On October 22, the Court of Appeals for the Fifth Circuit issued a ruling in Crocker v. Navient Solutions that could have mixed consequences for student loan borrowers and creditors alike. The Court determined that a bankruptcy court lacks the authority to enforce discharge injunctions issued by bankruptcy courts in other districts. It also ruled, however, that student loans obtained from a for-profit corporation whose loans are not part of any governmental loan program can be dischargeable.

In Crocker, the plaintiffs obtained private student loans that ultimately ended up being serviced by Navient. The plaintiffs—Evan Brian Crocker in Texas and Michael Shahbazi in Virginia—later filed voluntary Chapter 7 bankruptcies in their respective states and received discharges under 11 U.S.C § 727. Navient attempted to continue collecting on the unpaid student loans after Crocker and Shahbazi received their discharges in 2016 and 2011, respectively.

In August 2016, Crocker filed an adversary proceeding against Navient in the Bankruptcy Court for the Southern District of Texas (herein “the Bankruptcy Court”), the same court that granted Crocker the discharge. Shahbazi later joined the suit as an additional plaintiff, and both plaintiffs filed an amended complaint seeking certification of a nationwide class of individuals who took out loans, in which a governmental unit or nonprofit institution had no defined role, that were used to cover expenses at an institution not accredited under Title IV, where the loans were validly discharged but still subjected to collection efforts by Navient.

Navient filed its motion for summary judgment, arguing that the Bankruptcy Court cannot enforce the injunctions of discharge orders issued by another court and that the loans should have been excluded from being discharged per 11 U.S.C. § 523(a)(8)(A)(ii). The Bankruptcy Court ruled in favor of the plaintiffs on both counts – a decision Navient appealed to the United States Court of Appeals for the Fifth Circuit.

The Fifth Circuit ruled that bankruptcy courts do not have the authority to enforce discharge injunctions from other districts, although it did not rule on a bankruptcy court’s ability to enforce discharge injunctions issued by other bankruptcy courts in the same jurisdiction. This decision, in effect, significantly hindered the ability of debtors to assert a nationwide class action in a bankruptcy court regarding violations of a discharge order. In fact, the Fifth Circuit stated that “certifying [a class that includes debtors whose discharges were entered by bankruptcy courts in other districts] would be highly dubious.” Crocker at 16.

The Fifth Circuit, however, agreed with the Bankruptcy Court that the plaintiffs’ loans “are not statutorily excepted from discharge.” The Fifth Circuit focused on the portion of the statute that stated “an obligation to repay funds received as an educational benefit, scholarship, or stipend” is not dischargeable. 11 U.S.C. § 523(a)(8)(A)(ii). Such debts are “educational payments not initially loans but whose terms will create a reimbursement obligation” when the borrower fails to meet the conditions of the payments (such as with a scholarship or a stipend). Crocker at 28.

The Fifth Circuit concluded that the loans in question—those from for-profit institutions that the borrower used to pay expenses of education—“do not qualify as ‘an obligation to repay funds received as an educational benefit, scholarship, or stipend’ because their repayment was unconditional.” Since there is no classification under 11 U.S.C. § 523(a)(8) in which the plaintiffs’ student loans fall, the debts were validly discharged.

The Crocker decision may prove to be a double-edged sword for student lenders. It may make it more difficult for plaintiffs to certify classes pertaining to the alleged violations of a discharge injunction. At the same time, though, it may provide new arguments for plaintiffs to allege that certain education-related loans are dischargeable.