Opinion ID: 204483
Heading Depth: 2
Heading Rank: 1

Heading: The Dischargeability of Busson-Sokolik's Loan from the Milwaukee School of Engineering

Text: A key issue is whether the MSOE loan constitutes a non-dischargeable debt under 11 U.S.C. § 523(a)(8). We review questions of law pertaining to the Bankruptcy Code de novo and the factual determinations underlying the lower courts' conclusions for clear error. See Wiese v. Cmty. Bank of Cent. Wis., 552 F.3d 584, 588 (7th Cir.2009); Mungo v. Taylor, 355 F.3d 969, 974 (7th Cir.2004). Section 523(a)(8) creates exceptions to the general discharge of a debtor's financial obligations in bankruptcy under 11 U.S.C. § 727. Under § 523(a)(8)(A), an individual debtor is not discharged from a debt for (i) an educational benefit overpayment or 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 (ii) an obligation to repay funds received as an educational benefit, scholarship or stipend, unless excepting such debt from discharge would impose undue hardship on the debtor and the debtor's dependents. The bankruptcy court and the district court each found that the MSOE loan was non-dischargeable under § 523(a)(8)(A). We agree. We note at the outset the parties' failure to explicitly identify whether the applicable framework for the court's analysis should be § 523(a)(8)(A)(i) or (ii). Though the parties refer to § 523(a)(8)(A) generally, the analysis below and in the parties' briefing before this court tracks § 523(a)(8)(A)(i). So, section 523(a)(8)(A)(i) will be our framework. It is undisputed that MSOE is a § 501(c)(3) non-profit institution. While it seems clear to us that the funds were furnished as part of a loan program, Busson-Sokolik disputes that the funds transferred constituted a loan. We do not find his argument compelling. For there to be a loan, there must be (i) a contract, whereby (ii) one party transfers a defined quantity of money, goods or services, to another, and (iii) the other party agrees to pay for the sum or items transferred at a later date. In re Chambers, 348 F.3d 650, 657 (7th Cir.2003). The October 1999 promissory note evinces a contract for the transfer of $3,000 to be repaid at a later date. Since the Bankruptcy Court made a reliable factual finding that the $3,000 was transferred to Busson-Sokolik's student account on November 9, 1999, each of the three elements of a loan are present. [1] Busson-Sokolik next challenges whether the loan can properly be considered educational, as required to bring the loan within § 523(a)(8)(A). While some courts look to the use of the funds received to determine whether a loan is educational, we adopt the approach taken by the Fifth Circuit in In re Murphy, 282 F.3d 868 (5th Cir.2002). In so doing, we hold that it is the purpose of a loan which determines whether it is educational. This approach seems most consistent with the language of § 523(a)(8)(A). It also aligns with the broader goal of protecting lenders against debtors who divert educational funds toward other uses. In our view, adopting a use test would be problematic. Such a test would enable students who abuse funds intended for their education to receive the benefit of a discharge, while those who use the loan proceeds as intended would retain the burden of paying them even after a chapter 7 discharge. Murphy, 282 F.3d at 873. The purpose test avoids this potential problem by refocusing the inquiry on the nature and character of the loan. For example, rather than trying to determine whether a computer purchased with loan money was used for schoolwork, personal use or some combination of both, we need only ask whether the lender's agreement with the borrower was predicated on the borrower being a student who needed financial support to get through school. We find the following facts established below relevant to our inquiry into the purpose of the MSOE loan: (1) MSOE is a school; (2) the loan was part of a package that included scholarship and grant money toward completion of Busson-Sokolik's education at MSOE; (3) the promissory note for the loan was signed while Busson-Sokolik was a student at MSOE; (4) Busson-Sokolik had to be a student to be eligible for the loan he received from MSOE; and (5) the MSOE loan money was deposited into Busson-Sokolik's student account at MSOE, an account he presumably would not have had if he were not a student. Together these facts establish that the loan was part of a program specifically designed by the school to provide financial support to students working to complete their education. Under the purpose driven test this court has adopted, there is no question that the loan was educational. As a result, we affirm the finding that 11 U.S.C. § 523(a)(8) bars Busson-Sokolik from discharging his debt to MSOE in bankruptcy because the debt resulted from an educational loan.