Central District Consumer Bankruptcy Attorney's Association

Brunner is still the law, correct? Or is there now a "totality of the
circumstances" test?
Holly Roark
Certified Bankruptcy Specialist*
*and Sports Lawyer*
holly@roarklawoffices.com **primary email address**
www.roarklawoffices.com
Central District of California
Consumer Bankruptcy Attorney
1875 Century Park East, Suite 600
Los Angeles, CA 90067
T (310) 553-2600
F (310) 553-2601
*By State Bar of California Board of Legal Specialization
**For a quicker response, email me at holly@roarklawoffices.com.
I only use gmail for my listservs, and am likely to miss private emails
directed to my gmail account.**
On Wed, Aug 7, 2013 at 3:26 PM, wrote:
> FYI
>
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> -----Original Message-----
> To: Bus. Law Insolvency Constituency List
> Sent: Wed, Aug 7, 2013 3:23 pm
> Subject: Update from the Business Law Section's INSOLVENCY LAW COMMITTEE
>
>
> [image: Description: http://www.calbar.org/barseal_75x75.jpg]
> *Insolvency Law Committee - Business Law Section of the State Bar of
> California*
> Bankruptcy e-Bulletin
> Co-Chair
> James P. Hill
>
> Co-Chair
> Thomas R. Phinney
> Co-Vice Chair
> Diana D. Herman
>
> Co-Vice Chair
> Uzzi O. Raanan
>
> *Jennifer Choy*
> Business Law Section
> Administrative Assistant
> State Bar of California
> 180 Howard St.
> San Francisco, CA 94102
> 415-538-2570
> FAX 415-538-2368
> jennifer.choy@calbar.ca.gov
> August 7, 2013
>
> Dear constituency list members of the Insolvency Law Committee, the
> following are three recent case updates discussing the dischargeability of
> student loans in bankruptcy:
>
> *Summary*
>
> The U.S. Court of Appeals for the Ninth Circuit, in *Hedlund v. Educ.
> Resources Institute, Inc.*, No. 12-35258 (9th Cir. May 22, 2013) and *Roth
> v. Educ. Credit Mgmt. Corp.*, No. 11-1233 (B.A.P. 9th Cir. Apr. 16,
> 2013), and the U.S. Court of Appeals for the Seventh Circuit, in *Krieger
> v. Educ. Credit Mgmt. Corp.*, No. 12-3592 (7th Cir. Apr. 10, 2013), have
> recently ruled on the standard of review applicable to the determination of
> good faith under the long-standing *Brunner* test for dischargeability of
> student loan debts in bankruptcy under 11 U.S.C. 523(a)(8). Although
> *Hedlund* overrules the holding in *Roth, *Judge Pappass concurrence in *Roth
> *is a noteworthy commentary regarding *Brunner'*s undue hardship> analysis, as applied to the current economic climate.
> *Hedlund v. Educ. Resources Institute, Inc.,** et al., No. 12-35258 (9th
> Cir. May 22, 2013). To read the full decision, click here:
> http://cdn.ca9.uscourts.gov/datastore/o ... rected.pdf
> *
>
> *Factual Background and Procedural History*
>
> The debtor owed the appellee creditor over $85,000 in student loan debt.
> After graduating from law school, the debtor failed the Oregon bar
> examination twice and planned a third attempt but missed the exam when he
> locked his keys in his car during a coffee stop on his way. Making only
> $10 per hour as an intern, he could not afford his monthly loan debt
> service payments of over $800. The debtor researched but concluded that he
> was ineligible for the Income Contingent Repayment Plan (ICRP> negotiated unsuccessfully with the creditor for more lenient terms.
>
> The debtor filed an adversary proceeding seeking a partial discharge under
> Bankruptcy Code section 523(a)(8). Applying the three-factor test
> established in *Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re
> Brunner)*, 46 B.R. 752 (Bankr. S.D.N.Y. 1985), *affd*, 831 F.2d 395 (2d
> Cir. 1987), adopted by the Ninth Circuit in *United Student Aid Funds,
> Inc. v. Pena* (*In re Pena*), 155 F.3d 1108, 1111-12 (9th Cir. 1988), the
> bankruptcy court ruled for the debtor, discharging all but $32,080 of the
> debt. Under the *Brunner* test,
>
> the debtor must prove that: (1) he cannot maintain, based on current
> income and expenses, a minimal standard of living for himself and his
> dependents if required to repay the loans; (2) additional circumstances
> exist indicating that this state of affairs is likely to persist for a
> significant portion of the repayment period; and (3) the debtor has made
> good faith efforts to repay the loans.
>
> *Educ. Credit Mgmt. Corp. v. Mason* (*In re Mason*), 464 F.3d 878, 882
> (9th Cir. 2006). The bankruptcy court found that the debtor had
> sufficiently maximized his income. Although the debtor did not fully
> minimize his expenses, the bankruptcy court concluded that this did not
> tip the balance away from a good faith finding because [the debtor] and
> his family have always lived frugally. The bankruptcy court also
> considered various repayments the debtor made and the fact that his wages
> had been garnished. The bankruptcy court did not fault the debtor's
> refusal to enter into the ICRP or to agree to payment plans that would have
> caused undue hardship.
>
> On appeal, the district court, applying de novo review, reversed the
> bankruptcy court based on its conclusion that the bankruptcy court erred in
> its good faith finding. Rather, the district court found that the debtor
> did not sufficiently minimize expenses and maximize income, and failed to
> make an adequate effort to negotiate a repayment plan. It faulted the
> decision of the debtor and his wife to live as a single-income family, a
> lifestyle that few today can afford.
>
> *Holding and Analysis*
>
> Reversing the district court, the Ninth Circuit employed a different
> application of de novo review to the bankruptcy courts good faith
> determination. It held that the correct standard of review was the
> deferential clear error standard, with good faith being an essentially
> factual inquiry (although, as the Ninth Circuit observed, an appellate
> court should nonetheless apply de novo review when addressing a specific
> error of law that was part of the good faith determination). Reviewing the
> bankruptcy courts factual determinations, the Ninth Circuit discussed the
> mix of evidence, both favorable and unfavorable, to a finding of good
> faith. Ultimately, the Court of Appeals concluded that, though some might
> disagree with the bankruptcy courts good faith finding, the bankruptcy
> court did not commit clear error.
>
> *Krieger v. Educ. Credit Mgmt. Corp., **No. 12-3592 (7th Cir. Apr. 10,
> 2013). To read the full decision, click here:
> http://volo.abi.org/krieger-v-education ... rp/opinion
> *
>
> *Factual Background and Procedural History*
>
> In *Krieger*, the bankruptcy court held that a debtor seeking to
> discharge her student loans satisfied the *Brunner* test, which the
> Seventh Circuit adopted in *In re Roberson*, 999 F.2d 1132, 1135 (7th
> Cir. 1993). The debtor lived with her 75-year old mother in rural
> Illinois, subsisting on a few hundred dollars per month. She had
> difficulties finding employment due to her location, financial inability to
> relocate, lack of internet access, and car trouble. The educational loan
> creditor argued that the debtor did not try hard enough to find work,
> although she applied for roughly 200 positions over a decade-long period.
>
> The district court reversed, holding that the debtor did not make
> sufficient attempts to gain employment and had not enrolled in a 25-year
> repayment program. Although the debtor could not afford to pay even $1
> per year, the district court found that committing to a repayment plan
> would have shown good faith. The debtor appealed.
>
> *Holding and Analysis*
>
> The Seventh Circuit disagreed with the district court, noting that if
> good faith necessitated a commitment to future efforts to repay, then > educational loan *ever* could be discharged, because it is always
> possible to pay in the future should prospects improve. Reasoning that
> section 523(a)(8) allows for the discharge of student loans upon a showing
> of undue hardship, the appellate court concluded that > not to allow judicial glosses, such as language in *Roberson* and
> *Brunner*, to supersede the statute itself.
>
> The Seventh Circuit further opined that the fact-specific nature of the
> undue hardship determination requires deferential clear error review,
> although legal determinations are reviewed de novo. The Court of Appeals
> agreed with the bankruptcy courts determination that the debtor> difficult situation was likely to persist indefinitely, satisfying the
> second *Brunner* prong. Ultimately, as did the bankruptcy court, the
> Seventh Circuit found that the debtors situation was hopeless. Indeed,
> even the debtors creditor conceded that the result of a 25-year payment
> plan would likely be no payment as the debtor simply *cannot* pay.
>
> *Roth v. Educ. Credit Management Corp.**, No. 11-1233 (B.A.P. 9th Cir.
> Apr. 16, 2013), overruled by Hedlund v. Education Resources Institute,
> Inc., No. 12-35258 (9th Cir. May 22, 2013). To read the full opinion,
> click here:
> http://volo.abi.org/roth-v-educational- ... th/opinion
> *
>
> *Factual Background and Procedural History*
>
> The debtor sought the discharge of her student loan debt of about $95,000,
> owed to Educational Credit Management Corporation (ECMC) and the
> Department of Education (DOE), as an undue hardship. The debtor suffered
> from chronic medical conditions, some of which required surgery, which
> hampered her efforts to gain employment.
>
> Other than one informal attempt, the debtor never sought any deferments or
> forbearances. Neither did the debtor make any efforts to restructure the
> loans to reduce payments or otherwise modify their terms. After the
> debtors default, the DOE, with her consent, garnished her wages. In 2009,
> the debtor filed for chapter 7 bankruptcy, seeking to discharge her student
> loans as an undue hardship under section 523(a)(8).
>
> Applying the *Brunner *test, the bankruptcy court held that the debtor
> did not make good faith efforts to repay the loans. The debtor appealed,
> and the U.S. Bankruptcy Appellate Panel for the Ninth Circuit ("BAP")
> reversed, holding that the lack of even minimal voluntary payments did not
> evidence a lack of good faith where the debtor did not have the financial
> wherewithal to make such payments.
>
> *Holding and Analysis*
>
> In determining the standard of review for the *Brunner* test, the BAP
> held that each *Brunner* prong must be reviewed de novo, while the
> factual findings underpinning the determination of undue hardship must be
> reviewed for clear error. Applying this standard, the BAP held that the
> bankruptcy court erred in concluding that the debtor had failed to make a
> good faith effort to repay her student loans.
>
> *This holding has been invalidated by the Ninth Circuits Hedlund decision
> issued about five weeks after the BAP published Roth. *
>
> *Judge Pappas' Concurrence in Roth*
>
> In concurrence, the Hon. Jim D. Pappas agreed with the majoritys decision
> to reverse the denial of discharge of the debtors student loan debt.
> However, Judge Pappas wrote separately to emphasize his opinion that the
> *Pena/Brunner* regime for the determination of undue hardship is too
> narrow, no longer reflects reality, and should be revised by the Ninth
> Circuit. Instead of applying *Brunner*, Judge Pappas determined that
> bankruptcy courts should consider the totality of the circumstances when
> making the undue hardship determination.
>
> In an historical overview, Judge Pappas described several revisions of
> section 523(a)(8) over the years, each one further limiting the
> dischargeability of student loan debts. As Judge Pappas explained, when
> *Brunner* was decided by the U.S. Court of Appeals for the Second Circuit
> in 1987, the undue hardship determination only applied during the first
> five years after the student loan became due; and in 1990, the applicable
> period expanded to seven years, which time limit was operative for purposes
> of the Ninth Circuits *Pena* decision in 1998. Congress eliminated such
> time restrictions altogether in 1998, and in 2005, Congress expanded
> nondischargeability to private student loans. Thus, while the statutory
> exception to discharge has been repeatedly expanded and educational costs
> have skyrocketed, adherence to *Brunner* has remained constant.
>
> As Judge Pappas concluded, requiring that a debtor demonstrate that his
> or her financial prospects are forever hopeless is an unrealistic
> standard. Observing that the good faith requirement under *Brunner*
> lacks any textual basis in the Bankruptcy Code, Judge Pappas opined that
> such a requirement can result in a lifetime of financial struggle. The
> concurrence concludes by urging the Ninth Circuit to craft, as have some
> other courts, a new hardship standard based on the totality of the
> circumstances to decide simply, can the debtor currently, or in the
> near-future, afford to repay the student loan debt while maintaining an
> appropriate standard of living.
>
> *Authors Commentary*
>
> American student loan debt has reached record levels, as has the cost of
> tuition. There have been attempts, legislatively and judicially, to
> challenge both section 523(a)(8) and *Brunner*. *See*, *e.g.*, Fairness
> for Struggling Students Act of 2013, S. 114, 113th Cong. (2013); *In re
> Traversa*, 444 F. Appx 472 (2d Cir. 2011) *cert. denied*, 133 S. Ct.
> 135, 184 L. Ed. 2d 29 (2012). The *Hedlund* and *Krieger* decisions
> applying the deferential clear error standard of review permit flexibility
> on the part of the bankruptcy court in fact specific undue hardship
> determinations. However, these decisions still maintain *Brunner* as the
> prism through which such determinations must be made. The concurrence of
> Judge Pappas in *Roth*, on the other hand, invites the Ninth Circuit to
> reconsider the application of the more than twenty-five year old *Brunner*
> test in light of the statutes evolution and the drastic changes in today's
> economic reality. It is a possible roadmap for a litigant attempting to
> challenge the primacy of *Brunner*.
>
> These materials were prepared by Zev Shechtman *(zshechtman@dgdk.com
> ) *and Kevin D. Meek *(kmeek@dgdk.com
> ), *of Danning, Gill, Diamond & Kollitz, LLP, in Los
> Angeles, California. Editorial contributions were provided by ILC member
> Ori Katz and Aaron Kleven, of Sheppard, Mullin, Richter & Hampton LLP, in
> San Francisco, California.
>
> Thank you for your continued support of the Committee.
>
> Best regards,
>
> Insolvency Law Committee
>
>
> *The Insolvency Law Committee of the Business Law Section of the
> California State Bar provides a forum for interested bankruptcy
> practitioners to act for the benefit of all lawyers in the areas of
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