Opinion
No. 00-10884-PHX-GBN, Adversary No. 01-00062-GBN.
January 15, 2004
Gregory T. Boehm Tempe AZ, Plaintiff Pro Se.
Madeleine C. Wanslee, Gust Rosenfeld PLC, Phoenix, AZ, Attorneys for Pennsylvania Higher Assistance Agency and Educational Credit Management Corporation.
AMENDED FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER
The complaint of plaintiff Gregory Travis Boehm for a declaration that his student loan debt owed to creditors Educational Credit Management Corporation and the Pennsylvania Higher Educational Assistance Agency ("defendants") was discharged in his chapter 7 bankruptcy was heard as a bench trial on February 19, 2002. The proceeding was not submitted to the court for decision until November 18, 2003, to allow an extended opportunity to attempt to settle, to divert plaintiff's case to an administrative resolution under the William D. Ford Loan Consolidation Program, 34 C.F.R. § 685 et. seq. and for extensive post trial briefing.
The Court has considered sworn witness testimony, admitted exhibits, a declaration of defendants' witness Danielle Smith and the facts and circumstances of this case. An interim order was entered on December 4, 2003 announcing the Court's decision. The following findings and conclusions are now entered:
FINDINGS OF FACT
1. Plaintiff Boehm is a tetraplegic, unable to use his arms or legs since suffering a spinal cord severance injury in a May 7, 1981 automobile accident. He functions and interacts verbally and through use of mouth sticks and employment of a personal assistant. He has employed a personal assistant for the last 20 years and is confined to a wheelchair. Following his injury, plaintiff acquired a considerable amount of higher education, receiving a Bachelor of Science degree in Hotel Administration in 1990, a Juris Doctor degree from the Arizona State University Law School in 1994 and a Master's degree in Business Administration in 1995. Mr. Boehm is single and has no dependents. Plaintiff has been unable to pass the examination requirements for admission to Arizona bar membership after eight attempts. Since August 16, 2001 plaintiff has been employed part time at Arizona State University as a technical support representative, responding to inquiries by telephone and email. His salary is $954 per month. He estimates his current gross salary is $15-16,000. Plaintiff additionally receives $763 monthly in untaxed Social Security Disability Insurance payments. He previously received $486 monthly in Supplemental Security Income ("SSI") payments. The SSI payments terminated when he became employed at the University.
At the time of trial, plaintiff was concerned because his Social Security disability benefits were under periodic agency review. If he were to lose his social security, the state of Massachusetts would cut off his personal assistant benefits, paid directly to the assistant. He maintains state residency by leasing premises in Clinton, Massachusetts. Plaintiff testified his personal expenses have escalated since he filed his Schedule J current expenditures statement on October 5, 2000 and he is unable to make payments on defendants' claims. Trial testimony of Gregory Travis Boehm of February 19, 2002 ("test."); admitted exhibit ("ex") B. The Court finds that debtor is a credible witness.
The pro se litigant subsequently supported his trial testimony by post-trial filings of bills, including a statement reflecting his Massachusetts lease has increased from $51 monthly, effective February 1, 2001 to $902, effective October 1, 2003. Dkt. 52. He also attaches correspondence reflecting the Social Security Administration is attempting to collect an asserted overpayment of $6,570.66. Dkt. 40 at attachment. Defendants properly object to consideration of documents not admitted at trial. In re MacDonald, 222 B.R. 69, 72-73 (Bankr. E.D.Pa. 1998). The documents will not be considered. Plaintiff's trial testimony will be considered, however.
2. Plaintiff filed a Chapter 7 bankruptcy case in this judicial district on October 5, 2000. He scheduled his monthly income as $1,203.76, based entirely on government assistance through Social Security Disability and the SSI programs. His earnings from these same governmental assistance programs provided income of $13,064.00 in 1999 and $13,215.00 in 1998. Debtor listed his expenses as $1,454.89, including payments of $771.19 monthly on $34,001.74 of scheduled student loan debt owed to three creditors. Debtor's bankruptcy schedules list his unsecured debt as $95,656.51, including the above student loans and $61,246.33 in credit card debt owed to ten creditors. No secured or priority debt was listed. Plaintiff valued his total assets at $4,125, primarily consisting of a 1990 Ford van worth $3,800. His bankruptcy trustee reported no assets were available to pay creditors. Debtor has been granted a bankruptcy discharge on January 29, 2001 and his case was closed on August 8, 2002. Administrative file 00-10884-PHX-GBN and supporting schedules.
Credit card debts of $650.73 and $5,196.15 were apparently listed twice. See Schedule F at pgs. 1-2.
3. On January 31, 2001 plaintiff filed the complaint in this proceeding, seeking discharge of student loan debt held by three defendants with a current balance of $25,129.09. He alleged in the complaint and testified at trial that he remained current in his student loan payments until he filed the adversary proceeding. Complaint at pgs. 1-4, adversary docket item ("Dkt.") 1. Debtor credibly testified that he kept current with his $771 monthly student loan payments by charging expenses on his credit cards.
A settlement was reached with defendant The Education Resources Institute ("TERI") on January 7, 2002 by which the TERI claim would be discharged on April 15, 2003, provided debtor established through tax returns that his gross income did not exceed $25,000 in either calendar year 2001 or 2002. Stipulated Judgment at 1-2, Dkt. 28. Plaintiff and the two remaining defendants could not reach settlement: debtor rejected defendants' request that he stipulate to a 25-year income contingent repayment plan under the William D. Ford Foundation Income Contingent Repayment Program. Defendants rejected debtor's request that they stipulate to a settlement similar to the TERI resolution. Test., ex. D.
4. To the extent any of the following conclusions of law should be considered findings of fact, they are hereby incorporated by reference.
CONCLUSIONS OF LAW
1. To the extent any of the above findings of fact should be considered conclusions of law, they are hereby incorporated by reference.
2. Pursuant to 28 U.S.C. § 1334(a), jurisdiction of debtor's bankruptcy case is vested in the United States District Court for the District of Arizona. That court has referred all cases under Title 11 of the United States Code and all adversary proceedings arising under Title 11 or related to a bankruptcy case to this court. 28 U.S.C. § 157 (a); Amended District Court General Order 01-15. This proceeding having been appropriately referred, this court has core bankruptcy jurisdiction to enter a final judgment determining whether defendants' claims should be discharged in the related bankruptcy case. 28 U.S.C. § 157(b)(2)(I).
3. This court's conclusions of law are reviewed de novo. Its factual findings are reviewed for clear error. Hanf v. Summers (In re Summers), 332 F. 3d 1240, 1242 (9th Cir. 2003). The appellate court accepts the bankruptcy court's findings, unless upon review, it is left with the definite and firm conviction that a mistake has been committed. Ganis Credit Corp. v. Anderson (In re Jan Weilert RV, Inc.), 315 F. 3d 1192, 1196 (9th Cir.) amended by 326 F. 3d 1028 (9th Cir. 2003). Whether a claim is dischargeable presents mixed issues of law and fact that are reviewed de novo. Hamada v. Far East National Bank (In re Hamada), 291 F. 3d 645, 649 (9th Cir. 2002).
4. Under § 523(a) (8) of the Bankruptcy Code, the issue is whether plaintiff has established that he is entitled to discharge defendants' student loans as constituting an undue hardship on him. 11 U.S.C. § 523 (a) (8). The Ninth Circuit has adopted the so-called Brunner test. Under this three-part test, debtor must first establish that he cannot maintain, based on current income and expenses, a minimal standard of living, if forced to repay the loans. Second, debtor must show that additional circumstances exist indicating this state of affairs is likely to persist for a significant portion of the repayment period. The third prong requires that debtor has made good faith efforts to repay the loans. Saxman v. Educational Credit Management Corp. (In re Saxman), 325 F. 3d 1168, 1173 (9th Cir. 2003).
Plaintiff has the burden to satisfy all three elements before a student loan can be discharged. If he fails to meet one of the requirements, the court's inquiry must end there with a finding of no dischargeability. United Student Aid Funds, Inc. v. Nascimento (In re Nascimento), 241 B.R. 440, 445 (9th Cir. Bankr. 1999). The elements are to be proven by a preponderance of the evidence. Cota v. U.S. Department of Education (In re Cota), 298 B.R. 408, 414 (Bankr. D. Az. 2003).
5. The first prong of the Brunner test requires debtor to prove he cannot maintain, based on current income and expenses, a minimal standard of living if forced to repay the loans. This requires an examination of debtor's current income and expenses to see if payment would cause his standard of living to fall below that minimally necessary. Debtor must demonstrate more than simply tight finances. Courts require more than temporary financial adversity, but typically stop short of utter hopelessness. The proper inquiry is whether it would be unconscionable to require debtor to earn more income or reduce expenses. Birrane v. Pennsylvania Higher Education Assistance Authority (In re Birrane), 287 B.R. 490, 495 (9th Cir Bankr. 2002).
Defendants presented no witnesses controverting plaintiff's credible testimony that he could not maintain his modest living standard and make payments on their claims. There is no evidence of a lavish lifestyle or significant disposable income. Defendants' post trial briefing attacks inclusion of $55 budgeted for monthly home maintenance, although plaintiff is a renter (no trial time was spent on this issue on cross examination) and urges that since plaintiff pre petition could make $771.19 monthly student loan payments, he should be able to do so post petition as well. Defendants' supplemental reply, dkt. 58 at pgs. 5-6. Defendants also argue for the existence of $793 in disposable income, based on his 2003 income and his 2000 Expense Schedule J, filed in his bankruptcy. Post trial brief at 2, dkt. 38. These arguments do not overcome plaintiff's credible testimony that he was required by Social Security regulations to keep his student loans current which he did by charging living expenses on multiple credit cards. This testimony is supported by the large number and amount of credit card debt scheduled in the bankruptcy. See finding of fact 2, id. This fact finder concludes debtor has met his burden to establish the first prong of the Brunner test.
6. The second prong requires debtor to prove that additional circumstances exist indicating that debtor's current situation is likely to persist for a significant portion of the student loan repayment period. 287 B.R. at 497. This test is to effect clear congressional intent to make discharge of student loans more difficult than that of other debt. There must be evidence debtor's road to recovery is obstructed by the type of barrier that would lead the court to believe he will lack the ability to repay for several years. Examples of such barriers may include psychiatric problems, lack of usable job skills and limited education. Id., citing cases. Nothing has been presented indicating plaintiff's present disabled condition will improve over time. He meets defendants' suggestion of seeking more gainful employment as an attorney, paralegal, or business manager with the following:
The debtor has taken the bar exam 8 times, and a good portion of the debtor's discharged debt was incurred in the pursuit of a successful bar exam. Exams plus review courses all have fees that are fairly substantial. Debtor could not afford these fees at present. Debtor cannot afford to incur more debt.
Also, defense counsel fails to consider Debtor's total lack of physical ability and his complete dependence on others to assist in his day. The biggest variable is the dependence on others. Employees are (sic) don't show up, are late or tired, hungover, angry, have personal problems and a myriad of other things going on in their lives besides their work for Debtor. If employees don't show up for work, the debtor cannot do their work for them. As Defense counsel will point out, these circumstances existed at the time the loans were incurred.
However, the comfortable pace of law school and the physical rigors of an active attorney are entirely different. These differences only became apparent through actual externships as a law clerk and as student counsel to juvenile defendants. Attorneys typically are at the office early and they stay late on many occasions especially as a new attorney. Flexibility in their ability to schedule is imperative to success. Attorneys read and reread papers, briefs, depositions; (sic) shuffle papers, retrieve files, do legal research, get themselves to court, depositions, and other activities all without assistance. A paralegal's duties can be similar to an attorney's but include secretarial-type activities. The Debtor is dependent on others for this assistance. This assistance is not free and the monies the debtor receives from the state for his care is relegated to Activities of Daily Living (personal care, at-home medical care, and necessary household assistance). Use of the monies for other activities (such as help with employment related activities) is not allowed.
These circumstances are indeed, extraordinary and will persist for all if not more than the loan repayment period.
Plaintiff's answer to closing brief at 3-4, dkt. 40.
This court concurs. Debtor has met the second prong of the test.
7. The third prong of the Brunner test requires that debtor prove good faith efforts were made to repay the loans. Birrane at 499. Courts measure good faith by examining various factors. The fact debtor has made no or only some payments is not, in and of itself dispositive. Good faith is measured by debtor's efforts to obtain employment, maximize income and minimize expenses. Id. (citing cases). Debtor may not willfully or negligently cause his own default. His condition must result from factors beyond his reasonable control. 287 B.R. at 500. Finally, good faith is also measured by debtor's effort, or lack thereof, to negotiate a repayment plan. Id.
Plaintiff's trial testimony that he remained current with $771.19 monthly student loan payments until February of 2001 is undisputed. His adversary complaint was filed in January of 2001. His filing of the adversary does not automatically excuse his obligation to continue to make good faith student loan payments, if feasible. Birrane at 500. While he ceased payments as his complaint was being adjudicated, his testimony that he could only remain current by living on credit cards is both credible and undisputed. There is no good faith requirement that he create unpaid post petition credit card debt to ensure his student loans are current.
Debtor's good faith efforts to negotiate a repayment plan include a successful settlement with defendant TERI, allowing discharge of student loan debt provided debtor documented his modest income. Finding of fact 3. He also attempted to settle with the remaining defendants. Given his disability and employment status, debtor was unwilling to commit to a long-term 25-year, income-contingent repayment plan. Defendants in turn, refused his request to settle based on a proposal similar to the TERI arrangement. Id. at 3. In post trial briefing, plaintiff asserts he also attempted to comply with defendants' request for a physician certified total and permanent disability finding. Closing brief at 4-5, dkt. 37. See 34 C.F.R. §§ 685.212(b), 213(c).
As plaintiff argues:
The debtor has co-operated (sic) with the defense by showing good faith prior to and after filing for bankruptcy. The debtor faithfully paid toward reducing the debt owed on his student loans prior to bankruptcy.
What is not noted by defense counsel is that student loans were a first priority of the debtor at the expense of other debts as the need to request bankruptcy drew near; there was not enough income to satisfy all creditors.
There is not excess income, as stated by the Defense. In fact, income is reduced since the inception of this litigation. Additionally, two of the Debtor's monthly obligations, the state-owed PCA fee/premium and his Section 8 rent, are income-sensitive, increasing/decreasing with his income.
Answering Brief at 4-5, dkt. 40.
This court concludes debtor made good faith efforts to negotiate a repayment plan, given his physical and employment prospects. Debtor has met the third prong of the test.
8. After making findings and conclusions that all three undue hardship prongs have been met, courts in the Ninth Circuit must evaluate debtors' income and expenses to determine if a partial or complete hardship discharge of student loans should be entered. Saxman at 1173-75.
This fact finder evaluates debtor's income and expenses as justifying a complete, rather than a partial discharge. The method for calculating debtor's average monthly expenses is properly left to the discretion of the bankruptcy court. United Student Aid Funds, Inc. v. Pena (In re Pena), 155 F. 3d 1108, 1112 (9th Cir. 1998).
First, there was no trial evidence received indicating a reasonable prospect of improvement of either debtor's debilitating physical or modest financial circumstances. Second, this fact finder views debtor's testimony of his present modest finances and lifestyle as credible and substantiated by filed bankruptcy schedules. Defendants' argument that the discharge of thousands of dollars of debt leaves available the funds originally used to keep the student loans current, founders on the uncontradicted testimony and evidence that debtor was able to keep current only by going into debt on his credit cards. While the standard for discharge of a student loan is indeed stringent, debtors are not required to set the stage for a second bankruptcy filing.
Our Bankruptcy Appellate Panel's requirement of maintaining student loan payments presents a conundrum for debtors. If debtor fails to do so, good faith may be lacking. If debtor does so, arguably there is post discharge income available to pay student loans. Birrane at 500, citing, U.S. Department of Education v. Wallace (In re Wallace), 259 B.R. 170, 185 (C.D. Cal. 2000). C.f. Cota, 298 B.R. at 420. (Failure to make payments does not prevent a finding of good faith when debtor lacks the resources to make payments).
ORDER
The Court finds for plaintiff and against defendants. Plaintiff's complaint is sustained and defendants' claims are discharged in this bankruptcy pursuant to 11 U.S.C. § 523(a)(8). A judgment was issued on December 12, 2003.