Providing an exception to the axiom that no good deed goes unpunished (a wonderful phrase courtesy of Clare Booth Luce, author, Ambassador, speaker, and a model for our times even thirty years after her death), a Texas bankruptcy court recently declared nondischargeable a debt owed to a guarantor who had been forced to pay the debtor’s defaulted student loan.
The case, De La Rosa v. Kelly (Adv. Pro. No. 17-03320 (In re Kelly, Case No. 17-32295)) was resolved by the U.S. Bankruptcy Court for the Southern District of Texas by way of summary judgment on March 23, 2018. The debtor, Tabitha Renee Kelly, borrowed $6,292 from the Texas Higher Education Coordinating Board in 2002 to pay educational expenses. The plaintiff in the adversary proceeding, Mary A.V. De La Rosa, a longtime acquaintance of Kelly who attended the same church, agreed to guaranty the loan.
Kelly defaulted on the loan and the lender sued De La Rosa, as guarantor, in 2016. De La Rosa resolved the suit by paying the loan in full, $12,136.80. Kelly and her husband filed a Chapter 13 bankruptcy case in 2017. De La Rosa filed an adversary proceeding seeking to have the debt declared a nondischargeable student loan debt under Bankruptcy Code § 523(a)(8)(ii), which expanded nondischargeability of student loans to non-governmental obligees.
In granting summary judgment to De La Rosa, the court noted that in order to prevail, De La Rosa was required to prove that Kelly was obligated to repay the funds, that the funds had been received for an educational purpose, and that De La Rosa had standing to sue. Even in the face of such proof, the debt could still be discharged if Kelly could prove repayment would constitute an undue hardship. The court stated that there was no dispute as to the obligation to repay the loan and its receipt for educational purposes and that Kelly never alleged undue hardship.
The only issue to be resolved by the court was De La Rosa’s role in the loan and whether it conferred standing to enforce the nondischargeability provisions of Bankruptcy Code § 523(a)(8)(ii). Kelly argued that De La Rosa was, in fact, a co-maker or co-borrower and not entitled to seek nondischarge under the student loan provisions of the Bankruptcy Code. The court concluded that De La Rosa was an accommodation party under Texas law, in part because she had received no direct benefit in return for guarantying the loan. As an accommodation party, the court concluded that De La Rosa was and entitled to bring the nondischarge action.
The court noted that there was no binding precedent regarding accommodation parties, but found two earlier cases addressing the issue to be persuasive. The cases, Benson v. Corbin (In re Corbin), 506 B.R. 287 (Bankr. W.D. Wash. 2014) and Brown v. Rust (In re Rust), 510 B.R. 562 (Bankr. E.D. Ky. 2014), both involved co-signers who had received no consideration for co-signing for a student loan and who had had to pay the loan in full when the borrower defaulted. In both cases, the debt to the co-signors was declared nondischargeable.
The court rejected as unpersuasive an opinion that had found a co-signer to be a co-borrower who could not invoke the non-discharge provision of Bankruptcy Code § 523(a)(8)(ii). The opinion, Gorosh v. Posner (In re Posner), 434 B.R. 800 (Bankr. E.D. Mich. 2010), was deemed unpersuasive because it relied on two other cases, Resurrection Medical Center v. Lakemaker (In re Lakemaker), 241 B.R. 577 (Bankr. N.D. Ill. 1999) and Santa Fe Medical Services, Inc. v. Segal (In re Segal), (57 F.3d 342 (3rd Cir. 1995), both of which involved employers who had assumed physicians’ educational debt as part of an employment compensation package rather than co-signers or guarantors who derived no direct benefit from the student loan. The Posner opinion, the court also stated, failed to take into account the Congressional intent to broaden the protections provided by Bankruptcy Code § 523(a)(8)(ii) to include accommodation parties.
As a practical matter, to increase the likelihood that a debt arising from a third party’s student loan would be declared non-dischargeable, it is probably advisable to assume the role of guarantor rather than co-signer, so as to discourage an argument that the guarantor is a co-borrower. It is also advisable to include recitations in the guaranty that the loan is for educational purposes and that the guarantor is receiving no direct benefit from the loan.
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