Opinion
Civil Nos. 04-1020 ADM, 04-1021 ADM.
August 2, 2004
Curtis P. Zaun, Esq., St. Paul, MN, Educational Credit Management Corporation, on behalf of Appellant Educational Credit Management Corporation.
Philip R. Schenkenberg, Esq., and Michael D. Gordon, Esq., Briggs Morgan, P.A., St. Paul, MN, on behalf of Appellants Pennsylvania Higher Education Assistance Agency, Hemar Insurance Corporation of America, and the Education Resource Institute.
Roylene A. Champeaux, Assistant United States Attorney, Minneapolis, MN, on behalf of Appellant United States Department of Education.
Monica L. Clark, Esq., and Andrew R. Toftey, Esq., Dorsey Whitney L.L.P., Minneapolis, MN, and Jonathan A. Strauss, Esq., Flynn, Gaskins Bennett L.L.P., Minneapolis, MN, on behalf of Appellee Laura Susan Reynolds.
MEMORANDUM OPINION AND ORDER
I. INTRODUCTION
This matter is before the undersigned United States District Judge on an appeal from a Bankruptcy Court Order. See Reynolds v. Penn. Higher Educ. Assist. Agency (In re Reynolds), 303 B.R. 823 (Bankr. D. Minn. 2004). Appellants include the United States Department of Education, the Pennsylvania Higher Education Assistance Agency, the Hemar Insurance Corporation of America, the Educational Credit Management Corporation, and the Education Resource Institute (collectively, "Appellants"). Appellants contend that the Bankruptcy Court erred in discharging Appellee Laura Susan Reynolds's ("Reynolds") student loans under federal bankruptcy law, which permits discharge of student loan obligations only when they "impose an undue hardship on the debtor and the debtor's dependents." 11 U.S.C. § 523(a)(8). Appellants argue that Reynolds possesses adequate surplus income to repay this debt. Reynolds asserts that the Bankruptcy Court correctly discharged her loans because the debt imposed an undue hardship on her. For the reasons explained below, the Bankruptcy Court's Opinion discharging Reynolds's student loan debt is affirmed.
II. BACKGROUND
Reynolds filed for Chapter 7 bankruptcy on June 20, 2000. See In re Reynolds, 303 B.R. at 826. In April 2002, at the time of the bankruptcy court trial, Reynolds was thirty-two years old.Id. at 827. She married her husband John Turner ("Turner") in 1999. Id. Reynolds and Turner share a one-bedroom apartment in St. Paul, Minnesota. Id. Reynolds does not have any children, but Turner has three children for whom he pays child support.Id. The children were ages fourteen, fifteen, and sixteen in April 2002. Id.
A. Reynolds's Educational Background and Employment History
Reynolds graduated cum laude from Claremont McKenna College in 1992, and earned a law degree in 1995 from the University of Michigan Law School. Id. After passing the Colorado bar exam on her first attempt, Reynolds was admitted to the Colorado Bar in the fall of 1995. Id. However, her Colorado Bar membership is currently inactive, and she is not admitted to practice law in any other state. Id. To finance her law school education, Reynolds took out several loans, evidenced by the eleven different promissory notes involved in this appeal. Id. at 826. Appellants hold the rights to payment of these notes.
Reynolds has almost no work experience as an attorney despite her law degree from the University of Michigan. See id. 827-28. She unsuccessfully sought employment during her third year of law school. Id. at 828. In the fall of 1995, Reynolds spent about two hours negotiating with vendors and drafting a contract for a family friend, but has not completed any other legal work since this time. Id. She continued looking for employment as a practicing attorney for about a year after graduating, both in Colorado and in Boston, where she moved in 1996. Id. 827-28. While in Boston, Reynolds obtained various short-term clerical positions through temporary-employment agencies since she could not find work as a lawyer. Id. 828. She earned from $10.00-$12.00 per hour at these jobs. Id.
Reynolds moved to the Twin Cities area in August 1997. Id. By then she had "given up hope of working as an attorney," and started working as a temporary secretary for $12.00 an hour.Id. She began a permanent position as an administrative assistant at the St. Paul Foundation in October 1999, and worked on reports and other publications. Id. Reynolds's salary was initially $29,000 a year, and rose to $30,000 during her employment. Id. She received positive to very positive evaluations, but left the Foundation in Spring 2001 without securing other employment. Id. Following her resignation, Reynolds again worked as a temporary secretary for several months. Id. She unsuccessfully applied for a position as a head-noter at West Publishing, and as a clerical assistant for the Minnesota Court of Appeals. Id.
In November 2001, Roof Spec Inc., a local contractor, hired Reynolds as a secretaryreceptionist for $15.00 per hour. Id. She testified that her net earnings were approximately $1700 a month. Reynolds received some "negative feedback" concerning her attitude and productivity, but retained this position at the time of the trial. Id.
Turner, Reynolds's husband, worked as a standby school bus driver for First Student Transportation as of the trial date.Id. He worked between fifteen to thirty hours a week and was paid $13.75 an hour. Id. The Bankruptcy Court estimated that he earned around $1300 per month after child support payments were deducted from his wages. Id. at 829. However, the Bankruptcy Court ultimately adjusted Turner's net monthly income to $1600 per month based on his ability to obtain additional employment.Id. Thus, the estimated total monthly income for the Reynolds-Turner household is $3300. Id.
B. Reynolds's Mental Health Concerns and their Impact on Her Employment
Numerous mental health care professionals have diagnosed Reynolds with a variety of mental illnesses including major depression, panic and anxiety disorder, agoraphobia, and borderline personality disorder. Id. Reynolds's problems with mental illness began in junior high and have exacerbated as she has aged. Id. at 829-30. She sought treatment for the first time after experiencing a "very bad panic episode" during her junior year of college while traveling in Scotland for a semester abroad program. Id. at 829. She left the program and returned to the United States to consult a psychiatrist. Id. Her mental health problems caused her to miss a semester of college, during which she suffered from depression and panic attacks. Id.
Reynolds's depression continued during law school where she remembers the "truly bad depression started." Id. at 830. She obtained treatment after graduating from law school when she returned to Colorado, and consulted with various health care professionals in Boston and Minneapolis. Id. After procuring health insurance to cover the cost, Reynolds began attending regular appointments with a psychotherapist. Id. She takes medication which reduces her symptoms somewhat, though she still experiences feelings of hopelessness and resignation, lethargy, and occasional suicidal thoughts. Id. At trial Reynolds characterized her personal finances, particularly her student debt, as a "major stressor" in her life, and the Bankruptcy Court concluded that stress triggers Reynolds's panic attacks. Id. Reynolds's condition is unlikely to improve from additional medications, as her psychiatric expert testified that "no medication combination has resulted in a substantial sustained partial remission" of her mental health concerns. Id. at 830-31.
The Bankruptcy Court found that Reynolds's mental illness precludes her employment as a lawyer, paralegal, or legal secretary. Id. at 831-32. While Reynolds is highly intelligent, she has difficulty functioning in non-academic settings because she is excessively self-critical and sensitive to others' criticism of her, and overreacts to ordinary work-place stress.Id. Further, she cannot realistically obtain a license to practice law due to her long-term and ongoing mental health problems. Id. Based on the evidence presented at trial, the Bankruptcy Court determined that Reynolds cannot work beyond "any level of responsibility greater than that of office manager or administrative assistant," but that even these non-legal positions are beyond her capabilities unless her mental health improves. Id. at 832.
C. The Reynolds-Turner Household's Living Expenses and Assets
Reynolds's household living expenses are approximately $2600 a month, and include costs for rent, utilities, food, transportation and personal needs. Id. at 833-34. Deducting this amount from the Reynolds-Turner household income of $3300 leaves a surplus of $700 per month. Id.
Appellants contest the reasonableness of some of Reynolds's household expenses, and argue that Reynolds has an additional $279.99 of disposable income each month. See Appellants' Br. at 17.
At the time of the trial, Reynolds and her husband had minimal assets, including a 1992 Mercury Sable, a 1990 Dodge Silhouette, and modest household furnishings. Id. at 834-35. Reynolds has a checking account which she normally draws down after paying monthly bills, and does not have any investments or retirement funds. Id.
D. Reynolds's Educational Loan Burden
Reynolds's student debt includes eleven separate loans owed to Appellants. See R. at 215-22. In March 2002, Reynolds owed a total of $142,044.55, a figure that now likely exceeds $160,000.See In re Reynolds, 303 B.R. at 835; Appellee's Br. at 10 n. 6. Depending on the terms of repayment, Reynolds's total monthly obligation on the $142,044.55 figure is $1,641.04 for a ten-year repayment plan, and $1,021.55 for a twenty-year plan. See In re Reynolds, 303 B.R. at 835. Some of Reynolds's loans are eligible for consolidation under the William D. Ford Direct Loan Program, which provides for a thirty-year repayment period that would lower Reynolds's monthly payment. Id.
Reynolds attempted to repay her loans for the first six months after they became due by charging daily living expenses to credit cards and using her income to pay off her educational debt. Id. However, she could not sustain this pattern and defaulted on the loans. Id. She unsuccessfully attempted to renegotiate payment terms with lenders, and finally concluded that she could not repay her loans given her employment prospects. Id. at 835-36.
III. DISCUSSION
Appellants argue that the Bankruptcy Court erred in discharging Reynolds's student loans, in determining that Reynolds maximized her income, and in calculating certain household expenses. Reynolds contends that the Bankruptcy Court properly discharged her student loans under the undue hardship standard.A. Standard of Review
District courts apply de novo review to a bankruptcy court's conclusions of law. Papio Keno Club, Inc. v. City of Papillion (In re Papio Keno Club, Inc.), 262 F.3d 725, 728-29 (8th Cir. 2001). Thus, whether the Bankruptcy Court properly discharged Reynolds's student loan debt under the undue hardship standard is a legal question subject to de novo review, and the appellate court must assess "the legal effect of the Bankruptcy Court's findings as to [the debtor's] circumstances." Long v. Educ. Credit Mgmt. Corp., 322 F.3d 549, 553 (8th Cir. 2003). The bankruptcy court's factual findings are reviewed under the clearly erroneous standard. See In re Papio Keno Club, Inc., 262 F.3d at 728-29. A particular finding must stand unless it lacks substantial evidentiary support, or if "the reviewing court on the entire record is left with the definite and firm conviction that a mistake has been made." Day v. Johnson, 119 F.3d 650, 654 (8th Cir. 1997) (citation omitted).
B. Discharge of Reynolds's Student Loans
The chief issue on appeal is whether the Bankruptcy Court properly discharged Reynolds's student loans after determining that this obligation imposed an undue hardship on her mental health, despite her ability to repay some portion of the debt. Student loan debt is exempt from discharge in bankruptcy proceedings unless retention would impose an undue hardship on the debtor and her dependents. See 11 U.S.C. § 523(a)(8). The bankruptcy code does not define "undue hardship," but circuit courts have developed two distinct tests to facilitate this determination. See Long, 322 F.3d at 554-55; Brunner v. N.Y. State Higher Educ. Serv. Corp., 831 F.2d 395, 396 (2d Cir. 1987). The Eighth Circuit applies the totality of the circumstances orAndrews test, which considers the following factors: (1) the debtor's past, present and reasonably reliable future financial resources; (2) a calculation of the debtor's and her dependent's reasonably necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case. See Long, 322 F.3d at 554-55; Andrews v. S.D. Student Loan Assistance Corp. (In re Andrews), 661 F.2d 702, 704-05 (8th Cir. 1981).
To prove undue hardship under the Brunner test, the debtor must meet all three of the following: (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 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 she has made good faith efforts to repay the loans.Brunner, 831 F.2d at 396.
The Eighth Circuit has not evaluated the relationship between the test's three prongs, or discussed the balance of pecuniary versus non-pecuniary concerns that might arise in a particular bankruptcy case. Rather, the case law contains an unresolved tension about which factors, if any, should predominate. Id. For example, in adopting the Andrews test, the Long court embraced a "less restrictive approach to the `undue hardship' inquiry," and rejected the more rigid Brunner test because "fairness and equity require each . . . case to be examined on [its own] unique facts and circumstances." 322 F.3d at 554. The Eighth Circuit's adherence to a highly particularized approach suggests that non-financial concerns may authorize discharge even when the debtor has some disposable income. Id. Further, the Eighth Circuit has recognized that a debtor's illness or disability is a factor in analyzing undue hardship.See In re Andrews, 661 F.2d at 704-05. However, the Long court also held that "[s]imply put, if the debtor's reasonable future financial resources will sufficiently cover payment of the student loan debt-while still allowing for a minimal standard of living-then the debt should not be discharged." Long, 322 F.3d at 554-55.
Faced with this apparent conflict and overwhelming evidence of Reynolds's debilitating mental illness, the Bankruptcy Court concluded that the Long decision allowed discharge of Reynolds's student loans. In re Reynolds, 303 B.R. at 840-41. Chief Bankruptcy Judge Kishel wrote, "[n]ondischargeability poses such negative consequences to [Reynolds's] mental health recovery, that they outweigh her current ability to make payment on at least a portion of her educational loan obligations." Id. at 841. Appellants argue that the Bankruptcy Court's decision improperly discharges Reynolds's loans because she possesses adequate surplus income to repay them.
Though recognizing the ambiguity in Long about how non-pecuniary factors interact with pecuniary concerns under theAndrews test, this Court must affirm the Bankruptcy Court's decision to discharge Reynolds's student loans under the undue hardship standard. As the Bankruptcy Court acknowledged, "a holding of undue hardship despite a demonstration of some ability to pay, should not be done or made lightly." In re Reynolds, 303 B.R. at 839. However, subjugating Reynolds's severe mental illness to purely financial considerations undermines Long's adherence to a "less restrictive approach to the `undue hardship' inquiry" as compared to the more rigid Brunner test. 322 F.3d at 554. Therefore, the Bankruptcy Court's decision to discharge Reynolds's student loan debt is affirmed.
C. The Bankruptcy Court's Factual Findings
Appellants also appeal several factual findings concerning Reynolds's household expenses and her employability. Specifically, Appellants argue that the Bankruptcy Court erred in the amounts it allocated for emergencies, transportation, auto insurance, "the vagaries of everyday life," and telephone expenses. Additionally, Appellants contend that the Bankruptcy Court failed to consider the elimination of Turner's tax debt and child support obligations, and improperly minimized Reynolds's earning potential.
The Bankruptcy Court's factual findings must stand because they are not clearly erroneous. See In re Papio Keno Club, Inc., 262 F.3d at 728-29. Starting with Reynolds's household expenses, the Bankruptcy Court provided substantial evidentiary support and reasoning for its findings, and the Court declines to second-guess its conclusions "to find every possible way to boost a surplus. . . ." Cline v. Ill. Student Loan Assistance Ass'n (In re Cline), 248 B.R. 347, 351 (8th Cir. B.A.P. 2000); see also In re Reynolds, 303 B.R. at 833-35. Similarly, the Bankruptcy Court properly included Turner's child support obligations in its analysis because at the time of trial, Turner remained responsible for payments on the youngest child for several years into the future. See In re Reynolds, 303 B.R. at 827; Tr. at 292-93. Turner also owed a monthly payment of $50 for taxes at the time of trial. Tr. at 287. Thus, these findings are not clearly erroneous.
Finally, the Bankruptcy Court's determination that Reynolds cannot realistically obtain employment in the legal field falls within its discretion. At trial, experts testified that Reynolds cannot gain admission to the Minnesota Bar, and other evidence suggested that her functional deficits preclude her from working as a lawyer, paralegal, or legal secretary. In re Reynolds, 303 B.R. at 831-32. Consequently, the Bankruptcy Court's conclusions about Reynolds's employability must stand Because the Bankruptcy Court's findings are not clearly erroneous, they are affirmed. See In re Papio Keno Club, Inc., 262 F.3d at 728-29.
IV. CONCLUSION
Based on the foregoing, and all the files, records and proceedings herein, IT IS HEREBY ORDERED that the Bankruptcy Court's Opinion discharging Reynolds's student loan debt in its entirety is affirmed.