Opinion
Civil Action No. 22-cv-00487-LTB Bankruptcy Case No. 15-22984-MER Adversary Case No. 20-1342-MER
2023-03-09
IN RE: Nicholas Brian KURZ, Debtor. Nicholas Brian Kurz, Plaintiff, v. Colorado Department of Public Health and Environment, Defendant, Colorado Department of Public Health and Environment, Appellant, v. Nicholas Brian Kurz, Appellee.
Guy Brian Humphries, Guy Humphries, Attorney at Law, Littleton, CO, for Nicholas Brian Kurz. Deanna Lee Westfall, Deanna Lee Westfall, Attorney at Law, Lafayette, CO, Morgan Henry Stanley, Colorado Department of Law, Denver, CO, for Colorado Department of Public Health and Environment.
Guy Brian Humphries, Guy Humphries, Attorney at Law, Littleton, CO, for Nicholas Brian Kurz. Deanna Lee Westfall, Deanna Lee Westfall, Attorney at Law, Lafayette, CO, Morgan Henry Stanley, Colorado Department of Law, Denver, CO, for Colorado Department of Public Health and Environment.
MEMORANDUM OPINION AND ORDER
Babcock, JUDGE
Appellant Colorado Department of Public Health and Environment ("CDPHE" or the "Department"), appeals the United States Bankruptcy Court for the District of Colorado (the "Bankruptcy Court") Order and Judgment dated February 10, 2022, granting Appellee Nicholas Brian Kurz's ("Kurz") motion for summary judgment and denying CDPHE's motion for summary judgment in the above referenced adversary proceeding. Appellate Record, Doc #5, at 220-231 (the "Order"). Oral argument would not materially assist in the determination of this appeal. After full consideration of the record and the parties' briefs, I AFFIRM the Bankruptcy Court's Order.
I. JURISDICTION
Under 28 U.S.C. § 158(a)(1), this Court has jurisdiction to hear appeals from "final judgments, orders and decrees" of the Bankruptcy Court. There is no dispute that the Order fully adjudicated the parties' dispute and is final and that this Court has jurisdiction over the appeal.
II. BACKGROUND
The underlying facts as set forth in the parties' briefs submitted in this appeal and in the parties' Stipulation of Facts filed with the Bankruptcy Court in connection with their motions for summary judgment in the adversary proceeding ("Stip.") (R. at 57-60), are undisputed, unless otherwise noted.
Kurz attended the Des Moines University Osteopathic Medical Center from 2000-2004. Stip. ¶ 13. He is a Doctor of Osteopathic Medicine licensed in the State of Colorado and has been a practicing physician since 2004. Id. ¶ 12.
Pursuant to C.R.S. § 25-1.5-501(1), the State of Colorado established the Colorado Health Service Corps (the "Program") to implement incentives to encourage health care professionals to practice in medically underserved areas of the State. Stip. ¶ 15. Pursuant to C.R.S. § 25-1.5-501(2), the incentives under the Program permit health care professionals with existing educational loans to exchange a work obligation for repayment of existing medical education student loans. Stip. ¶ 16. The Program has a dual purpose: (1) encouraging health care providers to work in underserved areas and (2) using "state money, federal money, when permissible, and private sources to help repay the outstanding education loans that many health-care professionals . . . hold." C.R.S. § 25-1.5-501(1)-(2).
On August 19, 2010, six years after Kurz completed his medical education and six years after he became a practicing physician, the Colorado State Controller approved the Loan Repayment Contract (the "Contract") executed by Kurz and the Department. R. at 61-83; Stip. ¶¶ 12, 13, 17. (The Contract itself was entered into on July 9, 2010, but did not become effective until August 19, 2010, the date it was approved by the State Controller. Stip. ¶¶ 17, 18.) Pursuant to the terms of the Contract, the Department paid $105,000.00 of Kurz's medical student loans with funding from a combination of federal and state funds. Stip. ¶ 19; R. at 134, ¶¶ 5, 13. The $105,000 of Kurz's loans paid pursuant to the Contract included a government educational loan in the amount of $91,490 and a private educational loan in the amount of $13,510. R. at 134-135, ¶¶ 14-22.
Section 5 of the Contract discusses the repayment of Kurz's educational loans. Section 5(C) states that the loans to be paid are "qualified educational loan(s)" and that the funds disbursed by the Department are "applied solely to repayment of qualifying educational loans." R. at 64. Section 12 of the Contract imposes financial penalties in the event Kurz defaults. R. at 65-66. Section 12(A)(3) provides that if Kurz "fails to complete the full Period of Service or separates from the [Upper San Juan Health Service District (a subdivision of the State of Colorado), doing business as Pagosa Mountain Hospital] prior to completion of the Period of Service, [Kurz] is required to make full and immediate repayment to [the Department], pursuant to federal regulations governing the Program." R. at 65-66.
On October 16, 2013, the Department commenced litigation against Kurz in the District Court for Archuleta County, Colorado, Case No. 2013CV30078 ("Archuleta District Court case"), asserting that Kurz had failed to complete the full period of service required under the Contract, resulting in a breach that entitled the Department to damages. Open. Br. Ex. 1 [Doc #9-1]; R. at 97. On November 22, 2015, prior to a ruling in the Archuleta District Court case, Kurz filed a Chapter 7 petition for relief, Case No. 15-22984-MER. Stip. ¶ 14; R. at 57. In his Statement of Financial Affairs, Kurz described the Archuleta District Court case as an action "for breach of student loan repayment contract." Stip. ¶ 10. In his bankruptcy Schedule F, Kurz listed CDPHE's claim against Kurz (sometimes referred to by CDPHE and herein as the "Debt") as "dispute of educational loan repayment contract." Id. ¶ 9. A Discharge Order was entered in Kurz's bankruptcy case on February 22, 2016. Id. ¶ 8.
Post-discharge, on February 19, 2018, the Archuleta District Court (the "District Court") found that Kurz had breached the Contract, made factual findings regarding the breach and damages, and granted summary judgment to the Department. R. at 99. Kurz appealed the judgment to the Colorado Court of Appeals, Case No. 18CA0643. See R. at 96-104. On April 4, 2019, the Colorado Court of Appeals made the following findings in support of its decision that Kurz had breached the Contract and that the Department was entitled to damages:
a. "It is undisputed that (1) [the Department] paid $105,000 as agreed; and (2) although Kurz's contractual commitment ended in mid-August 2013, he worked at the site only through June 27, 2013, a difference of approximately seven weeks." R. at 97. (Although the Bankruptcy Court's Order correctly states that Kurz's period of service under the Contract began on August 19, 2010, the Order also describes his work period as "July 1, 2010, through June 27, 2013," leaving the incorrect impression that he worked all but four days of his required service period. Order at 2.)
b. "The parties eventually moved to stay the proceedings anticipating the fulfillment of a settlement agreement. The settlement required Kurz to provide seven weeks of service at a qualifying site and to reimburse [the Department] $3400. He was to begin work within ninety days. Kurz did not start work. Shortly after ninety days had passed, Kurz filed for bankruptcy, and his filing automatically stayed the proceedings again." R. at 98.
c. With regard to damages, the Department presented evidence to the District Court that Kurz did not provide "full-time clinical practice" throughout his time at the site (in addition to leaving the site approximately seven weeks early). R. at 97-98.
Based on the foregoing, the Court of Appeals affirmed the District Court's finding that Kurz breached the Contract by failing to provide seven weeks of required service and remanded the case to the District Court to calculate damages based upon Kurz's failure to complete seven weeks of service and Kurz's failure to provide full-time service during his period of service. R. at 103-104.
On December 19, 2020, prior to the hearing on remand, Kurz filed the underlying adversary proceeding, seeking a determination that the Debt was discharged in his 2015 bankruptcy case pursuant to Section 523(a)(8) of the Bankruptcy Code. R. at 4-30. The District Court case is held in abeyance pending the outcome of this matter. Open. Br., Ex. 1 [Doc #9-1]; Ex. 2 [Doc #9-2]. On February 10, 2022, the Bankruptcy Court entered summary judgment in favor of Kurz and against the Department, holding that the Debt was dischargeable. In its Order, the Bankruptcy Court held that "in construing whether the Contract falls within the exception to discharge under § 523(a)(8) narrowly and in favor of Kurz, as this Court is required to do, the Court finds it is neither a 'qualified education loan' in the form of a refinance, or an 'obligation to repay funds received as an educational benefit.' " Order at 10.
III. STANDARD OF REVIEW
In reviewing a bankruptcy court's decision, the district court functions as an appellate court and is authorized to affirm, reverse, modify or remand the bankruptcy court's rulings. 28 U.S.C. § 158(a). A bankruptcy court's construction of the Bankruptcy Code is reviewed de novo and because the bankruptcy court granted summary judgment to Kurz, we also review the record de novo. See In re C.W. Min. Co., 798 F.3d 983, 986 & n. 2 (10th Cir. 2015).
IV. ANALYSIS
One of the principal purposes of the Bankruptcy Code is to grant a "fresh start" to the "honest but unfortunate debtor." In re Kinney, 5 F.4th 1136, 1145 (10th Cir. 2021) (quoting Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007)). However, by providing limited exceptions to discharge, the Bankruptcy Code recognizes that certain interests outweigh the "fresh start" for the debtor. Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). To that end, the Bankruptcy Code excepts from discharge certain categories of debt, including certain student loans. See 11 U.S.C. § 523(a)(8); In re Segal, 57 F.3d 342, 348 (3d Cir. 1995) (explaining, based on the limited legislative history of section 523(a)(8), that the "exclusion of educational loans from the discharge provisions was designed to remedy abuses of the educational loan system by restricting the ability of a student to discharge an educational loan by filing for bankruptcy shortly after graduation, and to safeguard the financial integrity of educational loan programs").
A. Relevant Statutes
Section 523(a)(8) of the Bankruptcy Code excepts educational benefits and educational loans from discharge unless excepting the debt from discharge would impose an undue hardship on the debtor. Kurz does not claim undue hardship. The relevant part of the statute provides as follows:
(a) A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt . . .
(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for . . .
(A)(i) an educational benefit over-payment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal
11 U.S.C. § 523(a)(8).Revenue Code of 1986, incurred by a debtor who is an individual.
The version of § 523(a)(8) that is in effect today (as quoted above) includes revisions pursuant to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the "BAPCPA"). Among other things, "[t]he BAPCPA separated the initial language of section 523(a)(8) into two subsections, sections 523(a)(8)(A)(i) and (ii), and added a completely new section, section 523(a)(8)(B)" which excepts from discharge "any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code." In re Conklin, No. 3:19-CV-00091-KDB, 2020 WL 1672786, at *4 (W.D.N.C. Apr. 6, 2020).
Section 221 of the Internal Revenue Code (the "IRC"), entitled "Interest on Education Loans," allows an income tax deduction for interest paid by a taxpayer on any "qualified education loan." A "qualified education loan" is defined as:
any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses—26 U.S.C. § 221(d)(1).
(A) which are incurred on behalf of the taxpayer . . . as of the time the indebtedness was incurred,
(B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and
(C) which are attributable to education furnished during a period during which the recipient was an eligible student.
Such term includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan. The term "qualified education loan" shall not include any indebtedness owed to a person who is related (within the meaning of section 267(b) or 707(b)(1)) to the taxpayer . . . .
B. Whether the Debt is Nondischargeable as a Refinance of Qualified Education Loans
CDPHE's first argument on appeal is that the Bankruptcy Court erred in failing to determine that Kurz's debt to the Department (as represented by the Contract) is nondischargeable as a refinance of qualified student loans pursuant to § 523(a)(8)(B) (and § 221(d)(1) of the IRC) or as a refinance of an educational benefit pursuant to 11 U.S.C. § 523(a)(8)(A)(i). There is no dispute that the underlying loans (Kurz's original student loans that were paid off with $105,000.00 in funds provided by the Department pursuant to the Contract) were qualified education loans. At issue here is whether the Contract created, in the words of § 221(d)(1), an "indebtedness used to refinance an indebtedness which qualifies as a qualified education loan," making it nondischargeable under § 523(a)(8)(B). The Department correctly points out that this appears to be a matter of first impression. As the creditor, the burden is on the Department to show that the debt is nondischargeable under § 523(a). See In re McDaniel, 973 F.3d 1083, 1092 (10th Cir. 2020) (quoting Okla. Dep't of Sec., ex rel. Faught v. Wilcox, 691 F.3d 1171, 1174 (10th Cir. 2012)).
In its Order, the Bankruptcy Court summed up the issue as follows:
While the Court agrees the refinance of otherwise nondischargeable student loan debt falls within the exception to discharge under § 532(a)(8) [sic], it disagrees with the characterization of the Contract as a refinance.Order at 5. After analyzing case law it considered most analogous, specifically In re Nies, 334 B.R. 495 (Bankr. D. Mass. 2005) and In re Segal, 57 F.3d 342 (3d Cir. 1995), the Bankruptcy Court concluded:
As such, in looking at the business purpose of the Contract replacing Kurz's original student loan debt, the Court finds the Contract was not a refinance of an otherwise qualified student loan debt, but rather was a "buyout" as described by the court in Nies.Order at 8.
Both parties recognize that the Bankruptcy Code does not define "refinance." (I also note the absence of a definition of the term in the IRC.) The Department therefore correctly looks to the ordinary meaning of the word. See First Nat'l Bank & Trust Co. of Chickasha v. United States, 462 F.2d 908, 910 (10th Cir. 1972) (when a statute does not define a term, the general rule is that the term is to be interpreted in its ordinary, everyday sense). The Department cites Black's Law Dictionary which defines "refinancing" as "[a]n exchange of an old debt for a new debt, as by negotiating a different interest rate or term or by repaying the existing loan with money acquired from a new loan." Refinancing, BLACK'S LAW DICTIONARY (11th ed. 2019). Kurz takes no issue with this definition.
However, CDPHE argues that despite the agreed-upon ordinary meaning of the word, a refinance under the statute does not need to be in the form of a loan. In support of its position, the Department points out that § 221(d)(1) "does not use the term loan in describing the refinancing of a qualified education loan." Open. Br. at 18. Instead, according to the Department, "to be a 'qualified educational loan' a refinance need only be an indebtedness 'used to refinance an indebtedness.' " Id. (citing "hanging paragraph" of § 221(d)(1)). According to the Department, and based on Black's Law Dictionary's definition of "indebtedness" as "[t]he quality, state, or condition of owing money," or "[s]omething owed; a debt," the word "indebtedness" as used in § 221(d) is broader and more inclusive than the term "educational loan" used throughout § 523(a)(8). Id. at 18-19. The Department argues that "Kurz incurred an indebtedness through the Loan Repayment Contract in the form of an obligation [by Kurz] to provide service or repayment which refinanced his qualified education loans" and that this form of "indebtedness" meets the definition of a qualified education loan under § 221(d)(1) and is therefore non-dischargeable under § 523(a)(8). Open. Br. at 21.
Kurz counters, focusing on § 221(d)(1)'s use of the word refinance in the phrase "indebtedness used to refinance." He argues that since, by definition, a "refinance" involves a new loan and since the Contract is not a new loan, it is outside the scope of § 523(a)(8)(B) and the Debt is therefore dischargeable. As further support, Kurz adds that § 523(a)(8)(B), by its express terms, applies only to an educational "loan."
In construing a statute, courts must give meaning to every word, if possible. See, e.g. Robbins v. Chronister, 435 F.3d 1238 (10th Cir. 2006); Smith v. Midland Brake, Inc., 180 F.3d 1154, 1165 (10th Cir. 1999) (en banc). I agree with Kurz that § 221(d)(1) does not refer broadly to any kind of indebtedness. Rather it expressly refers to "indebtedness used to refinance." Therefore, the indebtedness, to be non-dischargeable, must be "used to refinance" another indebtedness. As referenced above, refinance is defined in Black's Law Dictionary as "an exchange of an old debt for a new debt, as by negotiating a different interest rate or term or by repaying the existing loan with money acquired from a new loan." (I note that "refinance" is similarly defined in the Merriam-Webster Dictionary as: "to renew or reorganize the financing of something: to provide for (an outstanding indebtedness) by making or obtaining another loan or a larger loan on fresh terms." See https://www.merriam-webster.com/dictionary/refinance.) Thus, to give meaning to every word in the phrase and to apply the ordinary meaning of refinance, an "indebtedness used to refinance indebtedness" must involve a new loan.
I also agree with Kurz that another indication that § 523(a)(8)(B) applies only to loans is its plain language which refers to "any other educational loan that is a qualified education loan " as defined in section 221(d)(1) of the IRC. See 11 U.S.C. § 523(a)(8)(B) (emphasis added). Section 221(d)(1), in turn, defines the term "qualified education loan " in a section of the IRC entitled, "Interest on Education Loans " which pertains to the deductibility of interest on such loans. See 26 U.S.C. § 221(d)(1) (emphasis added).
Additionally, that the Contract is not a refinance is evident in the fact that it contains no provisions or terms for a new loan to take the place of the old loan. While the Contract does provide that the Department (referred to in the Contract as the Primary Care Office) would "payoff" Kurz's old debt -- which ordinarily would constitute one part of a typical refinancing transaction -- there is nothing in the Contract, as Kurz points out, evidencing a new loan such as an interest rate, payment amounts, payment schedule or other terms one would expect in a loan. See Contract, Section 4(C) (R. at 64) ("Primary Care Office shall compensate Provider [Kurz] by paying off its loan"); id., Section 5(C) (Primary Care Office shall repay Provider's qualified educational loan(s) for the Period of Service in the amount of . . . $105,000.00."). Neither the word "refinance" nor the concept, appears anywhere in the Contract. Instead, the Contract is clear that the Department is simply "paying off" Kurz's student loans to "compensate" him for his services. And, in the event Kurz breaches, the Contract includes a provision (Section 12, referenced above) that imposes financial penalties. R. at 65-66.
I also note that the Contract appears consistent with the Colorado statute that created the Program. As discussed above, the statute allows the use of state and federal money to help "repay" the outstanding education loans of healthcare professionals in exchange for their commitment to provide health care services in underserved areas. C.R.S. §§ 25-1.5-501(2), 503(1). There are no references in the statute to "refinancing" those education loans. In fact, the choices appear to be limited to either "mak[ing] payments on the education loans of the healthcare professional" or "[a]gree[ing] to make an advance payment in a lump sum of all or part of the principal, interest, and related expenses of the education loans of health-care professionals." See C.R.S. § 25-1.5-503(1)(a)(II)(A)&(B). The statute also provides that "[i]n consideration for receiving repayment of all or part of his or her education loan, the health-care professional shall agree to provide primary health services in health professional shortage area in Colorado." C.R.S. § 25-1.5-503(1)(a)(III)(A). Therefore, the Contract appears consistent with the statute authorizing it in that the funds advanced under the Contract were provided to pay off, but not to refinance, Kurz's student loans in exchange for his services.]
I agree with the Department that the parties' intent or purpose (as educational, business, personal or something else) is irrelevant under § 221(d)(1) in determining whether a refinance (assuming it is a refinance) is nondischargeable because the refinance provision of § 221(d)(1) does not require, or forbid, any such purpose for the refinance. For this reason, In re Nies and In re Segal, supra, cases on which the Bankruptcy Court relied, are not dispositive. However, the Bankruptcy Court's error, if any, in relying on these cases was harmless for the reasons discussed below. While the facts in the two cases are similar to the facts here - they both involved physician recruiting programs where student loans were paid off in exchange for work obligations - the statutory environment was different, as both cases were decided before the BAPCPA added § 523(a)(8)(B) and the courts did not decide whether the subject loans were refinances of qualified student loans. Rather, the issue before those courts was whether the loans qualified as educational loans under a different subsection of § 523 which, under the prevailing case law, required an educational purpose for the loans. Therefore, whether the loans served an educational (as opposed to a business or some other) purpose was relevant and determinative on the issue of dischargeability. That, however, is not the issue here as § 221(d)(1) (as incorporated by § 523(a)(8)(B)) does not require that the refinance have an educational (or any other) purpose. In re Conklin, supra, at *7, *9. The only requirement of § 221(d) that is relevant, but lacking, here is that the indebtedness be a "refinance" of a qualified student loan. See id. at *7. Indeed, in In re Conklin, a case heavily relied on by CDPHE, the court stated that "the proper question is not whether the Jubers' loan [to their son's former fiancé] was educational in nature, but rather whether the Jubers' loan is a refinance of the Three Original Loans, which would in turn make it a qualified education loan under 26 U.S.C. § 221(d)(1))." Id. at *7 (recognizing that the intent or purpose behind a refinance loan is almost always simply to reorganize a debt and create better terms). While the transaction at issue in Conklin was clearly a loan (initially a verbal agreement, but later a written promissory note with a term of ten years and a stated interest rate), the court declined to decide the ultimate question as to whether the Jubers' loan was in fact a "refinance" under section 221(d)(1), leaving that question, among others, to the bankruptcy court to decide on remand. There is no record of a bankruptcy court decision on remand and it appears that the parties settled.
CDPHE also relies on In re Mallett, 625 B.R. 553 (Bankr. M.D. Fla. 2021) for the proposition that a loan made by an individual to refinance a debtor's student loans is non-dischargeable under § 523(a)(8)(B) and § 221(d)(1) if the underlying loans were qualified student loans. In re Mallett, however, like In re Conklin, is distinguishable from the instant case because the transaction involved an actual loan in writing, for a sum certain, with a specified term and interest rate. See In re Mallett, at 555, 556,; In re Conklin, at *2. Moreover, the issue in In re Mallett was not whether the loan was a refinance - there was no question that it was - but rather whether the underlying original student loans were qualified education loans. Id. at 558.
While In re Conklin and In re Mallett do not resolve the issue at hand, the cases are instructive by way of contrast. In both cases, unlike here, the transaction in question involved an instrument that contained typical loan terms (a sum certain, interest rate, specified term), facts which the courts relied on in determining that the transaction was a loan (and, in the case of Mallett, a refinance loan). In a similar vein, In re Biondo, 180 F.3d 126 (4th Cir. 1999), not cited by either party, is also instructive. In In re Biondo, the court held that a settlement agreement between the debtors and their attorneys over the debtors' outstanding debt to the law firm which reduced the amount due from the debtors, and, unlike the Contract here, included an interest rate and payment terms as detailed in a promissory note, constituted a "refinance" because it resulted in the substitution of one debt for another debt. Id. at 132, 133 (relying, in part, on a definition of "refinancing" from an earlier edition of Black's Law Dictionary). Though In re Biondo was decided pre-BAPCPA and under a different subsection of § 523, specifically § 523(a)(2) which, similar to § 523(a)(8)(B), provides an exception to discharge for "any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses . . . .", id. at 130-31, it offers guidance as to what is required for a transaction to be considered a refinance and shows, by contrast, what is missing here.
Though I disagree with the Bankruptcy Court's reasoning and its reliance on Nies and Segal, I agree with its conclusion that the Contract is not a refinance of otherwise qualified student loans, and it is therefore dischargeable. For the reasons set forth above, and based on a narrow construction of the statute, the Contract did not create an "indebtedness used to refinance" Kurz's student loans because the Contract did not create a new loan. Rather, the funds advanced under the Contract to pay off Kurz's student loans were part of a compensation package in exchange for his services. To adopt the broad reading advanced by the Department would violate the well-established principle that exceptions to discharge in section 523(a) must be narrowly construed. See In re Kaspar, 125 F.3d 1358, 1361 (10th Cir. 1997) ("exceptions to discharge are to be narrowly construed, and because of the fresh start objectives of bankruptcy, doubt is to be resolved in the debtor's favor").
C. Whether the Debt is Non-Dischargeable as an Educational Benefit
CDPHE's second argument is that the Bankruptcy Court erred in failing to determine that Kurz's debt to the Department arising out of the Contract is non-dischargeable as "an obligation to repay funds received as an educational benefit" pursuant to § 523(a)(8)(A)(ii). According to the Department, the Contract conferred an educational benefit in the form of a conditional grant that would not need to be repaid as long as Kurz completed his service obligation. This issue also appears to be a matter of first impression.
In its Order, the Bankruptcy Court held that the Contract was not an "educational benefit" as contemplated by § 523(a)(8)(A)(ii) based on the court's narrow interpretation of the statute, in keeping with the "fresh start" policy of the federal bankruptcy system, by "limit[ing] those exceptions to discharge only to those plainly expressed in the statute," as recognized by the Tenth Circuit. Order at 9 (quoting McDaniel, 973 F.3d at 1093-94). The Bankruptcy Court noted that the Second and Fifth Circuits have similarly held that a narrow interpretation of "educational benefits" is appropriate. Order at 9 (citing Homaidan v. Sallie Mae, Inc., 3 F.4th 595 (2d Cir. 2021) & In re Crocker, 941 F.3d 206 (5th Cir. 2019)). It also recognized that McDaniel, in distinguishing between a loan (which was the issue before the Tenth Circuit) and an educational benefit, defined educational benefit as "a conditional grant of funding for education - akin to a stipend and scholarship - as opposed to a loan of funds for education." Order at 9 (quoting McDaniel, 973 F.3d at 1098).
The Bankruptcy Court also considered the canon of statutory interpretation known as noscitur a sociis, or ascertaining the meaning of a particular word or phrase by looking at neighboring words and phrases, to ascertain the meaning of "educational benefit" within the phrase "educational benefit, scholarship, or stipend" in § 523(a)(8)(A)(ii). In reaching its conclusion that the benefit created by the Contract was not similar to a scholarship or stipend, the Bankruptcy Court found "of particular import" the traditional timing of scholarships and stipends and held that since scholarships and stipends are generally advanced prior to or during one's education, "[i]t is logical . . . for the Court to conclude 'educational benefits' must also be similarly received prior or during the education." Order at 10. Therefore, according to the Bankruptcy Court, since the benefit created by the Contract was not received prior to or during Kurz's education, it was not exempt from discharge as an "educational benefit" under § 523(a)(8)(A)(ii).
Finally, the Bankruptcy Court looked to the purpose of the Program, which it found was to induce the employment of physicians in underserved areas, the only real connection to education being that the physicians have undergone many years of education to receive their medical degrees. Order at 10. As such, according to the Bankruptcy Court, "the 'benefit' provided to Kurz under the Contract was strictly financial as opposed to educational." Id.
The Department argues that when the Bankruptcy Court concluded that, to be non-dischargeable, an educational benefit must, like a scholarship or stipend, be received prior to or during the education, it "gloss[ed] over" an important detail in the McDaniel case, that being the Tenth Circuit's "lengthy discussion" of conditional grants, including educational grants tied to service obligations. Open. Br. at 28, 29. Acknowledging that the McDaniel court did not have before it a conditional grant (the case involved the dischargeability of private student loans), the Department focuses on an example the McDaniel court gave of a conditional educational benefit with a service obligation - the GI Bill, a government benefit program that provides funding for education based on years of military service. (The "GI Bill" refers to veterans' benefits legislation that includes veterans' educational assistance benefits. See McDaniel, 973 F.3d at 1096-97 (citing Cleland v. Nat'l Coll. of Bus., 435 U.S. 213, 231 n.1, 98 S.Ct. 1024, 55 L.Ed.2d 225 (1978))). Arguing that if GI benefits (where service must be fulfilled before receipt of the educational benefit) qualify as "educational benefits" under the statute, then the benefit Kurz received under the Contract (where service must be fulfilled after receipt of the educational benefit) must also qualify. Therefore, according to the Department, the timing of receipt of the benefit should not be dispositive.
Kurz also relies on McDaniel as instructive on the question as to what the term "educational benefit" means. Emphasizing the McDaniel court's recognition of the narrow and limited exceptions to discharge only to those plainly expressed in the statute, Kurz also highlights the McDaniel court's definition of "funds received as an educational benefit" as "a conditional grant of funding for education -- akin to a stipend and scholarship." Appellee's Br. at 17-18 (quoting McDaniel, 973 F.3d at 1098) (emphasis added by Kurz). Kurz argues that the "for education" requirement means that there must be an educational purpose to the grant and that since there was no educational purpose to the Contract (because Kurz had completed his education and was a practicing physician six years before the Contract was executed) it was not akin to a stipend or scholarship and therefore was not an "educational benefit."
I agree with Kurz. The Contract is not an "educational benefit" because it did not, as McDaniel explained, provide funding for Kurz's education. He completed his education six years before entering into the Contract. The funding that Kurz received did not enable him to get an education, as do GI Bill benefits, scholarships, and stipends; therefore, the Debt is not an "educational benefit" under the statute. This is consistent with the Third Circuit's analysis in In re Segal, supra, where the court held that a contingent loan given to a physician in exchange for a work obligation was not an "educational benefit, scholarship or stipend," noting that the loan was not provided as "a means to obtain an education" or for the "purpose to facilitate Dr. Crowe's education, which had long since been completed." Id. 57 F.3d at 349. Rather, according to the court, the purpose of the funds was to induce the doctor to accept employment with the hospital by providing her with a means to repay obligations she owed on an earlier scholarship. Id. See also In re Gordon, 231 B.R. 459, 465 (Bankr. D. Conn. 1999) (in determining that a loan given in exchange for a service obligation was not an "educational benefit, scholarship or stipend," the court reasoned that "[t]he funds were not loaned or used as a means to obtain an education [since at the time the loan was made the debtor had completed medical school] but served as a vehicle for securing the services of a physician" and "were 'inextricably tied to the [Defendant's] employment with the Plaintiff' "); N.M. Inst. of Mining & Tech. v. Coole (In re Coole), 202 B.R. 518, 519 (Bankr. D.N.M. 1996) (cited in In re McDaniel as explaining that the GI Bill is a program whereby (veteran) students receive periodic payments upon their certification that they are attending school and that if a student receives funds but is not in school, this is an educational benefit overpayment which is not dischargeable).
It is also helpful, as Kurz suggests, to contrast cases in which debts were held nondischargeable where the debtors received tuition benefits from their employers in exchange for work obligations that were later unfulfilled. See, e.g., In re Udell, 454 F.3d 180, 185-86 (3d Cir. 2006) (holding that debt to attend the United States Air Force Academy, which was given in exchange for a later unfulfilled service obligation, was non-dischargeable as an "educational benefit"); In re Baiocchi, 389 B.R. 828, 831, 832 (Bankr. E.D. Wisc. 2008) (employer-sponsored program that "provided funds to cover educational expenses" by reimbursing 50% of debtor's cost of law school tuition and books in exchange for a work requirement was an "educational benefit" and non-dischargeable); In re Daymon, 490 B.R. 331, 336 (Bankr. N.D. Ill. 2013) (holding that employer-sponsored tuition assistance program, like a scholarship, provided "educational benefit" to debtor within the meaning of § 523(a)(8) where assistance financed debtors' graduate education and enabled her to pursue a graduate degree). In all of these cases, the benefit was given prior to or during the debtor's education and made it possible for the debtor to attend college.
In contrast to these cases, Kurz's education was completed six years prior to receiving the benefits conferred by the Contract. The funding Kurz received in 2010 was not for education because it did not enable him to pursue an education. He had already achieved that long before he entered into the Contract. The Bankruptcy Court's consideration of the timing of the Contract benefits, therefore, was appropriate in determining whether the Contract provided an "educational benefit" along the lines of a scholarship or stipend or other employer-sponsored benefit that enables the recipient to pursue an education. The Bankruptcy Court was also correct to adopt a narrow interpretation of this exception to discharge based on the fresh-start objectives of the bankruptcy system. In re Kaspar, 125 F.3d at 1361; In re McDaniel, 973 F.3d at 1093-94.
V. CONCLUSION
IT IS THEREFORE ORDERED that the United States Bankruptcy Court for the District of Colorado's Order dated February 10, 2022 is AFFIRMED.