#2573        signed 5-16-02

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

ORDER DECLINING TO DECLARE THAT SANCTIONS

WILL ALWAYS BE IMPOSED IN THE FUTURE

AGAINST ANYONE WHO FILES A PLAN PROVIDING FOR

DISCHARGE OF POSTPETITION INTEREST ON STUDENT LOANS

These matters are before the Court for resolution of an objection to a provision included in the

chapter 13 plan filed in each case. The debtors appear by counsel Gary E. Hinck and Fred W.

Schwinn. The objecting creditor, Educational Credit Management Corporation (“ECMC”), appears

by counsel N. Larry Bork. The Court has reviewed the relevant pleadings and is now ready to rule.

In each case, the plan creates a “Special Class II” and provides:

Special Class II, consisting of government guaranteed education loans, is to be paid in full, without interest. Any balance remaining on this debt consisting of post-petition interest shall be discharged upon completion of this plan. Confirmation of this plan shall constitute a finding to that effect and said post-petition interest is dischargeable.

Pursuant to 11 U.S.C.A. §1328(a)(2) and §523(a)(8), student loan debts are not dischargeable in

chapter 13 unless excepting them from discharge “will impose an undue hardship on the debtor and the

debtor's dependents.” In a case decided under the old Bankruptcy Act, the Supreme Court ruled in

Bruning v. United States, 376 U.S. 358 (1964), that postpetition interest on a nondischargeable tax

debt, though not allowable against a bankruptcy estate, was an integral part of the debt and remained

enforceable against the debtor personally after discharge. Typically relying on Bruning, courts have

generally agreed that postpetition interest on nondischargeable student loan debts is also

nondischargeable. See 4 Keith M. Lundin, Chapter 13 Bankruptcy §346.1 at 346-8 to 346-17.

Because the debtors' plans do not allege that excepting this postpetition interest from discharge would

impose an undue hardship on them or their dependents, their “Special Class II” provision seeks relief

that is not made available to them by the Bankruptcy Code, but can only be obtained with the consent

of their student loan creditors. Thus, plans with this provision are not confirmable because they do not

comply with the Bankruptcy Code, in violation of 11 U.S.C.A. §1325(a)(1). ECMC asks the Court to

declare that, in the future, the inclusion of such a provision in any chapter 13 plan will result in sanctions.

The Court recently considered a similar request by ECMC in a related, but distinguishable,

context. See In re Gardner, Case No. 00-42099-13, Order Concerning Request for Sanctions for

Including in a Plan a Provision for an Undue Hardship Discharge of Student Loans (Bankr.D.Kan. Feb.

22, 2001) (order applicable to three cases), aff'd sub nom. In re Wright, Case No. 01-4035 (Bankr.

Case. No. 00-42043-13) Memorandum and Order (D.Kan. Apr. 29, 2002) (Rogers, J.). In those

cases, the debtors had included in their plans provisions declaring that repayment of any balances

remaining on their student loan debts after completion of their plans would impose an undue hardship on

the debtors and their dependents, so the balances would be discharged. The distinction between

Gardner and these cases is that the discharge of student loan debts because of undue hardship is

available under the Bankruptcy Code, while the discharge of postpetition interest on student loan debts

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without undue hardship is not. Nevertheless, the Gardner decision informs the Court's thinking in

these cases.

In Gardner, the Court concluded that an undue hardship discharge provision could be included

in a chapter 13 plan and a creditor's opposition to the undue hardship allegation could be resolved

through the plan confirmation process because that process was sufficiently similar to the adversary

proceeding process that student loan creditors received all the procedural protections they would have

in an adversary proceeding. However, the Court also indicated that an undue hardship discharge

provision could not properly be included in a plan when no undue hardship even arguably existed, in

hopes of slipping it by inattentive or unsuspecting student loan creditors. Such action would likely

violate Federal Rule of Bankruptcy Procedure 9011(b)(3) and subject the person taking the action to

sanctions under subdivision (c) of that Rule. Similarly, including a provision for the discharge of

postpetition interest on student loans without alleging undue hardship would appear to raise the question

whether the proponent had falsely certified that “the claims, defenses, and other legal contentions

therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or

reversal of existing law or the establishment of new law.” Fed. R. Bankr. P. 9011(b)(2).

The debtors' counsel suggest the plan provision is merely a proposal to the student loan

creditors that they are free to accept or reject. The problem with this view in this context is that, if the

plan is confirmed without objection, the creditors' silence will have been treated as their consent to the

otherwise unlawful provision, even though §1325(a)(1) indicates the Court should not confirm the plan.

If accepted, the suggestion would permit debtors to propose plans with any impermissible provisions

their counsel can think of, and have the plans confirmed unless affected creditors object. For example,

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debtors could propose to expand the chapter 13 discharge to cover all the debts that are made

nondischargeable by §1328(a), and have their plans confirmed unless creditors object. The Court

believes debtors cannot rely on creditor silence to take away the creditors' unqualified rights under

chapter 13, but instead must obtain actual affirmative assent to such provisions.

While the Court can agree with ECMC that the plan provision used in these cases is improper,

the Court is not willing to declare now that all counsel and debtors who might include a similar provision

in a future plan will be sanctioned. The Court cannot prejudge the motives or knowledge of such

counsel and debtors, or foresee all the circumstances that might surround their decision to include the

provision. It is possible that some student loan creditor will affirmatively agree to such treatment.

Perhaps someone will devise an argument in support of the provision that satisfies the test of Fed. R.

Bankr. P. 9011(b)(2). The Court is willing to warn the attorneys who filed the plans in these cases that

they may be sanctioned if they include such a provision in a future chapter 13 plan unless there is some

relevant change in the law, or they are able to devise a nonfrivolous new argument justifying it. But the

Court will not establish a blanket sanction rule applicable to all future cases.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of May, 2002.

__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

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