Deceder v. Educational Credit Management Corporation et al

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United States Bankruptcy Court
District of Massachusetts

In re: Chapter 7
Case No. 05-42838-HJB

MELISSA A. DECEDER,

Debtor

MELISSA A. DECEDER, Adversary Proceeding
No. 05-04293

Plaintiff,
V.

PENNSYLVANIA HIGHER
EDUCATION ASSISTANCE
AGENCY D/B/A AMERICAN
EDUCATION SERVICES,

Defendant,

EDUCATIONAL CREDIT
MANAGEMENT CORP.,

Defendant- Intervenor.

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MEMORANDUM OF DECISION

Before the Court is a complaint filed by Melissa A. Deceder (the “Debtor’) against
the Pennsylvania Higher Education Assistance Agency, d/b/a American Education Services
(“PHEAA”). In Count | of her complaint, the Debtor asks this Court to rule that her student
loans are dischargeable pursuant to 11 U.S.C. § 523(a)(8). In Count Il, the Debtor seeks

damages for PHEAA’s alleged violations of Massachusetts General Laws chapters 93 and

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

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93A. PHEAA and intervening defendant Educational Credit Management Corporation
(“ECMC’”) have each filed motions to dismiss or to abstain, arguing, inter alia, that this
Court lacks jurisdiction over the claims brought under Massachusetts law. For the reasons

set forth below, this Court agrees that Count II of the Debtor's complaint must be

dismissed.

FACTS AND POSITIONS OF THE PARTIES

The Debtor filed a petition for relief under Chapter 7 of the United States Bankruptcy
Code’ (the “Bankruptcy Code’ or the “Code’”) on April 24, 2005. From the entries on the
docket, it appears that the Debtor’s case proceeded in a relatively uneventful manner prior
to the filing of the instant adversary proceeding.” On July 7, 2005, the Chapter 7 Trustee
reported that there were no non-exempt assets to distribute to creditors, and, on
September 12, 2005, this Court entered an order granting the Debtor’s discharge pursuant
to 11 U.S.C. § 727. According to the Debtor, however, those intervening months were not
without event. She alleges that, during the pendency of her bankruptcy case, PHEAA
attempted to collect its debt in a fashion which amounted to unfair and deceptive debt

collection practices under Massachusetts law.’

‘See 11 U.S.C. §§ 101 et. seq.

? This Court may take judicial notice of the documents filed in the Debtor’s bankruptcy case.
See In re Hyde, 334 B.R. 506, 508-09 n.2 (Bankr. D. Mass 2005).

* The material collection activities of PHEAA post-dated the Debtor's discharge.
Accordingly, the automatic stay under 11 U.S.C. 362(a) is not implicated. See 11 U.S.C.
362(c)(2)(C). Moreover, the Debtor has expressly disavowed any claim for relief against PHEAA
for violation of the automatic stay.

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The Debtor's contentions are summarized as follows. On May 7, 2005,
approximately 2 weeks after the commencement of her bankruptcy case, PHEAA sent a
letter to the Debtor, demanding payment of the subject student loan debt.* The letter
further stated that a “collection fee” would be added to the balance of the debt in the event
of default. On May 20, 2005, PHEAA sent a letter to the Debtor's counsel, stating that
collection activity would “cease during the pendency of the bankruptcy case.” On
September 6, 2005, Debtor’s counsel sent a letter to PHEAA proposing a settlement of the
student loans. In that letter, Debtor's counsel insisted that PHEAA send further
communications regarding the loans directly to counsel and not to the Debtor. Thereafter,
subsequent to the entry of the Debtor's discharge, PHEAA sent two letters directly to the
Debtor, again demanding payment of the student loans. Debtor’s counsel responded by
letter, dated October 19, 2005, demanding that PHEAA cease direct contact with the
Debtor and again seeking a reasonable settlement of the loans. PHEAA did not respond.

On November 2, 2005, the Debtor initiated the present adversary proceeding
against PHEAA. In the complaint, the Debtor asks this Court to declare the student loans

dischargeable pursuant to 11 U.S.C. § 523(a)(8).° Through Count II of the complaint, the

“ The student loan debts were incurred by the Debtor between 1991 and 1995, and were
used to help finance her undergraduate education at Pennsylvania State University. The loans
were consolidated through PHEAA in February of 1996.

5 A debtor under Chapter 7 of the Bankruptcy Code is generally
entitled to a discharge of all debts that arose before the filing of the
bankruptcy petition. See 11 U.S.C. § 727(a), (6). Student loans,
however, are excepted from this general discharge and, without
more, a debtor will emerge from bankruptcy with the continued
obligation to repay his or her student loans. See 11 U.S.C. §
523(a)(8). There is, of course, an exception to the exception. Under
§ 523(a)(8), student loans are excepted from discharge “unless
excepting such debt from discharge .. . will impose an undue

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Debtor also seeks damages pursuant to Massachusetts General Laws Chapter 93 and 93A
(“chapter 93" or “chapter 93A”) for PHEAA’s allegedly unfair and deceptive debt collection
practices (the “93A claim”).®

Shortly after the filing of the adversary proceeding, PHEAA assigned its interest in
the Debtor’s loans to ECMC. ECMC then filed an answer to the complaint and a motion
to intervene and be substituted as defendant in the adversary proceeding (the “Motion to
Intervene”). The Debtor filed a limited objection to the Motion to Intervene, acknowledging
that ECMC was the proper defendant vis-a-vis the dischargeability claim, but asserting that
ECMC could not substitute itself as the defendant with regard to the 93A claim. Ata
hearing held on January 18, 2006, this Court granted the Motion to Intervene in part,
allowing ECMC’s intervention into the proceeding, but left open the question of whether
ECMC would be substituted as the sole defendant.

ECMC and PHEAA subsequently filed motions asking this Court to abstain from
hearing the 93A claim or to dismiss the claim on jurisdictional or substantive grounds. In
their requests for abstention, they argue that because the 93A claim, in their view, is a non-

core proceeding and involves only questions of state law, this Court should exercise its

hardship on the debtor and the debtor's dependents.” (emphasis
added). 11 U.S.C. § 523(a)(8).

Hicks v. Educ. Credit Mgmt. Corp. (In re Hicks), 331 B.R. 18, 22 (Bankr. D. Mass. 2005). A debtor
seeking a declaration that student loan debts are dischargeable under § 523(a)(8) must file an
adversary proceeding against the entity holding the student loans. See Fed. R. Bankr. P. 7001(6).

5 Massachusetts law provides that “unfair deceptive acts or practices in the conduct of any
trade or commerce are hereby declared unlawful.” M.G.L. ch. 93A, § 2. A creditor may be liable
for damages under 93A if the creditor directly contacts a debtor after receiving notification from the
debtor’s attorney that all further communications relative to the debt should be addressed to the
attorney. See M.G.L. ch. 93, § 49(b); M.G.L. ch. 93A, § 2; 940 CMR 7.04(2).

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discretion to abstain pursuant to 28 U.S.C. 1334(c).’ In its motion, PHEAA further argues
that since the acts complained of occurred entirely post-petition and the recovery of
damages, if any, would not be part of the Debtor's bankruptcy estate, the claim is not
“related to” the Debtor's bankruptcy case within the meaning of 28 U.S.C. § 157. Thus,
PHEAA asserts that this Court lacks subject matter jurisdiction over the 93A claim.

The Debtor, however, argues that the 93A claim is related to the Debtor's
bankruptcy case, and is a core bankruptcy matter, because the letters were sent while the
bankruptcy case was still pending and receipt of the letters has caused the Debtor distress
that has further impaired her ability to pay back the student loans. Thus, according to the
Debtor, the 93A claim is “inextricably intertwined” with the request for discharge of the
loans under § 523(a)(8).°

According to ECMC and PHEAA, even if this Court were to rule that it had
jurisdiction over the 93A claim and declined to abstain, Count Il must be dismissed
because chapter 93A does not apply to PHEAA. First, they argue that the provisions of
chapter 93A are preempted by federal statutes and regulations which set certain time
frames within which student loan guarantor agencies such as PHEAA must contact
borrowers regarding payment of student loans. Second, relying on Massachusetts case

law, they maintain that as an entity legislatively created and controlled by the

’ Pursuant to 28 U.S.C. 1334(c)(1), this Court may, “in the interest of justice, or in the
interest of comity with State courts or respect for State law, . . . abstain[ ] from hearing a particular
proceeding arising under title 11 or arising in or related to a case under title 11.”

® The dischargeability determination under § 523(a)(8) is a core bankruptcy matter, see 28
U.S.C. § 157(b)(2)(I1), and the parties do not dispute the Court’s jurisdiction over Count !. See 28
U.S.C. § 157(b)(1).

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Commonwealth of Pennsylvania, chapter 93A does not apply to PHEAA. Because PHEAA
was merely performing the duties required by its legislative mandate — namely, assisting
in the financing of higher education opportunities — it is not a “person” engaged in “trade
or commerce” under chapter 93A.

The Debtor maintains that federal law does not preempt the provisions of chapter
93A. The Debtor contends that federal law merely requires guaranty agencies to
undertake a range of “reasonable” collection activities relating to a defaulted loan, and that
guaranty agencies are not required to directly contact a debtor following a request that
communications be sent to counsel. The Debtor also argues that the PHEAA’s status as
a governmental agency is not dispositive of whether chapter 93A applies. Instead, the
Debtor says that the question is whether the acts complained of were perpetrated by the
defendant within a “business context.” The Debtor contends that PHEAA runs a profitable
national student loan business in the same manner as any other for-profit corporation.
Thus, PHEAA conducts its affairs in a business context and for a business purpose and

engages in “trade or commerce” within the meaning of chapter 93A.

HI. DISCUSSION
This Court’s first obligation is to determine whether it has jurisdiction over the

Debtor’s 93A claim. See Csondor v. Weinstein, Treiger & Riley (In re Csondor), 309 B.R.

124, 126-27 (Bankr. E.D. Pa. 2004); Official Comm. of Unsecured Creditors v. Blease (In

re Envisonet Computer Servs., Inc.), 276 B.R. 7, 10 (D. Me. 2002); N. Parent, Inc. v. Cotter

& Co. (In re N. Parent, Inc.), 221 B.R. 609, 624 (Bankr. D. Mass. 1998) (each cause of

action must be separately analyzed to determine whether it falls within the court’s

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jurisdiction) (citing Ralls v. Docktor Pet Ctrs., Inc., 177 B.R. 420, 425 (D. Mass. 1995);

Hughes-Bechtol, Inc. v. State of Ohio (In re Hughes-Bechtol, Inc.), 141 B.R. 946, 949

(1992)). Although the parties have filed a Joint Stipulation of Facts, they did not stipulate
to the facts underlying the Debtor's 93A claim. Thus, this Court must consider whether

“the facts alleged in the complaint, taken as true, do not justify the exercise of subject

matter jurisdiction.” Muniz-Rivera v. United States, 326 F.3d 8, 11 (1st Cir. 2003).

It bears repeating that the bankruptcy courts are courts of limited jurisdiction, a
jurisdiction delineated by Congress in 28 U.S.C. § 1334 (“section 1334" or “§ 1334") and

28 U.S.C. § 157 (“section 157” or “§ 157"). See Celotex Corp. v. Edwards, 514 U.S. 300,

307 (1995); Boston Reg'l Med. Ctr., Inc. v. Reynolds (In re Boston Reg’! Med. Ctr., Inc.),

410 F.3d 100, 105 (1st Cir. 2005); Spookyworld, Inc. v. Town of Berlin (In re Spookyworld,

Inc.), 266 B.R. 1, 6 (Bankr. D. Mass. 2001); see also N. Pipeline Constr. Co. v. Marathon

Pipe Line Co., 458 U.S. 50 (1982). Section 1334 sets forth the District Court’s jurisdiction

over bankruptcy matters,? and the district court may “refer” bankruptcy matters to the

° Section 1334 provides, in relevant part:

(a) Except as provided in subsection (b) of this section, the district courts shall
have original and exclusive jurisdiction of all cases under title 11.

(b) Notwithstanding any Act of Congress that confers exclusive jurisdiction on
a court or courts other than the district courts, the district courts shall have
original but not exclusive jurisdiction of all civil proceedings arising under title
11, or arising in or related to cases under title 11.

11 U.S.C. § 1334(a), (b).

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bankruptcy courts under § 157.'° Section 157 also defines the jurisdictional limits of the

bankruptcy courts as follows:

(b)(1) Bankruptcy judges may hear and determine all cases under title 11
and all core proceedings arising under title 11, or arising in a case
under title 11, referred under subsection (a) of this section, and may
enter appropriate orders and judgments, subject to review under
section 158 of this title.

(c)(1) A bankruptcy judge may hear a proceeding that is not a core
proceeding but that is otherwise related to a case under title 11. In
such proceeding, the bankruptcy judge shall submit proposed findings
of fact and conclusions of law to the district court, and any final order
or judgment shall be entered by the district judge... ."'

28 U.S.C. § 157 (emphasis added). In sum, absent a source of jurisdiction other than §
1334, neither the district court nor the bankruptcy court may determine a dispute which is
unrelated to a bankruptcy case. However, if the dispute is sufficiently related to the
bankruptcy case, jurisdiction is then allocated so that the bankruptcy court (1) has
jurisdiction over, and may enter final orders regarding, proceedings that are “core”

bankruptcy matters; and (2) has jurisdiction over, but, absent consent of the parties, may

not enter final orders regarding, proceedings that are “non-core.” Accordingly, this Court

'° The United States District Court for the District of Massachusetts has acted pursuant to
§ 157(a) and refers bankruptcy matters to the bankruptcy courts. See D. Mass. R. 201.

" Under sub-section (2), the bankruptcy judge may enter final orders in non-core
proceedings with the consent of all parties. 11 U.S.C. § 157(c)(2). PHEAA has made it clear,
however, that it does not consent to the entry of final orders relative to Count Ii, assuming it is a
non-core claim.

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must first determine whether the 93A claim is related to the bankruptcy case. If not, there
is no need to go further.
The First Circuit has described “related to” proceedings as non-core proceedings

which

“potentially have some effect on the bankruptcy estate, such as altering
debtor's rights, liabilities, options, or freedom of action, or otherwise have an
impact upon the handling and administration of the bankrupt estate.” In re
Smith, 866 F.2d 576, 580 (3d Cir. 1989); 28 U.S.C. 157(c). “The usual
articulation of the test for determining whether a civil proceeding is related
to bankruptcy is whether the outcome of that proceeding could conceivably
have any effect on the estate being administered in bankruptcy.” Pacor v.
Higgins, 743 F.2d 984, 994 (3d Cir. 1984).

Inre G.S.F. Corp., 938 F.2d 1467, 1475 (1st Cir. 1991); see also Celotex, 514 U.S. at 307

n.5: Inre Boston Req’'l Med. Ctr., 410 F.3d at 105; In re Middlesex Power Equip., 292 F.3d

at 68; Ralls v. Docktor Pet Ctrs., Inc., 177 B.R. 420, 424-25 (D. Mass. 1995); Boyajian v.

Deluca (In re Remington Dev. Group, Inc.), 180 B.R. 365, 368-69 (Bankr. D.R.I. 1995)

(collecting cases).

Because the Debtor’s claim for relief under 93A arose post-petition, it is not property
of her bankruptcy estate;'? any recovery of damages would go to the Debtor and would not
be available for distribution under the Bankruptcy Code. This fact weighs heavily against
a finding that the claim is “related to” the Debtor’s bankruptcy case. See Celotex, 514 U.S.

at 308 (“bankruptcy courts have no jurisdiction over proceedings that have no effect on the

” Although legal claims held by a debtor may be property of the debtor’s bankruptcy estate,
see Howe v. Richardson, 193 F.3d 60, 61 &n.1 (ist Cir. 1999), the cause of action generally must
have existed at the time the petition was filed. See 11 U.S.C. § 541(a)(1) (a bankruptcy estate is
comprised of “all legal or equitable interests of the debtor in property as of the commencement of
the case.”) (emphasis added).

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estate of the debtor.”). In a case raising remarkably similar issues, Judge Haines of the
United States Bankruptcy Court for the District of Maine found that post-petition claims
under the Fair Debt Collections Practices Act and Maine tort law “hold no potential to

impact in any way the ‘handling and administration of the bankrupt estate,” Goldstein v.

Marine Midland Bank, N.A. (In re Goldstein), 201 B.R. 1, 5 (Bankr. D. Me. 1996), and were

therefore not related to the debtor’s bankruptcy estate. Id.; see also In re Csondor, 309

B.R. at 129-30; Close v. Edison (In re Close), 2003 Bankr. LEXIS (Bankr. E.D. Pa. 2003);

Vogt v. Dynamic Recovery Servs. (In re Vogt), 257 B.R. 65 (Bankr. D. Colo. 2000). This

Court agrees with Judge Haines’ analysis and conclusion in Goldstein — in a chapter 7
liquidation, tort claims for violations of state consumer protection laws, arising solely from
a creditor's post-petition activities, are simply not related to the debtor’s bankruptcy estate.

See Celotex, 514 U.S. at 308; Singer v. Adamson (In re Adamson), 334 B.R. 1, 11 (Bankr.

D. Mass. 2005); Adams v. Hartconn Assoc., Inc. (In re Adams), 212 B.R. 703, 715 (Bankr.

D. Mass. 1997) (“Bankruptcy courts do not have jurisdiction over postpetition matters which
are unrelated to the bankruptcy estate.”).

The Debtor has argued, however, that the facts underlying the 93A claim are
relevant to her § 523(a)(8) dischargeability claim, and therefore the two claims are
“inextricably intertwined.” But a common factual nexus does not, in and of itself, convert

an unrelated claim into a related one. See In re Close, 2003 Bankr. LEXIS 1507, *12-13:

In re Steele, 258 B.R. at 321; In re Vogt, 257 B.R. at 68. Regardless of the success or
failure of the 93A claim, the outcome of the proceeding will have absolutely no effect on

the Debtor’s bankruptcy estate. Whether PHEAA’s actions are relevant to the Debtor’s

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request for a determination of nondischargeability under § 523(a)(8) is a matter left for

another day.

IV. CONCLUSION

For all the foregoing reasons, this Court concludes that it lacks jurisdiction over the
93A claim and, accordingly, Count Il of the complaint is hereby DISMISSED. Furthermore,
since the only remaining claim relates solely to the dischargeability of the Debtor’s student
loans currently held by ECMC, ECMC’s request to be substituted as the defendant is
GRANTED.

Separate orders in conformity with this memorandum shall issue forthwith.

DATED: August 31, 2006 By the Ge
Mo el Bg
@

Henry J. Boroff —
United States Bankruptcy Judge

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United States Bankruptry Court
istrict of Massachusetts

in re: Chapter 7
Case No. 05-42838-HJB

MELISSA A. DECEDER,

Debtor

MELISSA A. DECEDER, Adversary Proceeding
No. 05-04293

Plaintiff,
V.

PENNSYLVANIA HIGHER
EDUCATION ASSISTANCE
AGENCY D/B/A AMERICAN
EDUCATION SERVICES,

Defendant,

EDUCATIONAL CREDIT
MANAGEMENT CORP.,

Defendant- Intervenor.

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JUDGMENT OF PARTIAL DISMISSAL

For the reasons stated in this Court's Memorandum of Decision of even date, the
motions filed by the Defendant and the Defendant-Intervenor to abstain and dismiss Count

Il of the Plaintiff's Complaint are granted insofar as the said Count II is DISMISSED.

DATED: August 31, 2006 By ie Yh Bef

Henry J. Boroff
United States Bankruptcy Judge