IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

MEMORANDUM AND OPINION

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This matter comes before the Court on the debtors' Complaints to Determine

Dischargeability and Motions for Contempt, Turnover of Funds and for Attorney Fees. Debtors

Donald Ray and Mary Jane Strotkamp, filed their Chapter 13 petition and plan on December 13,

1990. Debtors then amended their Chapter 13 plan on January 23, 1991, describing several

student loans and providing that payments on the loans would be made pro rata with the other

unsecured creditors. The amended plan also provided that its confirmation would represent a

finding that payment of these particular debts would work an undue hardship on the debtors and

that, upon this Court's granting a discharge, those debts would be discharged. The student loan

creditors did not object to confirmation of the plan which was confirmed in February 1991, nor

did they appeal the confirmation order. The Strotkamps completed their Chapter 13 plan and were

discharged in 1994. After discharge, the Strotkamps received collection notices from the student

loan creditors, but on the advice of counsel, they made no payments, considering the loans to have

been discharged by the language of the Amended Plan.

In 1997, the Strotkamps hired current counsel who, after informing them that their student

loans had not been discharged because a Complaint to Determine Dischargeability had not been

filed and dischargeability had not been litigated, negotiated a payment agreement between the

Strotkamps and ECMC. The Strotkamps made substantial payments under the agreement until June

1999 when the Tenth Circuit handed down its decision in Andersen v. UNIPAC-HEBHELP (In re

Andersen), 179 F.3d 1253 (10th Cir. 1999). Relying on Andersen, the Strotkamps filed the instant

complaints asserting not only that the student loan debts were discharged by the “undue hardship”

language in the amended plan, but also that ECMC violated the discharge injunction by

recommencing the collection process in 1994, and that all of the funds collected by ECMC,

whether by payment, garnishment or set-off, should be disgorged.

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The Court finds that, while Andersen compels the conclusion that the debts were indeed

discharged, ECMC did not violate the discharge and that the payments made voluntarily by the

Strotkamps need not be disgorged. Payments received by ECMC via garnishment or IRS set-off

before announcement of the Andersen decision need not be disgorged. Only those payments

obtained by ECMC post-Andersen via garnishment or set-off must be returned to the Strotkamps.

Further, the Court denies the Strotkamps' request to hold ECMC in contempt for violating the

discharge injunction and denies the award of attorneys fees to the Strotkamps' counsel.

JURISDICTION

The Court has jurisdiction over these proceedings under 28 U.S.C. § 1334. This adversary

proceeding is a core proceeding. 28 U.S.C. § 157(b)(2)(I).

FACTS

The parties submit this case on a somewhat incomplete set of stipulations. Donald and

Mary Strotkamp (“the Strotkamps”) filed their Chapter 13 petition and plan on December 13,

1990. On January 23, 1991, the Strotkamps amended their Chapter 13 plan to include two student

loans owed to the Higher Education Assistance Foundation (HEAF) and one to Payco, its

collection agent, as well as a debt of $1622.18 to the United States Veterans Administration for

overpayment on veteran's benefits. The amended Chapter 13 plan listed the student loan amounts

due for each debtor, $3,002.14 and $586.74 for Donald, and $6,426.87 for Mary, and provided

that payments on the loans would be made pro rata with the other unsecured creditors. The plan

also stated that the balance of the student loans would be ". . . discharged upon completion of all

plan payments. Confirmation of the plan shall constitute a finding that the payment of the

remainder of the debt will impose an undue hardship on the debtors and the debtors' dependents. .

..” Neither HEAF nor Payco objected or otherwise responded and the plan was confirmed in

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February 1991. Nor did they appeal the confirmation order. The Strotkamps completed their

Chapter 13 plan and received a discharge on March 25, 1994.

Subsequent to the Strotkamps' discharge, Educational Credit Management Corporation

(“ECMC”), successor in interest to HEAF and Payco, began collection efforts on the unpaid

student loan debts. The parties stipulate that ECMC obtained partial payments as a result of

garnishment and set-off of income tax refunds by the Internal Revenue Service.1 On the advice of

their attorney at that time, the Strotkamps did not voluntarily make any payments on their loans.

In 1997, the Strotkamps hired current counsel who informed them that their student loans

had not been discharged in their Chapter 13 plan. The Strotkamps' attorney sent correspondence

to ECMC stating, in part:

I have been retained by [the Strotkamps] to help them out with some problems they have had with their student loans. Their previous attorney advised them that these accounts had been discharged through a Chapter 13 bankruptcy, but this was not the case. I have advised them that these accounts are still valid and must be paid.

In order to take care of these debts, the Strotkamp's have made application and been approved to withdraw funds from a vested 401K plan in order to pay these accounts in full. (Emphasis added)

In the letter, debtors' counsel also references negotiations to waive fees and interest on Mrs.

Strotkamp's student loan. On April 29, 1997, Mrs. Strotkamp entered into a repayment agreement

with ECMC for $9,493.22. According to the agreement, Mrs. Strotkamp was to pay a $3,500

down payment, with payments of $100 per month thereafter for the first 12 months until the debt

was repaid, with an annual review every year to determine the amount still owing.

1The record is unclear whether the garnishments occurred by ECMC obtaining a judgment in some court against the Strotkamps, or whether the amounts were garnished pursuant to 31 U.S.C. § 3720D.

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The parties also stipulate to the Strotkamps' repayment history. Per the repayment

agreement, Mrs. Strotkamp paid ECMC a $3,500 lump sum. She also paid $100 per month

beginning June 1997 through June 1999 for a total payment of $2,600. In addition to these

payments, ECMC offset Mrs. Strotkamp's tax returns twice, once on February 10, 1997, and again

on February 11, 2000 totaling $2,626.10. ECMC also garnished her wages four times in 2000,

obtaining $393.60. Mrs. Strotkamp has repaid $9,119.60 of her student loan debt.

The stipulations do not refer to a repayment agreement between Mr. Strotkamp and ECMC.

Neither do they clarify the balance of Mr. Strotkamp's student loan debts in 1997. Mr. Strotkamp

made a lump sum payment of $3,000.00 in April, 1997 and the IRS offset two tax refunds, one in

1996 for $437.00, and one in 1997 for $867.00. Mr. Strotkamp made no monthly payments. His

lump sum and ECMC's offsets total $4,304.00.

The Strotkamps stopped making payments in June 1999 when the Tenth Circuit handed

down its decision in Andersen v. UNIPAC-NEBHELP (In re Andersen), 179 F.3d 1253 (10th Cir.

1999). In Andersen, the Tenth Circuit held that a plan which is confirmed with a provision

providing that excepting education loans from discharge would impose an undue hardship on the

debtor and his or her dependants, is a binding adjudication of undue hardship rendering the loans

dischargeable. Andersen, 179 F.3d at 1254. On February 7, 2000, in response to this decision,

the Strotkamps filed separate adversary proceedings, seeking a determination that the student loan

debts were discharged, that ECMC be held in contempt, that ECMC be ordered to turn over all

funds collected subsequent to the bankruptcy discharge, and attorney fees of $750 in each case.

ANALYSIS

At the core of this case is the conduct of the creditor in making its collection efforts and the

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voluntariness of the various payments made by or obtained from the debtors. 11 U.S.C. §524(f)2

provides that nothing contained in the statutory provisions on reaffirmation prevents a debtor from

“voluntarily repaying any debt.”3 § 524(f). The Court objectively decides whether a payment is

voluntary, focusing on the conduct of the creditor receiving the payments. In re Wiley, 224 B.R.

58, 72 (Bankr. N. D. Ill. 1998).

The inquiry should be whether the repayment is free from the influence or coercion of the creditor which, in turn, may be established by showing: (1) the creditor took no misleading or coercive action and (2) the creditor reasonably assumed that the debtor's payments were voluntary. The court should not be required to inquire into the psyche of the debtor to ascertain the forces which motivated the payments.

3 Norton Bankruptcy Law and Practice 2d § 48:3, Informal Acts to Collect (2000).

As established by the stipulated facts and exhibits, the Strotkamps voluntarily agreed to

repay their student loans in April 1997. The funds paid ECMC by the Strotkamps' 401(k)

retirement account liquidation and the $100 per month payments from June 1997 through June

1999, totaling $2600, were voluntary payments under § 524(f). Similarly, the Donald Strotkamp

lump sum payment of $3,000 and the Mary Strotkamp lump sum payment of $3,500 were also

voluntary. Although the Strotkamps' briefs assert that their “position never wavered concerning

the fact that the debt had been discharged,” and that they finally sent payments in April 1997 “due

to the threat of garnishment and further collection activity” and to avoid further credit problems,

2All subsequent statutory references are to the Bankruptcy Code, Title 11, United States Code, unless otherwise noted.

3Section 524(c) and (d) refer to the strict guidelines that must be followed in order to reaffirm a discharged debt. The Strotkamps did not reaffirm their student loans and these subsections are not relevant here.

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this position is belied by their own counsel's stated position in the letter quoted above that the

debts had not been discharged. Nothing in the record shows that these payments were anything but

voluntary. It simply appears that the Strotkamps received and acted upon their attorney's advice

that their student loans had not been discharged and they immediately made arrangements to begin

repayment. ECMC could reasonably have assumed that these payments were voluntary. Its efforts

to collect a debt that both parties considered to have been excepted from discharge were neither

misleading nor coercive. Therefore, it would be inequitable to require ECMC to disgorge these

payments. The lump sum payment of $3,000 made by Donald, and the lump sum payment of $3,500

made by Mary and Mary's monthly voluntary payments totaling $2,600 are not subject to turnover.

In addition, the IRS offsets made May 27, 1996 against Mr. Strotkamp and on February 10,

1997 against both Strotkamps are not subject to turnover even though the payments were not

voluntary. The IRS has authority to set off from refunds of income taxes amounts due and owing to

the Government for student loans under the Deficit Reduction Act of 1984. See 31 U.S.C § 3720A;

26 U.S.C. § 6402(d). Under this tax intercept program, upon receiving notice from any Federal

agency that a named person owes a past-due legally enforceable debt to such agency, the IRS shall

offset against any overpyament payable to such person the amount of the debt; pay the offset amount

to the agency; and, notify the taxpayer that their overpayment has been reduced by an amount

necessary to satisfy such debt. “Federal agency” means a department, agency or instrumentality of

the United States, 26 U.S.C. § 6402(f), which would include the Department of Education. 31

U.S.C. § 3720A(b) provides what notice shall be given to the taxpayer that their tax refund is about

to be setoff to pay a debt to another Federal agency, such as the Department of Education. Nothing

in the record suggests that the Government failed to meet its notice obligations. Further, this Court

has subject matter jurisdiction to hear the Strotkamps' claims that Andersen precluded any more

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offsets from occurring. 26 U.S.C. § 6402(e) provides that, [t]his subsection does not preclude any

legal, equitable, or administrative action against the Federal agency to which the amount of such

reduction was paid.”

At the time of these offsets, ECMC, like debtor's counsel, clearly believed that the student

loans were not discharged. This was an understandable belief, given the state of the law in 1996

and 1997. The contemporary understanding of the law on “bootstrap” discharges of student loans

is well set out in former United States Bankruptcy Judge John K. Pearson's well-reasoned opinion

in In re Andersen, Case No. 90-13912, Adv. No. 96-5277 (Bank. D. Kan. August 13, 1997),

rev'd. 179 F.3d 1254 (10th Cir. 1999). Furthermore, the Strotkamps took no action to challenge

these offsets at the time they occurred by asserting a violation of the discharge injunction. Their

acquiescence at this time was consistent with their apparent contemporary understanding of the

law and amounts to a voluntary waiver of their right (if any) to challenge these offsets. Thus, the

1996 and 1997 offsets of $437.00, $867.00, and $645.00 are not subject to disgorgment.

The Court does find however that the funds offset by the IRS subsequent to the Andersen

decision along with the garnishments taken in 2000 are subject to turnover. By the time these

collection actions occurred in January through March of 2000, it was clear that ECMC's debts had

indeed been discharged, at least under the Andersen rule. Based upon that decision, the

Strotkamps filed these adversary proceedings to recover those payments. They clearly did not

acquiesce in either the garnishments or the 2000 offsets. Further, garnishments and unchallenged

offsets are, by their very nature, involuntary payments. Therefore, the IRS offset in the amount of

$1,981.10 and the four garnishments in the amount of $98.40 each should be disgorged.

The Strotkamps also seek to have ECMC held in contempt for violation of the § 524(a)

discharge injunction. Section 524(a)(2) provides that a discharge under Title 11 “. . . operates as

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an injunction against . . . an act, to collect, recover or offset any such debt as a personal liability of

the debtor. . .” The permanent injunction in the confirmation order only enjoins proceedings with

respect to discharged debts. Systemcare, Inc. v. Wang Lab. Corp., 85 F.3d 465, 469 (10th Cir.

1996). As recently as 1999, ECMC and the debtors both believed that the student loan debts had

not been discharged. The Strotkamps have not proven that ECMC wilfully and knowingly violated

the discharge injunction, nor have they shown that during the time they were repaying their student

loans, that ECMC knew that it was in violation of § 524(a). Even though ECMC sent collection

letters to the Strotkamps, the stipulations do not reflect that these letters were threatening or

coercive. The stipulations simply show that the Strotkamps were first advised that their loans

were discharged, but then current counsel informed them they were not discharged. In fact, at the

time of repayment, both parties believed that the debts were still owing, making the payments

voluntary and the IRS offsets proper. This falls far short of showing that ECMC acted with

knowing intent to violate the discharge injunction. ECMC cannot be held in contempt for violation

of the § 524(a) discharge injunction.

Lastly, the Court similarly denies the Strotkamps' request for attorneys' fees. There are

three judicially-created grounds for awarding attorneys' fees outside of a statute or contract

providing for such “(1) when the litigant preserves or recovers a fund for the benefit of others; (2)

when a losing party acts in bad faith, vexatiously, wantonly, or for oppressive reasons; or (3)

when a defendant wilfully disobeys a court order.” Alyeska Pipeline Serv. Co. v. Wilderness

Soc'y, 421 U.S. 240, 259, 95 S. Ct. 1612 (1975). Although §524 does not authorize an award of

attorneys' fees, such an award would be appropriate for wilful and intentional violations of the

discharge order. Stevens, 217 B.R. 757, 762 (Bankr. D. Md. 1998). Because the stipulated facts

do not support a finding that ECMC intentionally violated the discharge injunction and the

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Strotkamps have not met the three grounds listed above, the Court denies their request for

attorneys' fees.

IT IS THEREFORE ORDERED THAT ECMC turnover $2,374.70 to Mary Jane Strotkamp

forthwith. This amount represents funds garnished and offset subsequent to the Andersen decision.

IT IS ALSO ORDERED THAT any remaining balance on Donald Ray and Mary Jane

Strotkamps' student loans be discharged.

IT IS FURTHER ORDERED THAT the balance of the relief sought by the Strotkamps in

their Complaints is DENIED.

A Judgment on Decision will issue this 16th day of October, 2001.

_________________________________________ 
ROBERT E. NUGENT, BANKRUPTCY JUDGE

UNITED STATES BANKRUPTCY COURT

DISTRICT OF KANSAS

CERTIFICATE OF SERVICE

The undersigned certifies that copies of the Memorandum and Opinion were deposited in the United States mail, postage prepaid on this 16th day of October, 2001, to the following:

Laurie B. Williams

328 N. Main, Suite 200

Wichita, KS 67202

John M. Studtmann

2400 W. Pawnee, Suite 110

Wichita, KS 67213

N. Larry Bork

515 S. Kansas Ave

Topeka, KS 66603-3999

Anne M. Kindling

515 S. Kansas Ave

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Topeka, KS 66603-3999

U.S. Trustee

500 Epic Center

301 N. Main

Wichita, KS 67202

U.S. Dept. of Education

Regional Director, Region 9

50 United Nations Plaza

San Francisco, CA 94102

Educational Credit Management Corp.

NW 8639

P.O. Box 1450

Minneapolis, MN 55485

Donald and Mary Strotkamp

1901 S. Edgemoor St.

Wichita, KS 67218-4511

____________________________________

Janet Swonger,

Judicial Assistant

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