Timothy M. Sirk
Keyser, West Virginia
Attorney for Appellant
The Opinion of the Court was delivered PER CURIAM.
In this appeal from the Circuit Court of Kanawha County, we are asked to consider whether pension loans made by the West Virginia Consolidated Public Retirement Board to three retirement system participants were discharged when the participants filed for bankruptcy. The Board asserts that, under the law at the time of the participants' bankruptcies, the loans could not have been discharged in bankruptcy, but made no attempt to collect those loans. The Board now asserts _ over 20 years after the participants' debts were discharged in bankruptcy _ that the loans were not debts and were not discharged, and asserts that it may collect both the principal and compounded interest on those loans.
An administrative law judge for the Board concluded that the loans made by the Board to the participants were not debts subject to discharge in bankruptcy. The administrative law judge then ruled that under state law, and pursuant to the loan agreements signed by the participants, the principal and interest on those loans had to be repaid to the Board. On appeal, the circuit court entered an order affirming the administrative law judge's rulings.
After careful consideration, we conclude that the administrative law judge was correct in finding that the principal amount of the participants' pension loans were not debts under bankruptcy law because the participants merely borrowed their own money, and therefore could not be discharged in bankruptcy. However, we find that the Board is prohibited from collecting compounded interest on those loans. Accordingly, we affirm, in part, and reverse, in part, the circuit court's order affirming the administrative law judge.
Before the loans were fully repaid, during the 1980s each appellant filed a Chapter 7 liquidation bankruptcy proceeding in a United States District Court. In each bankruptcy proceeding, each appellant listed the Board as an unsecured creditor. (See footnote 2) Subsequent to each bankruptcy filing, it appears that the Board notified each appellant's employer to stop making payroll deductions to repay the loans. (See footnote 3)
During the 1980s, in each appellant's bankruptcy case, the bankruptcy court issued an order that released each appellant from all personal liability for debts existing on the date of commencement of this case, and ordering that [a]ll creditors are prohibited from attempting to collect any debt that has been discharged in this case. From the last bankruptcy court order in 1989 until 2003, none of the appellants made any payments to the Board, and the Board made no attempts to resume its payroll deductions or collect any payments from the appellants. Furthermore, each appellant received an annual statement from the Board reflecting their total payroll contributions, but none of these statements reflected an unpaid liability on the loans that could be offset against their future benefits. The appellants later testified that they believed their loan obligations to the Board had been discharged by the bankruptcy courts' orders.
In 1990, the Board recognized a developing problem involving members of the Teachers Retirement System who had obtained a loan and then subsequently filed for bankruptcy before the loan was repaid. In a January 22, 1990, memorandum from an assistant attorney general to the Board, the Board was advised that if a member of the Teachers Retirement System filed a Chapter 7 bankruptcy petition before January 1990, any loans to the member from the System were likely discharged. The memorandum states:
Generally, whenever an individual files for bankruptcy he or she
will file a Chapter 7 petition which calls for the liquidation of
all pre-petition debts and that the creditors accept a certain percentage of the outstanding debt as payment in full. Such may very well be the case for members of [the Teachers Retirement System].
The memorandum goes on to state that after January 1990, the assistant attorney general planned to argue to the bankruptcy court that loans from the Teachers Retirement System should not be discharged. The assistant attorney general said he intended to argue to the bankruptcy court that only monthly repayments toward the loans should be stopped, and the balance owing on the loan should be collected from the member whenever the member reaches retirement. (See footnote 4) The assistant attorney general's memorandum contains no discussion or recommendations regarding interest on the loans.
Thirteen years later, in mid-2003, the Board sent letters to the appellants demanding that they repay the outstanding balances of their loans. Furthermore, in subsequent letters sent to the appellants in 2004, the Board demanded that the appellants pay 15 to 17 years of interest that had accumulated on the loans. In December 2003, Mr. Clay repaid his loan balance of $2,103.50, but in January 2004 was told that he owed an additional $7,671.24 in interest. Mr. Corbett and Ms. Hoopengarner offered to repay only the balance of their loans, but the Board demanded repayment of both the principal and interest.
The appellants filed petitions with the Board seeking an administrative review of their cases. The appellants insisted that their obligations to repay the loans to the Board had been discharged in bankruptcy, and that the Board was wrong to interpose a demand for repayment of the loans so many years later. However, on August 2, 2005, the Board entered an order that adopted the decision of an administrative law judge and that rejected the appellants' position, and concluded that the appellants had a duty to repay both the loans and the years of accumulated interest.
On September 1, 2005, the appellants filed the instant case in the circuit court seeking appellate review of the Board's decision. In an order dated October 17, 2008, the circuit court affirmed the Board's decision. The circuit court concluded that state law, state regulations, and the loan agreements signed by the appellants all required the appellants to fully repay any unpaid loans, including compounded interest, to the Board.
The appellants now appeal the circuit court's October 17, 2008 order.
(g) The court may affirm the order or decision of the agency or remand the case for further proceedings. It shall reverse, vacate or modify the order or decision of the agency if the substantial rights of the petitioner or petitioners have been prejudiced because the administrative findings, inferences, conclusions, decision or order are:
(1) In violation of constitutional or statutory provisions;
(2) In excess of the statutory authority or jurisdiction of the agency; or
(3) Made upon unlawful procedures; or
(4) Affected by other error of law; or
(5) Clearly wrong in view of the reliable, probative and substantial evidence on the whole record; or
(6) Arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise of discretion.
The appellee Board contends that loans from a government pension plan are not debts subject to discharge in bankruptcy. The Board cites to one of the earliest cases on the question, In re Villarie, 648 F.2d 810 (2nd Cir. 1981) (per curiam), where the bankruptcy court considered a loan from a government pension fund to a government employee and concluded that the loan was not a debt that can be discharged in bankruptcy. 648 F.2d at 811.
In Villarie, a New York City employee was a member of the City's retirement system. The employee obtained a loan from the City retirement system, a loan that was in effect . . . an advance against the member's future retirement benefits. 648 F.2d at 811. The loan agreement required the employee to repay the loan, with interest, through payroll deductions[.] Id.
The Villarie court examined two cases with analogous transactions that failed to give rise to a debtor-creditor relationship: an annuitant's withdrawal from the savings account of his annuity fund; and an insured's advance from the reserve fund of his insurance policy. 648 F.2d at 812 (citations omitted). In both cases, the courts found that the transactions were not dischargeable in bankruptcy because the borrower had merely borrowed . . . his own money[.] Id.
The court in Villarie also found an analogous transaction in the congressional record underlying adoption of the 1978 Bankruptcy Code. The congressional record states:
[The] definition of debt and the definition of claim on which
it is based . . . will not include a transaction such as a policy loan
on an insurance policy. Under that kind of transaction, the
debtor is not liable to the insurance company for repayment; the
amount owed is merely available to the company for setoff
against any benefits that become payable under the policy. As
such, the loan will not be a claim (it is not a right to payment)
that the company can assert against the estate; nor will the
debtor's obligation be a debt (a liability on a claim) that will be
H.R. Rep. No. 595, 95th Cong., 1st Sess. 310 (1977). The Villarie court relied upon congressional discussion of the definitions of the words debt and claim, and the statement that loans from an insurance policy are not debts dischargeable in bankruptcy, and concluded that a debtor's loan from his retirement fund is not a debt dischargeable in bankruptcy.
The appellee Board argues that, under Villarie and its progeny, (See footnote 6) the appellants' loans were clearly not discharged by the bankruptcy courts' orders.
The three appellants counter that the Board's interpretation of bankruptcy law under Villarie was not apparent to the appellants, their bankruptcy counsel, or the bankruptcy judges in the 1980s. Further, while the Board's interpretation of bankruptcy law might be legally correct, the appellants point out that _ unlike the pension fund in Villarie _ the Board never appeared and presented that interpretation in the 1980s to the bankruptcy judges in the appellants' bankruptcy cases. The appellants assert that neither the Fourth Circuit Court of Appeals nor the bankruptcy courts in West Virginia have ever published a decision that addressed this question, let alone clearly adopted (or rejected) the reasoning in In re Villarie. Under these circumstances, the appellants assert that it would be unfair to permit the Board to collect the principal and interest of the loans so many years later.
After carefully reviewing the authorities cited by the parties, we agree with the Board that the principal portion of each appellant's loan, due and owing at the time of the filing of the appellant's bankruptcy petition, was not discharged by the bankruptcy courts' orders. We agree with the Board's argument that the principal amount of a loan of pension benefits is, as was previously noted from the congressional record, merely available to the [Board] for setoff against any benefits that become payable from the appellants' retirement benefits. The logic of Congress is that such a loan is nothing more than a plan participant moving his/her own money from the right pocket to the left. Repaying the loan then becomes nothing more than shifting money back to the right pocket.
But neither Villarie nor Congress say anything about interest on such a loan. And if one simply moves money from their right to their left pocket, it seems absurd for the right pocket to then demand that interest be paid for so long as the money sits in the left pocket. We do not believe that Villarie supports the Board's attempt to collect the interest on the appellants' loans, interest that has now compounded for over two decades.
The record is clear that the Board failed to make any effort to appear before the bankruptcy courts in the 1980s to obtain clear rulings about the appellants' pension loans. (See footnote 7) In Villarie, the pension fund commenced a proceeding in the bankruptcy court seeking an order allowing it to resume deducting loan payments from the employee's paychecks. 648 F.2d at 811-12. (See footnote 8) The Board's agreement in this case with the appellants indicated that their loans would be repaid through payroll deductions _ but the Board halted those payroll deductions upon the filing of each appellant's bankruptcy petition, and unlike in Villarie, never made any effort before the bankruptcy court to resume those deductions. The Board did nothing until 2003 when it informed the appellants that they would be responsible for repaying the principal on their loans. Further, it was not until 2004 that it told the appellants they would also be responsible for compound interest on those loans.
The Board was advised by an assistant attorney general in 1990 that the
appellants' loans may very well have been discharged in bankruptcy. While we think this
advice was not correct, it is clear that the Board never sought a ruling from the bankruptcy
courts concerning interest on these loans. As we interpret Villarie, the proper route would
have been for the Board to have immediately, in the 1980s, sought permission from the
bankruptcy court to resume payroll deductions from the appellants to repay the loans. It was
improper for the Board to do nothing, and attempt to collect compounded interest decades
after the fact.