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In re Berry

United States District Court, D. South Carolina

March 4, 2019

In re LaDeidra Antoinette Berry
LaDeidra Antoinette Berry, Appellee. Pennsylvania Higher Education Assistance Agency, Appellant,

          Appeal from the United States Bankruptcy Court For the District of South Carolina (Hon. John E. Waites)


          Margaret B. Seymour Senior United States District Judge

         This is an appeal of an order awarding attorney's fees with respect to a motion to enforce a bankruptcy plan. A bankruptcy court has the power to hold a litigant in contempt and sanction it for violating the court's orders pursuant to 11 U.S.C. § 105(a), which provides:

         The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No. provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.

         I. FACTS

         Appellee LaDeidra Antoinette Berry (“Debtor”) is obligated on student loans held by the United States Department of Education (“DOE”) and served by Appellant Pennsylvania Higher Education Assistance Agency (“PHEAA”), d/b/a FedLoan Servicing. Debtor was enrolled in an income-driven repayment (“IDR”) plan, which allows a borrow to make payments based on income; and the Public Service Loan Forgiveness (“PSLF”) program, which provides for forgiveness of student loan debt for borrowers employed full time in public service positions.

         On March 25, 2016, Debtor filed for relief under Chapter 13 of the Bankruptcy Code. Debtor's proposed Chapter 13 plan provided for Debtor to pay PHEAA directly, rather than through the bankruptcy trustee. Debtor had made 43 qualifying pre-petition payments toward the 120 qualifying payments required under the PSLF. Debtor's intent was to maintain her student loan payments under the IDR plan and PSLF program in order to continue to accrue the benefits of that arrangement. The Honorable John E. Waites entered an order confirming the plan on May 9, 2016.

         PHEAA placed Debtor's loan in administrative forbearance, as required by applicable law. On June 14, 2016, PHEAA filed a proof of claim on behalf of DOE in the amount of $97, 009.87. However, PHEAA discontinued applying Debtor's payments in accordance with the IDR plan and PSLF program. Counsel for Debtor contacted PHEAA, and was informed that Debtor was not eligible for the PSLF program until the bankruptcy was concluded. PHEAA further informed counsel that, because the loan was in administrative forbearance, any payments made were voluntary and not considered to be qualifying payments under the PSLF.

         On October 3, 2016, Debtor filed an amended Chapter 13 plan that provided, in relevant part:

F. Student Loan Claims: As indicated on Schedule J, the Debtor will pay this creditor directly; this creditor will not share in the pro rata distribution from the Trustee: FedLoan Servicing [PHEAA]. If this claim is filed by any other entity or account number, Debtor will be responsible to notify the Trustee or Trustee may make disbursements on the claim pursuant to IV.E. above. Debtor agrees that if she signs a certification of plan completion, she will be certifying that all contractual payments that come due to this creditor have been made through the date of certification.
The debtor is not seeking nor does this Plan provide for any discharge, in whole or in part, of her student loan obligations.
The Debtor shall be allowed to seek enrollment, or to maintain any pre-petition enrollment, in any applicable income-driven repayment (“IDR”) plan with the U.S. Department of Education and/or other student loan servicers, guarantors, etc. (collectively referred to hereafter as “Ed”), including but not limited to the Public Service Loan Forgiveness program, without disqualification due to her bankruptcy. Any direct payments made by the Debtor to Ed since the filing of her petition shall be applied to any IDR plan in which the Debtor was enrolled pre-petition, including but not limited to the Public Service Loan Forgiveness program.
Ed shall not be required to allow enrollment in any IDR unless the Debtor otherwise qualifies for such plan.
The Debtor may, if necessary and desired, seek a consolidation of her student loans by separate motion and subject to subsequent court order.

ECF No. 2-6, 5.

         The bankruptcy judge entered an order confirming the amended plan on January 20, 2017.

         On April 27, 2017, Debtor filed a motion to enforce. Debtor asserted that she had continued making payments directly to PHEAA, but that no post-petition payments had been applied to the PSLF program. Debtor argued that PHEAA's forced suspension of her participation in the PSLF program was in violation of the amended plan and constituted discrimination in violation of 11 U.S.C. § 525(c)(1).[1] ECF No. 2-8. The parties resolved the matter, which resolution was memorialized in a consent order filed by the bankruptcy judge on August 29, 2017. The consent order provided that all post-petition student loan payments made by Debtor would be applied to her IDR plan and PSLF program and that her loan balance would be recalculated. The order further provided that Debtor had not waived her right to attorney's fees. The consent order was signed by counsel for Debtor, DOE, and PHEAA. ECF No. 2-15.

         On September 28, 2017, Debtor moved for attorney's fees against DOE pursuant to the Equal Access to Justice Act (“EAJA”), 28 U.S.C. § 2412(d); and against PHEAA under 11 U.S.C. § 105. With respect to PHEAA, Debtor asserted that its pre-litigation and post-litigation conduct violated the bankruptcy judge's order confirming the Debtor's Chapter 13 plan. Debtor argued that the bankruptcy judge possessed power under § 105 to sanction where it is necessary to prevent abuse of the judicial system. ECF No. 2-16, 1-4.

         The bankruptcy judge held a hearing on October 26, 2017, at which he was informed that Debtor had incurred attorney's fees of approximately $12, 574.00, not including fees for time expended on the hearing. Tr. of Hearing, ECF No. 8-3, 6. The bankruptcy judge further was informed that DOE had settled with Debtor for $6, 000.00, and that she sought the balance of attorney's fees from PHEAA. Id. at 6-9.

         Initially, PHEAA asserted that the confirmed plan was contrary to law, that being the requirement that student loans in bankruptcy must be placed in forbearance. Tr. of Hearing, ECF No. 8-2, 92; see 34 C.F.R § 682.402(f)(2). Relying on United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010), PHEAA argued that the confirmation order was void, so that PHEAA was not required to conform to the terms of the Chapter 13 plan or confirmation order.[2] Id. PHEAA stated that it had no record of having received the amended plan, and that, in any event, PHEAA had received no guidance from DOE as to applying income-based repayment plan (“IBR”)[3] payments to a student loan in forbearance. Id. at 94-95.

         At the hearing, PHEAA called Katelynn Marie Bias, manager of the bankruptcy and disability document processing unit at PHEAA, to testify. ECF No. 8-3, 11. Ms. Bias testified that the contract and Common Manual[4] between DOE and PHEAA required PHEAA, as appropriate, to place loans into bankruptcy status, prepare the proof of claim, and assist in defending the loan against a bankruptcy discharge. Id. at 15. Ms. Bias testified that payments received when a loan is in bankruptcy status are applied to interest and principal. Id. at 20. Ms. Bias testified that DOE had given no directive with regard to income-driven repayment, income based repayment, or public service loan forgiveness. Id. at 22. According to Ms. Bias, PHEAA has no authority to appear in court on behalf of DOE, to file an objection to a bankruptcy plan on behalf of DOE, or to retain lawyers and appear in court to make arguments with regard to a bankruptcy plan. Id. at 25. Ms. Bias testified that her office had received the initial Chapter 13 plan, but had never received the amended plan. Ms. Bias also testified that, had her office received the amended Chapter 13 plan, someone would have reached out to DOE for guidance as to how to handle Debtor's request for the IBR plan and PSLF program. Id. at 32.

         Counsel for Debtor argued that Debtor repeatedly had contacted PHEAA in an attempt to have her student loans qualified for the IBR plan and PSLF program, but repeatedly was told by PHEAA via both telephone and correspondence that any payments made could not be applied toward these programs because she was in bankruptcy. Id. at 45. Counsel stated that it had taken a great deal of effort to obtain the August 29, 2017 consent order. Counsel also informed the ...

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