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Substantial bankruptcy sanction upheld

It is common knowledge that student loans are nearly impossible to discharge in bankruptcy.

But after a Feb. 10 opinion from the 7th Circuit, attorneys need to know that overzealous litigation in trying to obtain discharge for a client can be hazardous to their own financial health.

The court upheld more than $30,000 in sanctions against the debtor and his attorney over what began as a $3,000 student loan. The only upside for the attorney is that the original sanction, which the court reduced, was more than $60,000.

In 1999, Dustin Busson-Sokolik borrowed $3,000 from the Milwaukee School of Engineering. The note included a clause making Busson-Sokolik liable for all reasonable collection costs, including attorney fees necessary for collecting the debt.

In 2005, MSOE obtained a default judgment of $5,909.63, after which Busson-Sokolik filed for bankruptcy.

Busson-Sokolik also filed an adversary complaint, arguing that the debt was dischargeable. The bankruptcy court disagreed and held that MSOE was entitled to $16,248.78, including costs and attorney fees.

On appeal, the district court affirmed and found the appeal frivolous, imposing a sanction of $60,942.50, with Busson-Sokolik and his attorney jointly and severally liable.

In an opinion by Judge William J. Bauer, the 7th Circuit affirmed, although it cut the sanction in half.

Dischargeability

The court first held that the student loan was correctly found nondischargeable in bankruptcy. Busson-Sokolik argued that it was dischargeable, because he did not use the funds for an “educational” purpose.

But the court declined to adopt a distinction based on to what “use” a student puts funds that he borrows for school, finding that doing so would be problematic.

The court explained, “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.”

Attorney fees

Second, the court held that the bankruptcy court properly included MSOE’s attorney fees in the judgment.

Busson-Sokolik argued that he should only be liable for attorney fees MSOE incurred in obtaining the default judgment, but not attorney fees incurred in the bankruptcy proceeding.

But Judge Bauer concluded, “The fact that the fees were incurred litigating a bankruptcy case does not disallow MSOE’s contract based claim for attorney’s fees.”

Merger doctrine

The court rejected Busson-Sokolik’s argument that he should be excused from paying attorney fees under the merger doctrine, which allows a court to modify a judgment to avoid injustice. Busson-Sokolik argued that the size of the attorney fees award was “inherently unfair.”

But the court held that he waived this argument by failing to raise it until he filed his reply brief in the district court. Addressing the merits, notwithstanding the waiver, the court also found the fees reasonable.

Sanctions

Finally, the court held that the district court did not err in awarding sanctions under Rule 8020 against Busson-Sokolik and his attorney for filing a frivolous appeal.

The court acknowledged that Busson-Sokolik’s arguments on the merits were not baseless. But it agreed that the appeal was litigated in a frivolous manner.

The court upheld the findings of the district court: “Motions were filed by appellant without any basis in the rules, deadlines were ignored, procedural requirements were dismissed as unnecessary and duplicative filings and objections were made thereby making it impossible for appellee to minimize its costs in this action.”

However, it reduced the sanction in half, explaining, “Recognizing that Busson-Sokolik is a student who has filed for bankruptcy and finding no evidence of bad faith on the part of Busson-Sokolik or his attorney, we conclude that a reduction in sanctions is warranted in this case.”

As a result, Busson-Sokolik and his attorney are jointly and severally liable to MSOE for $30,971.25 in sanctions, and Busson-Sokolik remains solely liable for another $18,347.65.

David Ziemer can be reached at david.ziemer@wislawjournal.com.

What the court held

Case: In re Busson-Sokolik, No. 08-4317, 09-4009 & 10-1456

Issues: Does the nondischargeability of a student loan depend on the use to which it was put?

Are a creditor’s attorney fees incurred in bankruptcy court defending a nondischargeable debt also nondischargeable in bankruptcy?

Were sanctions properly awarded?

Holdings: No. If the loan was predicated on the borrower being a student needing support to get through school, the loan is nondischargeable.

Yes. If the loan agreement provided for reimbursement of attorney fees, it does not matter whether they were incurred prior to bankruptcy or after.

Yes. Where the appeal from the bankruptcy court was litigated in a frivolous manner, sanctions are appropriate.

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