Opinion
CIVIL ACTION NO. 1:17-CV-3018-AT
2020-06-04
Josephine GRADDY, Plaintiff/Appellant, v. EDUCATIONAL CREDIT MANAGEMENT CORPORATION, Defendant/Appellee.
Elizabeth Graddy, Graddy Law, LLC, Atlanta, GA, for Plaintiff/Appellant. Thomas W. Joyce, Jones Cork & Miller, Macon, GA, for Defendant/Appellee.
Elizabeth Graddy, Graddy Law, LLC, Atlanta, GA, for Plaintiff/Appellant.
Thomas W. Joyce, Jones Cork & Miller, Macon, GA, for Defendant/Appellee.
ORDER
Amy Totenberg, United States District Judge
This bankruptcy appeal is before the Court on remand from the Eleventh Circuit for a consideration of the merits. As the procedural history of this case has been thoroughly briefed and discussed by multiple courts, it suffices to say that the matter under review is a determination of the dischargeability of student loan debt under 11 U.S.C. § 523(a)(8). For the reasons that follow, the bankruptcy court's July 24, 2017 Order ("Opinion" or "Op."), Adv. Proc. No. 15-5453-CRM, Docket Number 79 ("Adv. Doc."), and July 25, 2017 Judgment (Adv. Doc. 80) determining Appellant's student loan debt to be nondischargeable is AFFIRMED .
The Motion for Leave to File Surreply [Doc. 54] is GRANTED .
I. Background
Appellant Josephine Graddy attended New York University Law School from 1994 to 1997, where she obtained a J.D., and the University of Southern California from 2006 to 2008, where she obtained an M.F.A. (Op. at 340.) On her bankruptcy schedules, she listed student loans with Sallie Mae and Citibank, which the bankruptcy court found were incurred to attend those universities. (Id. ) (the "Student Loans").
The bankruptcy court determined that Ms. Graddy's loans were transferred to Appellee Educational Credit Management Corp. ("ECMC") in December 2015. (Op. at 340.) The Court's definition of the term "Student Loans" does not constitute any sub silentio finding that the loans are or are not subject to 11 U.S.C. § 523(a)(8), but is solely for convenience.
At the time of the bankruptcy court's Opinion, Ms. Graddy was 49 years old and licensed to practice law in Florida, Georgia, and New York. (Id. ) The bankruptcy court found that she had not been diagnosed with any disabling medical conditions, but noted that "she testified that she has experienced acute stress and anxiety at times in her working life." (Id. ) At the time of trial, she was employed as an attorney with Smith LLC and as a screenwriting instructor at the Savanah College of Art and Design. (Id. ) She was also involved with a rural television venture in Homerville, GA, which had not turned a profit at the time of trial. (Id. at 340-41.) Also at the time of trial, her husband was employed as a special education teacher with DeKalb County Schools, which provided health insurance for Ms. Graddy and the couple's three children. (Id. at 340-41.)
The bankruptcy court described Ms. Graddy's household income as "substantial." (Id. ) The court found that between 2015 and 2016, Ms. Graddy's average monthly household income was $8,669.92. (Id. ) Joint tax returns for years 2008 to 2015 showed an adjusted gross income ranging from $64,609 to $235,330. (Id. ) Furthermore, the bankruptcy court found that when Ms. Graddy was working as an attorney (before she left that career to attend USC in 2006) she earned between $100,000 and $155,000 annually. (Id. )
Ms. Graddy's monthly household expenses were approximately $3,035, based on her Schedule J filed in her chapter 7 case. (Id. ) Ms. Graddy testified that her expenses had changed, but the bankruptcy court took into account these changes and determined that her disposable income was about $4,000 per month. (Id. at 343.)
The bankruptcy court found that the Student Loans held by Appellee ECMC totaled $388,609.14 at trial. (Id. at 341.) The bankruptcy court found that the Student Loans had income-based repayment options available, and that Ms. Graddy's payments under the Pay As You Earn program, or PAYE, would be between $349 and $672. (Id. ) The court found that Ms. Graddy's payment history was sporadic, writing that she had
made payments on an inconsistent basis from 2000 to 2006. During this time, she made 29 payments amounting to approximately $9,200. This was the same period when Plaintiff was earning $100,000 to $155,000 annually as an attorney in Florida. She has made only 13 payments in the past nine years, totaling $10,095.
(Op. at 345.) Ms. Graddy scheduled the original principal balance of the Student Loans at $177,000. (Id. at 341.)
The bankruptcy court held a two day trial on March 8, 2017 and April 19, 2017. Ms. Graddy testified on her own behalf, and Jennifer Skerbinc, litigation specialist for ECMC, testified for ECMC. The bankruptcy court ruled in favor of ECMC, and this appeal followed. The appeal took a brief trip to the Eleventh Circuit on a threshold issue, and was remanded here for a consideration of the merits. Graddy v. ECMC , 762 F. App'x 735 (11th Cir. 2019).
On March 23, 2020, the Court returned this matter to the bankruptcy court on limited remand under Federal Rule of Bankruptcy Procedure 8009(e)(2)(B) for the purpose of compiling and transmitting a supplemental record containing the trial exhibits received by the bankruptcy court. On April 23, 2020, the bankruptcy clerk transmitted the remainder of the record, including the trial exhibits. The merits of this appeal are now ripe for adjudication.
II. Issues on Appeal
Appellant raises 11 issues on appeal:
(1) In a trial on non-dischargeability of a debt, may a court relieve the creditor of its burden of proof under 11 U.S.C. § 523 that its claim comes squarely within one of the exceptions enumerated in § 523(a) ?
(2) In a trial on non-dischargeability of a debt, if a court may relieve a creditor of its burden of proof, what grounds will support this shifting of the burden of proof to a debtor in bankruptcy?
(3) In a trial on non-dischargeability of a debt, may the creditor meet its burden of proof by relying exclusively on evidence that is not admissible under the Federal Rules of Evidence?
(4) In a trial on non-dischargeability of a debt, may the creditor meet its burden of proof by relying on evidence that is not admissible due to the creditor's violation of Rule 26 of the Federal Rules of Civil Procedure ?
(5) In applying the Brunner test to determine undue hardship in a student loan dischargeability trial, and specifically in determining whether the debtor will be able to maintain a minimal standard of living for herself and her dependents if forced to repay the loan, may
the court extend the repayment period of the loan beyond the term set forth in the promissory note?
(6) In applying the Brunner test to determine undue hardship in a student loan dischargeability trial, may the court require the debtor to demonstrate that she will not be able to maintain a minimal standard of living for herself and her dependents even if she is not forced to repay the loan ?
(7) In applying the Brunner test to determine undue hardship in a student loan dischargeability proceeding, and specifically in determining whether the debtor will be able to maintain a minimal standard of living for herself and her dependents if forced to repay the loan, may a court examine past income and expenses rather than current income and expenses?
(8) In applying the Brunner test to determine undue hardship in a student loan dischargeability trial, and specifically in determining whether the debtor has made a good faith effort to repay the loan, may the court require the debtor to have accepted the creditor's pre-trial settlement offer in order to prove good faith?
(9) In applying the Brunner test to determine undue hardship in a student loan dischargeability trial, must the court consider evidence of the creditor's lack of good faith in making or servicing the loan? Or is the covenant of good faith and fair dealing unilaterally imposed on student borrowers and not education lenders?
(10) Are student loan dischargeability proceedings subject to the Due Process Clause of the Fifth Amendment of the U.S. Constitution and/or the Due Process Clause of the Fourteenth Amendment of the U.S. Constitution?
(11) Assuming that student loan dischargeability proceedings are subject to due process requirements under the U.S. Constitution, may a court relieve the creditor of compliance with Rule 26 of the Federal Rules of Civil Procedure, of its burden of proof under 11 U.S.C. 523(a), and of compliance with the Federal Rules of Evidence?
III. Standard of Review
This Court functions as an appellate court in reviewing the decision of a bankruptcy court. In re Fin. Federated Title & Trust, Inc. , 309 F.3d 1325, 1328 (11th Cir. 2002). As such, the Court reviews questions of law under a de novo standard of review. Id. at 1329. The Court reviews the bankruptcy court's findings of fact for clear error. Id. ; Fed. R. Civ. P. 52(a)(6) ("Findings of fact, whether based on oral or other evidence, must not be set aside unless clearly erroneous, and the reviewing court must give due regard to the trial court's opportunity to judge the witnesses' credibility."); Fed. R. Bankr. P. 7052 (applying Fed. R. Civ. P. 52 to bankruptcy proceedings). The Court will overturn a factual finding only when "although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Holton v. City of Thomasville Sch. Dist. , 425 F.3d 1325, 1350–51 (11th Cir. 2005) (quoting Anderson v. City of Bessemer City , 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) ) (internal quotations omitted).
The present appeal is from a final judgment determining the dischargeability of a debt, which the bankruptcy court had authority to enter under 28 U.S.C. § 157(b)(2)(I). Accordingly, the Court has jurisdiction of this appeal pursuant to 28 U.S.C. § 158(a). IV. Discussion
Ms. Graddy seeks a discharge of her Student Loans under 11 U.S.C. § 523(a)(8), which provides that most student loans are nondischargeable "unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents." For determining "undue hardship," the Eleventh Circuit has adopted the test set out in Brunner v. New York State Higher Educ. Servs. Corp. , 831 F.2d 395 (2d Cir. 1987). Hemar Ins. Corp. v. Cox (In re Cox) , 338 F.3d 1238, 1241–42 (11th Cir. 2003). Under the Brunner test, if a debt falls under Section 528(a)(8), a debtor must prove all of the following to obtain a discharge of the debt:
(1) That the debtor cannot maintain, based on current income and living expenses, a "minimal" standard of living for herself and her dependents if forced to repay the loans;
(2) That additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
(3) That the debtor has made good faith efforts to repay the loans.
ECMC v. Acosta-Conniff (In re Acosta-Conniff) , 686 F. App'x 647, 648 (11th Cir. 2017) (citing Brunner , 831 F.2d at 396 ). With regard to the second factor, courts have often described the necessary showing as " ‘certainty of hopelessness’ that the debtor will be able to repay the loans within the repayment period." Id. at 649 (quoting ECMC v. Mosley (In re Mosley) , 494 F.3d 1320, 1326 (11th Cir. 2007) ). Whatever that means, ultimately "the standard of proof for the dischargeability exceptions in 11 U.S.C. § 523(a) is the ordinary preponderance-of-the-evidence standard." Grogan v. Garner , 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
Ms. Graddy, however, contends that the Court should not even reach the issue of whether the Brunner standard was met below, because she contends that ECMC did not meet its burden of showing that the Student Loans are covered by Section 523(a)(8). Relatedly, she contends that the evidence as to this issue provided by ECMC at trial should have been excluded by the bankruptcy court under Federal Rules of Civil Procedure 26 and 37 and/or the Federal Rules of Evidence. Several of the Issues on Appeal raised by Ms. Graddy relate to this issue. Rather than taking up each issue on appeal one by one, the Court will consider them in "chunks."
A. The Bankruptcy Court did not err by failing to exclude evidence of the Student Loans under Rule 37.
Issues 3, 4, and 11 generally speaking concern the bankruptcy court's decision to admit evidence. The Court reviews the bankruptcy court's evidentiary rulings for abuse of discretion. United States v. Kennard , 472 F.3d 851, 854 (11th Cir. 2006) ; United States v. Siddiqui , 235 F.3d 1318, 1322 (11th Cir. 2000). This standard applies to a trial court's determination to admit records under the business records exception as well. United States v. Garnett , 122 F.3d 1016, 1018 (11th Cir. 1997). Lastly, "the Eleventh Circuit reviews [trial] court determinations under Rule 37(c)(1) for abuse of discretion." Pitts v. HP Pelzer Auto. Sys., Inc. , 331 F.R.D. 688, 696 (S.D. Ga. 2019).
Issue 10, concerning whether "student loan dischargeability proceedings [are] subject to the Due Process Clause" was not raised below, and will not be considered on appeal. Furthermore, to the extent that, through Issue 11, Ms. Graddy contends that the bankruptcy court's purported failure to comply with the relevant rules of procedure constituted a violation of due process, failure to comply with a rule "outlining procedure does not necessarily equate to a due process violation under the federal constitution." Harris v. Birmingham Bd. of Educ. , 817 F.2d 1525, 1528 (11th Cir. 1987). Finally, "[t]here is no constitutional right to obtain a discharge of one's debts in bankruptcy." United States v. Kras , 409 U.S. 434, 446, 93 S.Ct. 631, 34 L.Ed.2d 626 (1973).
1. Initial and Pretrial Disclosures
First, Ms. Graddy contends that ECMC failed "to make initial disclosures of the testimony and documents that support its claims or defenses and to compute each category of its damages." Rule 26(a)(1) requires initial disclosures unless "ordered by the court." Under the Bankruptcy Court Local Rules, failing to submit a Rule 26(f) report within 21 days after the appearance of the first defendant by answer or motion constitutes a waiver of initial disclosures. BLR 7016-1(a)(1), (4). ECMC answered the adversary complaint on January 5, 2016. (Adv. Doc. 4.) Plaintiff filed her portion of the Rule 26(f) report on March 24, 2016, 79 days later. (Adv. Doc. 13). Accordingly, Plaintiff waived initial disclosures.
The Bankruptcy Local Rules were amended effective September 2, 2019, but the version of Rule 7016-1 in effect at the time the adversary proceeding was filed was substantively identical. Public Notice Regarding Changes to the Local Rules for the United States Bankruptcy Court, Northern District of Georgia (Aug. 21, 2019), https://www.ganb.uscourts.gov/news/public-notice-regarding-changes-local-rules-united-states-bankruptcy-court-northern-district.
Next, Ms. Graddy contends that ECMC failed to comply with the pretrial disclosures requirement of Rule 26(a)(3) by failing to provide its witness and exhibit list 30 days before trial. Like many courts, the bankruptcy court has utilized the process of having the parties prepare a joint consolidated pretrial order in lieu of pretrial disclosures. BLR 7016-2; See also, e.g. , LR 16.4, NDGa ("The parties shall prepare and sign, in lieu of the Fed. R. Civ. P. 26(a)(3) disclosures, a proposed consolidated pretrial order to be filed with the clerk ...."). Under the applicable bankruptcy local rule, "[t]he parties must prepare and sign a proposed consolidated pretrial order to be filed with the Bankruptcy Clerk no later than thirty days after the close of discovery." BLR 7016-2(a). It does not appear that a joint consolidated pretrial order was prepared by the Parties, and it does not appear that Ms. Graddy filed her portion of the order. Crucially, "[i]t is the responsibility of plaintiff's counsel to contact defense counsel to arrange a date for the conference necessary to prepare the pretrial order." BLR 7016-2(a). While Ms. Graddy is a pro se litigant, she is also a licensed attorney. If she intends to insist on the strict application of the rules, it is incumbent on her to follow them.
When the parties failed to complete a consolidated pretrial order, the bankruptcy court, on November 9, 2016, entered an Order and Notice of Assignment of Trial that required the Parties to exchange witness and exhibit lists on February 15, 2017, a week before the February 22 trial date. There is no dispute that the vast majority of ECMC's exhibits were produced by this date. Rule 26 requires pretrial disclosures to be made 30 days before trial "[u]nless the court orders otherwise." Fed. R. Civ. P. 26(a)(3)(B). In light of the Parties' failure to submit a joint consolidated pretrial order, the Court "ordered otherwise." There was no abuse of discretion.
ECMC exhibits 26–29 were documents related to loans which were paid off by a consolidation loan. (Appeal Docs. 60-26 to 60-29.) Those documents were produced on February 21 and 23, 2017, the day before and the first day after the first date of trial respectively. (Aff. Skerbinc ¶ 11–12, Adv. Doc. 65.) ECMC's witness, by affidavit, explained that ECMC had only obtained those documents the week before. (Id. ) With respect to those documents, the bankruptcy court considered Ms. Graddy's arguments for exclusion and ultimately opted not to exclude the documents. Ms. Graddy's sole contention of prejudice was that she could not analyze the documents for authenticity or perform discovery related to their contents. However, after a day of taking evidence, the trial was continued until April 19, 2017. (Adv. Docs. 58, entry at Mar. 8, 2017.) Ms. Graddy had the opportunity to cross-examine Ms. Skerbinc at the continued hearing, well over a month after the documents were produced. (Adv. Doc. 6-64.) Any prejudice related to surprise was cured by the continuance. Accordingly, the bankruptcy court did not abuse its discretion in failing to exclude the documents.
2. Business Records
Next, Ms. Graddy contends that the bankruptcy court erred by admitting Exhibits 24 through 29, which she contends was "all evidence of the debt amount." Exhibits 24 and 25 are ECMC discovery responses with attachments from ECMC's loan file. Some portions of the documents appear to have been generated by ECMC. For example, Attachment A to Exhibit 24 is an ECMC transaction history covering June 29, 2012 to July 9, 2013. (Appeal Doc. 60-24 at 8.) Pages 53–62 of Exhibit 25 are an ECMC payment history. (Appeal Doc. 60-25 at 53–62.) Others appear to be correspondence sent by other servicers to ECMC. The remainder of the documents produced by ECMC in response to discovery requests do not appear to have been generated by ECMC. Exhibits 26 through 29 relate to loans which were consolidated. (Appeal Docs. 60-26 to 60-29.)
For example, Attachment D to Exhibit 25 is a Blanket Assignment of Guarantee Portfolio between the California Student Aid Commission and ECMC dated November 1, 2020. (Id. at 348.) Attachment E are FFEL Claim Forms for loans Graddy owes held by Sallie Mae which are marked received by ECMC on August 9, 2012. (Id. at 348-49.) Attachment F is a cover letter dated December 4, 2015 for a bankruptcy assignment packet from the New York State Higher Education Services Corporation to ECMC dated December 4, 2015. (Id. at 351-52.).
Ms. Graddy contends that Ms. Skerbinc was not a qualified witness to lay the foundation for the business records exception to the hearsay rule under Rule 803(6), because she could not testify as to the procedures used to create and maintain the third-party documents. (Br. Appellant at 22 (citing Curtis v. Perkins , 781 F.3d 1262, 1268 (11th Cir. 2015) ; see also United States v. Garnett , 122 F.3d 1016, 1018–19 (11th Cir. 1997) ). ECMC responds that a company can admit documents it received from a third party under the business records exception, so long as the records are reliable. (Br. Appellee at 25 (citing In re Int'l Mgmt. Assocs., LLC , 781 F.3d 1262, 1268 (11th Cir. 2015) ; U.S. v. Butler , 635 F. App'x 585, 589 (11th Cir. 2015) (admitting cell-phone records created by third-party company); U.S. v. Childs , 5 F.3d 1328, 1333 (9th Cir. 1993) ; Elliott v. Specialized Loan Servicing, LLC , 2019 WL 1198760, 7-9 (N.D. Ga. 2019) (noting that " ‘[t]he testifying witness does not need firsthand knowledge of the contents of the records, of their authors, or even of their preparation,’ " so long as they can testify "about the procedures used to create the alleged business record[s]." Elliott , No. 1:16-CV-4804-TWT-JKL, 2019 WL 1198760, at *7 n.4 (quoting In re Int'l Mgmt. Assocs., LLC , 781 F.3d at 1268 ))). As the Court noted above, the bankruptcy court "has broad discretion in ascertaining admissibility of business record evidence, which should not be disturbed on review in absence of abuse." Garnett , 122 F.3d at 1018 (citing Capital Marine Supply, Inc. v. M/V Roland Thomas, II , 719 F.2d 104, 106 (5th Cir. 1983) ). "The application of an abuse-of-discretion review recognizes the range of possible conclusions the trial judge may reach." United States v. Frazier , 387 F.3d 1244, 1259 (11th Cir. 2004). Under this standard, "[b]y definition ... there will be occasions in which" this court will affirm the bankruptcy court "even though [it] would have gone the other way .... That is how an abuse of discretion standard differs from a de novo standard of review." Id. (quoting Rasbury v. I.R.S. (In re Rasbury) , 24 F.3d 159, 168 (11th Cir. 1994) ).
Ms. Graddy argues that Ms. Skerbinc admitted that she had no knowledge of the third-party recordkeeping practices. However, the bankruptcy court heard testimony that ECMC receives documents from third parties in the ordinary course of its business and relies upon the documents. (Br. Appellee at 26–27 (citing Tr. I 118:19-119:25; 129:11-137:20)). The testimony may have been conclusory, but it was within bankruptcy court's discretion to credit this testimony over any limitations elicited by Ms. Graddy on cross examination when a ruling on the preliminary question of whether to admit the business records. Fed. R. 104(a). Ms. Graddy goes to great lengths to attempt to distinguish this case factually from the cases relied on by ECMC where third-party documents were admitted, but the fact that authority arguably supporting the bankruptcy court's decision is distinguishable does not render the bankruptcy court's decision an abuse of discretion.
(Br. Appellant at 22.) Ms. Graddy does not provide a citation to the transcript for this assertion.
Likewise, the bankruptcy court had broad discretion under Rule 104 to determine whether the source of the information or method or circumstances of preparation indicated a lack of trustworthiness sufficient to exclude the records. The fact that there were mistakes in the records received from the National Student Loan Data System (NSLDS), acknowledged and corrected by ECMC at trial, does not automatically render this conclusion an abuse of discretion. As ECMC noted in its surreply brief, the error was in the NSLDS system, generated by the United States Department of Education, not ECMC, and ECMC's own records did not reflect the error. (Surreply at 6.)
Moreover, even if Ms. Graddy could have shown abuse of discretion, it is also her burden on appeal to show prejudicial error. And in an appeal from a bench trial, as in this case, "the prejudicial impact of erroneously admitted evidence is ... presumed to be substantially less than it might have been in a trial before a jury." United States v. Nicholson , 492 F.2d 124, 124 (5th Cir. 1974). As the Court will hold below, ECMC did not have to prove the amount of the debt to meet its initial burden under 11 U.S.C. § 523(a)(8). Accordingly, any purported error on these grounds would be harmless.
B. The Bankruptcy Court was not required to ascertain the exact amount of the debt and did not err by finding that ECMC had met its burden of showing the debt was covered by Section 523(a)(8).
Issues 1 and 2 on appeal concern ECMC's initial burden of showing that it holds a debt covered by 11 U.S.C. § 523(a)(8). As noted above, that section excludes certain educational loans or benefit overpayments from the bankruptcy discharge absent a showing of undue hardship. In relevant part, the statute applies to:
an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution.
11 U.S.C. § 523(a)(8)(A)(i). The creditor has the initial burden to establish it is owed a debt and that that the debt falls within Section 523(a)(8). 4 Collier on Bankruptcy ¶ 523.14 (16th ed. 2019). However, ECMC is correct that its burden does not include establishing the amount of the debt as of the date of trial. While a bankruptcy judge can enter a judgment determining the amount of a nondischargeable debt, it does not have to. A bankruptcy court "may exercise its discretion to limit the adjudication to a determination of nondischargeability and leave the liquidation of the liability and the entry of a money judgment to another court." 4 Collier on Bankruptcy ¶ 523.32. The bankruptcy court did so here: the judgment in this case is not for a sum certain, but merely states that "judgment is entered in favor of Defendant." (Adv. Doc. 80.) Consequently, if ECMC were to seek to enforce the judgment against Ms. Graddy judicially (rather than administratively), it could not merely introduce evidence of the judgment and rest its case, it would have to produce evidence of the amount of the debt anew.
ECMC met its burden of showing that the Student Loans were covered by Section 523(a)(8). Ms. Skerbinc testified that the loans held by ECMC were "made under a program funded in whole or part by a governmental unit or non-profit," the Federal Family Education Loan Program (FFEL). (Tr. I at 121:8–24.) She testified that the loans had all been assigned to ECMC prior to the trial date as a result of claims being made on the loan guarantees. (Tr. I at 144:25 (citing Ex. 25-F), 147:21–16 (citing Ex. 25-D), 149:7–11 (citing Ex. 25-G).). To the extent that Ms. Graddy contends that the amount of the debt was relevant to her undue hardship claim, that was her burden to meet. Accordingly, the bankruptcy court did not commit clear error by determining that the Student Loans were an educational benefit insured or guaranteed by a governmental unit, and accordingly did not err by finding ECMC had met its burden going forward.
C. The Bankruptcy Court did not err by determining that Appellant failed to meet the Brunner standard.
The Court turns next to the merits of Ms. Graddy's undue hardship claim. The debtor bears the burden of proving all three Brunner prongs at trial, and the bankruptcy court held that Ms. Graddy did not meet her burden as to any of them. See Mosley , 494 F.3d at 1324. The Court may therefore affirm the bankruptcy court's judgment if the record shows Ms. Graddy failed to prove any of the three prongs, as the Court "may affirm ... ‘on any ground that finds support in the record.’ " Lucas v. W.W. Grainger, Inc. , 257 F.3d 1249, 1256 (11th Cir. 2001) (quoting Jaffke v. Dunham , 352 U.S. 280, 281, 77 S.Ct. 307, 1 L.Ed.2d 314 (1957) ).
As such, in order to show reversable error, Ms. Graddy must show that the bankruptcy court erred in its determination as to all three of these prongs. "A bankruptcy court's findings as to each of the three prongs of the Brunner test are factual findings that should be reviewed by the district court for clear error...." Acosta-Conniff , 686 F. App'x at 649 (citing Mosley , 494 F.3d at 1326–27 ). For the reasons that follow, the Court finds that Ms. Graddy has not met her burden of showing clear error as to each of the prongs, and therefore the Court will affirm the judgment of the bankruptcy court.
1. The Bankruptcy Court likely erred in calculating the "minimum standard" prong.
The first Brunner prong "requires a debtor to show that repayment of the student loan would not allow her to maintain a minimal standard of living." In re Gordon , No. 07-9049-MGD, 2008 WL 5159783, at *6 (Bankr. N.D. Ga. Oct. 10, 2008). Issues on appeal numbers 5–7 deal with the bankruptcy court's determination of this prong.
The first step in determining the minimal standard prong is to determine the debtor's monthly income. Next, the Court reviews the debtor's actual monthly expenses and determines which are "reasonable and necessary." "[T]he Court must apply its common sense knowledge gained from ordinary observations in daily life and general experience to determine whether Debtor's expenses are reasonable and necessary. Id. (quoting Douglas v. Educ. Credit Mgmt. Corp. (In re Douglas) , 366 B.R. 241, 253–54 (Bankr. M.D. Ga. 2007) ). "In America, ‘shelter, basic utilities, food and personal hygiene products, vehicles, and the costs associated with a vehicle, health insurance, and some source of recreation’ are deemed necessary for a minimal standard of living." Hill v. ECMC (In re Hill) , 598 B.R. 907, 916 (Bankr. N.D. Ga. 2019) ( Gordon , 2008 WL 5159783, at *6 ).
From there, it is essentially a math problem: subtract the reasonable and necessary expenses from the debtor's monthly income to determine monthly surplus income. If the debtor's surplus income is less than the monthly student loan payment necessary to repay the loans sought to be discharged, the debtor has met her burden under the first prong. See, e.g. , Hill , 598 B.R. at 916 ("Debtor's ‘surplus’ is insufficient to cover the more than $ 1,400 per month due on her student loans at the time she filed her Complaint ....").
Ms. Graddy first disputes the bankruptcy court's calculation of her income and expenses, and contends that her testimony supported expenses which the bankruptcy court left out. But the bankruptcy court was not tasked with ascertaining her actual expenses, but those necessary for maintaining a " ‘minimal’ standard of living for herself and her dependents if forced to repay the loans." Acosta-Conniff , 686 F. App'x at 648. The Court will overturn a factual finding only when "although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Holton , 425 F.3d at 1350–51.
The Court begins by noting that the record on this factor is muckier than the Court would prefer, though Ms. Graddy bears some responsibility for the muckiness. The bankruptcy court surveyed Ms. Graddy's "[b]ank statements from 2015 and 2016" to determine "an average monthly household income of $8,669.92." (Op. at 340-41.) But without making any findings as to which particular expenses are reasonable and which are not, the bankruptcy court seems to magically arrive at a finding that her "disposable income is about $4,000 per month." (Id. at 343.) The bankruptcy court purportedly considered her "changes to her Schedule J expenses, certain increases since 2009 and her stepson coming to live with her" to arrive at this finding. However, the bankruptcy court noted that "Plaintiff's testimony about her expenses was unclear." (Id. ) While the bankruptcy court appears to have found that Ms. Graddy's expenses were higher than the roughly $3,000 that ECMC advocated for below, the lack of analysis on this point is troubling.
Earlier in the opinion, the bankruptcy court notes that while Ms. Graddy's "utility bills have increased marginally since 2009, she no longer pays for a car note, child care providers, child support, alimony, or out-of-pocket healthcare costs as scheduled" and that her "stepson has moved into her household since she filed bankruptcy" and she "anticipates higher maintenance and repair costs for her vehicles." (Op. at 340-41)
Ms. Graddy next contends that the bankruptcy court did not properly calculate the monthly payment on her student loans, instead using a hypothetical income-based repayment amount. The bankruptcy court's decision to use the income-based repayment monthly payment amount, rather than the amount necessary to repay the loan, was also likely not correct. This is because "[t]he test under Brunner is not whether Debtor would be able to maintain a minimal standard of living if she made payments under REPAYE or another income-based repayment program," but rather "whether Debtor can maintain a minimal standard of living if she is forced to repay the actual outstanding student debt." Hill v. ECMC (In re Hill ), 598 B.R. 907, 918 (Bankr. N.D. Ga. 2019) (citing Brooks v. ECMC (In re Brooks) , 406 B.R. 382, 393 (Bankr. D. Minn. 2009) )
Ms. Graddy contends that "repaying under the terms of the promissory notes meant monthly payments of $4,040.50 through January 2027, then $2,000 until December 2031, and then $1,000 through January 2033." (Br. Appellant at 7.) In support of her contention that her initial payment would be $4,040.50, Ms. Graddy cites to the trial transcript for her own testimony and that of ECMC's witness. (Id. , citing Tr. I at 16:25–17:6, Adv. Doc. 68, Tr. II at 26:14, Adv. Doc. 70.) Likewise, in her Trial Brief to the bankruptcy court, (Adv. Doc. 72), Ms. Graddy also cited to her own testimony. (Adv. Doc. 72, citing Tr. I at 17:1–8.) The Court excerpts the portions cited below:
25 THE WITNESS: And my understanding is I would be
1 making a payment of $4,040.50 through January 2027. And
2 then from January 2027 until December of 2031, I would be
3 making a payment of almost $2,000, having paid off some of
4 the loans at that point of what they say the loans are. And
5 then from December of 2031 until January of 2033 I would
6 then have a payment of almost $1,000. So we're looking at
7 the next ten years of having a payment of $4,000 and then it
8 dropping by about half.
(Tr. I at 16:25-17:8 (testimony of Ms. Graddy))
12 Q. At this point, correct. And what is the repayment
13 period for the loan reflected in Exhibit 3?
14 A. Standard repayment is ten years.
15 Q. What is the repayment period for the loan
16 reflected in Exhibit 2?
17 A. On consolidation loans, repayment can be up to 25
18 years.
(Tr. II at 26:12-18 (testimony of Ms. Skerbinc).) Ms. Graddy does not state where she got these numbers from, or how she calculated these amounts. If she is relying on documentary evidence, she does not indicate what this evidence is or that it was admitted. The bankruptcy court, as the trier of fact, was not required to take Ms. Graddy's conclusory assertions about the loan payments as a given.
In light of the foregoing, the Court will at least consider the real possibility that the bankruptcy court committed clear error as to the first factor for present purposes. However, as noted above, the Court must affirm the bankruptcy court's judgment if the record shows Ms. Graddy failed to prove any of the three Brunner prongs, and for the reasons that follow, the Court finds that the bankruptcy court correctly held that Ms. Graddy failed to meet her burden as to the remaining prongs. See Lucas , 257 F.3d at 1256.
2. The bankruptcy court did not err in determining an absence of "additional circumstances."
The bankruptcy court also held that Ms. Graddy failed to meet the second prong of the Brunner test. "[T]he second prong is a forward-looking test that focuses on whether a debtor has shown her inability to repay the loan during a significant portion of the repayment period. It does not look backward to assess blame for the student debtor's financial circumstances." Acosta-Conniff , 686 F. App'x at 650. The first two prongs are linked: together, they "identify[ ] those debtors whose earning potential and circumstances make it unlikely that they will produce the means necessary to repay the student loans while maintaining a minimal standard of living. This situation, in essence, is what constitutes an ‘undue hardship’—not the mere inability to pay, but an inability to pay that is likely to continue for a significant time." Cox , 338 F.3d at 1242.
The bankruptcy court held that Ms. Graddy failed to present "any credible evidence to prove that she would be unable to make payments for a substantial portion of the repayment period." (Op. at 343-44.) The Court found that Ms. Graddy had no physical or mental infirmities which prevented her from continuing to work, and had no trauma or long-lasting injury. (Id. )
Ms. Graddy's argument to the contrary is that her testimony showed the "unextraordinary facts that she expected her family's income to remain level while her and her dependent's expenses rose." While the Court does not seek to puzzle out what is meant by ‘certainty of hopelessness by a preponderance of the evidence,’ it is at least clear that "undue" hardship must mean something beyond "unextraordinary" hardship. Cf. ECMC v. Nys (In re Nys) , 446 F.3d 938, 944 (9th Cir. 2006) ("What separates a ‘garden-variety debtor’ from a debtor who can show ‘undue hardship’ is the realistic possibility that a ‘garden-variety debtor’ could improve her financial situation in the future."). While the Court does not hold that a debtor must be elderly or have a medical infirmity, severe mental illness, or other serious condition to obtain a student loan discharge under current law, Ms. Graddy is a licensed attorney with many years of productivity ahead of her. Accordingly, the Court does not find that the bankruptcy court clearly erred in determining this prong was not met.
3. The bankruptcy court did not err in finding a lack of "good faith."
The three Brunner prongs essentially serve as a temporal review of the debtor's circumstances: the first prong examines at the present, the second, the likely future, and the third, the past. More specifically, the last prong of the Brunner test looks at the Debtor's historical good faith attempts to repay the student loans. "Good faith is measured by the debtor's efforts to obtain employment, maximize income, and minimize expenses," but the "debtor's failure to make a payment, standing alone, does not establish a lack of good faith." Mosley , 494 F.3d at 1327 (quoting ECMC v. Polleys (In re Polleys) , 356 F.3d 1302, 1311 (10th Cir. 2004) ).
Cf. Charles Dickens, A Christmas Carol (1843). The Dickensian allusion is in in some ways quite apt, considering the miserly approach many courts take to giving out student loan discharges.
The origin of the good faith requirement was likely the fact Marie Brunner, the namesake of the Brunner test, "filed for discharge within a month of the date the first payment of her loans came due." In re Brunner , 46 B.R. 752, 758 (S.D.N.Y. 1985), aff'd sub nom. Brunner v. New York State Higher Educ. Servs. Corp. , 831 F.2d 395 (2d Cir. 1987). Courts have taken the good faith inquiry as an invitation to play Monday morning quarterback with debtors' lives, denying discharges for all manner of subjective and unfair reasons. See, e.g. , Hedlund v. TERI , 468 B.R. 901, 914 (D. Or. 2012) (finding no good faith where debtor could have "increase[ed] his [non-borrower] wife's work to more than six hours per week"), rev'd , 718 F.3d 848 (9th Cir. 2013) ; In re Stupka , 302 B.R. 236, 245 (Bankr. N.D. Ohio 2003) (finding no good faith where a debtor could have intentionally defaulted on timeshare maintenance payments to pay student loans); In re Mallinckrodt , 274 B.R. 560, 568 (S.D. Fla. 2002) (reversing good faith finding where debtor "has unnecessarily limited his job search to Miami Beach" and failed to provide evidence that he "made efforts to generate income outside of his chosen professions"); In re Salinas , 262 B.R. 457, 460 (W.D. Wis. 1999) (reversing good faith finding where debtor "failed to seek maintenance from his wife in the divorce proceedings although he had been the primary care giver of their child from 1992 to 1998").
Indeed, academics have noted that "given the absence of factual circumstances to account for a debtor's good faith, and given the strong association between a court's dispositions on other core considerations regarding the debtor's conduct, courts that are predisposed to view the debtor's claim for undue hardship from a forgiving stance ruled favorably for the debtor on those considerations and vice-versa." Rafael I. Pardo & Michelle R. Lacey, Undue Hardship in the Bankruptcy Courts: An Empirical Assessment of the Discharge of Educational Debt , 74 U. Cin. L. Rev. 405, 509 (2005).
Issues 8 and 9 on appeal both deal with the good faith prong. The bankruptcy court found that Ms. Graddy failed to show good faith, in part because she had "not taken advantage of any loan repayment options" such as the income-based Pay As You Earn program. (Op. at 344-45.) While "in the Eleventh Circuit, failure to participate in an income contingent repayment program is not per se bad faith," Hill , 598 B.R. at 921, it is a relevant consideration. Mosley , 494 F.3d at 1327.
Issue on Appeal No. 9 asks this Court to consider evidence of the creditor's lack of good faith. This argument finds no basis in the Brunner standard, which this Court is bound to apply. Ms. Graddy's arguments here are better addressed to the Court of Appeals.
Ms. Graddy declined to participate in the income-based repayment program in large part due to "the potential tax debt resulting from loan forgiveness" which the bankruptcy court characterized as "unpersuasive and speculative." (Op. at 345.) Ms. Graddy, however, correctly notes that the Eleventh Circuit has recognized that income-based repayment options are "not always a viable option for debtors ..., as it may require them effectively to ‘trad[e] one nondischargeable debt for another’ because any debt that is discharged under the program is treated as taxable income." Mosley , 494 F.3d at 1327 (quoting In re Barrett , 487 F.3d 353, 364 (6th Cir. 2007) ). The Court can certainly see why enrolling in a program that requires annual recertification for 20 years or more and results in the borrower's student loan balance increasing every month would not be an appealing option for many borrowers. Cf. Hill , 598 B.R. at 918. However, the Court does not agree with Ms. Graddy that the bankruptcy court adopted a per se rule requiring enrollment in income-based repayment.
The bankruptcy court also considered the fact that Ms. Graddy only paid approximately $9,200 on her loans during a six-year period where she "was earning $100,000 to $155,000 annually as an attorney in Florida." (Op. at 345.) At a minimum, "[g]ood faith effort ... requires the debtor to have made payments when she was in a position to make such payments." Hill , 598 B.R. at 921 (citing Thompson v. N.M. Student Loan Guarantee Corp. (In re Thompson) , 329 B.R. 145, 184 (Bankr. E.D. Va. 2005) ). Ms. Graddy argues that the bankruptcy court fixated on this period of time to the exclusion of other periods of time where her finances were less stable. Ms. Graddy is certainly correct that narrowly fixating on one period of a debtor's relative affluence runs the risk of making that debtor's student loans permanently nondischargeable regardless of how dire future circumstances become. However, the Court does not read the good faith inquiry as imposing a permanent bar on discharge for now-impoverished or financially challenged borrowers who were previously affluent but failed to make substantial payments on their loans. The bankruptcy code expressly considers that a student loan debtor who was not eligible for a discharge of her student loans in a prior bankruptcy case may apply again in a future case. 11 U.S.C. § 523(b) ("[A] debt that was excepted from discharge under subsection ... (a)(8) of this section ... in a prior case concerning the debtor under this title ... is dischargeable [unless again excepted from discharge.]"). On the other hand, the Court does not mean to imply that such debtors necessarily have to file bankruptcy twice to get a clean slate, as this contravenes the fresh start principal — a bankruptcy court should not withhold a discharge solely because a debtor can try again. Particularly in these difficult times, the Court can conceive of a debtor who could show that her circumstances changed so severely and abruptly that a historical failure to make payments while able would not bar a finding of good faith.
Ms. Graddy contends for the first time in her Reply Brief that the bankruptcy court's findings about her career history were not supported by the record, but a cursory review of the transcript shows these findings were drawn from Ms. Graddy's own testimony. (Tr. I at 24–27, 76–77.)
All that said, it was certainly permissible for the bankruptcy court to consider Ms. Graddy's payments during the period as one factor in the analysis. Indeed, Ms. Graddy does not contend that the bankruptcy court considered a fact it should not have considered, but takes issue with how the bankruptcy court weighed the facts in the record. Re-weighing evidence is not the Court's role on a clear error review. As the bankruptcy court considered other permissible factors besides her failure to participate in an income-based repayment program, the bankruptcy court did not clearly err by determining Ms. Graddy had failed to meet her burden of showing good faith. V. CONCLUSION
In her opening brief, Ms. Graddy frames the bankruptcy court's determination as "a rule that a debtor's acceptance of a pre-trial settlement offer is the sine qua non of good faith." The "settlement offer" she references appears to be a letter dated August 16, 2016 from ECMC's counsel to Ms. Graddy outlining various repayment options which was introduced into evidence as Def.'s Ex. 21. (Appeal Do c. 60 -21.) Whether this letter is an inadmissible settlement offer under Federal Rule of Evidence 408 is an interesting question, but Ms. Graddy appears to have waived the issue by failing to object to the letter's admission. (Tr. II at 81:9–11.).
It is regrettable that Congress shed so inadequate a spotlight on the exculpating phrase ‘undue hardship’. What can be gleaned is that the hardship is to be found in the exceptional case and must be based on something more than present inability to pay. It is also regrettable that so much is therefore left to the individual view of each judge who, after all, brings the sum of who and what he was, what he has become, and what he sees through his own eyes to this basically disagreeable task.
Pardo & Lacey, supra (quoting In re White , 6 B.R. 26, 29 (Bankr. S.D.N.Y. 1980) ). This Court does not envy the task of a bankruptcy court faced with an undue hardship determination. However, the Court, sitting as an appellate court, is constrained under the deferential legal standards applicable to reviewing findings of fact and admissibility of evidence. Indeed, as the foregoing has shown, it is these deferential legal standards which proved the undoing of Ms. Graddy's appeal. The Court does not doubt that Ms. Graddy has faced adversity in her life, and as her impressive appellate presentation has shown, she has persisted in the face of it. However, for all of the above reasons, the Court cannot grant her the relief she seeks.
The Motion for Leave to file Surreply [Doc. 54] is GRANTED . The Judgment of the Bankruptcy Court is AFFIRMED . The Clerk is directed to close the case.
IT IS SO ORDERED this 4th day of June, 2020.