Leeper & Webster v. PHEAA , 49 F.3d 98 ( 1995 )

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
2-27-1995
Leeper & Webster v PHEAA
Precedential or Non-Precedential:
Docket 94-3372
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UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
Nos. 94-3372 & 94-3373
LISA LEEPER; WILLIAM LEEPER;
DWIGHT WEBSTER and DELLA WEBSTER,
Appellants
v.
PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY,
(PHEAA), STUDENT LOAN SERVICE CENTER;
GARY J. GAERTNER,
Trustee
On Appeal from the United States District Court
For the Western District of Pennsylvania
D.C. Civ. Nos. 93-cv-01905 & 93-cv-01906
Submitted Under 3rd Cir. LAR 34.1(a)
January 23, 1995
Before: SLOVITER, Chief Judge,
LEWIS and ROSENN, Circuit Judges
(Opinion Filed February 27, 1995)
Edward A. Olds
Olds & Innamorato
Pittsburgh, PA 15223
Attorney for Appellants
K. Kevin Murphy
Pennsylvania Higher Education
Assistance Agency
Harrisburg, PA 17102
Attorney for Appellee
OPINION OF THE COURT
SLOVITER, Chief Judge.
This appeal presents an issue of law: whether interest
can accrue after the filing of a Chapter 13 bankruptcy petition
on a nondischargeable student loan. The bankruptcy court held
that debtors would remain liable for the amount of the post-
petition interest that accrued on the unpaid principal of the
student loan. The district court affirmed. This appeal presents
what appears to be an issue of first impression for the courts of
appeals as to which, unfortunately, we have found no helpful
legislative history.
I.
FACTS AND PROCEDURAL HISTORY
Appellants Della and Dwight Webster ("the Websters")
filed a Chapter 13 bankruptcy petition on March 25, 1992.1 Lisa
and William Leeper ("the Leepers") filed a bankruptcy petition on
July 28, 1992. Their Chapter 13 plans have been confirmed and
are currently in place.
1 Chapter 13 of the Bankruptcy Code sets forth the method by
which individuals with regular income may adjust their debts
through bankruptcy. See 11 U.S.C. §§ 1301-1330 (1988 & Supp. II
1990). A debtor is required to file a plan providing for the
submission to the trustee of whatever amount of the debtor's
income is necessary to execute the plan, and to provide for the
payment of various secured and unsecured claims existing at the
time of the filing. See 11 U.S.C. §§ 1321-1322. The plan
submitted by the debtor must be presented for confirmation to the
bankruptcy court. See 11 U.S.C. § 1325.
The Pennsylvania Higher Education Assistance Authority
("PHEAA") is an unsecured creditor of both the Websters and the
Leepers. Both the Websters and the Leepers borrowed money from
PHEAA to attend college under the guaranteed student loan
program. When the Leepers and the Websters filed for bankruptcy,
PHEAA filed claims with the bankruptcy court for the principal
amounts owing on the respective loans at the time of the
bankruptcy petitions plus all pre-petition interest. Portions of
the amounts paid pursuant to their two Chapter 13 plans are being
applied to the PHEAA claims.
Neither the Websters nor the Leepers will be able to
repay their student loan debts in full during the course of their
Chapter 13 plans. Pursuant to 11 U.S.C. § 1328 (1988 & Supp. II
1990), which references 11 U.S.C. § 523(a)(8) (1988 & Supp. II
1990), debts for student loans such as those guaranteed by PHEAA
are excepted from discharge in Chapter 13 bankruptcy proceedings
unless they fall within a hardship exception or unless they
matured seven years before the commencement of the bankruptcy
case.2 The parties agree that unless one of the two exceptions
2
In 1990, Congress amended § 1328 to except debts arising
under 11 U.S.C. § 523(a)(8) from discharge in a Chapter 13
bankruptcy. Section 523(a)(8) includes:
[A]ny debt . . . for an educational benefit overpayment
of 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 for an obligation to repay funds received as an
educational benefit, scholarship or stipend, unless--
(A) such loan, benefit, scholarship, or stipend
overpayment first became due more than 7 years
applies, PHEAA will be able to collect the balance of the amount
owing on its bankruptcy claims at the end of the sixty-month
bankruptcy period for each of the debtors.
In addition, PHEAA intends to accrue interest on the
unpaid principal balance of the loans while the two Chapter 13
bankruptcy cases are pending and intends to collect that interest
after the plans are completed. Thus, after their plans were
confirmed both the Leepers and the Websters (hereafter "the
debtors") initiated adversary proceedings in the bankruptcy court
against PHEAA, invoking the bankruptcy court's core jurisdiction
under 28 U.S.C. § 157 (1988). Each complaint sought an order
from the bankruptcy court declaring (1) that PHEAA is not
entitled to accrue post-petition interest during the pendency of
the Chapter 13 proceedings, and (2) that payments made to PHEAA
under the Chapter 13 plans be applied only to the principal
balances of the loans.
In its answers to the complaints, PHEAA conceded that
all plan payments made by the debtors should be applied only to
their bankruptcy claims, which include the outstanding principal
balances of the loans and all pre-petition interest. PHEAA
(exclusive of any applicable suspension of the
repayment period) before the date of the filing of
the petition; or
(B) excepting such debt from discharge under this
paragraph will impose an undue hardship on the
debtor and the debtor's dependents;
11 U.S.C. § 523(a)(8) (1988 & Supp. II 1990).
maintained, however, that it is entitled to accrue post-petition
interest on the unpaid principal balance of the student loan
debts during the pendency of the Chapter 13 plans.
After the two cases were consolidated and the parties
filed cross-motions for summary judgment, the bankruptcy court
granted summary judgment in favor of PHEAA. The bankruptcy court
relied primarily upon Bruning v. United States, 376 U.S. 358
(1964), in concluding that post-petition interest may accrue on a
nondischargeable student loan debt during the pendency of a
Chapter 13 bankruptcy proceeding, although it ordered that all of
the debtors' payments during the course of the plan should be
applied to the principal balances and the pre-petition interest.
The court declined to address the debtors' claim that the accrual
of post-petition interest would impose an undue hardship on the
debtors under 11 U.S.C. § 523(a)(8)(B). The court determined
that the hardship claim would not be ripe for review until the
debtors have completed all payments under the Chapter 13 plan.
That determination is not before us in this appeal.
The district court entered an order affirming the
bankruptcy court's decision, essentially adopting the reasoning
of the bankruptcy court. The debtors appeal.
We have jurisdiction over the debtors' appeal pursuant
to 28 U.S.C. § 158(d) (1988). Because the only issues presented
in this appeal involve the proper interpretation of the
Bankruptcy Code, our review is plenary. See In re Roth American,
Inc., 975 F.2d 949, 952 (3d Cir. 1992); see also In re Abbotts
Dairies, 788 F.2d 143, 147 (3d Cir. 1986).
II.
DISCUSSION
A.
Under the Bankruptcy Code, creditors are not entitled
to include unmatured (or "post-petition") interest as part of
their claims in the bankruptcy proceedings. See 11 U.S.C. §
502(b)(2) (1988); see also Sexton v. Dreyfus, 219 U.S. 339, 344
(1911) (noting that this rule is derived from a fundamental
principle of the English bankruptcy system). This longstanding
rule is designed to assure that no creditor gains an advantage or
suffers a loss due to the delays inherent in liquidation and
distribution of the estate. American Iron & Steel Mfg. Co. v.
Seaboard Air Line Ry., 233 U.S. 261, 266 (1914); see also In re
Hanna, 872 F.2d 829, 830-31 (8th Cir. 1989). The prohibition
against claims for post-petition interest generally applies even
in instances where the claims are based upon underlying debts
that are not dischargeable. See, e.g., City of New York v.
Saper, 336 U.S. 328, 337-38 (1949); see also In re JAS
Enterprises, Inc., 143 B.R. 718, 719 (Bankr. D. Neb. 1992).
In Bruning v. United States, 376 U.S. 358 (1964), the
precedent of most significance for the issue before us, the
Supreme Court distinguished between denial of post-petition
interest against the bankruptcy estate on a nondischargeable debt
and the accrual of interest on a nondischargeable debt during the
pendency of the bankruptcy to be collected from the debtor after
the bankruptcy proceeding is completed. Id. at 362-63. In
Bruning, a taxpayer who had been discharged from bankruptcy
challenged the IRS's contention that it was entitled to collect
post-petition interest on a nondischargeable tax debt after the
conclusion of the taxpayer's bankruptcy. The taxpayer based his
argument on the traditional rule barring creditors from claiming
post-petition interest from the bankruptcy estate, a rule now
codified in 11 U.S.C. § 502(b)(2). The Bruning Court, in a
unanimous opinion authored by Chief Justice Warren, upheld the
IRS's position.
The Court's reasoning is directly applicable to the
issue before us. Because Congress made the tax debt
nondischargeable, it "clearly intended that personal liability
for unpaid tax debts survive bankruptcy." Bruning, 376 U.S. at
361. The Court then stated that it did not have any "reason to
believe that Congress had a different intention with regard to
personal liability for the interest on such debts." Id. The
Court reasoned that "[i]n most situations, interest is considered
to be the cost of the use of the amounts owing a creditor and an
incentive to prompt repayment and, thus, an integral part of a
continuing debt." Id. at 360. Thus, the Court concluded, if a
tax debt was nondischargeable, post-petition interest on that
debt would also be nondischargeable. Id. at 363. The Court held
that the policy reasons for denying post-petition interest from
the bankruptcy estate, which it described as "the avoidance of
unfairness as between creditors" and "the avoidance of
administrative inconvenience," were not applicable to an action
brought against the debtor personally. Id. at 362-63.
 While Bruning was decided prior to the enactment of the
Bankruptcy Code, it has been applied by other courts of appeals
to cases arising under the Code. See Burns v. United States (In
re Burns, 887 F.2d 1541, 1543 (11th Cir. 1989) (specifically
addressing the issue of whether the Bruning holding survived the
enactment of the Bankruptcy Code of 1978 and answering
affirmatively); In re Hanna, 872 F.2d at 830-31 (same); see also
Bradley v. United States, 936 F.2d 707, 709-10 n.3 (2d Cir. 1991)
(declining to reach the issue, but acknowledging that "the weight
of authority" permits accrual of interest on nondischargeable tax
debts during a bankruptcy); Paulson v. United States (In re
Paulson), 152 B.R. 46, 49-51 (Bankr. W.D. Pa. 1992) (concluding
that the Bruning rule applies to actions arising under the
Bankruptcy Code).
In addition, while Bruning involved the accrual of
post-petition interest on a nondischargeable tax debt, its
reasoning has been applied to other types of nondischargeable
debts. See In re Fullmer, 962 F.2d 1463, 1468 (10th Cir. 1992)
(applying Bruning to post-petition interest on a nondischargeable
tax penalty); In re Burns, 887 F.2d at 1543 (same); In re Brace,
131 B.R. 612, 613-14 (Bankr. W.D. Mich. 1991) (holding that post-
petition interest may accrue on a debt that was nondischargeable
under 11 U.S.C. § 532(a)(2) because it arose from fraudulent
misrepresentations); In re Kellar, 125 B.R. 716, 720-21 (Bankr.
N.D.N.Y. 1989) (same).
The Bruning decision therefore stands for the general
proposition that creditors may accrue as to the debtor personally
post-petition interest on nondischargeable debts while a
bankruptcy is pending. The bankruptcy court and the district
court relied primarily upon this proposition in granting and
affirming summary judgment in favor of PHEAA in this case. But
while courts have applied the Bruning rule to permit accrual of
interest on nondischargeable debts, no court of appeal has
specifically applied the rule in the Chapter 13 context. In this
case, the debtors argue that Bruning is inapplicable to Chapter
13 bankruptcies and to student loans in particular.
B.
The debtors contend that it is unfair to apply Bruning
to Chapter 13 debtors because a Chapter 13 bankruptcy plan cannot
make any provision for the payment of the post-petition interest
that accrues on a nondischargeable debt. The debtors fail to
explain why this problem distinguishes Chapter 13 from Chapter 7
or Chapter 11. In all situations where the Bruning rule is
applicable, the bankruptcy plan cannot make allowances for post-
petition interest; the interest merely accrues and is collectable
against the debtor after the bankruptcy is completed. Thus, the
debtors' effort to distinguish Chapter 13 cases on this ground is
unpersuasive.
The debtors argue that we should follow the authority
of the New Mexico bankruptcy court in In re Wasson, 152 B.R. 639
(Bankr. D. N.M. 1993), that rejected a creditor's objection to
the confirmation of a debtor's Chapter 13 plan that failed to
provide for post-petition interest on a nondischargeable student
loan. Id. at 642. Notwithstanding the fact that the Wasson
court explicitly limited its holding disallowing the claim for
post-petition interest on the nondischargeable student loan to
instances where the underlying debt was paid in full from the
bankruptcy estate, id. at 642, the debtors rely on Wasson for the
general principle that Bruning is inapplicable to Chapter 13
cases.
The result in Wasson has been expressly disapproved in
In re Shelbayah, 165 B.R. 332, 337 (Bankr. N.D. Ga. 1994), and
Branch v. UNIPAC/NEBHELP (Matter of Branch), 175 B.R. 732 (Bankr.
D. Neb. 1994), both of which held that post-petition interest may
accrue on a nondischargeable student loan during the debtor's
Chapter 13 bankruptcy. In Shelbayah, the debtor had conceded
that the creditor could file a claim for the principal plus all
pre-petition interest, but objected to the inclusion of the post-
petition interest in the claim. The debtor argued that the
creditor was barred from filing a claim for post-petition
interest by 11 U.S.C. § 502(b)(2), and, further, that such
interest was dischargeable pursuant to 11 U.S.C. § 1328(a) (1988
& Supp. II 1990), which permits discharge of all debts
"disallowed under section 502." Shelbayah, 165 B.R. at 334.
The Shelbayah court, applying the analysis of Bruning,
held that while the creditor was barred from claiming the post-
petition interest in the bankruptcy proceeding, such post-
petition interest could accrue during the course of the
bankruptcy and would not be dischargeable. Id. at 337. The
court noted that "[a]lmost all courts that have considered the
issue presented have concluded that the disallowance of
postpetition interest has no effect on the dischargeability of a
claim for, and an individual's future liability for, such
interest." Id. at 335 (citing, inter alia, Bruning, 376 U.S. 358
(1964)). The Shelbayah court acknowledged that the Wasson
decision reached a contrary result, but concluded that the Wasson
court's reasoning was based on a decision that "confus[ed] the
disallowance of unmatured interest with the non-accrual of
interest." Shelbayah, 165 B.R. at 337. The court held that
while section 502(b)(2) bars claims for unmatured interest
against the bankruptcy estate, it should not preclude the accrual
of interest on nondischargeable claims against the debtor. Id.
Even more recently, the bankruptcy court in Branch held
that post-petition interest may accrue on a nondischargeable
student loan and is nondischargeable, therefore remaining an
obligation of the debtor after the bankruptcy case is completed.
Matter of Branch, 175 B.R. at 734-35. Branch rejects the Wasson
analysis as "contrary to the logic of [In re Hanna], the
authority in [the Eighth] circuit." Id. at 734. In re Hanna
followed Bruning and held that a debtor remains personally liable
for post-petition interest on a nondischargeable tax debt after
bankruptcy proceedings are completed. See 872 F.2d at 831. We
agree that the Wasson decision failed to distinguish properly
between a claim for unmatured interest and the accrual of post-
petition interest on a nondischargeable debt, and that the
discharge of post-petition interest on nondischargeable debts was
clearly inconsistent with the mandate of Bruning.
With the exception of Wasson, every court that has
addressed the issue has determined that interest may accrue on
nondischargeable student loans during the pendency of a Chapter
13 bankruptcy plan. See Jordan v. Colorado Student Loan Program
(In re Jordan), 146 B.R. 31, 32-33 (D. Colo. 1992) (affirming
denial of debtor's motion to confirm a Chapter 13 plan based on
creditor's objection that the plan improperly provided that
interest on the debtor's non-dischargeable student loans would be
tolled while the bankruptcy was pending); Ridder v. Great Lakes
Higher Educ. Corp. (In re Ridder), 171 B.R. 345, 346-47 (Bankr.
W.D. Wis. 1994) (post-petition interest on a nondischargeable
student loan may be collected after bankruptcy concluded); see
also In re Crable, 174 B.R. 62, 63 (Bankr. W.D. Ky. 1994)
(permitting accrual of post-petition interest on nondischargeable
debt for child support during pendency of Chapter 13 proceeding
and noting that cases involving student loans are analogous).
It remains to be considered whether there is any
validity to the debtors' argument that the bankruptcy court
improperly created two classes of debtors in Chapter 13 cases
involving nondischargeable student loans. The debtors base this
argument on the bankruptcy court's acceptance of the premise in
Wasson that debtors who will completely satisfy their student
loan obligations during the course of the Chapter 13 plan will
have no obligation to pay any post-petition interest,3 whereas
3
In In re Christian, 25 B.R. 438, 438-39 (Bankr. D. N.M.
1982), the New Mexico bankruptcy court had held that the Bruning
rule did not apply to a tax debt which was fully paid out of the
estate. Wasson followed Christian and reasoned that "[a]s
those who, like themselves, will not have satisfied all of their
loan obligations during the course of the Chapter 13 proceeding
will be obligated to pay post-petition interest on the loans.
The debtors then reason that because there is no statutory basis
for such a distinction, this court should extend the Wasson
reasoning to bar the accrual and collection of all post-petition
interest on all nondischargeable student loans in Chapter 13
cases, whether or not the debt was paid in full during the
bankruptcy.
The premise of the debtors' "two class" argument is
that no post-petition interest accrues when a nondischargeable
debt is fully paid out of the estate in the course of the
bankruptcy proceeding. The difficulty with the debtors' argument
is that this court has already held that the Bruning reasoning
applies even in instances where the debt is paid in full. In
Hugh H. Eby Co. v. United States, 456 F.2d 923 (3d Cir. 1972), a
taxpayer in a pre-Code case where the underlying debt was paid in
full argued that it was entitled to recovery of post-petition
interest on taxes that it had paid. The taxpayer sought to
distinguish Bruning, which would have permitted the interest to
accrue, on the ground that in Bruning the taxes had not been paid
in full out of the estate. Id. at 925. The taxpayer also argued
Bruning does not apply to cases in which tax debts are fully paid
out of the estate, it logically follows that Bruning should not
apply to student loan debts which are fully paid out of the
estate." In re Wasson, 152 B.R. 639, 642 (Bankr. D. N.M. 1993).
in Eby that because only liability for post-petition, pre-
confirmation interest was at issue, Bruning was inapplicable.
We rejected both distinctions. We stated: "[I]n
Bruning, the Supreme Court held that all post-petition interest,
including interest accrued during the pendency of the bankruptcy
proceeding, could be collected by the Government from after-
acquired assets of the debtor. A fortiori, post-petition, pre-
confirmation interest is also collectible." Id. We then stated,
in language of particular relevance here, "That the underlying
taxes were later paid in full here does not affect the fact that
appellant had the use of the Government's money during the
pendency of the reorganization proceeding, and that since the
underlying debt is not discharged . . . neither is the interest
which accrues by reason of the use of such money during the
pendency of the proceedings." Id.; see also United States v.
River Coal Co., Inc., 748 F.2d 1103, 1107 (6th Cir. 1984)
(holding that the Bruning rule applied "regardless of whether the
underlying debt has been paid or not").
Eby is good precedent. We cannot distinguish it, even
if we were so inclined, on the ground that it is a pre-Code case
because as we noted earlier, Bruning has been held as equally
applicable to cases under the Bankruptcy Code. It follows from
our construction of Bruning in Eby that even if the
nondischargeable debt has been paid in full by the bankruptcy
estate, accrual of post-petition interest is not precluded.
Therefore the two-class problem identified by the debtors is
eliminated.
C.
Finally, the debtors argue that Bruning has been
overruled by the automatic stay provision of the Bankruptcy Code.
See 11 U.S.C. § 362(a) (1988). Relying on cases suggesting that
the automatic stay provision of the Bankruptcy Code should be
broadly construed, the debtors contend that the accrual of
interest against them while a bankruptcy is pending violates the
stay. They reason that insofar as Bruning permitted such accrual
prior to the enactment of the Code, it is no longer valid.
The debtors' argument here rests on the dubious
assertion that the act of charging interest on a nondischargeable
claim is essentially an act to "collect" a debt. See Appellant's
Brief at 24. Because the automatic stay provision bars the
collection of any debts from the debtor while a bankruptcy is
pending, see 11 U.S.C. §§ 362(a)(6), the debtors reason that
charging interest must necessarily be barred.
As the debtors acknowledge, none of the cases applying
Bruning to post-Code bankruptcy cases has addressed the effect of
the automatic stay provision on the accrual of post-petition
interest. Indeed, those cases permit the accrual of such
interest with no mention of the automatic stay provision.
Moreover, as PHEAA notes, the cases cited by the debtors do not
support the debtors' theory. Instead, those cases only support
the propositions that the enforcement of a judicial lien, see,
e.g., In re Miller, 98 B.R. 110, 113-14 (Bankr. N.D. Ga. 1989),
and the garnishment of wages, see, e.g., In re Hulvey, 102 B.R.
703, 704-05 (Bankr. C.D. Ill. 1988), after the filing of a
bankruptcy proceeding violate the automatic stay. The actions in
those cases, which involve affirmative efforts by the creditor to
collect from the debtor, differ significantly from the mere
accrual of interest, which requires a wholly separate action for
collection.
In light of the lack of support for the debtors' theory
in either the Code or caselaw, and in light of the continued
viability of Bruning in bankruptcy cases arising under the Code,
see Burns, 887 F.2d at 1543, we decline to hold that the
automatic stay provision of the Bankruptcy Code overruled
Bruning. We conclude that the mere accrual of post-petition
interest does not violate the automatic stay.
D.
We are not unaware that the result in this case may be
viewed as harsh by student debtors saddled with the mounting
costs of higher education. In this case the Websters listed the
claim of PHEAA as totalling a combined $34,302.74 on their
bankruptcy schedules. The Leepers listed the claim of PHEAA as
totalling a combined $18,542.26 on their bankruptcy schedules.
During the Websters' Chapter 13 plan, PHEAA will accrue almost
$15,000 in interest on the Websters' debt. During the Leepers'
Chapter 13 plan, PHEAA will accrue almost $8,000 in interest on
the Leepers' debt. As a result, both the Leepers and the
Websters will emerge from bankruptcy owing PHEAA more money than
was owed to PHEAA at the time of their bankruptcy petitions.
However, whether Bruning should be applied to permit
post-petition interest to accrue on nondischargeable student
loans is a political decision. Congress, which created the
student loan program and which then decided for policy reasons to
make debts arising from those loans nondischargeable (presumably
with the knowledge that under Bruning post-petition interest
would then also be nondischargeable) may choose to amend the
statute with respect to the treatment of post-petition interest.
But until and unless it does so, we see no basis for the courts
to change the longstanding rule as to nondischargeability of
post-petition interest.
Congress did provide for amelioration of the effect of
nondischargeability in appropriate circumstances by authorizing
the bankruptcy court to discharge the remainder of a debt for a
student loan if, inter alia, the debt "will impose an undue
hardship on the debtor and the debtor's dependents." 11 U.S.C. §
523(a)(8)(B) (1988); see note 2 supra. On this appeal, we have
no occasion to determine whether the debtors status at the close
of bankruptcy will be sufficient to support a finding of "undue
hardship." Undoubtedly, the amount of post-petition interest
that will have accrued on the loans is a factor that the
bankruptcy court will consider in making its "undue hardship"
determination.
III.
CONCLUSION
For the foregoing reasons, we conclude that the
bankruptcy court did not err in ruling that PHEAA is entitled to
accrue interest on the nondischargeable student loans during the
pendency of the debtors' Chapter 13 bankruptcies. We therefore
will affirm the order of the district court.