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Mendoza v. Educational Credit Management Corp.

United States Bankruptcy Court, N.D. California
Jun 20, 2007
Case No.-01-53238-MM, Adversary No. 01-5283 (Bankr. N.D. Cal. Jun. 20, 2007)


Case No.-01-53238-MM, Adversary No. 01-5283.

June 20, 2007



Debtor, Christian Mendoza, initiated this adversary proceeding against defendants, Educational Credit Management Corporation and Hemar Insurance Corporation of America, to obtain a determination that his student loan debt, now held by the defendants, was not excepted from discharge pursuant to § 523(a)(8) of the Bankruptcy Code. Following trial, this court found the debt to be non-dischargeable and entered judgment in the defendants' favor. The dispute is back before the court on remand from the Ninth Circuit Court of Appeals for a determination of whether Mendoza has made a good faith effort to repay his student loans, and, if so, to grant relief to Mendoza. For the reasons set forth, the court concludes that Mendoza has made a good faith effort to repay his student loans and, therefore, the debt is dischargeable.


As of the time of trial, Mendoza owed approximately $107,000 to ECMC and Hemar. Mendoza entered into the loans to fund his education at Tufts University School of Medicine, but it was interrupted when he suffered a severe head injury in a car accident. Although he was able to complete his second year of course work, several attempts to pass a test required to continue with his medical education proved to be unsuccessful. Further, his substantial efforts to gain admission to a different medical school were to no avail.

After determining that he would not be able to continue his medical education, Mendoza began to seek out ways to earn enough income to cover his living expenses and to repay his student loans. Mendoza testified that he first tried to enter the lucrative commercial real estate market. When that did not work out, he turned to his former profession as a real estate broker soliciting and promoting various refinancing options. At trial, he earned approximately $1,600 a month, but his expenses exceeded $1650 a month, largely due to medical expenses. He had no medical insurance and, during the two previous years, had lived in a variety of rented rooms, with friends, or out of his car. The testimony of an expert witness established that Mendoza suffers from acquired attention deficit disorder that inhibits ability to work.

As detailed in its memorandum decision of June 30, 2006, the Ninth Circuit has concluded that the record before the court establishes that Mendoza cannot maintain a minimal standard of living if forced to repay his student loans and that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period. The court remanded the case for consideration of a third issue not previously reached by this court: whether Mendoza made a good faith effort to repay his student loans. The answer to this question forms the last prong of the three-part test designed to determine whether Mendoza will suffer undue hardship if he is required to repay the defendants' loans. In re Pena, 155 F.3d 1108 (9th Cir. 1998) (describing all three prongs).


A debtor's good faith in repaying student loans is measured by the debtor's effort to obtain employment, maximize income and minimize expenses. In re Mason, 464 F.3d 878, 884 (9th Cir. 2006), quoting, In re Birrane, 287 B.R. 490, 499 (9th Cir. B.A.P. 2002). Although recognizing that a history of payments or non-payments, alone, is not dispositive, the Ninth Circuit has recognized that courts also consider a debtor's effort to negotiate a repayment plan in determining good faith. Mason, 464 F.3d at 884. The debtor bears the burden of proof. Birrane, 287 B.R. at 494.

Here, the evidence at trial establishes that Mendoza made a concerted effort to continue his medical education, which would have allowed him to defer his loan payments until his education to become a doctor was complete. When that effort was unsuccessful, he began making payments on his student loans whenever he had funds available. However, he found it difficult to impossible to earn enough income to repay the debt. At first, he attempted to sell commercial real estate, but his only transaction fell through after lengthy negotiations. During the negotiations, he lived off of credit and took on a second job working the night shift as a forklift operator. Just three weeks after starting his night job, he was fired. During that short tenure, he had caused two accidents with over $25,000 of damage. He attributed the accidents to "sleepiness."

After the commercial real estate deal fell through, Mendoza returned to his former profession as a real estate broker. Prior to medical school, Mendoza "did well" as a real estate broker. Following his head injury, however, he was unable to earn enough to cover his daily living expenses. During 1999 and 2000, Mendoza also spent a significant amount of time oil painting, and he initially thought he might be able to retrain himself to earn a living selling religious artwork. However, he determined that he painted too slowly to support himself in that profession. Although Mendoza works as a real estate broker approximately forty hours per week, he earns, on average, just $1600 per month. As the Ninth Circuit pointed out, "[s]ince 1998, he has been unable to earn an income above the poverty level, despite his best effort to succeed."

Due to the difficulties Mendoza has encountered in earning sufficient income, Mendoza's payment history on his student loans is irregular. Nevertheless, he has exhibited some sense of responsibility by sending partial payments to the defendants, often as little as $1.00, whenever he has had the funds available. The defendants urge that Mendoza's accumulation of thousands of dollars in credit card debt following medical school is indicative of his lack of good faith in attempting to repay his student loans. The court disagrees. After his failed attempt at medical school, Mendoza testified that his lack of income led to his use of credit card accounts to meet his daily expenses and to make payments on other credit card accounts. Contrary to defendants' argument, this evidence indicates that Mendoza made attempts to repay the loans even when he otherwise was living off of ever-increasing amounts of credit.

In 1998, Mendoza began requesting deferments of his student loan obligations, and a number were granted. Mendoza testified that he applied for deferments as long as he could. Although Mendoza does not appear to have diligently pursued some options, like loan consolidation under the William D. Ford Federal Direct Loan Program, this fact alone is not dispositive proof of a lack of a good faith effort. Under the standards discussed above, it is only one factor to be considered in determining whether Mendoza acted in good faith. Mason. 464 F.3d at 884; In re Nys, 446 F.3d 938, 947 (9th Cir. 2006) (consideration of programs like the Ford program is not required for a good faith finding but is considered an important indicator). Here, Mendoza's efforts to maximize his income as best he could and to make payments whenever possible outweigh any shortfall in pursuing further loan consolidation programs. Additionally, the evidence at trial demonstrates that Mendoza lived as inexpensively as possible, at times living out of his car when he could not afford housing.

Based on the same evidentiary record that is before this court, the Ninth Circuit pointedly noted that "there appears to be little question in the record that Mendoza exhibited good faith in attempting to pay back his student loans." This court's review of the record does not lead to a contrary conclusion. Taking all of the facts into account, the court finds that Mendoza has adequately established that he made a good faith effort to repay his student loans. Accordingly, pursuant to the direction of the ourt of Appeals, the court concludes that Mendoza's student loan debt is not excepted from discharge. Judgment is awarded in favor of plaintiff, Christian Mendoza, and against the defendants.

Good cause appearing, IT IS SO ORDERED.

Summaries of

Mendoza v. Educational Credit Management Corp.

United States Bankruptcy Court, N.D. California
Jun 20, 2007
Case No.-01-53238-MM, Adversary No. 01-5283 (Bankr. N.D. Cal. Jun. 20, 2007)
Case details for

Mendoza v. Educational Credit Management Corp.

Case Details

Full title:CHRISTIAN D. MENDOZA, Chapter 7, Debtor. CHRISTIAN D. MENDOZA, Plaintiff…

Court:United States Bankruptcy Court, N.D. California

Date published: Jun 20, 2007


Case No.-01-53238-MM, Adversary No. 01-5283 (Bankr. N.D. Cal. Jun. 20, 2007)