Opinion
No. C-02-3213 PJH
February 13, 2003
ORDER RE: BANKRUPTCY APPEAL
Creditors Educational Credit Management Corporation ("ECMC") and The Education Resources Institute ("TERI") appeal the bankruptcy court's judgment discharging debtor Stephen Marks' student loans held by ECMC and TERI (collectively "creditors") pursuant to Bankruptcy Code § 523(a)(8). For the reasons that follow, this court AFFIRMS the bankruptcy court's determination that payment of the student loans due at the time of trial would pose an undue hardship on Marks and his family. The court, however, REVERSES the complete discharge granted by the bankruptcy court, and concludes that a partial discharge, as opposed to a complete discharge, is appropriate and REMANDS to the bankruptcy court to determine the extent of the partial discharge.
BACKGROUND
Marks, who is fifty-three years-old and married with a baby, incurred significant student loan debt, around $240,000, in obtaining his bachelor's degree in industrial organizational psychology from San Francisco State in 1991, and his master's degree and Ph.D. in organizational psychology in 1994 and 1998, respectively, from the California School of Professional Psychology. Despite much searching, Marks, however, was unable to find a job in his field. He is currently employed as a counselor at the Marin Abused Women Services, and conducts training regarding domestic violence. His wife is an elementary school teacher in Mill Valley.
Faced with mounting student loan, credit card, and other debt, Marks filed his chapter 7 bankruptcy petition on February 15, 2000. Subsequently, on August 21, 2001, Marks filed the instant adversary proceeding giving rise to this appeal to discharge his student loans owed creditors pursuant to Bankruptcy Code § 523(a)(8). At the time of those proceedings, Marks owed ECMC approximately $205,000 on twenty unconsolidated student loans, and approximately $35,000 to TERI on four unconsolidated student loans. Following a February 25, 2002 trial, the bankruptcy court, in a March 15, 2002 memorandum decision, held that the student loans posed an undue hardship to Marks and his family, and ordered them discharged. This appeal followed.
At the time of the adversary proceedings below, Marks owed on essentially four "bundles" of student loans, only two of which were at issue in the proceedings below. E.R.K. The first "bundle" included twenty unconsolidated loans owed to ECMC, in the amount of approximately $205,000. The second "bundle" included three unconsolidated loans owed to TERI, in the amount of approximately $35,000. E.R.F. at Exh. B. The final two bundles which are owed to Sallie Mae and University Accounting Service, Marks' alma mater, were not at issue in the adversary proceeding.
Subsequently, on June 14, 2002, following additional objections and responses by the parties, the bankruptcy court amended its March 15, 2002 decision to include the TERI loans, which it had inadvertently omitted from its initial decision.
DISCUSSION
This court reviews the bankruptcy court's findings of fact under a clearly erroneous standard. See In re Birrane, 287 B.R. 490, 494 (9th Cir. BAP 2002). Review under the clearly erroneous standard is significantly deferential, and requires a "definite and firm conviction that a mistake has been committed." Security Farms v. International Bhd. Of Teamsters, 124 F.3d 999, 1014 (9th Cir. 1997). If the bankruptcy court's "account of the evidence is plausible in light of the record viewed in its entirety," this court "may not reverse it even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently." Phoenix Eng'g Supply Inc. v. Universal Elec. Co., 104 F.3d 1137, 1141 (9th Cir. 1997). This court, however, "reviews the bankruptcy court's application of the legal standard in determining whether a student loan debt is dischargeable as an undue burden de novo." Id.
Section 523(a) of the Bankruptcy Code specifically excepts various categories of debts from the discharge granted pursuant to chapter 7 and other bankruptcy chapters. Section 523(a)(8), which governs the dischargeability of student loans provides in pertinent part:
A discharge under section 727 . . . does not discharge an individual debtor from any debt — for 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, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents.
There is no definition of undue hardship in the Bankruptcy Code. To determine if excepting student loans from discharge will create an undue hardship on a debtor, the Ninth Circuit has adopted the three-part test set forth in In re Brunner, 46 B.R. 752, 756 (S.D.N.Y. 1985) aff'd 831 F.2d 395 (2nd Cir. 1987). See In re Pena, 155 F.3d 1108, 1112 (9th Cir. 1998); accord In re Birrane, 287 B.R. at 494. To obtain a discharge of a student loan obligation, the debtor bears the burden of proving by a preponderance of evidence, the following three factors:
1) That the debtor cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and his 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.Id.
Here, creditors challenge the bankruptcy court's undue hardship determination under each of the prongs set forth above. Additionally, creditors challenge the bankruptcy court's "all or nothing" approach in granting a complete discharge, and contend that to the extent any discharge is granted, it should be a partial discharge.
I. The Bankruptcy Court did not Err in Concluding that Marks and His Family Would Suffer an Undue Hardship
A. Minimal Standard of Living
The first prong of the Brunner test, as adopted by the Ninth Circuit in Pena, looks at the debtor's current income and expenses to see if payment of the loan would cause his standard of living to fall below that minimally necessary. Birrane, 287 B.R. at 496.
To meet this requirement, the debtor must demonstrate more than simply tight finances. In defining undue hardship, courts require more than temporary financial adversity, but typically stop short of utter hopelessness. The proper inquiry is whether it would be "unconscionable" to require the debtor to take steps to earn more income or reduce her expenses.In re Nascimento, 241 B.R. 440, 445 (9th Cir. BAP 1999).
With respect to the first prong, the bankruptcy court concluded that "there is no way Marks and his family can maintain a minimal standard of living if forced to repay the loans."
Creditors challenge both the bankruptcy court's factfinding with respect to this prong and, notwithstanding what they claim was erroneous factfinding, the bankruptcy court's ultimate conclusion. Creditors argue that even if the bankruptcy court's factual findings are accepted, that Marks has a monthly budget surplus of at least $329/month with which he could pay the ECMC and TERI loans. Creditors, however, take issue with the bankruptcy court's findings regarding the Marks family's income and expenses. Marks concedes that there is a monthly budget surplus, but notes that it is nowhere near the requisite monthly loan payments to ECMC and TERI.
At the time of trial, Marks' combined monthly payment due creditors on their student loans was approximately $2,210. Without making any specific findings regarding Marks' monthly expenses, the bankruptcy court found that the Marks' household budget was modest, with no unreasonable expenses. It also found that Marks and his wife had a net monthly income of approximately $5,500. Creditors challenge both the expense and income findings.
"The method for calculating a debtor's average monthly expenses is a matter properly left to the bankruptcy court." Birrane (quoting Pena, 155 F.3d at 1112) (panel could not find that the bankruptcy court's factual finding that debtor's income and expenses were approximately equal was clearly erroneous). Here, the bankruptcy court's lack of specific findings on the disputed issues complicates this court's review since there were significant discrepancies in the evidence.
Among the evidence regarding the Marks family's income, was Marks' testimony at trial, the bankruptcy schedules, and Marks' 2001 tax information. The bankruptcy court found that the Marks' income was around $5,500 despite Marks' testimony and bankruptcy schedules that indicated that the family's 2002 net monthly income was probably closer to $5700. However, there was evidence that the Marks' family income had fluctuated, and recent 2001 tax forms demonstrated that the Marks' net monthly income was around $5200. Therefore, the bankruptcy court, which had conflicting evidence before it, appears to have accounted for the variations in the Marks' income.
This court cannot say that such a process or finding is clearly erroneous. As the Ninth Circuit noted in Pena:
Although the Brunner test looks to the debtor's current income and expenses, where the evidence suggests that the debtor's income or expenses tend to fluctuate, it is not inappropriate to average figures over a reasonable period of time. To require strict reliance upon conditions existing at the moment of trial could result in an accurate snapshot but a distorted picture. We do not believe Congress intended to impose upon the debtor or the bankruptcy court such a narrow focus.Pena at 1112.
As for the expenses, creditors take issue with the bankruptcy court's failure to make specific findings, and essentially suggest that this court should step into the role of trier of fact and make those findings for the bankruptcy court. While the lack of specific findings op the disputed issues is troublesome, creditors' suggestion ignores this court's role on appeal and is not supported by Ninth Circuit precedent. See In re Birrane, 287 B.R. at 496 (where bankruptcy court did not make specific findings regarding disputed expense items, BAP concluded nevertheless that "bankruptcy court heard and considered [the] evidence when making its finding regarding the first prong of the Brunner test").
The § 1983 case cited by creditors in support of specific findings by this court is inapposite and misleading. In that case, Maynard v. City of San Jose, the district court did not make any factual findings regarding an issue on appeal: whether the statute of limitations had passed on plaintiffs claim pursuant to the California Tort Claims Act. 37 F.3d 1396, 1406 (9th Cir. 1994). Here, the bankruptcy court made findings regarding the first prong of the Brunner test, just not the specific findings favorable to creditors.
Specifically, creditors take issue with certain expenses that they claim must be omitted from the Marks' monthly expenses based on testimony at trial or because the expenses are not necessary for a minimal standard of living. Creditors claim that in determining the Marks' monthly surplus or disposable income available for their loan payments, certain expenses listed on Marks' bankruptcy schedules should be reduced or omitted. Among those which creditors claim should be omitted are student loan payments owed creditors ECMC and TERI, federal income tax payments, band expenses, other student loan payments, Marks' charitable contributions to Alcoholics Anonymous, his medical expenses related to his psychotherapy, the $25 monthly payment to his child's college fund, and cable. Creditors further claim that the listed child care expenses should be reduced.
This court agrees with creditors that ECMC and TERI student loan payments should be omitted from the monthly expenses in calculating the monthly surplus available to repay ECMC and TERI loans. As for the other disputed expenses, and despite the lack of specific findings, this court cannot say that the bankruptcy court's determination that "there is no way Marks and his family can maintain a minimal standard of living if forced to repay the loans" is clearly erroneous. "[W]hether to decline a discharge due to expenses which may be beyond the minimal standard of living is discretionary with the court." Birrane, 28 R.R. at 496. "A bankruptcy court's refusal to decline a discharge because of [expenses which may be beyond the minimal standard of living], may not be necessarily "clearly erroneous." Id. (rejecting creditor's argument that bankruptcy court's finding regarding minimal standard of living was erroneous because debtor's budget included extraneous expenses related to debtor's dance company, charitable contributions to Amnesty International, dining out expenses, and book club purchases and gifts); see also In re Rifino, 245 F.3d 1083, 1088 (9th Cir. 2001) (rejecting same argument where debtor's budget included tanning, cable television, and new car payments, which creditor contended were unnecessary). While there may be a "close question," regarding the necessity and amount of certain expenses, that does not make the bankruptcy court's refusal to decline a discharge in light of those expenses clearly erroneous where there are "two permissible views of the evidence." In re Rifino, 245 F.3d at 1088 (quoting Anderson v. City of Bessemer, 470 U.S. 574 (1985)).
Marks concedes that there is a surplus. See Reply at 3. However, that there was a monthly surplus does not make the bankruptcy court's hardship determination erroneous. Marks' monthly loan payments due creditors was $2210, which indisputably could not be satisfied by any monthly surplus. Moreover, the parties agree that even if Marks had utilized an income-contingent loan consolidation program, his monthly payments to ECM (only would have remained around $1300 or $1400, with an additional $380 or more to TERI whose loans were not eligible for such a repayment plan. Therefore, even if Marks had consolidated his loans under such plan, the undue hardship would not have been significantly ameliorated.
B. Second Brunner Prong
The additional circumstances prong of the Brunner test is intended to effect the clear congressional intent exhibited in § 523(a)(8) to make the discharge of student loans more difficult than that of other nonexcepted debt." Birrane, 287 B.R. at 497 (quoting Rifino, 245 F.3d at 1088-89). There must be evidence that the debtor's road to recovery is obstructed by the type of barrier that would lead [the court] to believe he will lack the ability to repay for several years." Id. Examples of such barriers can include lack of usable job skills, limited education, and psychiatric problems, including a spouse's ongoing mental disability. Id.; see also Pena, 155 F.3d at 1114.
Here, the bankruptcy court made a number of findings with respect to the second prong, which sustain its conclusion that "given [Marks'] age and psychological difficulties, the fact that he is now doing far better than he has ever done, and the fact that his young child will be a dependent until well after Marks has reached normal retirement age, this condition will almost certainly persist for the rest of the repayment period." The bankruptcy court found that Marks had "a long history of mental illness," and suffered from bouts of alcoholism and drug abuse. The court further noted that although Marks' eleven years of psychotherapy, with which creditors take issue, had enabled him to overcome some of his problems, to have a family, and obtain an education, there was nevertheless evidence of "lingering psychological difficulties." Moreover, the court found that Marks' wife suffers from clinical depression.
Creditors do not contest any of the bankruptcy court's findings with respect to this prong; rather, they again argue that there were insufficient specific findings of fact
Although the bankruptcy court does not fully explain the nexus between Marks' psychological problems and his inability to pay, the totality of its findings, which are not clearly erroneous, is nevertheless sufficient to satisfy the second prong of the undue hardship test.
C. Good Faith
"Courts have measured good faith by examining various factors; the fact debtor has made no payments or has made some payments on the loan is not in and of itself dispositive." Birrane, 287 B.R. at 499. "Good faith is measured by the debtor's efforts to obtain employment, maximize income, and minimize expenses." Id. "Good faith is also measured by a debtor's effort — or lack thereof — to negotiate a repayment plan." Id.
Creditors argue that the scarcity of pre-petition payments to ECMI and TERI, the fact that Marks filed for bankruptcy protection less than two years after obtaining his Ph.D., and Marks' failure to apply for an income-contingent payment plan, or a Ford direct loan, prevent a good faith determination.
The bankruptcy court concluded otherwise, noting that:
The evidence in this matter established that Marks has acted in good faith. He made a diligent effort for more than three years to find work in his field. He made some payments on the student loans at issue here, and continues to pay on other student loans he can afford. The repayment options made available to him were not reasonable and his failure to accept them is not evidence of bad faith.
Moreover, the court found that "[t]he draconian plan put forth by defendant as reasonable made no allowance for the individual needs of Marks and his family. . . . [It] would reduce him to penury for the rest of his life."
Based on this court's review of the record, the bankruptcy court's findings regarding Marks' good faith effort to repay creditors' student loans are not clearly erroneous. There is evidence in the record that Marks made combined payments of nearly $9000 to ECMC and TERI. Creditors' attempt to distinguish the payments as pre-petition versus post-petition does not change this court's conclusion. That the majority of the payments were made post-petition does not diminish Marks' good faith. A debtor's obligation to make good faith efforts to repay his student loans continues following the initiation of an adversary proceeding to determine dischargeability. See In re Wallace, 259 B.R. 170 (C.D. Cal. 2000).
Here, despite a fairly extensive job search, following his graduation in 1998, Marks was unemployed during 1998 and 1999 and unable to make payments on creditors' loans. Once Marks obtained employment, he continued to pay on the loans until he filed his chapter 7 bankruptcy case, then subsequently following his chapter 7 discharge and throughout the course of the adversary proceeding.
Furthermore, this case is different than Birrane, in which the 9th Cir. BAP determined that the debtor lacked good faith where she failed to take any steps toward renegotiating an alternative repayment plan. See 287 B.R. at 500. Here, Marks investigated to some degree the alternative plans and made the decision that the approximately $1700/month due under those plans was not a viable option.
In conclusion, this court cannot conclude that the bankruptcy court's findings were clearly erroneous, and affirms the court's determination that Marks acted in good faith and its ultimate determination that Marks demonstrated sufficient undue hardship.
II. The Bankruptcy Court Should Have Considered a Partial Discharge
The issue then arises whether the bankruptcy court, in applying the undue hardship test, must discharge all or none of the student loan debt, or may discharge only a portion of it. Here, the bankruptcy court took an all or nothing approach, and discharged all twenty-three of the unconsolidated ECMC and TERI student loans. The application of a partial discharge is a question of law that this court reviews de novo. See In re Saxman, 263 B.R. 342, 345 (W.D. Wash. 2001).
The ability of the bankruptcy court to enter a partial discharge pursuant to § 523(a)(8) has been somewhat controversial in this and other circuits. In 1998, in In re Taylor, the 9th Cir. BAP rejected the concept of a partial discharge under § 523(a)(8). See 223 B.R. 747 (9th Cir. BAP 1998). However, the Ninth Circuit, in In re Myrvang, subsequently appears to have resolved the issue, approving the availability of a partial discharge under § 523(a)(15), and implying that it is available under § 523(a)(8) as well. 232 F.3d 1116, 1123-25 (9th Cir. 2000) (agreeing with a Sixth Circuit case, which allowed a partial discharge of student loan debt, and holding that bankruptcy court could order a partial discharge of debt arising from divorce pursuant to § 523(a)(15)).
Given the Ninth Circuit's decision in Myrvang and the fact that Marks admittedly has a monthly net surplus, this court concludes that the bankruptcy court erred by not considering a partial discharge. See, e.g., In re Saxman, 263 B.R. at 345. Because there have been no specific findings regarding Marks' expenses, this court hereby REMANDS to the bankruptcy court to determine the exact amount of the partial discharge.
CONCLUSION
The bankruptcy court's determination that repayment of Marks' student loans would constitute an undue hardship for him and his family pursuant to § 523(a)(8) is AFFIRMED. However, in light of Myrvang and Marks' monthly surplus, the complete discharge is REVERSED, and the matter is REMANDED to the bankruptcy court to determine the extent of a partial discharge, consistent with Myrvang.
On remand, the bankruptcy court should determine how much of the ECMC and TERI loan payments would create an undue hardship to Marks and his family, and discharge only that portion of the student loan payments. This will require the bankruptcy court to determine the amount of the Marks' monthly surplus, and should include specific findings, based on the trial record, regarding the contested monthly expenses, including but not limited to, childcare and federal tax payments. While Marks concedes that there is a surplus of $223, see Reply at 3, the amount appears to this court to be at least $329, and potentially much more. The amount of Marks' monthly surplus should not be discharged, but should be used to make payments on creditors' student loans.
This assumes that the Marks' net monthly income is approximately $5500 as determined by the bankruptcy court, and utilizes the expenses listed on Marks' bankruptcy schedule J ($7381 minus $2210 representing loan payments to ECMI and TERI).
This order fully adjudicates the appeal and terminates all other pending motions. The clerk shall close the file.
IT IS SO ORDERED.
JUDGMENT
Pursuant to the Order Re: Bankruptcy Appeal signed February 2003, the decision of the bankruptcy court is AFFIRMED in part and REVERSED in part, and the matter REMANDED to the bankruptcy court.
IT IS SO ORDERED AND ADJUDGED.