In re: Melissa Hoda Kashikar

FILED 1 ORDERED PUBLISHED APR 28 2017 SUSAN M. SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. CC-16-1298-FLKu ) 6 MELISSA HODA KASHIKAR, ) Bk. No. 2:14-bk-23848-ER ) 7 Debtor. ) Adv. No. 2:15-ap-01184-ER _____________________________ ) 8 ) MELISSA HODA KASHIKAR, ) 9 ) Appellant, ) 10 ) v. ) O P I N I O N 11 ) TURNSTILE CAPITAL MANAGEMENT, ) 12 LLC, assignee from ) DB Structured Products, Inc., ) 13 ) Appellee. ) 14 ______________________________) 15 Submitted without oral argument 16 on March 23, 2017 17 Filed – April 28, 2017 18 Appeal from the United States Bankruptcy Court for the Central District of California 19 Honorable Ernest M. Robles, Bankruptcy Judge, Presiding 20 21 Appearances: M. Jonathan Hayes on the brief for appellant Melissa Hoda Kashikar; Scott S. Weltman on the 22 brief for appellee Turnstile Capital Management, LLC. 23 24 Before: FARIS, LAFFERTY, and KURTZ, Bankruptcy Judges. 25 26 27 28

1 FARIS, Bankruptcy Judge: 2 3 INTRODUCTION 4 Section 523(a)(8) of the Bankruptcy Code1 provides that 5 several categories of educational indebtedness are not 6 dischargeable in bankruptcy unless the debtor proves that paying 7 the debt would impose undue hardship on the debtor or her 8 dependents. Chapter 7 debtor Melissa Hoda Kashikar argues that 9 her educational debt owed to Appellee Turnstile Capital 10 Management LLC (“Turnstile”) is not covered by § 523(a)(8). The 11 bankruptcy court declined to consider her argument concerning one 12 of the categories of debt and held that her debt was included in 13 the category of an “educational benefit” under 14 § 523(a)(8)(A)(ii). The court erred on both counts. 15 Accordingly, we REVERSE IN PART the court’s ruling as to 16 § 523(A)(8)(A)(ii), VACATE the court’s ruling as to 17 § 523(a)(8)(A)(i), and REMAND this case to the bankruptcy court. 18 FACTUAL BACKGROUND 19 Ms. Kashikar attended St. Matthew’s University School of 20 Medicine (“SMU”) in Grand Cayman, Cayman Islands. In order to 21 fund her education and pay for the costs of attending SMU, 22 Ms. Kashikar signed an application and promissory note with 23 24 25 1 26 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, all 27 “Rule” references are to the Federal Rules of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal 28 Rules of Civil Procedure.

1 StudentLoan Xpress. Turnstile’s predecessor in interest2 2 directly disbursed the funds to SMU. 3 There is no dispute that Ms. Kashikar attended classes at 4 SMU for the purposes of obtaining a degree and learning about 5 medicine. However, Ms. Kashikar did not complete her education 6 at SMU. She returned to the United States, but could not 7 transfer any of her SMU credits. 8 On July 21, 2014, Ms. Kashikar filed her chapter 7 petition. 9 She scheduled her student loan on Schedule F in the amount of 10 $73,804. She received a standard discharge on or around 11 November 10, 2014. 12 On April 14, 2015, Ms. Kashikar filed an adversary complaint 13 seeking a determination that the loan (the balance of which had 14 grown to $74,968.74) was discharged under § 523(a)(8). The 15 complaint is very brief. After identifying the parties and 16 describing the loan, it alleges that: 17 Since the purpose of the loan(s) in question were not for an, “eligible education institution” as defined 18 by 26 U.S.C. 221(d)(1) and (2), the subject loan(s) are not, “qualified education loan(s)” under 11 U.S.C. 19 523(a)(8)(B), and therefore not subject to the student loan general exception to discharge found at 11 U.S.C. 20 523(a)(8). Accordingly, the loan(s) alleged in Paragraph 4 were discharged on November 12, 2014, when 21 Plaintiff/debtor obtained her discharge in the underlying bankruptcy case. 22 23 In response to this paragraph of the complaint, Turnstile denied 24 2 StudentLoan Xpress was the original lender. Deutsche Bank 25 Americas Holding Corp. acquired the promissory note from 26 StudentLoan Xpress. Subsequently, DB Structured Products, Inc. purchased the promissory note. Turnstile purchased the 27 promissory note from DB Structured Products, Inc. For ease of reference, we will collectively refer to these creditors as 28 “Turnstile.”

1 that the loan was discharged. 2 The parties entered into a Pretrial Stipulation for Claims 3 for Relief (“Pretrial Stipulation”). The parties agreed that 4 certain facts were admitted and required no proof, including: 5 SMU has never been, and is not now, an “eligible educational institution” as that term is defined under 6 section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088), and has never been, and is not now, 7 eligible to participate in a program under title IV of the Higher Education Act. 8 9 The parties further stipulated that no issues of fact remained to 10 be litigated and that: 11 The following issues of law, and no others, remain to be litigated: 12 Whether or not Plaintiff’s student loans were 13 excepted from discharge under 11 U.S.C. § 523(a)(8)? 14 Defendant’s Defenses: 15 Can Plaintiff discharge her Student Loans solely 16 under 11 U.S.C. § 523(a)(8)(B), as plead [sic] in the complaint? 17 18 The Pretrial Stipulation provided that “this stipulation shall 19 supersede the pleadings and govern the course of trial in this 20 adversary proceeding, unless modified to prevent manifest 21 injustice.” 22 After reviewing the Pretrial Stipulation, the bankruptcy 23 court determined that there were no disputed facts to be 24 litigated and directed the parties to submit briefs explaining 25 why each party was entitled to judgment as a matter of law. The 26 court noted that it treated the Pretrial Stipulation as a 27 pretrial order and said that “the Pretrial Stipulation supersedes 28 the pleadings and governs this action.”

1 On July 22, 2016, Ms. Kashikar filed her motion for judgment 2 as a matter of law (“Motion”).3 She contended that her loan did 3 not fall within §§ 523(a)(8)(A)(i), (A)(ii), or (B). Regarding 4 subsection (A)(i), she argued that SMU was not an eligible 5 “governmental unit” as contemplated by the Bankruptcy Code. 6 Regarding subsection (A)(ii), she said that the statute covers 7 only “funds received” directly by the debtor. Because she did 8 not “actually” or “directly” receive any of the loan proceeds 9 (which were paid directly to SMU), she argued that subsection 10 (A)(ii) was not applicable. Regarding subsection (B), she argued 11 that Turnstile conceded that her loan was not a “qualified 12 educational loan” as defined by the Internal Revenue Code. 13 In response, Turnstile contended that Ms. Kashikar’s 14 complaint was deficient under Civil Rule 8 and the pleading 15 standards of Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), 16 and Ashcroft v. Iqbal, 556 U.S. 662 (2009), and only offered an 17 unsupported legal conclusion concerning § 523(a)(8)(B). It also 18 argued that she did not plead any theory relating to 19 § 523(a)(8)(A) in her complaint and that it was prejudicial for 20 her to raise that argument for the first time in her Motion. In 21 the alternative, it argued that she received an “educational 22 benefit” under § 523(a)(8)(A)(ii) and that the Ninth Circuit has 23 commanded that the statute is to be interpreted broadly. 24 The bankruptcy court issued its memorandum decision on 25 September 2, 2016. It considered whether Ms. Kashikar’s loan 26 3 27 The bankruptcy court noted that the Motion should have been styled as a motion for judgment on partial findings under 28 Civil Rule 52.

1 fell into any of the categories enumerated in § 523(a)(8). 2 The court said that it would not decide whether 3 § 523(a)(8)(A)(i) covered the loan because the complaint only 4 mentioned § 523(a)(8)(B) and Turnstile had no opportunity to 5 address or produce evidence regarding subsection (A)(i). 6 However, the court decided to consider § 523(a)(8)(A)(ii) 7 because the facts concerning that subsection were undisputed and 8 Turnstile had an opportunity to fully brief the issues (in 9 connection with subsection (B)). The court extensively examined 10 the conflicting case law and sided with the cases adopting an 11 “expansive reading” of the phrase “educational benefit” in 12 § 523(a)(8)(A)(ii). It held that “a tuition payment made by a 13 third-party lender to a school on behalf of a debtor creates ‘an 14 obligation to repay funds received as an educational benefit.’” 15 Accordingly, the court concluded that Ms. Kashikar’s loan was 16 excepted from discharge.4 17 The bankruptcy court entered its judgment in favor of 18 Turnstile, and Ms. Kashikar timely appealed. 19 JURISDICTION 20 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 21 §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. 22 § 158. 23 ISSUES 24 (1) Whether the bankruptcy court erred in holding that 25 Ms. Kashikar’s student loan was covered by § 523(a)(8)(A)(ii). 26 4 27 Regarding § 523(a)(8)(B), the court stated that the parties agreed that the loan was not a “qualified educational 28 loan” under that subsection.

1 (2) Whether the bankruptcy court erred in declining to 2 decide whether Ms. Kashikar’s loan was covered by 3 § 523(a)(8)(A)(i). 4 STANDARD OF REVIEW 5 “We review de novo the bankruptcy court’s application of the 6 legal standard in determining whether a student loan debt is 7 dischargeable.” Educ. Credit Mgmt. Corp. v. Jorgensen (In re 8 Jorgensen), 479 B.R. 79, 85 (9th Cir. BAP 2012) (citing Rifino v. 9 United States (In re Rifino), 245 F.3d 1083, 1087 (9th Cir. 10 2001)). “To the extent the bankruptcy court interpreted 11 statutory law, we review the issues of law de novo.” Thorson v. 12 Cal. Student Aid Comm’n (In re Thorson), 195 B.R. 101, 104 (9th 13 Cir. BAP 1996). 14 De novo review requires that we consider a matter anew, as 15 if no decision had been rendered previously. United States v. 16 Silverman, 861 F.2d 571, 576 (9th Cir. 1988). 17 DISCUSSION 18 Section 523(a)(8) provides that certain kinds of educational 19 debts are not discharged in bankruptcy unless repayment of the 20 debt would result in undue hardship. This section applies to: 21 (A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made 22 under any program funded in whole or in part by a governmental unit or nonprofit institution; or 23 (ii) an obligation to repay funds received as an 24 educational benefit, scholarship, or stipend; or 25 (B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the 26 Internal Revenue Code of 1986, incurred by a debtor who is an individual. 27 28 § 523(a)(8).

1 We have previously said that § 523(a)(8) excepts four types 2 of educational claims from discharge: 3 (1) loans made, insured, or guaranteed by a governmental unit; (2) loans made under any program 4 partially or fully funded by a governmental unit or nonprofit institution; (3) claims for funds received as 5 an educational benefit, scholarship, or stipend; and (4) any “qualified educational loan” as that term is 6 defined in the Internal Revenue Code. 7 Institute of Imaginal Studies v. Christoff (In re Christoff), 527 8 B.R. 624, 632 (9th Cir. BAP 2015) (quoting Benson v. Corbin (In 9 re Corbin), 506 B.R. 287, 291 (Bankr. W.D. Wash. 2014)). 10 Ms. Kashikar did not plead or prove that repayment of the 11 debt would subject her or a dependent to undue hardship. The 12 only issue is whether § 523(a)(8) covers her debt to Turnstile. 13 A. The bankruptcy court erred in holding that Ms. Kashikar’s loan is excepted from discharge under § 523(a)(8)(A)(ii). 14 15 The bankruptcy court held that Ms. Kashikar’s student loan 16 debt was nondischargeable under § 523(a)(8)(A) because the “funds 17 received” constituted an “educational benefit.” While we agree 18 that the “funds received” requirement was met, we hold that her 19 student loan was not an “educational benefit” within the meaning 20 of the statute. 21 1. Ms. Kashikar’s loan constitutes “funds received.” 22 Ms. Kashikar contends that, because the loan proceeds were 23 disbursed directly to SMU and not to her, her student loan is not 24 included in § 523(a)(8)(A)(ii). We disagree. 25 Section 523(a)(8)(A)(ii) excepts from discharge “an 26 obligation to repay funds received as an educational benefit 27 . . . .” (Emphasis added.) The statute does not specify who 28 must receive the funds.

1 We recently construed this phrase in Christoff. In that 2 case, the debtor applied for admission to a for-profit private 3 university. 527 B.R. at 626. The university offered her $6,000 4 of financial aid in the form of a tuition credit; she did not 5 receive any money from the university. She signed (1) an 6 agreement that the university was “financing” $6,000 of her 7 tuition and (2) a promissory note in favor of the university in 8 which she promised to repay the financial aid in installments 9 beginning when she either graduated or withdrew from the 10 university. Id. The following year, she executed a similar 11 agreement and promissory note for $5,000. Id. 12 The debtor withdrew from the university without receiving a 13 degree and defaulted on her payments. Id. She filed a chapter 7 14 bankruptcy petition, and the university commenced an adversary 15 proceeding seeking a determination that the debt was excepted 16 from discharge under § 523(a)(8). Id. at 626-27. The university 17 argued that the debt was excepted under § 523(a)(8)(A)(ii); the 18 bankruptcy court disagreed, holding that the debt “did not flow 19 from ‘funds received’ either by her as the student or by [the 20 university] from any other source” and was thus outside the scope 21 of § 523(a)(8)(A)(ii). Id. at 627. It said that the university 22 “simply agreed to be paid the tuition later . . . . It did not 23 receive any funds, such as from a third party financing source.” 24 Id. 25 The university appealed, and we affirmed. Relying on the 26 plain language of the statute, we said that “[t]he phrase ‘funds 27 received’ has been interpreted by the BAP, in an opinion which 28 was as [sic] adopted by the Ninth Circuit as its own, to require

1 ‘that a debtor receive actual funds in order to obtain a 2 nondischargeable benefit.’” Id. at 633-34 (quoting President of 3 Ohio Univ. v. Hawkins (In re Hawkins), 317 B.R. 104, 112 (9th 4 Cir. BAP 2004), aff’d, 469 F.3d 1316 (9th Cir. 2006)) (emphasis 5 in original). We thus held that the debtor did not receive any 6 funds, and her debt was not excepted from discharge under 7 § 523(a)(8)(A)(ii). 8 Ms. Kashikar argues that her case is similar to Christoff. 9 She contends that, because the loan proceeds were disbursed 10 directly to SMU, she did not “receive” any “funds.” However, 11 Christoff is distinguishable in this respect. In Christoff, the 12 university extended the debtor educational credits. Neither she 13 nor the university received any funds to pay for her education; 14 rather, the university just agreed to be paid at a later date. 15 See id. at 627. In the present case, however, Turnstile, a third 16 party, did disburse funds to SMU. In such a situation, the 17 disbursed funds were “funds received.” 18 We drew this very distinction in Christoff. Citing our 19 previous ruling in Hawkins, we said that § 523(a)(8)(A)(ii) 20 “includes a condition, distinct from those in the other 21 subsections of 523(a)(8), that must be fulfilled. . . . [T]his 22 unique requirement, that ‘funds [be] received’ by the debtor, 23 mandates that cash be advanced to or on behalf of the debtor.” 24 Id. at 634 n.9 (emphasis added). Indeed, in Hawkins, we noted 25 that “an educational loan need not include an actual transfer of 26 money or some form of cash equivalent to Debtor . . . .” 317 27 B.R. at 110. In other words, the statute does not require that 28 the lender pay funds directly to the borrower; the funds may be

1 paid to the educational institution on behalf of the borrower. 2 See also Rizor v. Acapita Educ. Fin. Corp. (In re Rizor), 553 3 B.R. 144, 150 (Bankr. D. Alaska 2016) (“[T]he restriction to only 4 money paid directly to the debtor does not appear in 5 § 523(a)(8)(A)(ii). Money paid to the education institution for 6 a debtor’s educational benefit which the debtor is required to 7 repay to the lender also qualifies.”). 8 Accordingly, the bankruptcy court did not err in holding 9 that “funds received” includes funds received by SMU on behalf of 10 Ms. Kashikar. 11 2. Ms. Kashikar’s loan is not an “educational benefit.” 12 The bankruptcy court ruled that Ms. Kashikar’s student loan 13 is an “educational benefit” contemplated by § 523(a)(8)(A)(ii). 14 The court’s expansive reading of the statute is not supported by 15 relevant case law or the statute itself. Accordingly, we hold 16 that Ms. Kashikar’s loan from Turnstile was not an “educational 17 benefit” under § 523(a)(8)(A)(ii). 18 Christoff is instructive. In that case, we held that an 19 “obligation to repay funds received as an educational benefit” is 20 different from an “educational overpayment or loan” or a 21 “qualified educational loan.” We stated: 22 This result [that the student loan debt was dischargeable because it did not constitute “funds 23 received”] is bolstered by the changes made to § 523(a)(8) by Congress in BAPCPA. As noted above, the 24 exact wording used in amended § 523(a)(8)(A)(ii) was formerly a part of § 523(a)(8). However, BAPCPA set 25 off the “obligation to repay funds received” language from the other provisions of § 523(a)(8) in a new 26 subsection. We agree with the bankruptcy court, that in restructuring the discharge exception in this 27 fashion, Congress created “a separate category delinked from the phrases ‘educational benefit or loan’ in 28 § 523(a)(8)(A)(i) and ‘any other educational loan’ in

1 § 523(a)(8)(B).” Put another way, “new” § 523(a)(8)(A)(ii), now standing alone, excepts from 2 discharge only those debts that arise from “an obligation to repay funds received as an educational 3 benefit,” and must therefore be read as a separate exception to discharge as compared to that provided in 4 § 523(a)(8)(A)(i) for a debt for an “educational overpayment or loan” made by a governmental unit or 5 nonprofit institution or, in § 523(a)(8)(B), for a “qualified education loan.” 6 7 In re Christoff, 527 B.R. at 634 (emphasis added) (citation 8 omitted). 9 We further rejected the lender’s argument that “loan” can be 10 read into § 523(a)(8)(A)(ii): 11 [The university’s] arguments conflating “loan” as used in § 523(a)(8)(A)(i) and (a)(8)(B) . . . with “an 12 obligation to repay funds received” as provided in § 523(a)(8)(A)(ii) are unconvincing. According to [the 13 university], “[t]here is no reason why the word ‘funds’ should not be interpreted in the same light that 14 ‘loans’ has been interpreted in prior cases in the Ninth Circuit . . . .” In effect, [the university] 15 argues that we should read § 523(a)(8)(A)(ii) to say “loans received” as opposed to “funds received.” But 16 this we must not do. . . . Instead, we must presume that, in organizing the provisions of § 523(a)(8) as it 17 did in BAPCPA, Congress intended each subsection to have a distinct function and to target different kinds 18 of debts. 19 Id. (citations omitted) (emphases added). “[Section] 20 523(a)(8)(A)(ii) is not a ‘catch-all’ provision designed to 21 include every type of credit transaction that bestows an 22 educational benefit on a debtor.” Id. at 634 n.9. 23 Therefore, we hold that a “loan” is not an “educational 24 benefit” within § 523(a)(8)(A)(ii). 25 B. The bankruptcy court erroneously declined to rule on § 523(a)(8)(A)(i). 26 27 The bankruptcy court held that it would not rule on 28 dischargeability under § 523(a)(8)(A)(i) because Ms. Kashikar did

1 not properly raise it in her complaint. We reluctantly conclude 2 that the bankruptcy court should revisit the issue, although the 3 problem stemmed from an ill-conceived complaint and a poorly 4 drafted Pretrial Stipulation. 5 As the bankruptcy court accurately noted, the complaint 6 alleged that the loan was discharged under § 523(a)(8) because it 7 is not of the kind described in § 523(a)(8)(B). The inexplicable 8 defect of this allegation is that the three subsections of 9 § 523(a)(8) are stated in the disjunctive; therefore, if the loan 10 is covered by any of the three subsections, it is not discharged 11 (absent undue hardship). A determination that only one of the 12 three subsections does not apply to a particular loan is useless, 13 because if either of the other two subsections applies, the loan 14 is not dischargeable (again, unless the debtor proves undue 15 hardship). 16 Ms. Kashikar attempted to clarify matters in the Pretrial 17 Stipulation, where she said that the issue for decision was 18 whether the loan was dischargeable under § 523(a)(8), without 19 identifying any particular subsection. At this point, Turnstile 20 muddied the waters by (1) inserting a defense contending that 21 only § 523(a)(8)(B) was at issue because the complaint only 22 mentioned that subsection; and (2) arguing that the complaint did 23 not adequately allege claims under the other subsections. This 24 argument ignored the point that the Pretrial Stipulation, by its 25 terms, superseded the complaint (and therefore cured the alleged 26 deficiency in the complaint). 27 The bankruptcy court attempted to straighten out this 28 confusion by considering Ms. Kashikar’s arguments under

1 § 523(a)(8)(A)(ii), but not under § 523(a)(8)(A)(i). This was 2 error. The Pretrial Stipulation did not limit the issues to any 3 of the subsections of § 523(a)(8). Turnstile’s attempt to 4 preserve its argument about the adequacy of the complaint, and 5 its contention of prejudice, are unavailing because the Pretrial 6 Stipulation superseded the complaint. Therefore, we must remand. 7 We remind the parties of two points. 8 First, once the question is put at issue by an appropriate 9 party, “[u]nder § 523(a)(8), the lender has the initial burden to 10 establish the existence of the debt and that the debt is an 11 educational loan within the statute’s parameters. . . . The 12 burden then shifts to the debtor to prove [undue hardship] by a 13 preponderance of the evidence.” Roth v. Educ. Credit Mgmt. Corp. 14 (In re Roth), 490 B.R. 908, 916–17 (9th Cir. BAP 2013) (citations 15 omitted); see Shells v. U.S. Dep’t of Educ. (In re Shells), 530 16 B.R. 758, 763 (Bankr. E.D. Cal. 2015); Scott v. U.S. Dep’t of 17 Educ. (In re Scott), 417 B.R. 623, 629 (Bankr. W.D. Wash. 2009). 18 Therefore, Turnstile will bear the burden of proving that 19 § 523(a)(8) applied to the loan. 20 Second, documents included in the excerpt of record state 21 that the program which provided Ms. Kashikar’s loan was funded in 22 whole or in part by a nonprofit corporation. If this is true, it 23 means that § 523(a)(8)(A)(i) covers the loan and that 24 Ms. Kashikar’s loan is not dischargeable. But Ms. Kashikar filed 25 a motion in limine to exclude those documents from evidence at 26 trial; the court did not rule on that question because it held 27 that the complaint did not adequately invoke § 523(a)(8)(A)(i). 28 We express no opinion concerning the admissibility of those

1 documents or any other issues bearing on § 523(a)(8)(A)(i). 2 Accordingly, we vacate the court’s ruling regarding 3 § 523(a)(8)(A)(i) and remand this matter to the bankruptcy court 4 to consider whether Ms. Kashikar’s loan is covered by that 5 subsection. 6 CONCLUSION 7 For the reasons set forth above, the bankruptcy court erred 8 in holding that Ms. Kashikar’s debt was an “educational benefit” 9 excepted from discharge under § 523(a)(8)(A)(ii) and declining to 10 rule on the § 523(a)(8)(A)(i) issue. Accordingly, we REVERSE IN 11 PART the court’s judgment as to § 523(a)(8)(A)(ii), VACATE the 12 court’s judgment as to § 523(a)(8)(A)(i), and REMAND this case to 13 the bankruptcy court so that it can determine whether 14 § 523(a)(8)(A)(i) applies. 15 16 17 18 19 20 21 22 23 24 25 26 27 28