During a House Judiciary Committee hearing in July, Rep. Scott Fitzgerald (R-WI) asked bankruptcy Judge Michelle Harner about student loan discharge cases.
00:00Professor Baird, as you mentioned in your opening statement, the Federal Priority Act allows receivers in state insurance insolvency cases to be held personally liable if the receiver disperses funds without repaying the federal government first.
00:17Bankruptcy cases are specifically exempt from the Federal Priority Act, but the bankruptcy code has the procedural protections to ensure the government is repaid.
00:27But I guess what we're seeing is the same is not true of insurance insolvency cases, which are largely handled under state law.
00:36If we're considering legislation a limit liability for state insurance receivers, what types of procedural safeguards should be in place so that the government does not get skipped over or becoming the first in line when attempting to collect on its claims?
00:52The thing to remember here is that the absence of the kinds of rules we have in bankruptcy for state insurance insolvencies is not a deliberate congressional decision, but rather is an artifact of the way the law has evolved over time.
01:09The Federal Priority Act was established first in 1797, and in bankruptcy we've realized that we need to have procedures.
01:20Having procedures for state insurance insolvencies would make sense.
01:24What you need to make sure of is the government is notified of the state insurance receivership and knows about the procedure.
01:32But it's also reasonable that once the government is notified that it has a certain clock that starts to tick, because unless you have clear procedures, you're not going to be in a world in which receivers will feel confident that they can dispense assets and not expose themselves to personal liability.
01:49So, again, the easiest, to answer your question directly, the easiest thing to do is simply ensure that there is proper notification to the government and that the technical rules are satisfied.
02:02But this shouldn't be a terribly difficult problem.
02:06Judge Hardener, I'm going to skip around a little bit, but you discuss undue hardship tests in your opening statement, and I wanted to focus a little bit on the student loans.
02:15So, it's been noted that relatively few student loans are discharged in bankruptcy.
02:21During your time on the bench, has there been any times when debtors satisfied the undue hardship tests, such as that you've ordered discharge under the student loans?
02:33So, it's a great question, Chairman.
02:36I will say I do not see many student loan cases, and that's, it could be in part.
02:42I don't have any empirical data to back me up here, but I will say procedurally, it's difficult for a debtor.
02:49They have to commence an adversary proceeding, they have to file a complaint, and then they have to meet what we call the Brenner standard, at least in my circuit, the Fourth Circuit, which incorporates the undue hardship standard you just referenced.
03:01I have had one opportunity where I had a 67-year-old woman who had incurred over $500,000 of student loan debt in the hopes of becoming a business executive.
03:15She was trying to repay, she was never going to be able to repay that entire amount.
03:21Doing the analysis based on the facts that she, representing herself as a pro se debtor, put into evidence, I was able to grant a partial discharge of some of her student loan debt, which was not appealed by the student loan lender.
03:38But I could not find, under the Brundersh standard, even in that situation with an older individual who had only limited time left to work to try to repay her debt, the ability to grant a full discharge.
03:52Judge Black, there have been some claims that medium-sized, well-capitalized businesses are small.
03:58Subsidiaries of larger businesses have been using Subchapter 5 to circumvent the creditor protections associated with general Chapter 11 cases.
04:08Have you seen any type of behavior that would, in your courtroom, that would suggest that this is actually happening?
04:19No, I really haven't in my court.
04:22You know, I've had, you know, some cases that may look right out of the gate, like a single-asset real estate case that probably shouldn't be there.
04:32But I have not seen any type of, you know, manipulation of insider debt or anything of that nature in the Western District of Virginia that would present itself in the cases that I see.
04:44I think the cases that have been presented to me have all been well-suited for Subchapter 5.
04:50And, again, as Judge Harner and some of the other witnesses have pointed out, if there are cases that come before us, we have the ability to do, to prevent shenanigans for the lack of a better description.
05:06We've got the ability to appoint a creditors committee.
05:08The, you know, different avenues are available for the Subchapter 5 trustee to have a different allocation of powers to investigate the debtors' business.
05:21So in the cases where I am in Southwest Virginia, I'm not seeing that.
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