Opinion
ED CV 01-318 RT
February 2, 2004
William M Burd, Burd Naylor, Santa Ana, CA, for Appellant.
Wayne S Basist, Wayne S Basist Law Offices, Aliso Viejo, CA, for Appellee.
ORDER AFFIRMING BANKRUPTCY COURT'S JUDGMENT IN FAVOR OF EDUCATIONAL CREDIT MANAGEMENT CORPORATION
Appellant Laura Ann Levernier ("Levernier") appeals the judgment by the United States Bankruptcy Court for the Central District of California in favor of Appellee Educational Credit Management Corporation ("ECMC") against Levernier
I. Background
This background is based on the materials constituting the record on appeal.
In 1983, Levernier began a full time course of study at Life Chiropractic West ("Life Chiropractic") She took out four student loans from Wells Fargo Bank totaling $17,500, and four loans from the Health Education Assistance Loan Program ("HEAL") totaling $18,157, to complete her education Levernier graduated from the program in 1986 Between 1986 and 1997, she made partial payments on her student loans while attempting to establish a chiropractic practice In October 1994, Levernier successfully consolidated her Wells Fargo Loans through the Student Loan Marketing Association ("Sallie Mae") Sallie Mae's consolidation loan was subsequently assigned to the Educational Credit Management Corporation ("ECMC")
After unsuccessful attempts to start a chiropractic business and stints as a food server, cocktail waitress, and hostess, Levernier filed a chapter 7 bankruptcy petition on July 9, 1997 She received her discharge on November 3, 1997 After reopening her case, she filed a complaint to determine the dischargeability of her ECMC consolidation loan on April 15, 1998 On July 15, 1999, Levernier filed a motion for judgment on the pleadings contending that the ECMC loan was not an educational loan within the meaning of 11 U.S.C. § 523(a)(8) ("Section 523(a)(8)") This motion was denied by the bankruptcy court on September 8, 1999 On February 8, 2001, the bankruptcy court, after an evidentiary hearing, ordered judgment for ECMC, finding that Levernier had not made a showing of undue hardship in order to discharge her ECMC loan under Section 523(a)(8)(B) Levernier appeals the judgment in favor of ECMC, including the interlocutory order denying her motion for judgment on the pleadings
II. Analysis
The jurisdiction of a federal district court to entertain an appeal from a bankruptcy court is governed by 28 U.S.C. § 158(a), which provides in pertinent part "The district courts of the United States shall have jurisdiction to hear appeals (1) from final judgments, orders, and decrees, and (3) with leave of the court, from other interlocutory orders and decrees"
This court reviews a bankruptcy court's conclusions of law de novoSiriani v. Northwestern Nat'l Ins. Co., 967 F.2d 302, 303-04 (9th Cir. 1992) Findings of fact are reviewed for clear error See id. The bankruptcy court's choice of remedies is reviewed for an abuse of discretion, since it has broad equitable remedial powers In re Goldberg, 168 B R 382, 384 (BAP 9th Cir 1994) Under this standard, "a reviewing court cannot reverse unless it has a definite and firm conviction that the court below committed a clear error of judgment in the conclusion it reached upon a weighing of the relevant factors" In re Sunnymead Shopping Cir Co., 178 B R 809, 814 (BAP 9th Cir. 1995) (citingGoldberg, 168 B.R. at 384)
Both Levernier and ECMC agree that this reviewing Court should apply the de novo standard of review regarding the issues on appeal The Court will do so.
A. Whether a consolidation loan is an educational loan for purposes of § 523(a)(8)
Levernier contends on appeal that her ECMC consolidated loan is not an "educational loan" for purposes of § 523(a)(8) and is therefore not to be considered non dischargeable under that section She asserts that her consolidation loan is not educational in nature because the proceeds were not used for educational purposes, but rather to pay off pre-existing educational loan debts She also characterizes her consolidation loan as a refinance loan and because California law holds that the refinance of a loan used to purchase real estate alters the loan's character as a purchase money loan, see Matthews v Transamerica Fin Servs (In re Matthews), 724 F.2d 798, 800 (9th Cir 1984), the consolidation of Levernier's educational loan similarly alters its educational character
In response, ECMC points to the wide body of caselaw in support of the proposition that consolidation loans related to pre-existing educational loans are educational loans within the meaning of § 523(a)(8) The District Court for the Eastern District of Michigan addressed this exact issue in United Student Aid Funds v. Flint, 238 B.R. 676 (ED Mich 1999), finding that consolidated loans are educational loans and are therefore not dischargeable under § 523(a)(8) ECMC also relies on the extensive body of caselaw discussing when consolidation loans triggered the former statute of limitations under § 523(a)(8) as further evidence that these loans are educational loans
The court agrees with ECMC that the consolidated loan obtained by Levernier is an educational loan within the meaning of § 523(a)(8) and that it therefore is not dischargeable under this section First, consolidation loans regarding pre-existing educational loans have an educational purpose They are issued under the Higher Education Act and are used to pay off educational debts See Flint, supra at 677-78 ("[c]ourts have reasoned that a consolidation loan is `for an educational purpose' because the loan was issued under the Higher Education Act"),Hiatt v. Indiana State Student Assistance Com'n, 36 F.3d 21, 24 (7th Cir 1994) ("a consolidation loan is in fact a second government guaranteed student loan debt") Levernier's contention that the ECMC loan was not used for educational purposes but rather to pay off an educational debt is unpersuasive As the court noted in In re Cobb, 196 B R 34, 38 (Bankr ED Va 1996)
[T]he original loan was admittedly for educational purposes The consolidation loan served to pay off and alter the terms of the initial education loan and thus created a new obligation relative to the reason for the debt The essential purpose of the consolidation was the repayment and restructuring of a debt incurred to pay the costs of higher education
Second, a number of courts have determined that the consolidation of educational loans triggered the former statute of limitations period under § 523(a)(8)(A) anew See Hiatt, 36 F.3d at 25 (finding that the nondischargeability period begins on the date the consolidation loan first becomes due and concluding that such a loan is "an education loan within the meaning of section 523(a)(8)(A)"),Cobb, 196 B R at 37 (finding that "the consolidation loan, which is in essence a second government guaranteed student loan, is collectible for at least seven years before it is dischargeable") These conclusions necessarily rest on the presumption that consolidation loans are educational loans within the meaning of § 523(a)(8) See Flint, supra at 679
Prior to 1990, educational loans that had first become due more than 5 years before the filing of a bankruptcy petition were not excepted from discharge In 1990, this period was extended to 7 years In 1998, it was eliminated altogether, reflecting a renewed congressional intent to facilitate loan repayment See Flint, supra at 681.
Third, the court does not agree with Levernier that the plain language of § 523(a)(8) with no specific reference to consolidation loans reflects Congressional intent to exclude such loans from its scope of coverage In interpreting a statutory provision, courts are not "guided by a single sentence or member of a sentence, but [by] the provisions of the whole law, and to its object and policy" Hiatt, 36 F.3d at 23 (quoting Kelly v. Robinson, 479 U.S. 36, 43, 107 S.Ct. 353, 357, 93 L Ed 2d 216 (1986)) The plain language of the statute will not control, therefore, if it yields `a result demonstrably at odds with the intentions of its drafters'" Id. (quoting United States v. Ron Pair Enters, 489 U S 235, 242, 109 S Ct 1026, 1031, 103 L Ed 2d 290 (1989)) In enacting and amending § 523(a)(8), Congress expressed a strong policy in favor of student loan repaymentSee Flint, supra at 679 This policy does not favor an interpretation that exempts initial educational loans but not subsequent consolidation loans related to the pre-existing educational loans from dischargeability as provided in Section under § 523(a)(8) In responding to the argument that Congress would have specifically exempted consolidated loans from dischargeability if it so intended, the Flint court noted, "[t]hat is too narrow a perspective Courts have applied § 523(a)(8) even when the loan was not used to confer an educational benefit on the borrower" Id at 681, (citing In re Hawkins, 139 B.R. 651, 652 (Bankr N.D. Ohio 1991)) For similar reasons, this court agrees with the bankruptcy court that Levernier's ECMC loan is an educational loan within the meaning of § 523(a)(8)
B. Undue Hardship
Levernier contends that even if this court finds that a consolidation loan is an educational loan within the meaning of § 523(a)(8), she will suffer undue hardship if the loan is not discharged and, therefore, she is entitled to the exception to non-dischargeability as provided in Section 523(a)(8)(B) The Ninth Circuit has adopted a three-part test from the Second Circuit governing the determination of undue hardshipSee United Student Aid Funds, Inc. v. Pena, 155 F.3d 1108, 1112 (9th Cir 1998) Under this test, Levernier must prove by a preponderance of the evidence that she meets all of the following criteria 1) that she cannot maintain, based on current income and expenses, a `minimal' standard of living for herself and her dependents if forced to repay the loans, 2) that additional circumstances indicate that her financial situation is likely to persist for a significant portion of the repayment period, and 3) that she has made a good faith effort to repay her loans Id., citing Brunner, 831 F.2d at 396 Because the bankruptcy court based its finding of no undue hardship exclusively on the first factor, the court will focus on this factor as well
In re Brunner, 831 F.2d 395, 396 (2d Cir 1987)
"The first prong of the Brunner analysis requires more than a showing of tight finances" In re Faish, 72 F.3d 298, 306 (3rd Cir 1995) "The proper inquiry is `whether it would be unconscionable to require [the debtor] to take any available steps to earn more income or to reduce her expenses'" In re Shankwiler, 208 B R 701, 705 (Bankr C D Cal 1997) (quoting Faish, 72 F.3d at 307) Levernier asserts that because her monthly expenses exceed her monthly income by $255 73, she cannot afford monthly payments to ECMC of approximately $256 31 On the other hand, the bankruptcy court found that because certain of Levernier's expenditures were excessive, she could make the ECMC payments while maintaining a minimal standard of living for herself In particular, the court found that 1) Levernier could reduce her $900 rental payments by living in a less expensive area and/or by sharing an apartment with a roommate, 2) Levernier had purchased a brand new Subaru Forester for $26,000, which, although financed by her mother at a comparatively low rate of interest, had increased her automobile insurance and her annual DMV charge, and 3) Levernier could reduce or eliminate such monthly expenses as FasTrak, 24-hour Fitness, cable television, tax preparation services, vitamins, and long distance calls
ECMC asserts that under a graduated repayment schedule, Levernier could reduce her monthly payments to $234 64
This court reviews the bankruptcy court's findings of fact for clear error See Siriani v. Northwestern Nat'l Ins. Co., 967 F.2d 302. 303-04 (9th Cir 1992) Under this standard, the court finds no reason to disturb the bankruptcy court's findings that Levernier could appropriately reduce certain expenditures and make her ECMC payments without falling below a minimal standard of living In In re Faish, the Third Circuit found that a single woman with an eleven year old son who received no child support and who had an annual income of $27,000 could afford to make a monthly payment of nearly $300 Levernier has no dependents and an annual income of approximately $31,085 28 Although she has certain expenses that the debtor in Faish apparently did not have, such as monthly car payments, the bankruptcy court has already found that these payments are excessive Levernier cannot show that all of her monthly expenses are necessary to maintain a minimal standard of living for herself
Levernier's reliance on Peel v. Sallie Mae Servicing, 240 B.R. 387 (Bankr N D Cal 1999) is unpersuasive In Peel, the Bankruptcy Court for the Northern District of California found that the debtor could not maintain a minimal standard of living and pay off his $635 ECMC loan, therefore meeting the first requirement ofBrunner However, the debtor in Peel spent only $750 a month for a basement apartment without a kitchen, $40 a month on phone calls, and $81 a month on automobile insurance Although he budgeted $190 more a month on automobile maintenance than Levernier, this is still $220 less than Levernier's monthly automobile payments Moreover, both the HEAL loans and ECMC loans at issue in Peel were significantly higher than Levernier's In short, there is nothing in Peel to indicate that Levernier could not make her ECMC payments and maintain a minimal standard of living under the first prong of the Brunner test Because the bankruptcy court's finding that Levernier has not met the first requirement is not clear error, the court need not address the remaining two factors under Brunner The court therefore concludes that Levernier has not made a showing by a preponderance of the evidence of undue hardship that would except her ECMC loan from non-dischargeability under § 523(a)(8)
III. DISPOSITION
ACCORDINGLY, IT IS ORDERED THAT
The bankruptcy court's Judgment is AFFIRMED DATED