Opinions of the United
2002 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


11-14-2002

In Re: Rajesh Mehta
Precedential or Non-Precedential: Precedential

Docket No. 01-2586




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PRECEDENTIAL

       Filed November 13, 2002

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 01-2586

IN RE: RAJESH MEHTA,
       Debtor

BOSTON UNIVERSITY,
       Appellant

v.

RAJESH MEHTA

Appeal from the United States District Court
For the District of New Jersey
(D.C. No. 00-cv-05448)
District Judge: Hon. William H. Walls

Argued: February 4, 2002

Before: BECKER, McKEE and BARRY, Circuit Judges

(Opinion filed: November 13, 2002)

       Louis G. Rubino, Esq. (Argued)
       White & Williams
       222 Haddon Avenue
       Suite 300
       Westmont, N.J. 08108
        Attorney for Appellant

       Theodore Kozlowski, Esq. (Argued)
       Suite 201
       20 Park Place
       Morristown, N.J. 07960
        Attorney for Appellee




OPINION OF THE COURT

McKEE, Circuit Judge:

In this case of first impression, we are asked to decide if
a student’s outstanding tuition balance at the university he
was attending can be discharged in bankruptcy. Rajesh
Mehta initiated a bankruptcy proceeding in which he
attempted to discharge tuition and fees he owed to Boston
University. The university opposed discharge arguing that
the outstanding balance of Mehta’s tuition and fees
constituted either a "loan" or a debt for an"educational
benefit" under 11 U.S.C. S 523(a)(8), and was therefore not
dischargeable in bankruptcy. The district court entered
partial summary judgment for Mehta and against the
university, and this appeal followed.1 For the reasons that
follow, we will affirm.2

I. Background.

Rajesh Mehta attended Boston University (hereinafter
referred to as "BU") from the Fall 1992 semester through
the end of the Fall 1993 semester. He received federally
guaranteed student loans for the Fall 1992 and Spring
1993 semesters. However, his loan application for the Fall
1993 semester was denied, and he failed to secure any
other financial assistance for that semester. Nevertheless,
BU allowed Mehta to register and continue taking classes.
Mehta completed the semester, and received academic
credit for three classes. As a result, he incurred charges for
delinquent tuition and related costs totaling $9,331.00.
That amount subsequently increased to $12, 953.73 when
interest and late fees were added. Mehta eventually filed a
petition for voluntary bankruptcy under Chapter 7 without
_________________________________________________________________

1. The bankruptcy court also ruled that the student’s delinquent
federally guaranteed loans were not dischargeable in bankruptcy. That
ruling has not been appealed, and is therefore not before us.

2. Inasmuch as our inquiry is limited to the proper interpretation of a
provision of the Bankruptcy Code, our review is plenary. In re Roth Am.,
Inc., 

, 952 (3d Cir. 1992).

                                2


satisfying his obligation to BU, and his petition listed BU as
a general unsecured creditor in the amount of $15, 434.00.3
He subsequently filed an adversary complaint with the
bankruptcy court to determine the dischargeability of his
obligation to BU.

BU opposed discharge under 11 U.S.C. S 523(a)(8), and
both parties eventually filed motions for summary
judgment. The parties agreed that $2,000 of the
outstanding balance was for a federally guaranteed
educational loan that was not dischargeable. The court
rejected BU’s argument that the remainder of Mehta’s debt
was not dischargeable under 11 U.S.C. S 523(a)(8), and
granted partial summary judgment in favor of Mehta in the
amount of his delinquent tuition, late fees and interest. The
district court affirmed.

II. Discussion.

11 U.S.C. S 523 provides in relevant part:

       (a) a discharge under section 727, 1141, 1228(a),
       1228(b) or 1328(b) of this title does not discharge an
       individual debtor from any debt--

       ***
       (8) for 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 for
       an obligation to repay funds received as an educational
       benefit, scholarship or stipend, unless 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. S 523(a)(8) (1994).

We look to the text of a statute to determine
congressional intent, and look to legislative history only if
the text is ambiguous. New Rock Asset Partners, L.P. v.
_________________________________________________________________

3. A portion of that delinquency included the amount Mehta owed on
nondischargeable government student loans.

                                3


Preferred Entity Advancements, Inc., 

(3d Cir.
1996). Where statutory language is plain and
unambiguous, " ‘the sole function of the court is to enforce
it according to its terms.’ " 

(quoting United
States v. Ron Pair Enters., Inc., 

, 241 (1989)).
Plain meaning is therefore conclusive, " ‘except in the ‘rare
cases [in which] the literal application of a statute will
produce a result demonstrably at odds with the intentions
of its drafters.’ " 

not define "loan" in S 523, and courts that
have been called upon to interpret that provision have not
agreed upon its meaning. BU urges us to broadly interpret
the statute and thus declare that Mehta’s debt constitutes
a loan or a debt for an educational benefit that is not
dischargeable in bankruptcy. Mehta of course disagrees. He
argues for a narrow interpretation consistent with the
remedial purpose of bankruptcy.

Courts have long recognized that bankruptcy is intended
to "relieve the honest debtor from the weight of oppressive
indebtedness and permit him to start afresh." In re
Renshaw, 

, 86 (2d Cir. 2000)(quoting Williams
v. U.S. Fidelity & Guar. Co., 

, 554-555 (1915)).
However, bankruptcy is not only an ameliorative right of
the debtor; it is also a remedy of the creditor. Matter of
Marchiando, 

, 1115 (7th Cir. 1994).
Accordingly, although bankruptcy is concerned with giving
honest debtors a new beginning, "there are circumstances
where giving a debtor a fresh start in life is not the
paramount concern and protection of the creditor becomes
more important." 

. Thus, the law
does not allow debtors to escape all financial obligations by
declaring bankruptcy. However, in large part because of
bankruptcy’s underlying concern for affording a new
beginning, statutory exceptions to discharge are generally
construed "narrowly against the creditor and in favor of the
debtor." In re Pelkowski, 

, 744 (3d Cir. 1993).
The creditor opposing discharge therefore has the burden of
establishing that an obligation is not dischargeable. Grogan
v. Garner, 

(1991).

These conflicting policy considerations have created a
certain tension that is reflected in the exclusions contained

                                4


in S 523 and the legislative history of the Bankruptcy Code.
That history has been detailed in In re Johnson , 

, 451-54 (B.A.P. 8th Cir. 1998), and outlined in
Renshaw. Accordingly, we will only touch upon it here.

A. Overview of 11 U.S.C. S 523(a)(8).

When Congress established the Guaranteed Student
Loan Program under the Higher Education Act of 1965, it
sought to increase the availability of low interest, federally
guaranteed loans in order to make higher education more
affordable for a greater number of qualified students. S.
Rep. No. 89-673, (1965), reprinted in 1965 U.S.C.C.A.N.
4027, 4055. However, the Bankruptcy Reform Act of 1978,
11 U.S.C. S 523(a)(8), placed restrictions on students’ ability
to discharge these loans in bankruptcy because Congress
was concerned about reported abuses of students who
obtained the benefits of higher education while avoiding
repaying student loans by declaring bankruptcy shortly
after graduation. Subsequent amendments expanded the
scope of the statute to its current form.

Prior to the Reform Act of 1978, loans were fully
dischargeable in bankruptcy. The law provided as follows:
"Upon default by the student borrower on any loan covered
by Federal loan insurance . . . the insurance beneficiary
shall promptly notify the Commissioner, and the
Commissioner shall . . . pay to the beneficiary the amount
of the loss sustained by the insured . . .". Higher Education
Act of 1965, Pub. L. No. 89-329, S 430(a), 79 Stat. 1219,
1260 (1965) (amended 1976). Thus, the statute required
the federal government to repay the educational institution
if the student defaulted. A Congressional Commission
subsequently recommended prohibiting discharge of
educational obligations for the first five years after
graduation unless the student faced undue hardship. See
Report of the Commission on the Bankruptcy Laws of the
United States, H.R. Doc. No. 93-137, at pts 1 & 11 (1973).
In 1976, Congress passed S 439A of the Education
Amendments of 1976, which added a limited
nondischargeability provision. See Education Amendments
of 1976, Pub. L. No. 94-482, S 439A(a), 90 Stat. 2081, 2141
(codified at 20 U.S.C. S 1087-2) (1976) (repealed 1978).

                                5


Section 439A was repealed in 1978, and 11 U.S.C.
S 528(a)(8) -- the current provision -- took effect on October
1, 1979.4

B. Is Mehta’s Tuition Debt a "loan"?

BU contends that Mehta’s tuition debt arose from an
extension of credit for educational services, and that it is
therefore tantamount to an educational "loan" that is
excluded from discharge in bankruptcy under 11 U.S.C.
S 523(a)(8). The university rests this argument in large part
upon various provisions of its Student Accounting Services
Department’s handbook. That booklet is referred to as "The
Guide," and it is apparently given to all BU students upon
registration or enrollment. BU notes that "The Guide states
that ‘[b]y registering for any class in the University, each
student accepts and agrees to be bound by’ certain
University regulations and policies." (Brackets in original).
Appellant’s Br. at 19. These regulations and policies include
each student’s obligation to pay all applicable fees and
charges, including tuition.5 Accordingly, BU argues: "when
Mehta registered for class at BU a contract was formed
whereby Mehta agreed to pay a defined quantity of money
in exchange for a defined set of services, i.e.
classes/tutition credits." Appellant’s Br. at 19. BU allowed
Mehta to attend classes during the Fall 1993 semester
without first paying tuition, and BU claims that the parties
to the resulting "agreement" therefore clearly understood
_________________________________________________________________

4. For an explanation of the "stop-gap" legislation that filled the gap
between the repeal of S 439A and the effective date of S 523(a)(8), see

.

5. More specifically, The Guide provided:

       Boston University’s policy requires the withholding of all credit,
       educational services, issuance of transcripts, and certification of
       academic records from any person whose financial obligations to the
       University (including delinquent student accounts, deferred
       balances, and liability for damages) are due and/or unpaid. . . . By
       registering for any class in the University, each student accepts and
       agrees to be bound by the foregoing University policy as applied to
       any preexisting or future obligation to the University.

App. at A.39.

                                6


that BU was extending a "loan" to Mehta in the amount of
the Fall 1993 tutition, and that both BU and Mehta
intended that result. However, the Court of Appeals for the
Second Circuit rejected an analogous argument in
Renshaw, and we find that court’s analysis persuasive.

In Renshaw, the court consolidated the appeals of two
students from different colleges who were each attempting
to discharge delinquent tuition obligations in 

. In both cases, the respective colleges
objected, arguing that S 523(a)(8) excluded delinquent
tuition from discharge. 

been allowed to
register and attend classes without first paying tuition after
he signed a "Reservation Agreement" that the college had
executed before Renshaw signed. 

       That agreement obligated [the college] to hold a place
       open for Renshaw, provided he paid the amounts billed
       when due, and not to charge him more for tuition than
       the amount that was in effect on the applicable
       registration date. The Agreement further required
       Renshaw to pay a $285 reservation fee when he
       returned it, to pay tuition, room, and board for the
       1992 summer session and 1992-93 academic year, and
       to be bound by various payment-related provisions set
       out on the back of the Agreement and in the college
       catalog. These provisions included an obligation to pay
       a "service charge" with an effective annual rate of 19.2
       percent if payments on the student’s account were not
       made by their due dates.

claimed that the executed Registration
Agreement constituted a loan under S 523 because it
allowed Renshaw to register without prepaying based upon
his promise to pay at a future date pursuant to the terms
of the Reservation Agreement. 

The court rejected
that argument. 

looked first to the common law definition of
"loan" to interpret the meaning of S 523(a)(8). 

Under common law, "[t]o constitute 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

                                7


transferred at a later 

; see also, In re
Grand Union, 

, 356 (2d Cir. 1914). The court
reasoned that "[t]his definition implies that the contract to
transfer items in return for payment later must be reached
prior to or contemporaneous with the transfer. Where such
is the intent of the parties, the transaction will be
considered a loan regardless of its 

.
However, the court concluded that the delinquent tuition
obligations of the two students before it did not amount to
loans because there was no "agreement" to extend credit,
"or to permit the student to attend classes in return for a
payment of tuition at a future date." 

both
cases, the student simply "unilaterally decided not to pay
tuition when it came due." 

concluded that the
colleges could well have prohibited the students from
attending classes but they "chose not to do so." 

also noted that both colleges had failed to reach any
agreement "about future class attendance or an extension
of credit." 

attempts to draw support from the analysis in
Renshaw by emphasizing that the court there stressed that
the exclusion contained in S 523(a)(8) applies if the parties
intended a loan "regardless of its form." 

We agree
that form can   not be elevated over substance, and that the
intent of the   parties must therefore dictate whether Mehta’s
debt to BU is   excluded from discharge under S 523(a)(8).
However, this   only undermine’s BU’s claim; it does not
advance it.

Mehta, like the students in Renshaw, simply"unilaterally
decided not to pay tuition when it came 

. This record simply does not allow us to conclude that
BU intended to loan Mehta the amount of the tuition for
the Fall 1993 semester when it allowed him to register and
attend classes or that Mehta understood that to be BU’s
intent. It does not appear that BU ever made any inquiry
into Mehta’s creditworthiness or that it ever required him to
execute any kind of promissory note or loan agreement. The
document that allegedly constitutes Mehta’s loan agreement
-- The Guide -- is nothing more than the type of
generalized informational handbook that colleges and
universities routinely supply to all students. It contains

                                  8


various fee schedules, and informs students of their
financial obligations, optional payment plans, and refund
procedures, as well as various remedies the university may
exercise to collect delinquencies. It also explains how to
replace meal and identification cards; and it provides
information about medical insurance, as well as students’
entitlement to "admission to Boston University football,
hockey, and basketball games." App. at A.41.

The Guide is, therefore, far less suggestive of a"loan"
than the Reservation Agreement in Renshaw. In Renshaw,
the university and the student both executed the
Reservation Agreement. That agreement contained language
far more characteristic of a loan agreement than The Guide.
For example, as noted above, it provided that interest would
accrue at a specified rate. Yet, the various provisions of the
Reservation Agreement were still insufficient to transform
the understanding between the university and student into
a loan under S 523. Rather, the Renshaw court concluded
that "none of [those] casual covenants[met] the definition
of loan." Renshaw, 222 F3d at 84.

Although courts have reached different results when
determining if forbearance in collecting tuition amounts to
a loan, we agree with the distinction drawn in Renshaw
between those cases holding that delinquent tuition is
dischargeable under S 523(a)(8) and those holding it is not.6
Renshaw instructs that courts have generally held that
nonpayment of tuition can qualify as an educational loan
under S 523(a)(8) "only in two classes of cases." See

. Courts have reached that
conclusion "where funds have changed hands," or where
"there is an agreement . . . whereby the college extends
credit . . . ."

included In re Joyner, 

, 763 (Bankr. E.D. Pa. 1994), as an example of the first
class of cases, and In re Merchant, as an example of the
_________________________________________________________________
6. Compare In re DePasquale, 

(Bankr. 1st Cir. 1998); In re
Johnson, 

(Bankr. 8th Cir. 1998); In re Merchant, 

(6th Cir. 1992); In re Hill, 

(Bankr. D. Mass. 1984); Najafi
v. Cabrini College, 

(Bankr. E.D. Pa. 1993) (disallowing
discharge) with In re Renshaw, 

(2nd Cir. 2000), and Seton
Hall Univ. v. Van Ess, (In re Van Ess) 

(Bankr. D.N.J. 1994)
(allowing discharge).

                                9


latter class. As the Renshaw court noted, the university in
In re Merchant required the student to sign a promissory
note evidencing the student’s agreement with the
university, and the university’s extension of credit. That
was found probative of the parties’ intent even though
neither a formal promissory note, nor written agreement, is
a prerequisite to proving a "loan" so long as the
circumstances allow the educational institution to satisfy
its burden of proof.7

Ironically, BU relies heavily upon In re DePasquale, 

(B.A.P. 1st Cir. 1998), in arguing that allowing
Mehta to attend classes without first paying the tuition he
knew he owed constituted a loan. There, BU allowed
DePasquale to attend classes without prepaying tuition only
after engaging in protracted discussions with the student
that lasted for two 

. BU finally
relented and allowed DePasquale to register and attend
classes without prepaying, but only after reaching an
individualized agreement that BU would continue to bill her
but allow her to register and pay tuition at some later time.8
Furthermore, "[a]s a condition of receiving her degree,"
Depasquale executed a promissory note "promising to pay
BU $22,607.05." 

held that BU’s arrangement
with DePasquale constituted a loan within the meaning of
S 523(a)(8). 

However, that is very different than
the situation here.

In fact, when we compare how BU handled DePasquale’s
delinquency with how it handled Mehta’s, it is even more
_________________________________________________________________

7. See generally, 

. See also In re Hill, 

(Bankr. D. Mass.1984), wherein a student’s loan application in the
amount of the semester’s tuition was pending, and the university
extended a credit in the amount of the loan application without interest
"to be paid as soon as he received the proceeds of his student 

. The bankruptcy court held that the credit in the amount of
the loan was nondischargeable under S 523(a)(8). 

court noted, "In the fall of 1998, after more than two years of
negotiations, BU permitted DePasquale to attend classes without
prepaying her tuition. Although BU billed DePasquale for tuition, it was
agreed that she would pay tuition later. They did not set a payment

. The record is not clear as to the interest that
was charged in DePasquale though it appears that interest did accrue.

                                10
evident that BU can not establish that Mehta’s delinquency
is excluded from discharge under S 523(a)(8). BU’s
argument to the contrary would have us equate the
generalized information in The Guide with the specific
undertakings contained in the promissory note it demanded
of DePasquale.9 As noted above, the court in Renshaw
referred to the obligations specified in the Reservation
Agreement (including the promise for a specific amount of
interest accruing) as "casual 

.
The terms of The Guide are even more "casual," and can
hardly be considered "covenants." Although Mehta was no
doubt aware of his obligations, as BU contends, awareness
of an obligation does not establish that the parties intended
a "loan."

BU’s attempt to distinguish Seton Hall v. Van Ess (In re
Van Ess), 

(Bankr. D.N.J. 1994), where the
court did grant discharge is equally unpersuasive. The
court there held that a student’s delinquent tuition was
dischargeable because the exceptions to discharge
contained in S 523(a) "should be narrowly construed against
the creditor in order to carry out the rehabilitative policy of
the Bankruptcy Code." 

Inasmuch as the
contrary construction urged by the university there would
have been inconsistent with that liberal, rehabilitative
policy, the court held that "a common sense reading of 11
U.S.C. S 523(a)(8) reveals that the Debtor’s nonpayment of
his tuition bill did not result in an extension of credit." 

After examining the legislative history, the court
concluded "[t]here is no overriding policy that warrants
treating [the university] differently from any other creditor.
Indeed, given the ready availability of student grants and
loans, one might very well conclude that [the university] is
particularly well situated to avoid defaults on tuition
obligations." 

The accuracy of that observation is
demonstrated by BU’s actions in DePasquale. All BU had to
do here was have Mehta sign the same kind of agreement
it had DePasquale sign.

BU suggests that Van Ess is distinguishable because the
_________________________________________________________________

9. The record does not reflect whether BU issued The Guide to students
when DePasquale registered there.

                                11


court there expressed doubt about the number of classes
the student actually attended during the semester in
question, and because that student, unlike Mehta,"did not
participate in any student loan programs." Appellant’s Br.
at 14. However, those distinctions do not establish a
difference. It is clear from the portion of the court’s opinion
quoted above that the court in Van Ess simply concluded
that delinquent tuition, without more, is not exempted from
discharge under S 523(a)(8). Here, as in Van Ess, the record
contains nothing that would allow us to find that the
university and the student actually intended a loan.
Accordingly, we will not now create a loan agreement where
none otherwise exists.

C. Mehta’s Delinquency is not a Debt for an
Educational Benefit Under S 523(a)(8).

BU relies in part upon Najafi v. Cabrini College, (In re
Najafi), 

(Bankr. E.D. Pa. 1993) in making an
alternative argument. BU claims that even if its"extension
of credit" to Mehta was not a "loan," Mehta’s delinquency is
still not dischargeable because it represents an
"educational benefit" under S 523(a)(8). As noted above, in
addition to excluding educational loans from discharge,
S 523(a)(8) also excludes "any debt . . . for 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, . . . ."

However, we are not persuaded by the analysis in Najafi.
The court there inserted commas into the relevant sections
of S 523(a)(8) and interpreted the statute as it read after
that change in punctuation. The court explained:

       We believe that the absence of commas in the phrase
       "educational benefit overpayment or loan made" makes
       this phrase difficult to interpret. However, as
       Pelkowski, supra, 

, there is
       no support for the Debtor’s contention, similar to that
       asserted by the Pelkowski debtor, that S 523(a)(8) must
       be read narrowly. We believe that, when reading the
       Code section more broadly than the Debtor suggests,

                                12


       the terms "benefit," "overpayment," and"loan" should
       be construed as a series of nouns, all modified by the
       adjective "educational." Therefore, we conclude that his
       debt, assuming arguendo that it could not be classified
       as an "educational loan," falls within the scope of
       S 

.

However, the statute that resulted from the court’s
editing is not the statute that Congress drafted. The court
in Renshaw properly rejected the analysis in Najafi, and so
do we. Renshaw concluded that the exemption in
S 523(a)(8) only applies where there has actually been an
overpayment for an educational benefit program such as
the GI 

. This is because Congress
concluded, as a policy matter, that the fiscal integrity of
such educational programs takes priority over giving the
individual debtor a fresh start. It therefore excluded such
programs from the discharge that is otherwise available in
bankruptcy. Accordingly, if a program such as a federally
funded loan program makes an overpayment to a student,
the student can not escape repayment by filing for
bankruptcy. See 

. That is not the
situation here.

We also reject any attempt to suggest that Mehta’s
obligation falls within S 523(a)(8)’s exclusion of obligations
for "funds received as an educational benefit. . . ." No funds
have been advanced by BU or received by Mehta for the
semester in question.

D. Equitable Considerations.

Finally, BU makes an equitable argument in support of
its opposition to discharging Mehta’s outstanding tuition.
The university reminds us that it has litigated the same
issue of dischargeability in a different jurisdiction and
prevailed. See Appellant’s Br. at 22 (citing DePasquale).
Accordingly, argues BU, lack of uniformity in various
jurisdictions will leave it vulnerable to the "luck of the
draw" and promote forum shopping by students seeking to
discharge educational debts.

                                13


However, we have already explained that Mehta’s
situation differs from DePasquale’s and that the holding in
DePasquale undermines BU’s claim here to the extent that
DePasquale does apply. Furthermore, we fail to see how
this logistical problem of BU’s own making translates into
the kind of equitable consideration that is cognizable in
bankruptcy. As noted above, BU does not have to do
anything more than it did in DePasquale to protect itself
from the parade of horribles it now marches in front of us.
Absent some similar evidence of a "loan,"S 523(a)(8) does
not apply. Therefore, neither equity nor our construction of
the statute allows us to reach the result BU urges upon us.
See Peller v. Syracuse Univ. (In re Peller), 

(Bankr. D.N.J. 1994).

III. Conclusion.

Accordingly, for the reasons set forth herein, we will
affirm the judgement of the district court.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

                                14