DISCHARGE OF STUDENT LOAN DEBT AND RECOVERY OF ATTORNEY FEES

I imagine we have all heard how difficult it is to discharge student loan debt in bankruptcy (perhaps this is something we will examine in greater detail later in the semester). A recent decision by the 9^th Circuit Bankruptcy Appellate Panel addressed the issue of attorney’s fees in the context of bankruptcy proceedings.

 

In 2010, a medical school graduate filed a chapter 7 petition and was successful in discharging over $280,000 in student loan debt (apparently because he failed the licensing exam and thus had limited income potential).

 

He then asked the court to grant him over $110,000 in attorney fees. He relied on a provision in his student loan promissory note that authorized the prevailing party to recover attorney fees in any action to enforce the note’s terms. The bankruptcy court denied the request, and the appellate panel affirmed. The court explained that the debtor’s bankruptcy petition was not an action to enforce the terms of the promissory note, and since there was no “general right to recover attorney fees,” the debtor was not entitled to those fees.

 

I thought this case was interesting for a few reasons.

 

First, it illustrates the type of extreme situation in which a discharge of student loan debt is actually feasible. I am curious to know more about where this line is in the context of student loan debt.

 

Second, I wonder what attorney was willing to incur that amount of fees in representing someone who is insolvent and appears to have no prospects for significant income in the future. Was the attorney convinced that the court would force the lender to pay his client’s fees and decided to roll the dice?

 

The court’s holding strikes me as correct and fairly predictable here (which is why I find it odd that an attorney would bet $110,000 of work on an opposite result). Attorney fee provisions like the one at issue are intended to ensure that the non-breaching party to a contract does not have to incur massive unrecoverable legal costs to assert a breach of contract claim. Here, the lender did not breach the agreement. The debtor sought relief through bankruptcy from the terms of the agreement he had entered into with the lender. The lender was merely asserting its rights as a creditor by being involved in the proceeding. It would be wrong to require creditors to pay attorney fees any time a debtor’s petition for discharge is granted; after all, they have already lost a lot of money that they were owed and had a right to try to collect.

 

Third, I am left wondering if now that the medical school graduate has been unsuccessful in recovering attorney fees, he will end up filing another petition for bankruptcy under chapter 7 (I am not sure how long one has to wait before filing a new petition).

 

The facts of this case are striking; there is a sort of irony in the fact that the debtor may have ended up with a huge and unmanageable debt that resulted from the very process of getting himself out of a different huge and unmanageable debt. On the bright side, it will probably be much easier for him to discharge his attorney’s fees in bankruptcy than it was to discharge his student loan debt.

 

See Daily Appellate Report (Jan. 13, 2014), discussing Hosseini v. Key Bank N.A. (In re Hosseini).