State of New York v. Wilkes, 41 N.Y.2d 655 (1977)
Student loans conditioned on events within the borrower’s control, such as teaching in a specific area, and which are therefore not subject to reasonable estimation or valuation at the time of bankruptcy, are not dischargeable debts under the Bankruptcy Act.
Summary
The State of New York sued Wilkes to recover funds from National Defense Student Loans after Wilkes declared bankruptcy. The loans included provisions where repayment could be reduced or canceled if Wilkes died, became disabled, or taught in certain schools. The court addressed whether these contingent obligations were provable and thus dischargeable in bankruptcy. The Court of Appeals held that due to the speculative nature of the contingencies, especially Wilkes’s option to teach and thereby reduce the debt, the loans were not provable debts at the time of bankruptcy and therefore not dischargeable. The decision hinged on the fact that the debtor, Wilkes, controlled whether the conditions reducing the debt would be met, making valuation impossible.
Facts
Wilkes received student loans from the State of New York between 1960 and 1969, totaling $3,975. The loan agreements stipulated repayment terms, including interest. Importantly, the agreements provided for cancellation of debt upon death or disability. Furthermore, the debt could be reduced by teaching in public elementary or secondary schools (up to 50%) or by teaching in low-income areas or teaching the handicapped (potentially up to 100% reduction for later loans). Wilkes filed for bankruptcy in January 1970, listing the student loans as his primary debt. No payments were due on the loans at the time of the bankruptcy filing. The State did not file a claim or object to the discharge.
Procedural History
The State sued Wilkes to recover the loan amounts after Wilkes’ bankruptcy discharge. Special Term granted summary judgment for Wilkes, holding the loans were discharged in bankruptcy. The Appellate Division affirmed. The State appealed to the New York Court of Appeals.
Issue(s)
Whether student loans containing provisions for cancellation or reduction of debt based on future events within the debtor’s control (such as teaching) constitute provable debts under the Bankruptcy Act, and are therefore dischargeable in bankruptcy?
Holding
No, because the various conditions attached to the student loans made the obligation to repay dependent on a series of events so speculative as to make valuation, in any realistic sense, impossible at the time of bankruptcy. Hence, there existed no provable debt, and Wilkes’ obligation to the State survived the discharge.
Court’s Reasoning
The court reasoned that only provable debts are dischargeable in bankruptcy. While contingent obligations can be provable, those that are not capable of