung Benefit Act and the Railroad Retirement Benefits

Act. 31 U.S.C. § 3716(c)(3)(A)(ii).5 State guaranty

agencies are required to attempt an annual federal

benefit offset. 34 C.F.R. § 682.410(b)(6)(ii).

Given the breadth of these extra-judicial

collection procedures, state guaranty agencies are not

likely to file state court collection actions against

bankruptcy debtors, nor are they required or

encouraged to do so by the Department of Education.

Moreover, the effectiveness of these procedures is

greatly enhanced by their operation free from state law

restrictions, including statutes of limitation. See 20

U.S.C. § 109 1a (a)(*... no limitation shall terminate the

period within which suit may be filed, a judgment may

be enforced, or an offset, garnishment, or other action

initiated or taken by - ... a guaranty agency....”).

Unlike a private creditor who must timely bring a

court action or forever forfeit the right to sue, a

guaranty agency may take advantage of non-judicial

collection procedures throughout the borrower’s life

5 The amount of the offset is set at the lesser of 1) the

amount of the debt; 2) an amount equal to 15% of the monthly

benefit payment; or 3) the amount, if any, by which the monthly

benefit exceeds $750. 31 C.F.R. § 285.4(e).

and still always retain the right to initiate or threaten

a court action.

The broader scope of these administrative

procedures also creates an incentive for guaranty

agencies to avoid state court collection actions. If a

guaranty agency obtains a state court judgment

against a borrower, it would be required to comply

with state and federal exemption schemes and post-

judgment enforcement procedures. For example, a

court judgment could not be enforced by garnishing or

seizing a borrower’s Social Security benefits (42 U.S.C.

§ 407), but these same benefits would be subject to

offset under the administrative procedures.

Thus, a guaranty agency that has blocked on

sovereign immunity grounds any attempt by the

debtor to have an undue hardship discharge

determination made during a bankruptcy proceeding,

and that is determined to keep the dischargeability

issue unresolved by avoiding any court rulings, can

simply elect not to file a court action and instead rely

upon the extra-judicial procedures. In this situation,

the debtor would also be precluded from initiating a

state court action against the state itself seeking

compliance with federal law as the state can continue

to assert its immunity from suit in the state action.

Alden v. Maine, 527 U.S. 706, 119 S.Ct. 2240, 144

L.Ed.2d 636 (1999).

B. The Extra-Judicial Debt Collection

Procedures Used By Student Loan

Guaranty Agencies Do Not Afford

Bankruptcy Debtors A Meaningful

Opportunity To Enforce Federal

Bankruptcy Law.

The non-judicial wage garnishment and

intercept procedures implemented by the Department

of Education in collecting student loans provide that

state guaranty agencies shall conduct a pre-seizure

hearing if the borrower contests the validity of the

debt. However, the procedures do not contemplate

that a borrower may obtain a bankruptcy undue

hardship determination at such a hearing. More

importantly, the hearing procedures are inadequate

when viewed in relation to the heavy burden imposed

on student debtors in establishing undue hardship

under § 523(a)(8). The procedures also fail to

expressly provide for an opportunity for judicial

review.

Before an administrative garnishment may

proceed, the borrower must be provided notice of the

right to a hearing to contest the existence or amount

of the student loan debt. 20 U.S.C. § 1095a(a)(5); 34

C.F.R. § 682.410(b)(9)(i)(E).6 The Department of

Education issues sample notices and request for

hearing forms used by guaranty agencies that specify

possible grounds for contesting the obligation.’ One of

6 If a borrower requests a hearing, an official appointed by

the guaranty agency will conduct the hearing. The hearing official

may be any qualified individual, including an employee of the

guaranty agency, who is not under the supervision or control of

the head of the agency. 34 C.F.R. § 682.410(b)(9)(i)(M).

7 For example, a Request for Hearing form that may be

submitted directly to the Department is available on the

Department’s website at:

http: / /www.ed.gov/offices/OSFAP/DCS/forms/Request.For.

Hearing.pdf. Similar forms are used by guaranty agencies.

the grounds listed on the hearing request form is that

a bankruptcy proceeding is pending, reflecting the

Department’s recognition that the automatic stay

applies during the bankruptcy to the administrative

garnishment and offset procedures.

The other bankruptcy specific ground that may

be asserted is that the “debt was discharged in

bankruptcy.” See DOE “Request for Hearing” form.®

Given that the Department’s regulations provide no

guidance to guaranty agency hearing officers on how

to apply the undue hardship discharge standard

found in § 523(a)(8), this appears simply to require

that the hearing officer accept as a defense a prior

bankruptcy court order that the loan was discharged

based on undue hardship (or that the debt was

discharged under the seven-year rule contained in

former § 523(a)(8)(A) for bankruptcy cases filed before

October 7, 1998).°

Even if the bankruptcy undue hardship

discharge issue could be raised in an administrative

garnishment hearing,!° the procedures used for such

8 See also, Department of Educations’s description of the

administrative wage garnishment procedure available on its

website at: http://www.ed.gov/offices/OSFAP/DCS/awg.html.

® In instructions and supporting materials that the

Department supplies to its authorized collection representatives, a

sample letter to a borrower who requests a hearing based on a

claim that the debt was discharged in bankruptcy, but who fails to

submit documentary evidence, states that the borrower should

submit the following as one form of acceptable documentation:

“Court order that debt is Dischargeable on grounds of undue

hardship.” See DOE website,

http: / /www.collections.sfa.ed.gov/contractors/pcanew/awg/AWG

_Hearings_Process.doc.

10 In the case of state courts, the grant of concurrent

jurisdiction with bankruptcy courts to make dischargeability and

automatic stay determinations is found in 28 U.S.C. § 1334(b).

This Court has stated, however, that § 1334(b) does not grant

hearings preclude any meaningful opportunity for the

matter to be properly adjudicated. The state guaranty

agency may provide an oral or written hearing. 34

C.F.R. § 682.410(b)(9)(i)(J). If an oral hearing is

provided, it may be conducted either in-person at a

location selected by the guaranty agency or by

telephone conference. Jd. There is no requirement

that an in-person hearing be held in a location

convenient to the debtor.!!' The guaranty agency is

also not required to record or maintain a transcript of

the proceedings. See 59 Fed. Reg. 22,474, 22,475,

Comment 75 (Apr. 29, 1994).

In the case of a tax intercept or administrative

offset, a borrower seeking an oral hearing must

submit with the hearing request a statement of the

reasons why the review should not be limited to a

review of the documentary evidence without an

evidentiary hearing. 34 C.F.R. §§ 30.25 and 30.33.!

If an oral hearing is granted, it is not a formal

such jurisdiction upon administrative agencies: “Section 1334(b)

concerns the allocation of jurisdiction between bankruptcy courts

and other ‘courts,’ and, of course, an administrative agency such

as the Board is not a ‘court.” Board of Governors v. MCorp

Financial, Inc., 502 U.S. 32, 41-42, 116 L.Ed 2d 358, 368 (1991).

See also, Sunrise Development, Inc. v. FDIC, 33 F.3d 106 (1st Cir.

1994); San Rafael Baking Co. v. Northern Calif. Bakery Drivers Sec.

Fund, 219 B.R. 860 (B.A.P. 9th Cir. 1998).

11 Although an administrative hearing may be held

thousands of miles away from the debtor’s residence, a state court

collection action filed by a guaranty agency through its attorney

would be required to be brought in the judicial district in which

the debtor resides at the time the action is commenced. See 15

U.S.C. § 1692i.

12 The borrower must also submit a list of the witnesses

the borrower wishes to call, the issues they will testify about, and

the reasons why the testimony is necessary. 34 C.F.R. § 30.25.

The Department’s regulations establish standards about when an

oral hearing will be granted. 34 C.F.R. § 30.26.

14.

evidentiary hearing subject to the Administrative

Procedure Act, 5 U.S.C. § 554. 34 C.F.R. § 30.26.

Finally, under the federal collection regime,

guaranty agencies are delegated the authority to

adjudicate collection disputes and make binding

decisions. See, e.g., 20 U.S.C. § 1095a(b). However,

unlike federal agency hearings or proceedings before

the bankruptcy court, borrowers have no explicit right

to judicial review of guaranty agency decisions. A

hearing conducted by a state guaranty agency,

although required by federal law, is not subject to the

federal Administrative Procedure Act. '3 And whether

such opportunity for review exists under state law,

and the extent of such review, may depend upon on

whether the guaranty agency is a governmental unit

subject to state administrative procedures law.

13 A borrower aggrieved by a guaranty agency decision

may also not have a right for review by the Department of

Education. With regard to administrative wage garnishments, the

Department of Education has not expressly provided for this direct

right of review and has stated that it “does not intend to second-

guess an agency’s decisions about wage garnishments on a case-

by-case basis.” 59 Fed. Reg. 22,474, 22,475, Comment 75 (Apr.

29, 1994). Nevertheless, the Department has indicated that it will

“take appropriate action” if a guaranty agency fails to follow the

Department’s procedures and regulations. Jd. The Deartment’s

tax intercept regulations permit a debtor to seek review by the

— of a guaranty agency decision. 34 C.F.R. § 30.33

(d)(3).

_>_

- ame a —— —

Cc. Unlike Guaranty Agencies And State

Courts, Federal Bankruptcy Courts

Are Uniquely Positioned And Qualified

To Make Student Loan

Dischargeability Determinations.

A fundamental goal of bankruptcy is that a

debtor’s financial matters should be _ resolved

expeditiously and economically in a single forum.

Katchen v. Landy, 382 U.S. 323, 328-329, 86 S.Ct.

467, 472, 15 L. Ed. 2d 391 (1966)(“chief purpose of

the bankruptcy laws is ‘to secure a prompt and

effectual administration of the estate of all bankrupts

within a limited period.”), quoting Ex Parte Christy, 3

How. 292, 312, 11 L.Ed. 603.14

The inability of a debtor to obtain a timely

discharge determination can significantly impact the

bankruptcy proceeding itself. Contrary to the

Petitioner’s assertion that a student’ loan

dischargeabiltiy determination is “unrelated to any

issues such as the distribution of assets of the

bankrupt estate” (Petitioner’s Brief at p. 30), the

prompt resolution of the dischargeability issue in

chapter 13 cases affects not only the debtor but all

creditors, including other state creditors. A debtor

may owe student loans to more than one state

guaranty agency, as well as taxes and other

obligations to different states. The bankruptcy

process ensures that there will be equitable treatment

of such creditors as part of the plan confirmation

process. See 11 U.S.C. §§ 1322(b)(2) and 1322(b)(5).

14 Rule 1001 of the Federal Rules of Bankruptcy Procedure

states that “/t}hese rules shall be construed to secure the just,

speedy and inexpensive determination of every case and

proceeding.” Citing this Court’s opinion in Katchen v. Landy, 382

U.S. 323 (1966), the Advisory Committee note indicates that “|t}he

objective of ‘expeditious and economical administration’ of cases

under the Code has frequently been recognized by the courts to be

‘a chief purpose of the bankruptcy laws.”

In addition, the needed contemporaneous

dischargeability determination of the debtor’s student

loan obligations can have a profound impact on the

formulation and confirmation of the debtor’s chapter

13 plan. For example, if the debt is subject to the

undue hardship discharge, the debt will be paid like

other unsecured debts based on a pro rata

distribution. See 11 U.S.C. § 1322. On the other

hand, if the debt is declared to be nondischargeable,

the debtor may seek to pay the student loan obligation

pursuant to 11 U.S.C. § 1322(b)(5).!5 See, e.g., In re

Williams, 253 B.R. 220 (Bankr. W.D. Tenn. 2000); In

re Chandler, 210 B.R. 898 (Bankr. D.N.H. 1997); In re

Benner, 156 B.R. 631 (Bankr. D. Minn. 1993); In re

Saulter, 133 B.R. 148 (Bankr. W.D. Mo. 1991). The

debtor may also propose to separately classify student

loan obligations and provide for their favored

treatment under the plan, e.g., In re Cox, 186 B.R. 744

(Bankr. N.D. Fla. 1995); In re Tucker, 159 B.R. 325

(Bankr. D. Mont. 1993), but see In re Bentley, 266

B.R. 229 (B.A.P. lst Cir. 2001), or establish a five-year

plan in which the student loans are not separately

classified for the first three years of the plan but then

are provided greater payment during the plan’s final

two years, eg., In re Simmons, 288 B.R. 737

(Bankr.D.N.D. Tex. 2003); In re Strickland, 181 B.R.

598 (Bankr. N.D. Ala. 1995).

Since debtors often have student loan

obligations owing to more than one lender or state

guaranty agency, it is also necessary, in order to avoid

inconsistent results, that a central forum such as the

bankruptcy court be available for resolution of all

debts of the debtor. In re Schmitt, 220 B.R. 68, 74

1S Section 1322(b)(5) permits the curing of defaults under

the plan and maintenance of ongoing payments, typically made

outside the plan, on any secured or unsecured claims where the

last payment on the debt is due after the final payment under the

plan. .

till -~—-——

(Bankr. W.D. Mo. 1998)(“The risk of inconsistent

determinations by the _ state courts as_ to

dischargeability, or as to the restructuring of

obligations due those states, is obvious.”). In some

cases, bankruptcy courts have determined, for

example, that a debtor owing $60,000 in student

loans may have the ability to repay $20,000, but

excepting the $40,000 balance from discharge would

impose an undue hardship. See, e.g., In re Hornsby,

144 F.3d 433 (6th Cir. 1998)(partial discharge is

permitted under bankruptcy court’s equitable powers);

In re Andresen, 232 B.R. 127 (B.A.P. 8th Cir. 1999)

(affirming bankruptcy court’s discharge of two of three

loans); In re Myers, 280 B.R. 416 (Bankr.S.D.Ohio

2002)(three loans totaling $59,438 discharged and

three smaller loans totaling $5,472 found

nondischargeable); In re Morris, 277 B.R. 910

(Bankr.W.D.Ark. 2002) (largest student loan in

amount of $65,912 discharged but not smaller loans

totaling $41,741). :

An individual student loan debt viewed in

isolation in a state court action may not properly

convey to the court the hardship a debtor may

experience in having the debt excepted from

discharge. See In re Grigas, 252 B.R. 866 (Bankr.

D.N.H. 2000) (based on court’s finding that debtor

could pay $224 per month for 15 years, debtor’s 15

student loans should be analyzed in chronological

order so that only those that can first be fully repaid

within 15 years will be excepted from discharge); Jn re

Hinkle, 200 B.R. 690 (Bankr. W.D. Wash. 1996) (first

three loans totaling $10,104 can be repaid by debtor

but repayment of remaining three loans totaling

$18,143.71 constitutes an undue hardship).

A guaranty agency hearing officer, even if he or

she had authority to adjudicate a bankruptcy undue

hardship discharge claim, would not consider debts

Owing to other guaranty agencies or have any reason

to apply an equitable allocation scheme. Similarly, a

debtor sued in a state court action on one of several

separate loans would be precluded from seeking an

undue hardship discharge ruling from that court as to

any loans held by other agencies as the state court

would likely lack jurisdiction over foreign guaranty

agencies and these agencies would in any event claim

immunity from suit. The piecemeal and ad hoc

method of dischargebility determinations suggested by

the Petitioner, assuming the availability of state court

venues actually were to materialize for the debtor,

would not only produce inconsistent results but would

force the debtor to incur excessive litigation costs in

seeking to prove undue hardship in multiple forums.

There are other risks that the debtor faces in

being precluded from obtaining a _ timely

dischargeability ruling. Some courts have held that

undue hardship should be determined at or near the

time of the bankruptcy filing. See In re Bugos, 288

B.R. 435 (Bankr.E.D.Va. 2003); In re Kapsin, 265 B.R.

778 (Bankr.N.D.Ohio May 29, 2001). If the debtor

must wait until he or she is sued, or some other

opportunity for a hearing, the adjudicator could find

that the debtor’s dischargeability defense is stale or

that the debtor’s current situation is irrelevant.

The Petitioner also contends that application of

the undue hardship standard contained in § 523(a)(8)

is “not peculiarly a bankruptcy issue.” (Petitioner’s

Brief, p. 29). On the contrary, while state courts

regularly make determinations about the validity and

amount of debts, they are not accustomed to making

determinations about whether a debtor may discharge

a debt, let alone whether such debt should be

discharged based on federal bankruptcy law. In

addition, there is a well-developed body of federal

decisional law that has interpreted the statutory

language in § 523(a)(8), and virtually all of the Circuit

Courts have adopted a variant of an undue hardship

only lend predictability to a bankruptcy discharge-

ability proceeding but also permit a debtor to

efficiently and economically prepare for trial.

Moreover, because these undue hardship tests

generally require that the bankruptcy court consider

not only the debt in question but all of the debtor’s

financial circumstances, including other debts,

available assets, and income and_= expenses,

bankruptcy courts are particularly well-suited for

making such determinations as a result of the

extensive financial information that is provided to the

court as part of the bankruptcy schedules and other

required filings. See In re Snyder, 228 B.R. 712, 719

(Bankr.D.Neb. 1998)(“Removing isolated issues of

discharge to state court from the context of a larger

bankruptcy proceeding in bankruptcy court removes

the ability of a bankruptcy court to review a debtor’s

entire financial picture and to ensure an equitable

result for both the debtor and all creditors.”).

The uncertainty and lack of finality as to the

scope of the discharge additionally subjects the debtor

to increased financial risk in the event that the debt is

later determined to be nondischargeable. Since the

debtor would have no way to know the effect of the

bankruptcy, a debtor in default would be subjected to

continuing post-bankruptcy interest charges and

substantial collection fees and costs while waiting to

16 E.g., In re Ekenasi, 325 F.3d 541 (4th Cir. 2003); Long

v. Educ. Credit Mgmt. Corp., 322 F.3d 549 (8th Cir. 2003); Goulet v.

Educ. Credit Mgmt. Corp., 284 F.3d 773 (7th Cir. 2002); In re

Brightful, 267 F.3d 324 (3rd Cir. 2001); In re Rifino, 245 F.3d 1083

(9th Cir. 2001), cert. denied sub nom., Nowland v. U.S., 534 U.S.

927 (2001); Brunner v. New York State Higher Educ. Servs. Corp.,

831 F.2d 395 (2d Cir. 1987).

obtain a dischargeability ruling sometime in the future

when a collection action is taken.!? Rather than risk

incurring such fees and permitting the loan amount to

escalate unchecked, many debtors will simply

abandon their right to an undue hardship discharge.

For debtors who meet the dischargeability

requirements set out in § 523(a)(8), this will result in a

serious erosion of their fresh start opportunity.

Grogan v. Garner, 110 U.S. 1945, 111 S.Ct. 654, 659,

109 L. Ed. 2d 308 (1991)(“a central purpose of the

Code is to provide a procedure by which certain

insolvent debtors can reorder their affairs, make peace

with their creditors, and enjoy ‘a new opportunity in

life with a clear field for future effort, unhampered by

the pressure and discouragement of preexisting

debt.”), quoting Local Loan Co. v. Hunt, 292 U.S. 234,

244, 54 S.Ct. 695, 699, 78 L.Ed. 1230 (1934).

D. Federal And State Repayment And

Discharge Options Are Not A

Substitute For A Bankruptcy Undue

Hardship Discharge.

Amici Council of State Governments contend

that abrogation of state immunity is unnecessary in

this case because debtors who are having difficulty

paying their student loans can obtain relief under the

Department of Education’s payment programs. See

Amici Council’s brief, pp. 27-29. As examples, Amici

refer to the Department’s regulations which permit the

17 Whether or not provided for in the _ borrower’s

promissory note, the Department of Education regulations require

that a guaranty agency charge the borrower for collection costs on

a loan in which it is has paid a default or bankruptcy claim. 34

C.F.R. § 682.410(b)(2). The amount of such collection fees is

generally determined by a formula set out in 34 C.F.R. § 30.60,

but in no event shall the fees exceed the amount that may be

charged by the Department itself. These collection fees may

amount to as much as 25% of the loan obligation.

granting of a temporary deferment or forbearance

under certain specified conditions. '!®

While these payment plan options can provide

temporary payment relief for some borrowers, they are

not a substitute for the discharge provided for in §

523(a)(8). The Bankruptcy Code undeniably provides

an opportunity for a debtor to obtain an absolute and

immediate discharge of student loans if the statutory

conditions are met, and no comparable discharge is

available under the Department’s regulations and

administrative collection programs. If Congress had

intended for the Department’s payment programs to

meet all hardship situations, it would have repealed

the undue hardship provisions in the Bankruptcy

Code. In fact, Congress has not eliminated the

bankruptcy hardship discharge despite having made

amendments to § 523(a)(8) since the student loan

payment programs were enacted. In this regard, one

court has noted that such payment plans should not

present an opportunity for courts to abdicate their

obligation to apply the bankruptcy law as written. In

re Kopf, 245 B.R. 731, 735 (Bankr. D. Me. 2000) (no

matter how flexible or “humanely executed” such

programs may be, they are not the equivalent of a

bankruptcy discharge)."’

Other courts have recognized that placing a

debtor in an extended payment plan, such an Income

18 Amici Council also refer to the Departrr :nt’s regulation

that authorizes the cancellation of a student loan if the debtor is

found to be totally and permanently disabled. 34 C.F.R. §

682.402. However, most debtors who believe they qualify for

cancellation of the debt under this provision would first apply for a

disability cancellation and would only seek a bankruptcy undue

hardship discharge if the Department denies the application.

'° The Kopf court noted that even where a debtor's

monthly payment obligation is reduced to zero under a repayment

plan, this will only “postpone repayment indefinitely and, unless

interest is abated, permit additional interest accruals.” /d. at 735.

Contingent Repayment Plan,” that is not likely to

result in the pay off of the loan, or in some cases may

not even reduce the amount owed, does not mitigate

the undue hardship the loan would cause. E.g., In re

Ford, 269 B.R. 673 (B.A.P. 8th Cir. 2001) (availability

of Income Contingent Repayment Plan is merely one

factor considered in totality of circumstances test and

not determinative in case where twenty-five year Plan

would result in 62-year-old woman with arthritic

condition carrying large and increasing debt that

would not be forgiven until she was 87 years old); Jn re

Cheney, 280 B.R. 648 (N.D. lowa 2002). Under such

plans, payments must be made if the debtor’s income

is even slightly above poverty level. In addition, unlike

a bankruptcy discharge, an Income Contingent

Repayment Plan actually allows the loan balance to

steadily climb due to the capitalization of interest and

it does not prevent the discharge of any remaining

balance after twenty-five years from being deemed

taxable income to the debtor. See 34 C.F.R §

685.209(c)(5).

II. THE COURT’S RULING ON THE

ABROGATION ISSUE SHOULD NOT ALTER A

STUDENT LOAN DEBTOR’S RIGHT TO

ENFORCE THE UNDUE HARDSHIP

PROVISIONS OF THE BANKRUPTCY CODE

BY SEEKING PROSPECTIVE RELIEF

AGAINST STATE OFFICERS.

Amicus believes that the decision below was

correctly decided for the reasons set forth in the

Respondent’s brief. In the event that the Court

declines to find a valid abrogation in this case,

however, amicus requests that this Court ensure that

debtors retain an effective remedy to enforce federal

2° See 20 U.S.C. §§ 1078(m) and 1087a; 34 C.F.R. §

685.209(a)(2)(i).

bankruptcy law. As the Court has done in recent

cases, this can be accomplished through a

reaffirmation of the vitality of the doctrine of Ex Parte

Young, 209 U.S. 123, 28 S.Ct. 441, 52 L.Ed.714

(1908), which permits suits for prospective declaratory

and injunctive relief against state officers to prevent

them from violating federal law. Alden v. Maine, 527

U.S. 706, 756-57, 119 S.Ct. 2240, 144 L.Ed.2d 636

(1999); Idaho v. Coeur d’Alene Tribe of Idaho, 521 U.S.

261, 276-77, 117 S.Ct. 2028, 2038, 138 L.Ed.2d 438

(1997); Seminole Tribe of Florida v. Florida, 517 U.S.

44, 48, 116 S.Ct. 1114, 1131 at n.16, 134 L.Ed.2d

252 (1996).

In Coeur D’Alene, this Court held in referring to

the Young doctrine that “where prospective relief is

sought against individual state officers in a federal

forum based on a federal right, the Eleventh

Amendment, in most cases, is not a bar,” and also

recognized that there exists a “presumption in favor of

federal-court jurisdiction in this type of case.” Coeur

d’Alene Tribe, 521 U.S. at 276-77, 117 S.Ct at 2038.

The rationale for the Young doctrine is that since a

state cannot authorize a state official to violate the

Constitution or federal laws, an action by a state

official in violation of federal law is not deemed an

action of the state and therefore not immune from suit

under the Eleventh Amendment. See Pennhurst State

School & Hosp. v. Halderman, 465 U.S. 89, 102, 104

S.Ct. 900, 909, 79 L.Ed.2d 67 (1984).

To invoke the Young doctrine, the party seeking

enforcement of federal law must establish the

following two elements. First, the party must allege

that a state official is acting in violation of federal law.

See Pennhurst State School, 465 U.S. at 106, 104 S.Ct.

at 911. Second, the relief sought must be prospective

in that the party must seek to enjoin future violations

of federal law rather than obtain monetary

compensation or other retrospective relief for past

violations. Green v. Mansour, 474 U.S. 64, 68, 106

S.Ct. 423, 425-26, 88 L.Ed.2d 371 (1985); Quer v.

Jordan, 440 U.S. 332, 346-49, 99 S.Ct. 1139, 1147-

49, 59 L.Ed.2d 358 (1979); Edelman v. Jordan, 415

U.S. 651, 664-71, 94 S.Ct. 1347, 1356-60, 39 L.Ed.2d

662 (1974).

A bankruptcy adversary proceeding filed

against an officer of a student loan guaranty agency

seeking a declaration that a student loan is

dischargeable because of undue hardship involves an

appropriate use of the Young doctrine. 2?! A debtor

whose student loan is dischargeable under § 523(a)(8)

needs a declaration of dischargeability only because

the student loan authority has refused to recognize

that the debt is dischargeable. In such cases where

the debtor alleges that a state officer is acting

unlawfully in refusing to implement the statute, the

first prong of the Young doctrine is satisfied. 2?

2! There is no doubt that the discharge itself that is

entered in a bankruptcy case is binding upon the state, because

the original bankruptcy case is not a suit against the state. State

of Texas v. Walker, 142 F.3d 813 (Sth Cir. 1998), cert. denied, 525

U.S. 1102 (1999). See also Maryland v. Antonelli Creditors’

Liquidating Trust, 123 F.3d 777, 787 (4th Cir. 1997)(bankruptcy

court may confirm a plan which determines the rights of a state

because jurisdiction is over debtors and estates rather than over

the state). As the Fourth Circuit held in Antonelli Creditors, this

result is a comsequence of Congress’ constitutionally authorized

legislative power to make the federal courts the exclusive venue for

administering the bankruptcy law. /d.

22 Some courts have wrongly held that the Young doctrine

is not applicable in the student loan context by suggesting that the

debtor cannot allege a continuing violation of federal law before a

court has declared the debt to be dischargeable. See, e.g., In re

Holland, 230 B.R. 387 (Bankr.W.D.Mo. 1999); In re Snyder, 228

B.R. 712 (Bankr.D.Neb. 1998). These cases are falsely premised

on a reading of § 523(a)(8) to the effect that a student loan is not

dischargeable unless a court has determined that it is

dischargeable. See, e.g., In re Janc, 251 B.R. 525 (Bankr. W.D. Mo.

The final requirement for invoking the Young

doctrine also applies in a student loan hardship case

because the debtor is typically requesting only

prospective and injunctive relief, and such relief

cannot be equated with a request for retrospective

damages.?

Cases involving student loan hardship

discharge present particularly powerful reasons for

2000). While student loan creditors will, as a practical matter,

continue collection efforts absent such a determination, the

language of § 523(a)(8) clearly provides that a loan is dischargeable

if it meets the undue hardship test; it does not provide that the

loan is non-dischargeable until a court finds otherwise. There is

no basis for distinguishing student loans from other types of debts

which in certain circumstances can be non-dischargeable, such as

tax debts. Student loans are either discharged or not discharged

depending solely upon whether they fit the description in § 523(a).

In contrast to the dischargeability provisions listed in § 523(c),

which renders certain debts dischargeable unless the bankruptcy

court specifically finds otherwise, a debt is not automatically

discharged or not discharged under § 523(a)(8) or the other

dischargeability provisions if the bankruptcy court does not make

a determination of dischargeability. See Collier on Bankruptcy, {

4007.03, n. 4a (15 ed. rev.).

23 The fact that enforcing the federal bankruptcy law

might affect the state treasury does not create an exception to the

doctrine. Quern v. Jordan, 440 U.S. 332, 346 349, 59 L. Ed. 2d

358, 99 S. Ct. 1139 (1979); Edelman v. Jordan, 415 U.S. 651, 664

671, 39 L. Ed. 2d 662, 94 S. Ct. 1347 (1974). In a student loan

discharge case, the fiscal impact is much less significant than in a

suit for damages, especially given that the state is reimbursed

based on its reinsurance agreement with the Department of

Education. Upon the commencement of a bankruptcy action

seeking a undue hardship declaration under § 523(a)(8), a

guaranty agency initially pays a default claim to the lender but

then is reimbursed by the Department for the unpaid balance of

principal and interest on the student loan if the loan is

discharged. 20 U.S.C. § 1087(b); 34 C.F.R. § 682.402(k). Even ifa

guaranty agency could show some palpable affect on the state

treasury resulting from prospective enforcement of the bankruptcy

discharge, such an impact would not justify the non-application of

the Young doctrine.

application of the Young doctrine. The bankruptcy

laws raise uniquely federal issues, due to the exclusive

power in the federal government to enact “uniform

bankruptcy laws” granted by the Constitution, Article

I,§ 8. The discharge of debts can only be provided by

federal law, so the interests of state sovereignty under

the Constitution with respect to that issue do not have

the same weight as they might with issues of greater

state concern, such as land use or social welfare.

And, far from enacting a detailed regulatory

scheme for adjudication of disputes outside of the

court system as in Seminole, Congress created the

bankruptcy courts within the federal court system,

clearly indicating that it expected bankruptcy disputes

to be decided in federal courts. The desire to

concentrate bankruptcy litigation in the federal courts

was a fundamental purpose of creating the expansive

jurisdiction of the bankruptcy court. See H.R. Rep. No.

995, 95th Cong. lst Sess. 43-50 (1977).24 Under

Petitioner’s theory, the federal courts would be

powerless to enforce the bankruptcy discharge, and

the uniformity envisioned by the Constitution would

be lost, with bankruptcy laws subject to interpretation

in the courts of the fifty states, and most likely not

even there.

Moreover, there were strong policy reasons for

adopting this system allowing consumer debtors to

enforce their rights in the bankruptcy court.

Consumer bankruptcy cases are, of necessity, low-

budget affairs. The typical fee for a chapter 7 case is

24 The jurisdictional scheme currently in place differs in

some respects from that envisioned by the bill which was the

subject of this report, principally in its division of jurisdiction

between the bankruptcy court and the district court. However, the

broad grant of jurisdiction for the federal courts to consider all

matters arising in bankruptcy cases or related to bankruptcy

cases remains. 28 U.S.C. § 1334

under $1,000.00. See In re Agnew, 144 F.3d 1013

(7th Cir. 1998). Consumer debtors do not have the

financial wherewithal to file proceedings to enforce or

interpret their discharges in courts other than the

bankruptcy court, a court in which they can obtain

expeditious and inexpensive relief as part of the

bankruptcy case they have already filed.25 In fact,

because debtors seeking to discharge student loans

are normally experiencing extreme financial hardship,

they are the least able to bear the costs of litigation.

It is therefore not surprising that since Coeur

d’Alene, federal courts have continued to invoke Ex

Parte Young to enforce the Bankruptcy Code,

determine the dischargeability of debts, and enjoin

violations of the bankruptcy laws by state officers.

E.g., In re Ellett, 254 F.3d 1135 (9th Cir. 2001), cert.

denied, Goldberg v. Ellett, 534 U.S. 1127, 122 S.Ct.

1064, 151 L.Ed.2d 968 (2002); In re Kahl, 240 B.R.

524 (Bankr. E.D. Pa. 1999) (case dismissed without

prejudice to afford debtor opportunity to invoke the

Young doctrine if relevant); In re Schmitt, 220 B.R. 68

(Bankr. W.D. Mo. 1998)(student loan hardship

dischargeability may proceed against official of state

college); In re Morrell, 218 B.R. 87 (Bankr. C.D. Cal.

1997) (granting debtors leave to amend in state

franchise tax case to invoke Young).

Regardless of the outcome of the abrogation

issue in this case, Amicus urges this Court to broadly

reaffirm the use of the Young doctrine generally in

bankruptcy cases and specifically in proceedings

brought to enforce the right to a student loan

discharge under § 523(a)(8).

25 In the bankruptcy court, filing such a proceeding does

not even require an additional filing fee for a debtor. See Federal

Judicial Conference Schedule of Bankruptcy Fees, Bankruptcy

Court Miscellaneous Fee Schedule, reprinted in 1 Collier on

Bankruptcy Ch. App. 9 (15% ed. rev.); Fed. R. Bankr. P. 4007(b).

CONCLUSION

For all the foregoing reasons, this Court should

affirm the decision below of the Sixth Circuit

Respectfully submitted,