Lewis v. United States Department of Education ( 2007 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: JAMES LEWIS, 
Debtor,
No. 06-35255
D.C. Nos.
JAMES LEWIS,
Plaintiff-Appellant,  CV-05-00034-S-
BLW
v. ADV. # 04-6060
UNITED STATES DEPARTMENT OF OPINION
EDUCATION,
Defendant-Appellee.

Appeal from the United States District Court
for the District of Idaho
Ralph R. Beistline, District Judge, Presiding
Submitted September 26, 2007*
Seattle, Washington
Filed November 5, 2007
Before: Betty B. Fletcher, Andrew J. Kleinfeld, and
Ronald M. Gould, Circuit Judges.
Opinion by Judge B. Fletcher
*This panel unanimously finds this case suitable for decision without
oral argument. See Fed. R. App. P. 34(a)(2).
14611
IN RE: LEWIS 14613
COUNSEL
D. Bernard Zaleha, Attorney at Law, Boise, Idaho for the
plaintiff-appellant.
Amy S. Howe, Assistant United States Attorney, Boise,
Idaho, for the defendant-appellee.
OPINION
B. FLETCHER, Circuit Judge:
Appellant James Lewis seeks review of a final judgment
issued by the United States District Court for the District of
Idaho in favor of appellee United States Department of Edu-
cation (“Department”). The bankruptcy court held and the dis-
trict court affirmed that a congressional amendment to the law
governing the dischargeability of a student loan obligation in
bankruptcy may be retroactively applied to an obligation
incurred prior to the date the law was changed. Whether the
district court correctly ruled that the retroactive amendments
14614 IN RE: LEWIS
govern appellant’s student loans is the single issue of law
before this court on appeal. Appellant’s central argument is
that he had a right to rely on the statute of limitations in effect
at the time he incurred his obligation because (a) the statute
of limitations was an implicit term of the contract he signed,
(b) his contract created a property right to discharge his stu-
dent loans after the prescribed statutory period, and (c) any
government action to impair his contractual right violates his
Fifth Amendment right to due process.1
We reject his challenge. Bankruptcy is a legislatively cre-
ated benefit, not a right, that Congress may alter or withhold
at its discretion. It did exactly that in 1998 when it amended
11 U.S.C. § 523(a)(8)(A) to eliminate, retroactively, the dis-
chargeability of student loans such as appellant’s that have
been in repayment for seven years or more. Congress left in
place an undue hardship exception to nondischargeability,
which appellant does not claim. Through its power to legislate
on bankruptcies, Congress has the power to impair contractual
obligations, even retroactively, and appellant has no supersed-
ing right to a discharge in bankruptcy.
BACKGROUND
Appellant Lewis obtained a student loan September 5,
1984, and executed a promissory note to secure it in the
amounts of $2,500.00 in order to attend Platt College in San
Diego, California. Lewis later obtained two additional loans,
executing one promissory note in the amount of $2,625.00
1
Appellant also attempts to invalidate the relevant congressional amend-
ment under the Sovereign Acts Doctrine. The doctrine holds that when
government undertakes a public and general act, it is not liable for inci-
dental breach of contract liability to private parties with whom it contracts.
See U.S. v. Westlands Water Dist., 134 F. Supp. 2d 1111 (E.D.Cal., 2001).
Appellant does not have a contract incidentally breached by a public and
general act. Rather, he is one member of the class intentionally affected,
albeit adversely, by a public and general act. We reject his arguments to
the contrary and reject his challenge under the Sovereign Acts Doctrine.
IN RE: LEWIS 14615
dated May 25, 1988 and one in the amount of $4,000.00 dated
December 3, 1988, both in order to attend Musicians Institute
in Hollywood, California. Lewis agreed to the terms of the
promissory notes, which were, in relevant part, to repay the
loans including accrued interest.2 The California Student Aid
Commission guaranteed all the loan obligations. Appellee
Department reinsured the loans under loan guaranty programs
authorized under Title IV-B of the Higher Education Act of
1965, 20 U.S.C. §§ 1071-1087-4.3 Lewis defaulted on each of
his three loan obligations.4 Due to these defaults, the guaran-
tee agency paid to the lender claims in the amounts of
$2,243.02, $2,776.73 and $5,964.39. Under the terms of its
reinsurance agreement, Appellee Department reimbursed the
guarantor, which was unable to collect the amounts due and
assigned its right and title to the loans to the Department on
August 25, 1997.
2
Appellant alleges that the financial aid officer at Musicians Institute
advised him when he obtained the May 25, 1998 loan that he could dis-
charge his loans through bankruptcy and that he relied on this representa-
tion in deciding to accept the loan. However, he states that he did not have
any plans to file for bankruptcy. Department alleges that to the extent
Lewis relied on representations of the loan officer, Lewis establishes that
he obtained the loans in bad faith. If a person entered into a contract with
the intention of declaring bankruptcy and not paying what he promised,
then his conduct would be fraudulent. However, we do not reach that issue
in the instant case.
3
Established by the Higher Education Act of 1965, the Guaranteed Stu-
dent Loan Program (since renamed the Federal Family Education Loan
Program) provides interest rate subsidies and federal insurance for private
lenders to make student loans pursuant to 20 U.S.C.S. §§ 1078(a) and (c)
(1994). Under 20 U.S.C.S. § 1078(c), original lenders sell loans to other
lenders to raise funds to make, specifically to originate, additional loans.
Guaranty agencies guarantee the loans, paying loan holders the amounts
due and taking assignment of the loans if students default. The Secretary
of Education reinsures the loans and ultimately reimburses guaranty agen-
cies on a sliding scale pursuant to 20 U.S.C.S. § 1078(c)(1).
4
Default dates were April 24, 1991, January 30, 1991 and November 29,
1992, respectively.
14616 IN RE: LEWIS
Congress has sought progressively to limit the instances in
which student loan debts may be discharged in bankruptcy. In
1998, Congress amended 11 U.S.C. § 523(a)(8)(A), which
had provided that student loans in repayment for seven years
were eligible for discharge.5 See Higher Education Amend-
ments of 1998, Pub. L. No. 105-244, § 971, 112 Stat. 1581,
1837 (1998). The 1998 Amendments repealed the safe harbor
provision “with respect to [student loans in bankruptcy] cases
commenced under Title 11, United States Code, after the date
of enactment of this Act.” Id. at § 971(b). The only remaining
exception to nondischargeability is through a showing of
undue hardship, which is not at issue in this case. Lewis filed
a petition for voluntary bankruptcy discharge under Title 11,
Chapter 7 on November 30, 2003.6
Lewis filed an adversary proceeding on February 27, 2004
in bankruptcy court against the Department seeking a declara-
tory judgment that his obligation to repay his student loans
was discharged. The bankruptcy court dismissed Lewis’ com-
plaint upon the Department’s motion for summary judgment
holding that the version of 11 U.S.C. § 523(a)(8) in effect on
the date the bankruptcy petition was filed, not the version of
the statute that was in effect on the date the student loans were
made, controlled. The district court affirmed the bankruptcy
court’s decision. Lewis timely appealed to this court pursuant
to Federal Rules of Appellate Procedure 4(a)(1) and 26(a).
The bankruptcy court had jurisdiction pursuant to 28
U.S.C. § 1334(b). The district court had jurisdiction to hear
5
At the time of its enactment in 1978, § 523 (a)(8)(A) provided that stu-
dent loans in repayment for five years at the time a bankruptcy petition
was filed would be discharged in that bankruptcy. Pub. L. 95-598
(November 6, 1978), § 523 (a)(8)(A), 92 Stat. 2549, 2591. In 1990, Con-
gress extended the time a student loan had to be in repayment from five
years to seven years. See Pub. L. 101-647, § 3621(2), 104 Stat. 4789, 4965
(1990) (amending 11 U.S.C. § 523(a)(8) (1984)).
6
As of July 30, 2004, Lewis owed the Department $20,774.27 plus
interest, accruing at the rate of 8% per annum ($1.97 per day).
IN RE: LEWIS 14617
the appeal from the bankruptcy court under 28 U.S.C.
§ 158(a). This court has jurisdiction under 28 U.S.C. § 1291.
DISCUSSION
1. The 1998 Amendments Apply to Appellant’s Loans
Retroactively.
[1] Since October 7, 1998 when Congress amended federal
bankruptcy law to eliminate 11 U.S.C. § 523(a)(8)(A), student
loans over seven years in repayment, dischargeable in bank-
ruptcy at the time appellant entered the loan, can no longer be
discharged. Appellant filed his voluntary Chapter 7 bank-
ruptcy discharge petition on November 20, 2003, six years
after the effective date of the 1998 Amendments.
Appellant argues that his loans are dischargeable because
the version of Section 523(a)(8)(A) in effect when he signed
his promissory note, which had provided that student loans in
repayment for seven years were eligible for discharge,
became part of his contract. Accordingly, appellant contends
that he is contractually entitled to a discharge of his student
loans in bankruptcy. To support his argument, appellant
recites Supreme Court jurisprudence explaining that “the laws
which subsist at the time and place of the making of a contract
. . . enter into and form a part of it, as if they were expressly
referred to or incorporated in its terms.” Von Hoffman v. City
of Quincy, 71 U.S. 535, 550 (1866). He then argues that the
D.C. Circuit has applied this principle in the student loan con-
text. Relying on Armstrong v. Accrediting Council for Contin-
uing Educ. and Training, Inc., 168 F.3d 1362 (D.C. Cir. 1999)
appellant argues that subsequent enactments of Congress that
impair benefits cannot be applied retroactively when those
contracts were entered into in reliance upon prior statutes. The
district court rejected these arguments, calling the cases cited
by Lewis “neither apropos, controlling, nor persuasive.” Dist.
Ct. Op. at 8.
14618 IN RE: LEWIS
[2] We review de novo the district court’s decision on an
appeal from a bankruptcy court. See, e.g. In re Raintree
Healthcare Corp., 431 F.3d 685, 687 (9th Cir. 2005). First,
the statute in question in Armstrong, the Holder Rule,7 does
not deal with Congress’ power to create uniform bankruptcy
laws and is therefore not relevant to this case. Moreover, the
Armstrong court elected not to apply the Holder Rule retroac-
tively because Congress expressly exempted student loans
from the rule. Armstrong, 168 F.3d at 1368. In this case, stat-
utory language indicates congressional intent to remove the
statute of limitations for all cases filed after October 7, 1998.
See Higher Education Amendments of 1998, Pub. L. No. 105-
244, § 971(b), 112 Stat. 1581, 1837 (1998). Moreover, Von
Hoffman and other general contract law cases cited by appel-
lant simply do not support his claim. Appellant fails to
address why his case should be an exception to the generally
strict enforcement by bankruptcy courts of the effective date
of the 1998 Amendments. See, e.g. In re McCormick, 259
B.R. 907 (8th Cir. BAP (Mo.), 2001) (holding that the seven
year rule to discharge a debtor’s student loans was unavail-
able to her because she filed her bankruptcy petition two
months after the effective date of the 1998 Amendments, and
the only option available to discharge her student loans was
a showing of undue hardship). We hold that appellant’s loans
are controlled by the 1998 Amendments.
2. The Bankruptcy Clause Provides Congress With the
Authority to Retroactively Impair Appellant’s Contract.
Appellant argues that the Fifth Amendment due process
clause imposes essentially the same restraint on the impair-
ment of contracts as does the Contract Clause8 (citing North-
7
The Federal Trade Commission’s “Holder Rule” does not implicate the
Bankruptcy Clause; rather it requires purchase money loan agreements to
contain a notice to all loan holders that preserves the borrower’s ability to
raise claims and defenses against the lender arising from the seller’s mis-
conduct. See 16 C.F.R. § 433.2(a) (1998).
8
Art. 1, § 10, cl. 1 of the U.S. Constitution.
IN RE: LEWIS 14619
western Nat. Life Ins. Co. v. Tahoe Regional Planning
Agency, 632 F.2d 104, 106 (9th Cir. 1980)). The district court
held that while that may be true in some instances, the enact-
ing legislation under the Bankruptcy Clause, Art. 1, § 8, cl. 4
of the U.S. Constitution controls in this instance. Relying on
Wright v. Union Central Life Ins. Co., 304 U.S. 502, 516
(1938), the district court reasoned that Lewis’ student loan
contract “was made subject to constitutional power in the
Congress to legislate on the subject of bankruptcies impliedly
written into the contract between Lewis and the original lend-
er.” Dist. Ct. Op. at 3.
This court, reviewing the district court’s decision de novo,
applies the presumption of constitutionality accompanying
congressional acts to the 1998 Amendments.9 To overcome
the presumption, appellant debtor must show a violation of a
constitutionally protected right or privilege. In re Simon, 311
B.R. at 645 (citing In re Golden, 16 B.R. 585, 587 (Bankr.
S.D. Fla., 1981)). In this case, appellant alleges a violation of
his Fifth Amendment right to due process. The questions we
must answer are whether Congress has the power to impair
appellant’s contractual obligation through its power to legis-
late on bankruptcies and whether appellant has a superseding
right to discharge in bankruptcy.
[3] Congress has specific authority under the Bankruptcy
Clause to regulate discharge in bankruptcy that is “not so
grossly unreasonable as to be incompatible with fundamental
law[.]” Hanover Nat’l Bank v. Moyses, 186 U.S. 181, 192
(1902). The district court relied on Ninth Circuit precedent
explaining that under the Bankruptcy Clause:
[Congress has] the power to establish uniform laws
9
Legislative acts that affect the “burdens and benefits of economic life”
are granted a presumption of constitutionality. In re Simon, 311 B.R. 641,
645 (Bankr. S.D. Fla., 2004) (citing Usery v. Turner Elkhorn Mining Co.,
428 U.S. 1, 15 (1976)).
14620 IN RE: LEWIS
on bankruptcy throughout the nation. Generally, this
authority includes the power to discharge the debtor
from his contracts and legal liabilities as well as to
distribute his property. Thus, bankruptcy legislation
has traditionally operated to affect creditors’ inter-
ests which vested prior to the effective date of the
legislation. Unlike the states, Congress is not prohib-
ited from passing laws that impair contractual obli-
gations. In fact, the very essence of bankruptcy laws
is the modification or impairment of contractual
obligations. In re Webber, 674 F.2d 796, 802 (9th.
Cir. 1982) (internal quotation marks and citations
omitted); see also Railway Labor Executives’ Ass’n
v. Gibbons, 455 U.S. 457, 466 (1982).
Dist. Ct. Op. at 3-4 (emphasis added)
[4] As noted by the district court, pursuant to authority
under the Bankruptcy Clause, Congress may pass laws that
impair contractual obligations. The court noted that in fact,
discharge in bankruptcy necessarily impairs or modifies the
rights of the creditor by eliminating the personal liability of
a debtor to a creditor. While appellant argues that contempo-
raneous laws are read into contracts as if they were expressly
referred to or incorporated in its terms, he fails to take into
account that “essential attributes of sovereign power [are] also
read into contracts as a postulate of the legal order.” Wright,
304 U.S. at 516 (quoting Home Bldg. & Loan Ass’n v. Blais-
dell, 290 U.S. 398, 435 (1934)). Appellant signed his promis-
sory note subject to this congressional authority to impair his
contractual obligation.
[5] The district court further found that Congress may
impair appellant’s contract retroactively. As the district court
noted we have previously rejected arguments against retroac-
tivity similar to those made by appellant. In Matter of Reyn-
olds, 726 F.2d 1420 (9th Cir. 1984), this court retroactively
made nondischargeable certain support obligations. As the
IN RE: LEWIS 14621
district court also noted, the Supreme Court recently upheld
retroactive application of a change in the law permitting the
Department to administratively offset delinquent student loans
against Social Security benefits for loans incurred prior to the
time the government could do so. Lockhart v. U.S., 546 U.S.
142 (2005). Although not addressing precisely the same issue,
Lockhart is “nonetheless a powerful indication that the
Supreme Court would not adopt the position advanced by
Lewis. . . .” Lockhart applied law as it existed at the time of
the decision rather than laws at the time the student loans
were made. Applying laws existing at the time of this deci-
sion, we hold that Congress has the authority to impair appel-
lant’s contractual obligation, and did so appropriately through
the 1998 Amendments.
3. Appellant Has No Superseding Right to a Discharge in
Bankruptcy.
[6] Appellant argues he has a contractual right to rely on
bankruptcy provisions in effect in 1984, which the parties
agree, would allow him to avoid repaying his loan obligation
in the instant case. The district court noted that bankruptcy is
a legislatively created benefit that Congress may withhold at
its discretion, citing Supreme Court precedent explaining that
“a debtor has no constitutional or ‘fundamental’ right to a dis-
charge in bankruptcy.” Grogan v. Garner, 498 U.S. 279, 286
(1991), citing U.S. v. Kras, 409 U.S. 434, 445-446 (1973).
Congressional repeal of a statute of limitations on a legisla-
tively created benefit such as bankruptcy does not deprive
appellant of property in violation of the Fourteenth Amend-
ment. See Campbell v. Holt, 115 U.S. 620 (1885). We hold
that because appellant has not been deprived of property, his
claim alleging violation of due process under the Fifth
Amendment must necessarily fail.
CONCLUSION
We hold that the district court correctly ruled that appel-
lant’s student loans are governed by the retroactive 1998
14622 IN RE: LEWIS
Amendment to 11 U.S.C. § 523(a)(8)(A) which eliminated the
dischargeability of his loan. We further hold that through its
power to legislate on bankruptcies, Congress has the power to
impair contractual obligations, even retroactively. Finally, we
reject appellant’s claim to an absolute right to a discharge in
bankruptcy and hold appellant has not been deprived of a
property interest.
AFFIRMED.