Follett v. Educational Credit Management Corporation et al

Filing 10

Order Reversing and Remanding Bankruptcy Decision for further proceedings. Signed by District Judge Martin Reidinger on 3/29/13. (ejb)

THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF NORTH CAROLINA
ASHEVILLE DIVISION
Case No. 1:12 cv 119
Educational Credit Management
Corporation, and Georgia Student
Finance Authority a/k/a Georgia Higher
Education Assistance Corporation,

)
)
)
)
)
Appellants and Cross-Appellees,
)
)
vs.
)
)
John R. Follett,
)
)
Appellee and Cross-Appellant.
)
________________________________ ____ )

ORDER

THIS MATTER is before the Court on the cross-appeals of the
Movant and Respondent from an order of the Bankruptcy Court imposing
sanctions on Respondent Georgia Student Finance Authority/Georgia
Higher Education Assistance Corp. (GSFA), and denying the imposition of
sanctions against Respondent Education Credit Management Corporation
(ECMC).
The Debtor, John Follett (Debtor) obtained a student loan from
Citibank. Debtor asserts that he thereafter became totally disabled as a
result of injuries sustained in an auto accident. He filed for bankruptcy and
then filed an adversary proceeding seeking discharge of the student loan

debt based on undue hardship. He named only Citibank as a defendant in
that adversary proceeding. Citibank defaulted, and judgment was entered
on February 17, 2009, discharging Debtor’s obligations to Citibank.
Thereafter, the Note was assigned to ECMC.1 ECMC was aware of the
Debtor’s bankruptcy and the judgment in the adversary proceeding, but
nonetheless took a very aggressive approach with Debtor’s counsel that
the discharge of the debt did not apply to ECMC. [B Doc. 17 at 2-4, 15-20].2
ECMC then sold the Note to Wells-Fargo on May 18, 2011. [B Doc. 17 at 4
n.1]. GSFA acted, presumably as a servicing agent on behalf of WellsFargo,3 and undertook aggressive actions seeking to collect the debt from
the Debtor.
After reviewing certain documents showing GSFA’s collection efforts
(but which documents were apparently not filed in the record) the
Bankruptcy Court entered an order sanctioning GSFA for its willful violation
1

GSFA argues in its brief that Citibank assigned the Note to its guarantor, USA Funds,
on February 13, 2009, just four days before the judgment of discharge was entered, and
that USA Funds subsequently assigned the Note to ECMC. [Doc. 5 at 6 n.1]. This,
however, appears to be unsupported by the record, and no party identifies any
document in the record where this information can be found.
2

Citations to the record in the Bankruptcy Court, Case No. 08-10788, will have a prefix
of “B” before the Docket number. Citations without such prefix are to the record in this
Court.
3

At the hearing on the matter, the attorney for ECMC stated that she “suspect[ed] they
[GSFA] might be a servicer of the loan,” [B Doc. 31 at 9], but there is no evidence in the
record to which any party has cited that supports this suspicion.
2

of the Bankruptcy Court’s discharge judgment, but denying any relief
against ECMC. Both GSFA and the Debtor appeal.4
The Debtor appeals the denial of sanctions against ECMC.

He

asserts that several of the Bankruptcy Court’s findings in the order are
unsupported by the record. The findings to which he assigns error are as
follows:
5. Debtor never named or served ECMC, the federal guarantor
of his student loan holding an interest separate and distinct
from Citibank’s interest, with the Summons and Complaint [in
the adversary proceeding].
6. ECMC’s guarantor interest in Debtor’s federal student loan
was not discharged by the default judgment entered against
Citibank.
7. On the date of this hearing, ECMC’s interest in Debtor’s
student loan had been repurchased by Wells Fargo, pursuant to
federal regulations. [GSFA] was servicing Debtor’s student
loan on behalf of Wells Fargo.
8. A review of ECMC’s records indicated that ECMC had not
engaged in collection activities against the Debtor and could not
have because the loan was in a “repurchase’ status and was
held by Wells Fargo. As was true when Debtor filed his
adversary proceeding, ECMC was, at the time of this hearing,
the federal guarantor of his loan.

4

The Notice of Appeal [Doc. 1] identifies both GSFA and ECMC as appealing from the
Order of the Bankruptcy Court, even though ECMC was the prevailing party. ECMC
appears to assign no error. Debtor has also appealed from the Order. All three briefs
from the attorney for GSFA and ECMC, however, appear to address only GSFA’s
issues, and none argue to defend the denial of relief against ECMC. [Doc. 5, 7, 9]. This
is particularly curious because at the hearing before the Bankruptcy Court ECMC
appeared to defend but GSFA did not. Those roles are, in substance, reversed here.
3

9. ECMC explained to this court its position that the default
judgment entered against Citibank in the adversary proceeding
did not affect its guarantor interest in Debtor’s student loan.
10. ECMC also explained that the debtor has been and remains
an eligible and logical candidate for a Total and Permanent
Disability (TPD) Discharge that would fully resolve debtor’s
student loan obligations against any and all past and future
interested parties
[B Doc. 24 at 2].

In addition, he assigns error to a footnote in the

Bankruptcy Court’s order that reads in pertinent part that “[GSFA] has
never held any right, title, or interest in the student loan debt owed by
Debtor. [GSFA] in this instance, is a servicer for Wells Fargo.” [Id. at 2].
Several of Debtor’s points are well taken. There is nothing in the
record to show that ECMC was the guarantor on Debtor’s student loan
debt. In fact, in its brief to this Court, GSFA asserts that the guarantor was
USA Funds, and that any assignment to ECMC was not effectuated until
after the judgment had been entered against Citibank. [Doc. 5 at 6 n.1].
This is of great importance, as both ECMC’s arguments below and GSFA’s
arguments here are entirely dependent upon ECMC having had some right
against the Debtor pursuant to a guaranty that was separate and apart from
the Debtor’s discharged obligation to Citibank on the Note.
Both ECMC and GSFA argue that they were seeking to enforce the
guarantor’s right of reimbursement, and not the debt on the Note itself.
4

They argue that these are two different claims. In this they are correct.
Harrison v. Brent Towing Co. Inc. (In re H&S Transp. Corp., Inc.), 939 F.2d
355, 359 (6th Cir. 1991) (“A guarantor or surety for the debtor will be a
creditor under the [Bankruptcy] Code because the guarantor holds a
contingent claim against the debtor that becomes fixed when the guarantor
pays the creditor whose claim was guaranteed.”); Wedell v. Sallie Mae, Inc.
(In re Wedell), 329 B.R. 59, 61 (W.D. Wash., 2005) (“The maker’s
obligation to the noteholder and the obligation that may arise to a guarantor
upon payment of the guarantee are two separate and distinct obligations.”);
Austin v. UMPAC/MHEAA (In re Austin), 294 B.R. 258, 260 (E.D. Va.
2003); Garmhausen v. Sallie Mae Service Corp., (in re Garmhausen), 262
B.R. 217, 222 (Bankr. E.D.N.Y. 2001) (debtor’s obligation to original
noteholder and to guarantor “are two distinct obligations and the mere fact
that [the guarantor] now holds both of them does not transform them into
one.”). That, however, would not be the end of the inquiry. Assuming
GSFA’s assertion in its brief is correct and the guarantor was USA Funds,
then any collection efforts by ECMC on a right of reimbursement would be
wholly

dependent

on

the

assignability

of

USA

Funds’

right

of

reimbursement, and whether such assignment was effectuated. There is
nothing in the record to show such an assignment having taken place.
5

Moreover, the Bankruptcy Court did not make any ruling regarding the
assignability of the right of reimbursement, so such conclusion is not before
this Court on appeal. These two crucial components being absent, the
Order of the Bankruptcy Court must be reversed and this matter remanded
for further proceedings.5
For similar reasons, the Order granting sanctions against GSFA is
infirm. First, there is no evidence in the record as to the capacity in which
GSFA acted in attempting to collect from the Debtor. It was merely the
suspicion of counsel for ECMC that GSFA was acting as the servicing
agent for Wells-Fargo. [B Doc. 31 at 9].

In Wells-Fargo we have a

supposed third guarantor of the debt. It is assumed that Wells-Fargo took
an assignment of something from ECMC, just as the parties appear to
assume that ECMC took an assignment from USA Funds. There is nothing
in the record, however, to support such assumptions.

Moreover, it is

entirely unclear whether any such assignment would have been of the Note
or of the right of reimbursement.

Assignment of the discharged Note

would, of course, have availed Wells-Fargo nothing. Therefore, on this

5

Of the six findings plus the footnote to which the Debtor assigns error, all find facts
that are unsupported by the record, except findings 9 and 10 which accurately recount
the position ECMC took below.
6

record it cannot be determined whether GSFA’s efforts were lawful, or
whether GSFA was acting as a stranger to the transaction.
In addition, there is nothing in the record to show what notice GSFA
had regarding the discharge of the underlying debt on the Note. The issue
of notice is crucial to the inquiry of whether a party has violated the
discharge injunction of 11 U.S.C. §524. Johnston v. Valley Credit Services,
Inc. (In re Johnston), 2007 WL 3166941 (Bankr. N.D.W.Va. 2007) (citing
ZiLOG, Inc. v. Corning (In re ZiLOG, Inc.) 450 F.3d 996, 1007 (9th Cir.
2005) and Bessette v. Avco Fin. Serv., 230 F.3d 439, 445 (1st Cir. 2000)).
The transcript of the hearing before the Bankruptcy Court shows that it was
provided with and reviewed documents detailing GSFA’s collection efforts.
These presumably showed what notice GSFA had. For whatever reason,
no party filed these documents in the record. Therefore, this Court cannot
review anything regarding GSFA’s notice.
For these reasons the Order of the Bankruptcy Court granting
sanctions against GSFA and denying sanctions against ECMC must be
reversed, and this matter remanded for further proceedings.
IT IS THEREFORE ORDERED that the Order of the Bankruptcy
Court entering sanctions against Respondent Georgia Student Finance
Authority/Georgia Higher Education Assistance Corp. and denying
7

sanctions against Education Credit Management Corporation is hereby
REVERSED, and this matter is hereby REMANDED for further proceedings
consistent with this opinion.

Signed: March 29, 2013

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