Opinion
Case No. 14-30295 Adv. No. 14-3064
03-24-2015
In re: KENNETH W. TERPENNING, Debtor KENNETH W. TERPENNING, Plaintiff v. SALLIE MAE, INC., ET AL., Defendants
Chapter 13
DECISION DETERMINING STUDENT LOAN OBLIGATIONS OWED TO NATIONAL COLLEGIATE STUDENT LOAN TRUST TO BE NONDISCHARGEABLE
The court has jurisdiction over this matter pursuant to 28 U.S.C. Sections 157(a), 157 (b)(2)(I) and 1334 and the standing General Order of Reference in this District.
This matter is before the court on a complaint filed by Debtor Kenneth Terpenning (hereinafter "Debtor") requesting that his student loan debts owed to Defendant National Collegiate Student Loan Trust (hereinafter "National Collegiate") be discharged pursuant to 11 U.S.C. § 523(a)(8) because repayment of the loans would constitute an undue hardship. National Collegiate filed an answer denying that repayment constitutes an undue hardship and asserting that these qualifying educational loans should remain nondischargeable. A trial was held on February 4, 2015. After careful consideration of the evidence including the testimony of the witnesses and exhibits admitted at trial, the court determines that the Debtor, who carries the burden of proving undue hardship by a preponderance of the evidence, has not proven all elements of the Brunner test. Consequently, the student loans owed to National Collegiate will not be discharged in Debtor's bankruptcy case.
The parties stipulated that certain trusts variously hold the student loan notes at issue and these trusts are the proper parties in interest and defendants in this adversary proceeding. Those trusts are National Collegiate Student Loan Trust 2006-2, National Collegiate Student Loan Trust 2006-3, National Collegiate Student Loan Trust 2007-1, and National Collegiate Student Loan Trust 2007-2 which are referred to in the aggregate as National Collegiate Student Loan Trust or "National Collegiate."
Plaintiff also named his former wife, Danielle Harbeson-Jones, as a defendant, but no claims were made against her and she filed no counter-claims. She was dismissed as a party defendant at the end of the trial with the understanding that the dismissal was in no way an adjudication of any claims or rights she may have in this bankruptcy case.
FINDINGS OF FACT
There are three sources for the facts set forth below: 1) limited stipulations read into the record by the parties at the commencement of the trial, primarily pertaining to the loan documents and amounts owing; 2) all of the exhibits of the parties, stipulated as admissible without reservation; and 3) the testimony of the Debtor, Mr. Terpenning and his former wife. Between April of 2006 and April of 2007 the Debtor and his former wife became jointly obligated on five private student loans that were subsequently assigned to National Collegiate. These loans were used to pay the couple's living expenses while they attended college. Loan payments were deferred while the Debtor attended school, but he graduated in 2010 and payments became due. The date, principal amount, and balance due on the National Collegiate loans as of May 15, 2014 are provided below:
At the beginning of the trial, the parties stipulated that all exhibits could be admitted into evidence without objection. No objections were raised during the trial with respect to any exhibits. Some exhibits were never introduced or referenced in any way, leaving it to the court's discretion to discern relevant facts and to determine how much weight, if any, to give certain documents.
Although the complaint provides factual details about which colleges were attended and what degrees the Debtor obtained, none of that information was provided on the record at trial. The loan documents submitted as exhibits by National Collegiate indicate that the colleges in question were Western International University, University of Kentucky, and University of Phoenix.
1. April 14, 2006 loan of $16,393.44 with a balance due of $23,765.31
2. June 13, 2006 loan of $22,710.38 with a balance due of $33,979.78
3. July 7, 2006 loan of $33,296.09 with a balance due of $54,828.25
4. October 18, 2006 loan of $9,756.61 with a balance due of $12,983.16
5. April 23, 2007 loan of $23,759.56 with a balance due of $32,356.02 The total balance due is $157,912.52. According to National Collegiate's loan records, uncontroverted by the Debtor, no payments were ever made on these loans. The current aggregate monthly payment necessary to pay down the loans over 240 months would be approximately $1,537.87 (variable interest rate).
Central to the Debtor's case is Plaintiff's Exhibit 8, a decision dated August 15, 2011 by an administrative law judge for the Social Security Administration Office of Disability Adjudication and Review ("SS Decision"). This document was accepted into evidence without objection. The succinct decision at the end of the document in which the Debtor is referenced as the "claimant" is as follows:
Based on the application for a period of disability and disability insurance benefits filed on June 20, 2010, the claimant has been disabled under sections 216(i) and 223(d) of the Social Security Act since January 26, 2010.[Pl. Ex. 8]
Also contained in the SS Decision is a description of the Debtor's impairments:
The claimant has the following severe impairments (in descending order of severity): post traumatic stress disorder; major depressive disorder; generalized anxiety disorder, rule out panic disorder, rule out agoraphobia; recurrent migraine headaches; gout causing recurrent diffuse joint pain; hypothyroidism; irritable bowel syndrome; anemia; chronic fatigue; a 7-mm. lacunar infarction in the left temporal white matter without evidence of acute cranial injury, 11/07/2007, unchanged from 03/03/2006; chronic versus recurrent bronchitis with a history of acute asthmatic bronchitis; gastroesophageal reflux disease; hypertension; dyslipidemia; and obesity (20 CFR 404.1520(c)).
At trial, the Debtor confirmed that this description of his diagnosis is accurate. His "conditions" (presumably his post-traumatic stress disorder ("PTSD"), but perhaps others as well) "arose" in 2006 or 2007 while he was still in school. By 2010, his year of graduation, he concluded he would never be able to work again. He primarily attributed his PTSD and anxiety to his past experiences working at a bank where he was held at gunpoint during five separate robberies. He also blames some of his health issues on heredity, pointing to the health issues suffering by his mother and brother. He characterized his various maladies as linked and described his symptoms as nightmares, migraine headaches, panic attacks, night sweats, negative thoughts, and fearful disinclination to go out in public. He likewise recounted his physical ailments such as joint pain from gout and a prior aneurysm as well as a more recent condition, Graves disease, which affects his vision. The Debtor provided a self-generated list of his many doctor visits from September 2011 through September 2014 [Pl. Ex. 9], but no medical records. He further opined that he believed he would never be able to work full-time again.
As noted, the SS Decision found the Debtor to be currently disabled. A Notice of Award from the Social Security Administration dated August 27, 2011 ("Notice of Award") [Pl. Ex. 1] provided that the Debtor would receive disability benefits of $12,450.75 for the past year and $1,277.00 per month prospectively.
The Debtor testified that he receives disability payments of $1,251.60 per month. The discrepancy was not explained, but the lower number may be net after taxes.
Although the Debtor's medical condition is limiting, he is able to work part time as an adjunct instructor for Strayer University teaching an online course on computer information systems from his home. He testified that he can only work up to four hours per week due to his medical condition such that his gross monthly income is approximately $766.00, netting about $684.00.
On cross-examination, the Debtor admitted that he may have worked up to ten hours per week at a prior position he held at Ohio Business College, but stated he could not work that many hours now.
The Debtor's current total net monthly income is approximately $1,935.60. His monthly expenses, as set forth in his budget [Pl. Ex. 3], amount to $1,495.60, leaving $440.00 per month for his Chapter 13 estate. Debtor did admit on cross-examination to occasional expenditures for American Gold online gambling and his bank statements show a number of $25 debits to American Gold. He also had gambling winnings of over $3,000.00 in 2014 which are not reflected in his budget. Otherwise, the Debtor's expenses are very moderate. He currently lives with and shares expenses with his mother and brother. For that reason, his apartment rental is only $313.00.
The Debtor is 42 years old and has no dependents. In his view, his future prospects are dim and he will never be able to pay his student loan debts. He believes his health situation has worsened and will continue to worsen until he is unable to do any work. He fears that his expenses will increase because his brother and mother have serious health problems that may eventually make cost sharing impossible. He thinks he may have to purchase another car in the future which would further erode his finances.
As noted, the Debtor has made no payments on the loans owed to National Collegiate. Sometime in 2010, the Debtor contacted the loan servicer (apparently a predecessor of National Collegiate) by letter, email, and telephone seeking some relief from his loan obligations. According to the Debtor, the person he spoke with would not work with him and unreasonably rejected his proposal of paying perhaps $10 or $15 dollars per month. The Debtor provided a copy of an email message dated January 5, 2011 he sent to American Education Services in which he complains of the lender's failure to respond to two prior communications requesting an "economic hardship deferment" [Pl. Ex. 10]. Sometime later, the Debtor received collection calls from the loan servicer.
LEGAL ANALSYSIS - 523(a)(8): Undue Hardship
In general, a Chapter 13 bankruptcy discharge will discharge a debtor's obligation to pay his or her pre-petition debts provided for in the plan. See 11 U.S.C. § 1328. However, there are exceptions to the discharge including an exception for student loan obligations. See 11 U.S.C. § 1328(a)(2); 11 U.S.C. § 523. More specifically, Section 523(a)(8) of the Bankruptcy Code provides:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt--
(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for—
11 U.S.C. § 523(a)(8). During the trial, the parties agreed that the loans owed to National Collegiate are qualified education loans pursuant to § 523(a)(8)(B). Consequently, the loan obligations are nondischargeable unless the Debtor can prove that repayment would impose an undue hardship on him. In order to establish undue hardship in the Sixth Circuit, a debtor must demonstrate each of the following elements of the Brunner test by a preponderance of the evidence:(A)(i) 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
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual[.]
(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;Barrett v. Educ. Credit Mgmt. Corp. (In re Barrett), 487 F.3d 353, 359 (6th Cir.2007) (quoting Brunner v. New York State Higher Educ. Serv. Corp., 831 F.2d 395, 396 (2nd Cir. 1987)); In re Goodman, 449 B.R. 287, 292-93 (Bankr. N.D. Ohio 2011). The court will analyze each prong separately to determine whether it has been met.
(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.
1) Can the Debtor maintain a "minimal" standard of living based on current income and expenses if forced to repay the loan?
The first element requires the Debtor to prove that he cannot presently maintain a minimal standard of living for himself and his dependents if forced to repay the student loans. "'A court should not expect a debtor to live in abject poverty. On the other hand, the minimal standard of living requirement of the Brunner Test may require that a debtor make some major sacrifices, both personal and financial, with respect to [his] current style of living.'" Goodman, 449 B.R. at 293 (quoting Mitcham v. U.S. Dept. of Ed. (In re Mitcham), 293 B.R. 138, 144 (Bankr. N.D. Ohio 2003)). A court is not required to accept the debtor's scheduled income and expenses at face value but, instead, " 'is under a duty to scrutinize, and in appropriate circumstances adjust, a debtor's income and expenses so as to ensure that such income and expenses reflect a true picture of the debtor's financial situation.' " Id. at 293 (further quotation omitted).
As noted, the Debtor's budget is modest, with several of his major expenses reduced due to his shared living arrangement. It is true that he incurs online gambling expenses, but these are just occasional $25 expenditures that might be regarded as reasonable sums for entertainment or recreation. Given his current monthly income of $1,935.60 and expenses of $1,495.60, he has just $440.00 remaining to pay his creditors under the terms of his confirmed Chapter 13 plan. Clearly, the Debtor cannot maintain his minimal standard of living with his current income if he has to make a monthly student loan payment to National Collegiate of approximately $1,537.87.
Debtor's claimed work limitation of four hours per week seems somewhat arbitrary in that he is able to spend additional time on his computer pursuing his hobby of horse racing and betting. Why four hours rather than five, or six? How does his PTSD and anxiety in public impair his ability to teach more hours per week online? The SS Decision found the Debtor to be currently disabled, but said nothing as to the number of hours he might be capable of working. However, these issues were not fully explored at trial and the Debtor's current ability to work more hours and earn more income, perhaps enough income to pay his student loan obligations, is simply speculation. Based on the available evidence, primarily the Debtor's uncontroverted testimony and the SS Decision, the first prong of the Brunner test is satisfied.
Although the parties have stipulated to the admissibility of the SS Decision, the decision is only entitled to limited weight because the issues and standards applicable in the Social Security proceeding are very different from those faced by this court under 11 U.S.C. § 523(a)(8) and the Brunner test. See Congdon v. Educational Credit Management (In re Congdon), 365 B.R. 433,443-44 (Bankr. D. Vt. 2007). Nevertheless, it is clear that the parties accept the decision's description of the Debtor's diagnosis and its determination of current disability and this court shall do likewise.
2) Do additional circumstances exist indicating this state of affairs is likely to persist for a significant portion of the repayment period?
To satisfy the second prong, the Debtor must show that circumstances indicate a "certainty of hopelessness, not merely a present inability to fulfill financial commitment[s]." Barrett, 487 F.3d at 359 (citing Oyler v. Educ. Credit Mgmt. Corp., 397 F.3d 382, 386 (6th Cir. 2005)). See also In re Hornsby, 144 F.3d 433, 438 (6th Cir.1998) (observing that debtors "need not live in abject poverty before a discharge is forthcoming"). These circumstances may include, but are not limited to, "illness, disability, a lack of useable job skills, or the existence of a large number of dependents." Barrett, 487 F.3d at 359. Ultimately, the most important factor in satisfying the second prong is that the "additional circumstances" must be "beyond the debtor's control, not borne of free choice." Id.
When a debtor asserts that the "additional circumstances" are health related, a debtor must precisely identify his problems and explain how his condition would impair his ability to work in the future. Id. at 359-60. A medical condition, no matter how severe, is not sufficient by itself to form the basis of an undue hardship discharge. Trudel v. United States Dept. of Ed. (In re Trudel), 514 B.R. 219, 226 (B.A.P. 6th Cir. 2014). Instead, a strong nexus between the medical condition and its adverse effect on the debtor's employment must be shown. Id.
Corroborating expert medical testimony, while probative, is not necessarily required to meet this burden and the burden can, in appropriate circumstances, be met through the Debtor's testimony. Barrett, 487 F.3d at 359-60 (noting the expense of hiring an expert may place an undue burden on the plaintiff in establishing his burden of proof). But see Trudel, 514 B.R. at 226 (while expert medical testimony may not be required, mere speculation will not suffice). In addition, other corroborating evidence may serve including medical bills, letters from treating physicians and other indicia of medical treatment. Barrett, 487 F.3d at 361.
For instance, in Barrett the debtor relied on a letter from his treating physician, but his testimony was also particularly compelling because the debtor had a master's degree in health administration and had attended medical school courses enabling him to testify 'informatively and cogently about his medical history." Barrett, 487 F.3d at 361-62. Furthermore, the bankruptcy court found debtor's claim of serious pain and future inability to work full time to be credible based upon his "physical demeanor." Id. In a case with virtually no corroborating evidence, another court ruled in favor of a debtor based upon her "physical demeanor," namely her "morbid obesity," unhealthy complexion, and prematurely aged appearance. Cekic-Torres v. Access Group, Inc. (In re Cekic-Torres), 431 B.R. 785, 793-94 (Bankr. N.D. Ohio 2010).
In the instant case, the Debtor proceeded without a corroborating witness or medical records, relying instead on his own testimony buttressed by his self-created log of doctor visits and the SS Decision. Other than a slight limp and a sober demeanor, there was nothing about the Debtor's appearance or deportment to evidence his disability. The Debtor testified in conclusory fashion that his medical conditions will worsen, his income will likely decrease, and that he cannot foresee a time when he will be able to pay his student loan debt. He provided no explanation for his opinions other than his history of medical and psychological problems.
It is possible to infer future debilitating illness from this history, but it is also possible to imagine medical and psychological rehabilitation. The Debtor takes many medications and regularly consults doctors and therapists. In considering whether his medical conditions will persist into the foreseeable future, a reasonable inquiry is whether these medications and consultations might allow for some improvement in his health and his employment prospects. This issue was barely explored at trial except for a question from the Debtor's counsel regarding the effectiveness of the medications which elicited the following ambivalent response from the Debtor:
Well, for right now they're...they're keeping me here. Very extremely anxious for this proceeding. But they do their job for the most part but they don't help all the time. There's quite, quite a bit of times I have to go to the doctor and talk to my therapist or see my doctor for other medication to help.[Trial Trans. p. 48]. The Debtor's most severe ailments are PTSD, depression, and anxiety. The court is left to wonder whether all those similarly afflicted, such as combat veterans, have no chance at recovery or if the Debtor's condition is more severe, and if so, in what way?
The Debtor places considerable reliance on the SS Decision, but that decision is not helpful in evaluating the Debtor's future prospects. The document makes it very clear that the Debtor is currently disabled but does not make a determination of permanent disability. The SS Decision merely finds that the Debtor has been disabled from January 26, 2010 through the date of the decision, August 15, 2011. The subsequent Notice of Award states that the "decision must be reviewed at least once every 3 years.... Based on that review, your benefits will continue if you are still disabled, but will end if you are no longer disabled." [Pl. Ex. 1]. During closing argument, counsel for the Debtor mentioned for the first time a document deeming the Debtor's disabilities to be permanent in the context of the discharge of his other federally insured student loans. However, counsel admitted that no such document was in evidence or even available in the courtroom. It is unclear what evidentiary impact, if any, such a document might have had. In any event, there is no document or any other evidence of permanent disability in the record other than the Debtor's self-serving statements.
There was no other mention during the trial of any student loans other than those owed to National Collegiate. --------
Ultimately, the court is left to wonder and speculate regarding what the future holds for this 42-year old educated man with no dependents. Where the primary disabling maladies are psychological rather than physical, corroborative evidence is particularly helpful and may be critical in proving the second prong of the Brunner test. See, e.g., Nash v. Conn. Student Loan Foundation, 330 B.R. 323, 327 (D. Mass. 2005) (debtor suffering from bi-polar disease and receiving temporary disability benefits was unable to prove continuing inability to repay in the future absent reliable evidence beyond her sole testimony); Foust v. Ed. Resources Institute, Inc. (In re Foust), 342 B.R. 384, 2006 WL 751383, at *5 (6th Cir. B.A.P. March 24, 2006) (debtor's receipt of Social Security benefits related to his ADD together with his testimony may establish that debtor's ADD currently impacts his employment, but is insufficient to establish that the disorder is permanent and that debtor will be prevented from earning enough to repay the loans into the future). Notwithstanding the sympathy this court has for the Debtor given his current health and financial situation, it cannot speculate. In the absence of evidence that his condition is unlikely to improve, the Debtor has failed to carry his burden of proof.
3) Has the Debtor made good faith efforts to repay the loan?
Finally, the court must consider whether the Debtor made a good faith effort to repay the student loans. Barrett, 487 F.3d at 359. A primary consideration for this prong of the Brunner test is the extent to which any voluntary payments were made towards the student loan obligation. Goodman, 449 B.R. at 296. However, good faith is a fact specific analysis and whether a debtor made payments on a student loan obligation will not always be dispositive. Id. See also Trudel, 514 B.R. at 229 (noting factors to consider include repayment history, efforts to obtain employment, efforts to maximize income and minimize expenses and participation in an alternative repayment program). If a debtor fails to make voluntary payments, the debtor may still be able to prove good faith if the debtor can provide a probative explanation for the behavior. Trudel, 514 B.R. at 229.
In this case, the Debtor has made no payments whatsoever on these loan obligations. He testified that he contacted the lender (presumably a predecessor of National Collegiate) by phone, letter, and email. The Debtor felt that the lender was unreasonable and unresponsive. These contacts appear to have been minimal and unproductive. The lack of any payments or any realistic attempt to renegotiate the loan terms suggests a lack of good faith by the Debtor. However, the Debtor was underemployed at the time the loans became due, only able to offer $10 or $15 per month. Furthermore, he was already suffering from many of the disabilities that resulted in the SS Decision. It is difficult to imagine what else the Debtor might have done to exhibit a good faith effort to repay the loans. Although this is a close question, the court finds the Debtor's explanation of these circumstances credible and sufficient to prove his good faith.
CONCLUSION
The Debtor has failed to prove the second prong of the Brunner test: "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." Barrett, 487 F.3d at 359. There was insufficient corroborating evidence to support the Debtor's testimony on this issue and as a consequence the court has no basis for concluding that the Debtor's future is hopeless. He may be able to improve his mental and physical health, become fully employed, and make payments towards his student loans. Therefore, pursuant to 11 U.S.C. § 523(a)(8), the debts owed to National Collegiate are not dischargeable.
Furthermore, in accordance with the court's determination at trial, Danielle Harbeson-Jones is dismissed as a party defendant and any and all claims against her are denied without prejudice.
SO ORDERED.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/ _________
Lawrence S. Walter
United States Bankruptcy Judge Dated: March 24, 2015 cc: Andrew Zeigler
John Frederick Kennel
Thompson and DeVeny Co. LPA
1340 Woodman Drive
Dayton, OH 45432 Joseph Michael McCandlish
Weltman Weinberg & Reis Co LPA
3705 Marlane Drive
Grove City, OH 43123 Jonathan T Dever
Jonathan T. Dever, LLC
9146 Cincinnati - Columbus Rd.
West Chester, OH 45069