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New York State Higher Educ. Services Corp. v. Lucianna

October 20, 1995


On appeal from the Superior Court of New Jersey, Law Division, Bergen County.

Approved for Publication October 20, 1995.

Before Judges Dreier, Kestin and Cuff. The opinion of the court was delivered by Dreier, P.j.a.d.

The opinion of the court was delivered by: Dreier

The opinion of the court was delivered by DREIER, P.J.A.D.

Plaintiff appeals from an order dismissing its complaint for reimbursement of funds advanced after defendant's default on his student loans. Plaintiff was the guarantor of two student loans made by Chase Manhattan Bank to defendant in 1980 and 1981 in the total amount of $7,500. Upon defendant's default, plaintiff paid the amount due and sought reimbursement from defendant. On October 28, 1987, defendant filed voluntary bankruptcy under Chapter 7 of the Bankruptcy Code. After listing plaintiff as a creditor on his schedule of debts, defendant received a discharge in bankruptcy on March 7, 1988. On February 14, 1994, plaintiff instituted this action. Defendant raised the affirmative defense of a discharge in bankruptcy and moved for summary judgment. On February 3, 1995, the trial Judge dismissed the case. Plaintiff filed this timely appeal.

The proceeds from defendant's student loans from Chase Manhattan Bank were applied to his graduate education at Columbia University in the fall semesters of 1980 and 1981. The terms of the loan required the borrower to provide notice to the lender no later than four months after the borrower "cease[d] being matriculated or at least a half-time student." The borrower was then required to sign a repayment note in which the repayment period would begin at the end of the ninth month following the month in which the borrower ceased to be so matriculated. In this case, defendant withdrew from school in December 1981, within two months of obtaining the second loan. He filed his bankruptcy petition on October 28, 1987. This was more than five years following the date his first payment would have been due if the date of his withdrawal was the operative date for repayment, but less than five years if the date of his anticipated graduation was the triggering date.

This case turns on a single point, a mixed question of law and fact. At the time of this transaction, the Bankruptcy Code, 11 U.S.C.A. § 523(a)(8)(A), exempted from the discharge provisions of a Chapter 7 proceeding a governmentally insured or guaranteed education loan that first became due within five years of the filing of the bankruptcy petition. *fn1 If we read the provisions in the interim note requiring notice when a student withdraws from the university as extending the initial payment date, then defendant's discharge in bankruptcy was ineffective to terminate these obligations. If, on the other hand, we read the note restrictively against the bank and guarantor, then the obligations were discharged.

The initial loan agreements between Chase Manhattan Bank and defendant were written in the form of interim promissory notes which preceded the anticipated signing of repayment notes following graduation or discontinuance of the student's education. As noted earlier, there was a provision requiring the borrower to repay the loan at "the end of the ninth month following the month in which [the borrower ceased] to be matriculated, [withdrew] from or [became] less than a half-time student at an approved school." The borrower also assumed an affirmative duty to notify the bank of such withdrawal and sign the new note. The agreement specifically provided that: "No later than four months after I cease being matriculated or at least a half-time student I will contact the lending institution to sign a Repayment Promissory Note."

In this case, when defendant withdrew from Columbia University he gave no notice to the bank or guarantor. By defendant's failure to contact the bank or plaintiff, they were led to believe that defendant was adhering to his scheduled completion of his education in May 1982, generating an expected first payment nine months later. In fact, plaintiff, in reliance upon the lack of notice, scheduled the first payment to be received in February 1983. Therefore, when plaintiff received the bankruptcy notice scheduling the debt based upon defendant's October 1987 filing, it appeared that the filing was within the prohibited five-year period, rendering the loan nondischargeable under the provisions of 11 U.S.C.A. § 523(a)(8)(A), quoted earlier. There thus was no reason for plaintiff to object to the entry of the order which affected only dischargeable debts.

The parties agreed that New York law would govern their relationship. Also, there is no question that, except in the area of certain fraud claims, state courts have concurrent jurisdiction with the federal courts to determine the dischargeability of debts enumerated in 11 U.S.C.A. § 523(a).

It is well established that the effect of a discharge may be subsequently litigated in any forum and that the usual practice has been to allow the discharged bankrupt to plead his discharge where he is sued.

[ In re Craig, 56 B.R. 479, 481 (Bankr. W.D.Mo. 1985)(quoting Robertson v. Interstate Sec. Co., 435 F.2d 784, 786 (8th Cir. 1971)).]

See also In re Marriage of Henderson, 225 Cal. App. 3d 531, 275 Cal.Rptr. 226, 228 (Cal. Ct. App. 1990) (holding creditor of debt not automatically dischargeable under the Code may bring suit in state court); Massachusetts Higher Educ. Assistance Corp. v. Taylor, 390 Mass. 755, 459 N.E.2d 807, 812 (Mass. 1984) (reasoning that because student loans are not automatically dischargeable, fact that creditor of student loans did not appear in bankruptcy proceeding to contest dischargeability did not bar creditor from bringing subsequent action in state court); Pennsylvania Higher Educ. Assistance Agency v. Kaufman, 9 B.R. 755 (Bankr.E.D.Pa. 1981); State v. Wilkes, 41 N.Y.2d 655, 394 N.Y.S.2d 849, 363 N.E.2d 555 (N.Y. 1977); State v. Perkins, 112 A.D.2d 485, 490 N.Y.S.2d 900 (N.Y. App. Div. 1985); State of New York Higher Educ. Serv. Corp. v. Quell, 104 A.D.2d 11, 482 N.Y.S.2d 373 (App. Div. 1984). But see George Washington Univ. v. Galdi, 475 A.2d 1130, 1134-1135 (D.C. 1984). Interpretation of promissory notes in this setting is a matter of State law. See Chisari v. Florida Dept. of Educ., 183 B.R. 963, 967 (Bankr.M.C.Fla. 1995).

Where an ambiguity exists, we ordinarily construe a written agreement against the preparer, here the bank and guarantor. In re Kennedy Mortgage Co., 2313 B.R. 466, 473 (Bankr. D.N.J. 1982) (loan agreement); see also In re Miller's Estate, 90 N.J. 210, 221, 447 A.2d 549 (1982) (documents transferring an interest in royalties); Terminal Constr. Corp. v. Bergen County Hackensack River Sanitary Sewer Dist. Auth., 18 N.J. 294, 302, 113 A.2d 787 (1955) (sewerage disposal contracts); Jennings v. Pinto, 5 N.J. 562, 569, 76 A.2d 669 (1950) (sales agreement). *fn2 However, such a construction here would work an inJustice permitting defendant to profit by his breach of the notice provision. We take notice that it is a virtual impossibility for banks engaged in making student loans or for state agency guarantors to police the many thousands of borrowers to determine which students are still in school and which have withdrawn before graduation. Even upon receipt of a bankruptcy notice, a bank or guarantor cannot be expected to initiate an investigation of each student's status. The student is obligated by the loan agreement to keep the lender and guarantor apprised. Absent express notice ...

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