Opinion
No. 05-8028.
Submitted: February 1, 2006
Decided and Filed: March 24, 2006
ON BRIEF: Stephen P. Hale, Carrie Ann Rohrscheib, HUSCH EPPENBERGER, Memphis, Tennessee, for Appellant.
Before: AUG, GREGG, and PARSONS, Bankruptcy Appellate Panel Judges.
Appeal from the United States Bankruptcy Court for the Western District of Tennessee, Western Division at Memphis, Case No. 00-24646, Adv. Pro. No. 00-0318.
OPINION
In this adversary proceeding, James Darryl Foust ("Debtor") seeks to discharge student loans owed to The Education Resources Institute, Inc. ("TERI") on the grounds that repayment of the loans would pose an undue hardship pursuant to 11 U.S.C. § 523(a)(8). Following trial, the bankruptcy court ordered the Debtor to repay the loans in a manner consistent with the calculations used for the determination of payments under the William D. Ford Income Contingent Repayment Plan for a period of twenty-five years. The bankruptcy court further ordered that upon conclusion of the twenty-five year repayment period, any remaining balance owed would be discharged as constituting an undue hardship on the Debtor. TERI appeals this order. The Panel concludes that the Debtor failed to adequately establish that repayment of the loans would pose an undue hardship. Accordingly, the bankruptcy court is REVERSED.
See, 34 C.F.R. § 685.209.
I. ISSUE ON APPEAL
The issue on appeal is whether the Debtor established, by a preponderance of the evidence, that repayment of his student loan debt would constitute an "undue hardship" entitling him to a discharge of the debt pursuant to 11 U.S.C. § 523(a)(8).
II. JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel of the Sixth Circuit ("BAP") has jurisdiction to decide this appeal. The United States District Court for the Western District of Tennessee has authorized appeals to the BAP, and a "final order" of the bankruptcy court may be appealed as of right under 28 U.S.C. § 158(a)(1). "A bankruptcy court's judgment determining dischargeability is a final and appealable order." Hertzel v. Educ. Credit Mgmt. Corp. (In re Hertzel), 329 B.R. 221, 224-25 (B.A.P. 6th Cir. 2005) (citing Cundiff v. Cundiff (In re Cundiff), 227 B.R. 476, 477 (B.A.P. 6th Cir. 1998)).
On appeal, the bankruptcy court's factual findings are reviewed for clear error and its legal conclusions are reviewed de novo. Oyler v. Educ. Credit Mgmt. Corp. (In re Oyler), 397 F.3d 382, 384 (6th Cir. 2005) (citing Behlke v. Eisen (In re Behlke), 358 F.3d 429, 433 (6th Cir. 2004)). "Whether the repayment of student loans would impose an undue hardship on the debtor is a question of law that we review de novo." Tirch v. Pa. Higher Educ. Assistance Agency (In re Tirch), 409 F.3d 677, 680 (6th Cir. 2005). The factual determinations underlying the bankruptcy court's dischargeability findings are upheld on appeal unless they are clearly erroneous. In re Hertzel, 329 B.R. at 225 (citations omitted).
III. FACTS
The Debtor filed a voluntary petition under chapter 7 of the Bankruptcy Code in April 2000. According to the Debtor's schedules, the only debts he owed as of the filing date were educational loan obligations he had incurred to fund his medical schooling. On May 9, 2000, the Debtor filed a complaint seeking to have these student loans discharged pursuant to 11 U.S.C. § 523(a)(8). Trial on the Debtor's complaint was held on July 23, 2003.
At trial, the following facts were established: the Debtor is a 40-year old single man in excellent health with no dependents. He earned his Bachelor of Arts degree in biology and anthropology from the University of Tennessee, Knoxville in 1985 and obtained a Doctor of Medicine degree from Saint Georges University School of Medicine in Grenada, West Indies in 1995. The Debtor funded his medical education by procuring three separate loans from the International Health Professions Loan Program. The Appellant, TERI, funds a portion of the loans under this program and is a guarantor of the loans obtained by the Debtor. As of the filing of the Debtor's bankruptcy petition, the Debtor's outstanding loan balance to TERI was approximately $104,423.90.
The Debtor's other student loan obligation, in the approximate amount of $125,000, is owed to Education Credit Management Corporation ("ECMC"). Although ECM C was a defendant in the adversary proceeding before the bankruptcy court, it is not a party to the present appeal.
After he graduated from medical school, the Debtor was licensed to practice medicine in the State of Alabama. He subsequently completed one year of residency at the Saginaw Cooperative Hospitals in Saginaw, Michigan. The Debtor's residency contract was not renewed after the first year. According to the Debtor, the stated reason for this result was that he failed two rotations, but the Debtor believed that the real reason for the nonrenewal was his Attention Deficit Disorder ("ADD") condition, which had been diagnosed while he was in medical school.
In fact, the Debtor's belief that his termination was related to his A DD diagnosis led him to file an employment discrimination claim against the hospital. Although the Debtor was ultimately unsuccessful in the discrimination action, this adversary proceeding was held in abeyance pending that litigation and is the reason for the rather large time lapse between the filing of the Debtor's dischargeability complaint and the trial of this adversary proceeding.
After losing his Michigan residency, the Debtor made numerous attempts to secure a position in another residency program. The Debtor testified that, in 1998 and 1999, he submitted over 300 applications to other residency programs. Despite these efforts, the Debtor was unable to secure another residency position.
In fact, except for a brief stint as a convenience store clerk in 2000 and 2001 during which he earned $9,571.17 and $19,770.25, respectively, the Debtor has remained continuously unemployed. The Debtor testified that he has sought employment in other medical fields, such as pharmaceuticals and nursing, but has found that he is either over-qualified or lacks the necessary skills or certification. He has also applied for teaching positions, but has found his lack of teaching certification to be an obstacle. He further claims to have applied for "many" other jobs requiring less skill and education.
The Debtor attributes his lack of success in obtaining employment to his ADD, a condition for which he takes no medicine due to his lack of health insurance. However, the impact of the Debtor's ADD on his employment was refuted by TERI's expert witness who testified that the Debtor has high abilities, a high IQ, and that even in his weakest areas, the Debtor's mental abilities are above the population average. (J.A. at 168.) Although the Debtor's ADD would render him ill-suited for jobs that involve juggling many tasks at once, the expert concluded that "[h]e absolutely is employable in just about every category of work that exists in the United States." (J.A. at 171.)
While the Debtor remained unemployed, the forbearance and deferment periods on his student loans expired. It is undisputed that the Debtor has never made a payment on any one of his student loans.
With regard to expenses, the Debtor has resided in his parents' home in Saulsbury, Tennessee since leaving the Michigan residency program. In exchange, the Debtor occasionally contributes $100 to the household budget. The Debtor's scheduled monthly expenses also include $50 for telephone, $200 for food, $25 for clothing, $10 for medical and dental expenses, $50 for transportation and $10 for recreation.
After the evidence was concluded and proofs were closed, the bankruptcy court deferred closing arguments for ninety days to allow the Debtor to seek job counseling. At the conclusion of the ninety days, the Debtor submitted a report and stated that he remained unemployed. He further advised the court that as of December 2003, he had begun receiving Social Security disability payments of $398 per month. Thereafter, the bankruptcy court entered a memorandum opinion and order regarding the Debtor's dischargeability complaint. In its opinion, the court made detailed findings of fact, analyzed the case under the Brunner test, and concluded that payment by the Debtor "of the unpaid balance [of the student loans], as viewed today, would constitute an undue hardship under these circumstances and should be dischargeable." (J.A. at 465.) The court acknowledged that the Debtor's circumstances could change in the future and stated that it could not say "that the debtor will remain continuously unemployed over the course of the next 25 years." Id. Thus, emphasizing the "unique difficult and specific facts and circumstances existing [in this case]," the court ordered the Debtor to participate in the William D. Ford Income Contingent Repayment Plan. Id.
In response to the court's order, TERI filed a motion to amend the judgment. The motion asserted that the TERI loans were neither government subsidized nor insured by the U.S. Department of Education and were therefore not eligible for the income contingent program. On December 7, 2004, the bankruptcy court issued an amended order, which stated that "[t]he Debtor shall make payments to . . . TERI in a manner consistent with the calculations used for the determination of payments under the William D. Ford Income Contingent Repayment Plan. . . ." (J.A. at 478.) The order further stated that "[u]pon the conclusion of the twenty-five (25) year repayment period, any remaining balance owed to . . . TERI shall be discharged by this court as constituting an undue hardship on the Debtor. . . ." (J.A. at 479.)
On April 15, 2005, the court denied TERI's second motion to amend judgment. This timely appeal followed.
IV. DISCUSSION
Section 523(a)(8) of the Bankruptcy Code excepts educational loan debts from the debtor's discharge, except to the extent that repayment of such debts would impose an "undue hardship" on the debtor. 11 U.S.C. § 523(a)(8). Over time, the Sixth Circuit Court of Appeals has refined its standard for determining whether repayment of student loans poses an "undue hardship." Most recently, the Sixth Circuit has joined the majority of its sister circuits in explicitly adopting the test set forth in Brunner v. New York State Higher Educ. Serv. Corp., 831 F.2d 395 (2d Cir. 1987). See Oyler v. Educ. Credit Mgmt. Corp. (In re Oyler), 397 F.3d 382, 385 (6th Cir. 2005). The Brunner "undue hardship" test requires the debtor to establish:
(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; and (3) that the debtor has made good faith efforts to repay the loans.
In re Oyler, 397 F.3d at 385 (quoting Brunner, 831 F.2d 395). As noted by the Oyler court, the Brunner test "subsumes the criteria" that Sixth Circuit case law previously "treated as distinct and independent." In re Oyler, 397 F.3d at 385. These "`[o]ther factors,' now part of the Brunner test, include a debtor's expenses, standard of living, amount of outstanding debt, and ability to maximize income." Fields v. Sallie Mae Servicing Corp. (In re Fields), 326 B.R. 676, 681 (B.A.P. 6th Cir. 2005) (citing In re Oyler, 397 F.3d 382). The Debtor bears the burden of proof on all three prongs of the Brunner test and must show that he satisfies all three prongs by a preponderance of the evidence. Sands v. United Student Aid Funds, Inc. (In re Sands), 166 B.R. 299, 306 (Bankr. W.D. Mich. 1994).
The Sixth Circuit has also "held that the bankruptcy court may grant a partial discharge of [student loan] debt pursuant to the equitable powers enumerated in 11 U.S.C. § 105(a)." Tirch v. Pa. Higher Educ. Assistance Agency (In re Tirch), 409 F.3d 677, 680 (6th Cir. 2005) (citing Miller v. Pa. Higher Educ. Assistance Agency (In re Miller), 377 F.3d 616, 623 (6th Cir. 2004) (additional citations omitted). However, "the requirement of undue hardship must always apply to the discharge of student loans in bankruptcy — regardless of whether a court is discharging a debtor's student loans in full or only partially." In re Miller, 377 F.3d at 622. Thus, the Debtor's student loan debt may not be discharged, even partially, unless he satisfies all three prongs of the Brunner test by a preponderance of the evidence. Id. at 623.
Here, the bankruptcy court's order will result in the discharge of an unspecified portion of the Debtor's student loan obligation after expiration of the court-imposed twenty-five year repayment period. On appeal, this Panel must revisit the three Brunner prongs in turn.
A. Whether the Debtor Can Maintain A Minimal Standard of Living If Forced to Repay the Loan.
The bankruptcy court found that the Debtor "very adequately met the first prong" of the Brunner test. (J.A. at 461.) The Debtor maintains a minimal standard of living by residing with his father and incurring minimal expenses. Aside from his occasional $100 contributions to the household, the Debtor's monthly expenditures are less than $400. Therefore, the bankruptcy court correctly found that, under the present circumstances, the Debtor could not maintain his current minimal standard of living if forced to repay his student loan obligation and thus has met the first prong of the Brunner test.
B. Whether Additional Circumstances Exist Indicating that the State of Affairs is Likely to Persist for a Significant Portion of the Repayment Period.
The second prong of the Brunner test requires the Debtor to demonstrate that his current "state of affairs is likely to persist for a significant portion of the repayment period of the student loans." In re Oyler, 397 F.3d at 385 (quoting Brunner, 831 F.2d 395). To sustain his burden under this portion of the test, "the debtor must precisely identify [his] problems and explain how [his] condition would impair [his] ability to work in the future." In re Tirch, 409 F.3d at 681 (citations omitted). The Debtor must establish "a certainty of hopelessness, not merely a present inability to fulfill financial commitment." Id. (quoting In re Oyler, 397 F.3d at 386) (additional citations and internal quotation marks omitted). Such hopelessness can stem from circumstances including "illness, disability, a lack of useable job skills, or the existence of a large number of dependents." In re Oyler, 397 F.3d at 386 (citation omitted).
In an attempt to meet the second prong of Brunner, the Debtor cites his Attention Deficit Disorder and the loss of his first residency position as the reasons that he has remained under- or unemployed since 1997. He further states that, despite multiple attempts to obtain employment both within and outside of the medical field, he has been unsuccessful in finding a job. However, he offered no proof that his ability to work has been permanently impaired. To the contrary, the evidence presented demonstrates that the Debtor is a healthy, relatively young man with no dependents and a wealth of education, including a Bachelor of Arts and Doctor of Medicine.
In finding that the Debtor met the second prong of the Brunner test, the bankruptcy court cited the Debtor's receipt of Social Security disability payments as evidence that his ADD impacts his employability. Because the Debtor submitted no supporting documentation or evidence as to the nature of the payments, the court presumed the payments were of a partial nature and that the Debtor would have the continued ability to seek employment within the confines of the disability payment. In fact, the bankruptcy court went on to note that it was "unconvinced that the debtor's ADD evidenced at trial is a malady that would entirely preclude him from working in gainful employment of some type in the future." (J.A. at 458.). Thus, even though the Debtor's ADD may currently impact his ability to earn a living, there was no evidence that this state of affairs will persist for a significant portion of the loan repayment period, especially in light of the fact that the Debtor currently takes no medication for his condition. Shilling v. Sallie Mae Servicing Corp. (In re Shilling), 333 B.R. 716, 722 (D. Pa. 2005) (debtor's determination by SSA that she is currently disabled did not establish that psychological disorder was permanent); see also Nash v. Conn. Student Loan Found., 330 B.R. 323, 327 (D. Mass. 2005) (debtor's current receipt of SSI benefits was insufficient to establish that she will never have the ability to pay student loan). At a minimum, the Debtor must present corroborative evidence that he has an impairment that prevents him from earning enough to repay his loans, and that the impairment is likely to persist well into the future. Hertzel v. Educ. Credit Mgmt. Corp. (In re Hertzel), 329 B.R. 221, 231 (B.A.P. 6th Cir. 2005) (citing Norasteh v. Dept. of Educ. (In re Norasteh), 311 B.R. 671, 678 (Bankr. S.D.N.Y. 2004)). The Debtor failed to present adequate proof.
Although not properly before the Panel, a letter from the Debtor to the clerk of BAP received on February 14, 2006, indicates that the Debtor receives SSI, rather than SSD.
Additionally, while the Debtor suggests that his ADD prevents him from obtaining gainful employment, that assertion was overwhelmingly refuted by TERI's expert witness. Dr. Sieveking, a clinical psychologist, testified that while the Debtor has a mild form of Attention Deficit Disorder, he also has very high abilities and is "absolutely employable in just about every category of work that exists in the United States" despite his ADD. (J.A. at 171.) In fact, the bankruptcy court acknowledged that it could not find that the Debtor would "remain continuously unemployed" in the future. (J.A. 465.)
TE RI's expert testified that the Debtor's IQ is quite high and that he scores in the ninety-ninth percentile in a number of achievement areas in his norm group. Additionally, in those areas where the Debtor considers himself weak, Dr. Sieveking's testing revealed he is still above the population average. (J.A. at 168.)
Because the Debtor failed to establish that his current state of affairs is likely to persist for a significant portion of the loan repayment period, he failed to satisfy the second prong of the Brunner test.
C. Whether the Debtor has Made a Good Faith Effort at Repayment.
The Debtor has also failed to demonstrate a good faith effort at repayment of his student loans under the third prong of the Brunner test. It is undisputed that the Debtor has never made a payment on his student loan debt. However, the fact that the Debtor has made no payments on his student loans does not alone preclude a finding of good faith. Instead, "[a] finding of good faith . . . turns on several considerations including the debtor's efforts to obtain employment, maximize his income, minimize his expenses, and participate in alternative repayment options." In re Hertzel, 329 B.R. at 233-34 (quoting Norasteh v. Boston Univ. (In re Norasteh), 311 B.R. 671, 676 (Bankr. S.D.N.Y. 2004)).
As noted previously, the Debtor's living expenses are minimal. Additionally, because the TERI loans are not eligible for the federal government's income contingent repayment plan, the Debtor's failure to avail himself of that program cannot indicate a lack of good faith in this instance. However, the evidence regarding the Debtor's efforts to obtain gainful employment and maximize his income do not demonstrate a good faith attempt to repay his loan obligations. For example, despite his nominal living expenses during his employment as a convenience store clerk in 2000 and 2001, during which he earned $9,571.17 and $19,770.25, respectively, he continued to seek deferments and forebearances rather than make any payments on his student loans. Furthermore, the Debtor left his residency in 1997 and has had over eight years to find steady, gainful employment.
Although he may never achieve his goal of practicing medicine, the Debtor is an intelligent, well-educated man who is qualified to perform any number of jobs, regardless of the fact that he suffers from ADD. Given the Debtor's minimal living expenses, even a low-paying job, such as his job as a convenience store clerk, would have provided him enough income to repay at least a small portion of his student loan debt. Accordingly, the Debtor has failed to meet the third prong of the Brunner test.
V. CONCLUSION
Because the Debtor failed to demonstrate that his circumstances meet the Brunner standard to qualify for an "undue hardship" discharge of his student loans, the judgment of the bankruptcy court is REVERSED.