Sanctions, costs, and attorneys’ fees turn $3k student loan debt into nearly $50k

By Joe Forward, Legal Writer, State Bar of Wisconsin

Feb. 16, 2011 – The U.S. Court of Appeals for the Seventh Circuit ruled that a student loan debt cannot be discharged in bankruptcy. Now, a former student at the Milwaukee School of Engineering (MSOE) who borrowed $3,000 is on the hook for nearly $50,000.

Dustin Busson-Sokolik, a student at MSOE in 1999-2000, signed a promissory note to repay a $3,000 loan from MSOE. The promissory note made Busson-Sokolik liable for reasonable collection costs and attorneys’ fees necessary to collect any amount not paid when due.

In April 2005, MSOE obtained a default judgment in Racine County Circuit Court against Busson-Sokolik for nearly $6,000, representing principal plus interest not paid when due.

Two months later, the former MSOE student filed for bankruptcy and petitioned the court to determine the dischargability of his student loan debt to MSOE.

The bankruptcy court determined the debt was not dischargeable and found that Busson-Sokolik owed $16,248, representing the circuit court default judgment award plus nearly $9,000 in attorneys’ fees. Busson-Sokolik appealed.

The U.S. District Court for the Eastern District of Wisconsin, Chief Judge Charles Clevert Jr., affirmed the bankruptcy court’s judgment and sanctioned Busson-Sokolik and his attorney, Chomi Prag, almost $62,000 for filing a frivolous claim under Fed. R. Bankr. P. 8020. The district court concluded that both were jointly and severally liable for the $62,000 sanction, and Busson-Sokolik alone was liable for the remainder. Both appealed.

In Sokolik v. Milwaukee School of Engineering, Nos. 08-4317, 09-4009 and 10-1456 (Feb. 10, 2011), a three-judge appeals panel affirmed the district court’s ruling but reduced the sanctions amount by half to $31,000.

Student loan?

The bankruptcy code creates an exception to the general discharge of debt in bankruptcy for educational loans made by a governmental unit or nonprofit organization. Busson-Sokolic argued that the transfer was not a “loan” and was not “educational.”

The appeals panel – in an opinion written by Judge William Bauer – found that the promissory note and subsequent transfer of money to Busson-Sokolik’s student account met the elements necessary to constitute a loan, and the purpose was educational.

“[W]e 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,” Judge Bauer wrote.

Attoneys’ fees and sanctions

Busson-Sokolik argued that the bankruptcy court improperly allowed MSOE to recover collection costs and attorneys’ fees under the promissory note. But the appeals panel noted that an enforceable contract with provisions for attorneys’ fees can override the “American Rule” that a litigant ordinarily cannot collect attorneys’ fees from a losing side.

The panel explained that a contract-based claim for attorneys’ fees is allowed in a bankruptcy court case unless disallowed by a provision in the bankruptcy code. No provision in the bankruptcy code disallows recovery in this case, the panel explained.

Additionally, the appeals panel ruled that Busson-Sokolik did not provide any support for the claim that a nearly $9,000 bill for attorneys’ fees was unreasonable or unfair.

Finally, the appeals court upheld the district court’s imposition of monetary damages against Busson-Sokolik and Prag for filing a frivolous appeal under Fed. R. Bankr. P. 8020, finding that errors were “numerous and well-documented” even if not made in bad faith.

However, the appeals panel concluded that a reduction in the sanction damages amount by half was warranted, noting 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.”

The panel concluded that Busson-Sokolik was solely liable for $18,347 in debt principal, collection costs, attorneys’ fees, and interest under the terms of the promissory note.

For violating Rule 8020, the court concluded that Busson-Sokolik and his attorney are jointly and severally liable for $30,971.