Opinion
01-C-234-S
June 13, 2001
JEFFREY O. DAVIS, QUARLES BRADY, MILWAUKEE, WI, COUNSEL FOR PLAINTIFF.
TERRENCE J. BYRNE, BYRNE, GOYKE TILLISCH, S.C., WAUSAU, WI, COUNSEL FOR DEFENDANT.
ORDER
This is the second appeal by defendant United Student Aid Funds, Inc., from a final order of the Bankruptcy Court in an adversary proceeding to determine the dischargeability of plaintiff's student loans as an "undue hardship" pursuant to 11 U.S.C. § 523(a)(8). The following is a summary of the undisputed facts and procedural history of the action.
BACKGROUND
On September 24, 1999 defendant United Student Aid Funds, Inc., appealed the September 15, 1999 decision of the United States Bankruptcy Court granting the debtor, Kenneth J. Salinas, a discharge of approximately $85,000 in student loans on the basis that repayment posed an undue hardship. The undisputed facts developed in a trial before the Bankruptcy Court in June 1999 and set forth in this Court's memorandum of December 7, 1999 follow:
From 1989 to 1992 Kenneth Salinas attended the Illinois College of Optometry and owes approximately $68,694.49 in Health Education Assistance Loans (HEAL loans) to the Department of Health and Human Services and approximately $84,650.00 in student loans to the defendant United Student Aid Funds. Salinas failed to complete his optometry studies but has a bachelor of science degree in visual science.
Salinas is 41 years old, has a 6 year old son and is divorced. He is employed at Marathon Communications Media Group. His base salary is $31,600.00 plus car expenses at 31 cents per mile averaging $300.00 a month. In the future he can expect to earn a salary in the range of forty to fifty thousand dollars. His ex-wife is a practicing optometrist who received a salary of $82,696.00 in 1998 and expects to receive salary increases of three to four percent per year.
Salinas receives child support in the amount of $200.00 a month. In his divorce stipulation his wife was not required to pay him maintenance although he stayed at home and was the primary care-giver for his son from 1992 through 1998. His house is worth approximately $100,000.00 of which he has an equity of $25,000.00.
Salinas has a monthly income of $2531.00 after taxes and insurance. His monthly expenses are estimated at $3513.00 including a mortgage payment of $742.00 and a HEAL student loan payment of $750.00. He pays $200.00 a month for recreation and entertainment and $150.00 a month for attorney fees which will be paid shortly. He has $160.00 per month in car expenses and a monthly car payment of $376.00.
The debtor, Kenneth Salinas, had paid a total of $50 on the loans for which he seeks discharge.
Based on these facts, this Court concluded as a matter of law that the debtor did not meet the three-part test for dischargeability, holding as follows:
The United States Seventh Circuit Court of Appeals adopted a three-prong test for determining whether undue hardship is present for purposes of discharging student loans under 11 U.S.C. § 523(a)(8). Matter of Roberson, 999 F.2d at 1135. Undue hardship requires a showing that the debtor cannot maintain, based on current income and expenses, a minimal standard of living for himself and his dependents if forced to repay the loan; 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 loan and that the debtor has made good faith efforts to repay the loan. Id.
. . . [P]laintiff has not shown that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period. He is relatively young and healthy and has a steady job which he has held for eighteen months. He can expect to earn significantly more money as he gains more experience. He is debt-free except for his HEAL loans. Furthermore, his current expenses will be reduced with payment of his attorney fees.
Finally, plaintiff has not made any good faith efforts to repay his loan. He 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 and has made only a $50.00 payment on these student loans.
Plaintiff has not shown that undue hardship prevents him from making a reduced or deferred payment. Pursuant to Roberson, the Court finds that the United States Bankruptcy Court erred when it found that plaintiff's entire debt to the United States Department of Education was discharged because of undue hardship. See 11 U.S.C. § 523(a)(8). Accordingly, the September 15, 1999 order of the bankruptcy court will be reversed and remanded for a determination as to whether a deferred or reduced payment would cause Salinas undue hardship.
On remand the Bankruptcy Court held another hearing on November 15, 2000 at which the following additional facts were presented. The debtor's financial obligations were similar to those at the time of the first hearing. The debtor had taken a new job as a commissioned insurance salesman. His monthly income was $2,740, with his sales increasing, and the debtor expressed "a measure of optimism" at the hearing indicating his belief that his present job would produce income of $30,000 per year in the relatively near term. The Bankruptcy Court noted: "Clearly, his income might rise since it is largely based on commissions from insurance sales." He has attempted unsuccessfully so far to obtain a sales position in a medical field for which he has training and which might offer greater income. He has made no additional payments on defendant's loans.
On February 14, 2001 the Bankruptcy Court issued a memorandum opinion once again granting the debtor full discharge of his student loans. The Bankruptcy Court rejected any deferral or partial discharge. Defendant now appeals from that final order.
MEMORANDUM
Stripped of its wide ranging dissertation on why, in the Bankruptcy Court's view, Seventh Circuit law should be different than it is, the most recent decision of the Bankruptcy Court adds almost no new factual findings or analysis to its previous decision. As before, all parties agree that the debtor's present expenses exceed present income so that he satisfies the first prong of the Roberson test. But there is no evidence in the record which would suggest that the debtor satisfies the second and third prongs of the test. In fact, the present evidence is less favorable to discharge than at the time of the previous appeal when the Court held as a matter of law that the evidence failed to support the finding.
Whether a debtor's circumstances meet the three-prong test for determining undue hardship for discharge of a student loan is a question of law subject to de novo review. Matter of Roberson, 999 F.2d 1132, 1127 (7th Cir. 1993). The Bankruptcy Court's findings of fact are disturbed only if this Court finds they are clearly erroneous. Id. Accepting the Bankruptcy Court's findings of fact, this debtor does not satisfy the test. In fact, there is virtually no additional evidence which could have justified a departure from this Court's previous ruling that a discharge was unavailable as a matter of law.
Concerning the second prong of the test, the debtor has not "show[n] his dire financial condition is likely to exist for a significant portion of the repayment period." To the contrary, the debtor's own expert opined that economic conditions for employment were excellent and the debtor could expect to earn between $40,000 and $50,000 per year in time, which would be ample to pay existing expenses and make payments on the student loans. The debtor expressed optimism that his present job could produce additional income. Indeed, it appears the Bankruptcy Court is far less optimistic about the debtor's future than is the debtor and his expert. This set of circumstances is clearly not the "certainty of hopelessness", which Roberson requires to satisfy the second prong. 999 F.2d at 1136. There appears a substantial likelihood that the debtor's present inability to fulfill his financial commitment will not continue and that his future financial circumstances will permit repayment.
Concerning the third factor, good faith effort to repay, nothing in the record supports a result different from that of the first appeal. The evidence does not support a good faith effort to repay. Accordingly, the Bankruptcy Court erred as a matter of law when it held the debt dischargeable under Roberson.
Notwithstanding debtor's failure to establish dischargeability defendant United Student Aid Funds, Inc., suggests and agrees to an order deferring payment, reducing the size of the total debt and waiving interest over the life of the debt, in effect granting a partial discharge. Specifically, defendant seeks an order reducing the debt to $60,000, eliminating ongoing interest, deferring payments for two years and requiring payments of $250 per month for twenty years thereafter. There is no question that Roberson expressly approved relief to the debtor short of complete discharge where there is a failure to satisfy the criteria for complete discharge. 99 F.2d at 1138.
The Bankruptcy Court erroneously found that complete discharge was available perhaps because of its intense philosophical disagreement with the Seventh Circuit's view of the law on this point. It ignored the previous mandate of this Court to deny discharge and consider partial relief suggested by defendant. Given debtor's failure to satisfy theRoberson criteria and defendant's acquiescence in an order restricting its rights, the Court now finds as a matter of law that it is appropriate to grant that relief to the debtor suggested by defendant. Accordingly,
ORDER
IT IS ORDERED that the decision of the Bankruptcy Court once again granting the debtor Kenneth J. Salinas full discharge of his student loans is REVERSED and VACATED.
IT IS FURTHER ORDERED that judgment be entered in favor of defendant United Student Aid Funds, Inc. against plaintiff Kenneth J. Salinas that said plaintiff's student loans owed to defendant in this matter are not dischargeable except that said obligations shall be modified as follows: The total amount of the debt shall be $60,000; no interest shall accrue on the debt; no payment shall be due for two years after entry of this order, and thereafter debtor shall be obligated to pay $250 per month on the fifth day of each month for twenty years in full satisfaction of the debt.
JUDGMENT IN A CIVIL CASE
This action came for consideration before the court with DISTRICT JUDGE JOHN C. SHABAZ presiding. The issues have been considered and a decision has been rendered.