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finding that "[g]enerally, the proper defendant to be named in the complaint is the holder of the student loan as of the date the complaint is filed."
Summary of this case from Grabis v. Navient Sols., LLC (In re Grabis)Opinion
No. 00-80532, Adv. No. 00-8072, Adv. No. 00-8073.
August 29, 2001
OPINION
The Debtor, Franklin John Himes (DEBTOR), brings these two adversary proceedings against the Illinois Student Assistance Commission (ISAC) and the Educational Credit Management Corporation (ECMC), seeking a determination that the student loans he incurred while pursuing an undergraduate degree, a Master's degree and a Doctorate degree are dischargeable debts in his Chapter 7 bankruptcy because excepting these debts from discharge will impose an undue hardship on the DEBTOR. As a preliminary matter, ISAC asserted that Sallie Mae is not a proper defendant because it no longer holds an interest in the student loan which the DEBTOR seeks to discharge in adversary proceeding No. 00-8073.
The complaint was filed against Sallie Mae Loan Servicing Center. The Illinois Student Assistance Commission (ISAC) filed an answer, alleging that Sallie Mae had exercised its guarantee with ISAC and that ISAC was the holder of the debt.
The named Defendant is the California Student Aid Commission (CSAC). EDUCATIONAL CREDIT MANAGEMENT CORPORATION filed a motion to be substituted for CSAC, alleging that it is the assignee from CSAC and that it would undertake the defense of the lawsuit on behalf of both itself and derivatively on behalf of the CSAC. An Order was entered granting the motion on Aug. 9, 2000.
This Court reserved ruling on that request. At trial, Patrick Beard, a paralegal with ISAC, testified that ISAC purchased the loan from Sallie Mae and that under no circumstances will Sallie Mae get the loan back. Generally, the proper defendant to be named in the complaint is the holder of the student loan as of the date the complaint is filed. In re Bernal, 207 F.3d 595 (9th Cir. 2000). If the loan is subsequently assigned, the assignee may be substituted as the party defendant pursuant to Fed.R.Bankr.Proc. 7025(c). Id. Given Mr. Beard's testimony, Sallie Mae will be dismissed as a defendant in that proceeding and ISAC is substituted as the proper party defendant.
The DEBTOR was born December 31, 1950, and at the time of trial was fifty (50) years of age. After graduating from high school, the DEBTOR attended the University of Illinois from 1969 through 1974, majoring in theater. He became so wrapped up in the theater that he neglected his course work and failed to obtain a degree. Anxious to begin an acting career, he headed to Los Angeles, California, in January of 1974, where he took odd jobs to support himself and worked for free in the theater in the evenings. From 1981 to 1983, in fulfillment of his father's last wish, he attended the University of Southern California to make up the credits he needed to obtain his Bachelor of Fine Arts in theater from the University of Illinois. To finance those studies, the DEBTOR borrowed $500, which he later paid off and also obtained a loan of $5,000 from CSAC in September of 1981. Broke and discouraged, the DEBTOR filed a Chapter 7 bankruptcy in Los Angeles, California, in October, 1985. The DEBTOR'S attorney advised him that the loan was probably discharged by the bankruptcy and that if he did not hear anything from them he could safely assume that it was. This advice appears to have been erroneous. Under the version of Section 523(a)(8) in effect in 1985, the $5,000 CSAC student loan would have been nondischargeable since it was obtained within five years of the petition date unless the debt was determined to be dischargeable as imposing an undue hardship on the DEBTOR. 11 U.S.C. § 523(a)(8) (1985). There is no allegation or evidence that a determination of dischargeability was made by the California Bankruptcy Court and both parties have proceeded on the assumption that the ECMC student loan was not discharged in the 1985 case.
The student loans he incurred while at the University of Illinois have been paid off.
Even after his 1985 bankruptcy, the DEBTOR experienced little success in the employment arena. During the fifteen years the DEBTOR stayed in Los Angeles, his work as an extra led to an occasional "hand modeling" assignment, but his theater jobs were scarce and never lasted more than three weeks.
In October of 1989, the DEBTOR left California, and, after living for a short time with his mother, went to Chicago to try his luck there. Unfortunately, that move did not pan out, as he was never hired for any acting jobs. After seventeen years of fruitless efforts to get into acting, the DEBTOR reluctantly redirected his career aspirations toward teaching theater at the college level. In the spring of 1991, he entered the master's program at Western Illinois University to obtain a Master of Fine Arts in theater, taking out an additional student loan in the amount of $46,172.50. He did not complete that program, but transferred to the communications and broadcasting department, in hopes that his job prospects would be brighter. He received a Master of Arts degree in Communications and Broadcasting in 1994.
On the advice of others in his field, the DEBTOR entered the Ph.D. program at Bowling Green State University, and earned a doctorate in theater in 1997, again taking out an additional student loan in the amount of $35,453. Equipped with this degree, the DEBTOR thought he could teach theater at the university level.
To the DEBTOR'S surprise and chagrin, despite a sincere and diligent job search, he remained unemployed. Lacking an agent, the DEBTOR no longer sought professional acting jobs, but he wrote many famous directors and actors, including Steven Spielberg and Tony Randall, pleading for an opportunity to demonstrate his abilities. The DEBTOR also purchased publications listing job opportunities in higher education and he pursued each plausible prospect, submitting his curriculum vitae. In addition to jobs in the theater and universities, the DEBTOR applied for factory jobs, openings in grocery stores and other unskilled positions. He was often turned down as overqualified. One of his academic advisers at Bowling Green State University cautioned him that he would not likely find work at his age (he was then in his late 40's) because the available jobs were being filled by younger persons, particularly minorities and females. During these hard times, he applied for and obtained deferments of his ISAC student loans. On Feb. 6, 1999, the loans were consolidated into a "SMART LOAN," with an "income sensitive repayment" option. The term of the note was thirty (30) years.
The DEBTOR'S one break came in the summer of 1999 when a former professor from the communications and broadcasting department at Western Illinois University retired and suggested that he fill her position for a year while the university sought a permanent replacement. The DEBTOR was offered and accepted the position, earning $30,000 during the 1999/2000 academic year. Though the DEBTOR applied for the permanent position, he was not hired because he did not have the qualifications the department was seeking. The DEBTOR learned of that rejection in the early months of 2000, at the same time his deferments of the ISAC loan ran out. The DEBTOR'S request that the payments on the student loans be postponed was denied, but the DEBTOR negotiated a reduction in payments from $600 to $133 per month. These two events triggered the DEBTOR'S Chapter 7 filing on Feb. 7, 2000, and this adversary proceeding seeking a determination that his student loans are dischargeable as an "undue hardship" under Section 523(a)(8) of the Bankruptcy Code. 11 U.S.C. § 523(a)(8). As of the date the bankruptcy was filed, the balance due ISAC, with accumulated interest, was $93,075.98 and the balance due ECMC was approximately $14,364.00.
This figure is taken from the DEBTOR'S schedules. Unlike ISAC, ECMC has not filed a proof of claim. ECMC, choosing to ride on ISAC'S coattails, introduced no evidence at trial.
Since the filing of the bankruptcy and the termination of his position at Western Illinois University, the DEBTOR has continued his search for a suitable position. These recent efforts have also been unsuccessful. The DEBTOR'S unemployment insurance ran out in January 2001, and the DEBTOR currently has no income at all. During the final months of his job at Western Illinois University, after filing bankruptcy, the DEBTOR managed to accumulate some savings and he has been using those funds to live. He is down to his last $2,600. The DEBTOR'S current expenses are limited. In addition to paying $350 for rent, the DEBTOR'S monthly expenses include $213 for a car payment, $35 for phone bill, and $32 for car insurance. Though the DEBTOR is currently in good health, he has no health insurance.
The DEBTOR testified that he has signed up for a subsistence program which will cover his utility bills.
This Court is bound by the Seventh Circuit's decision in In re Roberson, 999 F.2d 1132 (7th Cir. 1993), which, like the majority of courts addressing this issue, has adopted the three-part "Brunner" test. This test requires the debtor to demonstrate:
This test was set forth by the Second Circuit in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987).
1. 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 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.
3. That the debtor has made good faith efforts to repay the loans.
The DEBTOR bears the burden of proving by a preponderance of the evidence that repayment would constitute an undue hardship. Roberson, supra.
To meet the first hurdle of the Brunner test, the DEBTOR must show that he cannot repay the student loans while maintaining a minimal standard of living. The focus of this inquiry is the DEBTOR'S current financial situation, as it exists at the time of trial. The DEBTOR is currently unemployed with no immediate prospects of employment, either in his field or in some other line of work. The DEBTOR'S unemployment benefits have run out. The DEBTOR cannot meet his basic expenses. An unemployed debtor with no other means of income unquestionably satisfies the first prong of the Brunner test. In re Young, 225 B.R. 312 (Bankr.E.D.Pa. 1998).
Notwithstanding the DEBTOR'S present plight, ISAC argues that the first prong is not met, contending that repayment options are available which would, given those circumstances, require no payment to be made at all. ISAC referred to the "Income Contingent Repayment Plan," a deferral program devised by the Department of Education to meet the needs of debtors with minimal income. Under this program, the Department of Education reviews the debtor's income on an annual basis to determine whether the debtor has the ability to make any payments. If a debtor's income is below the federal poverty guidelines, no payment is required to be made. If the debtor's income exceeds that level, the poverty guideline is subtracted from the debtor's adjusted gross income to determine the debtor's "discretionary income" and payments are fixed at twenty percent of this amount. 34 C.F.R. § 685.209(a)(2)(ii).
In this Court's view, ISAC'S suppositions with regard to the DEBTOR'S qualification for and future participation in the income contingent plan are just that and as such, they beg the issue. The first prong of the Brunner test requires simply that the DEBTOR show that he cannot, given his current circumstances, repay the student loans if forced to do so and maintain a minimal standard of living. In re Thomsen, 234 B.R. 506 (Bankr.D.Mont. 1999). The focus is on the debtor's ability to pay, not the lender's willingness to grant deferments or otherwise work with the debtor.
If it were otherwise, the logical extension of ISAC'S argument would lead to the conclusion that a student loan could never constitute an undue hardship for a borrower living in poverty since borrowers with no discretionary income never have to make any payments. This Court believes that Congress did not intend for Section 523(a)(8), which expressly provides for a discharge under hardship circumstances, to be so cavalierly eviscerated by a Departmental Regulation. Indeed, the Seventh Circuit's application of the first prong of the Brunner test focuses solely on the DEBTOR'S present ability to pay the student loans. See, Roberson at 1135. Whether the DEBTOR was or was not aware of the Income Contingent Repayment Plan, or is eligible for such a program, is not relevant to the first prong of the Brunner test. As it stands now, the DEBTOR, unemployed with minimal savings, is unable to pay the student loans and still maintain a minimal standard of living.
If nothing else, the inability to obtain a hardship discharge of a student loan because of an inexhaustible supply of deferments, is contrary to the most fundamental of all bankruptcy policies: the fresh start.
The DEBTOR has met the first prong of the Brunner test.
The more problematic issue in this case arises under the second prong of the Brunner test which requires the DEBTOR to show that his bleak financial condition is likely to exist for a significant portion of the repayment period. The term of the ISAC loan is thirty years, extending well into the DEBTOR'S golden years. No testimony or documentation was introduced by ECMC or the DEBTOR as to the repayment period of the ECMC loan. The loan was issued in 1981, nearly twenty years ago. Even if the original term of ECMC'S loan has already expired, since there is no evidence in the record of the loan's term, the Court is unable to fully evaluate Brunner's second prong with respect to the ECMC loan, and must conclude that the DEBTOR'S burden has not been met.
The DEBTOR emphasizes his futile attempts to break into stardom in California when he was armed with only an undergraduate degree in theater. This Court agrees with ISAC that the DEBTOR'S history of unemployment prior to 1991, while very unfortunate, has little bearing on the issues presently before the Court. The DEBTOR obtained his masters in 1994 and his doctorate in 1997. While the DEBTOR depicts these degrees as occasionally creating the hindrance of overqualification, this Court finds that the advanced degrees are more likely to enhance his career opportunities, perhaps significantly, in the longer run. The DEBTOR taught for a year at Western Illinois University, earning $30,000 during the academic year. Though the competition for teaching positions at the university level may be very tough, this Court believes that it would be premature to find that the DEBTOR has exhausted all reasonable possibilities of obtaining employment which would enable him to make payments on these student loans. The DEBTOR may have to lower his sights (e.g., a high school or junior college position may be more readily obtainable) and engage in a broader search. The DEBTOR is in good health and has no dependents. It is true that his age may be a detrimental factor, but the DEBTOR elected to pursue advanced degrees at that stage in his life. As the 7th Circuit commented in Roberson:
The government is not twisting the arms of potential students. The decision of whether or not to borrow for a college education lies with the individual; absent an expression to the contrary, the government does not guarantee the student's future financial success. If the leveraged investment of an education does not generate the return the borrower anticipated, the student, not the taxpayers, must accept the consequences of the decision to borrow.
There is little evidence that the DEBTOR faces the kind of hurdles that render his present inability to pay near-permanent. For example, the DEBTOR suffers from no chronic, debilitating medical condition, he has no dependents, and he has a high level of education indicative of a sharp mind and a ready ability to learn and apply his knowledge. Although his age is a negative, at fifty (50) he certainly can expect to have many productive years ahead of him.
At this point, the Court cannot conclude that the DEBTOR'S current inability to obtain a position utilizing either or both of his higher degrees is likely to persist for a significant portion of the repayment period of the student loans. Because the DEBTOR failed to carry his burden as to Brunner's second prong, the student loans are not dischargeable on the basis of undue hardship, at this point in time. However, the dischargeability of these student loans may be revisited in the future, if the DEBTOR'S circumstances change or, if no change for the better occurs, merely based on the passage of additional time.
The first and second prongs of the Brunner test are both time-sensitive. Even though the DEBTOR has failed to satisfy the second prong today, if his situation does not improve, that hurdle becomes easier to clear as time goes by.
As the bankruptcy court did in Roberson, the Court has the option of ordering a deferral of the student loans. The Court finds that the following exceptional circumstances justify such a deferral:
1. The DEBTOR is presently unemployed.
2. The DEBTOR is barely maintaining a subsistence level existence.
3. The DEBTOR appears to have no non-exempt assets and is therefore "judgment-proof."
4. The consensual deferrals previously granted by ISAC have expired and ISAC has communicated an unwillingness to grant a further deferral.
5. The time which has elapsed since the DEBTOR earned his doctorate is relatively short and the degree is an advanced one in a specialized field.
6. The DEBTOR'S prior job search efforts have been limited to the university level.
7. An additional period of time during which the DEBTOR is free from collection activity, during which he may devote all of his time and energy toward finding a job, is in the best interest of both the DEBTOR and the student loan creditors.
Consistent with the 7th Circuit's decision in Roberson, this Court will grant the DEBTOR a deferral of both student loans for a period of eighteen (18) months from the date of this Opinion, at the expiration of which the DEBTOR may reopen this proceeding to petition the Court to re-examine this issue.
Given this Court's determination that the DEBTOR failed to establish that his inability to pay the student loans without undue hardship was likely to persist for a significant portion of the repayment period of the student loans, this Court does not reach the issue of whether the DEBTOR has made a good faith effort to repay the student loans.
This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be entered in each adversary proceeding.
ORDER
For the reasons stated in an Opinion filed this day, IT IS HEREBY ORDERED that:
1. Judgment is entered in FAVOR of the Defendant, EDUCATIONAL CREDIT MANAGEMENT CORP., and AGAINST the Plaintiff, FRANKLIN JOHN HIMES.
2. The Plaintiff, FRANKLIN JOHN HIMES, is granted a deferment of his obligation to repay the student loan to Defendant, EDUCATIONAL CREDIT MANAGEMENT CORP., commencing on the date of this Order and expiring eighteen (18) months thereafter. The Defendant, EDUCATIONAL CREDIT MANAGEMENT CORP., is enjoined from attempting to collect the loan from Plaintiff, FRANKLIN JOHN HIMES, during the term of the deferment.
ORDER
For the reasons stated in an Opinion filed this day, IT IS HEREBY ORDERED that:
1. SALLIE MAE LOAN SERVICING CENTER is DISMISSED as a Party Defendant, and ILLINOIS STUDENT ASSISTANCE COMMISSION is SUBSTITUTED as the proper Party Defendant.
2. Judgment is entered in FAVOR of the Defendant, ILLINOIS STUDENT ASSISTANCE COMMISSION, and AGAINST the Plaintiff, FRANKLIN JOHN HIMES.
3. The Plaintiff, FRANKLIN JOHN HIMES, is granted a deferment of his obligation to repay the student loan to Defendant, ILLINOIS STUDENT ASSISTANCE COMMISSION, commencing on the date of this Order and expiring eighteen (18) months thereafter. The Defendant, ILLINOIS STUDENT ASSISTANCE COMMISSION, is enjoined from attempting to collect the loan from Plaintiff, FRANKLIN JOHN HIMES, during the term of the deferment.