Faish, In re

• Decision Date: 19 October 1995
• Docket Number: No. 95-7178,95-7178
• Parties: , Bankr. L. Rep. P 76,715 In re Marjorie Jo FAISH, Debtor. PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY v. Marjorie Jo FAISH, Appellant. . Submitted Pursuant to Third Circuit LAR 34.1(a)
• Court: U.S. Court of Appeals — Third Circuit

Page 298

72 F.3d 298

64 USLW 2354, Bankr. L. Rep. P 76,715

In re Marjorie Jo FAISH, Debtor.

PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY v. Marjorie Jo FAISH, Appellant.

No. 95-7178.

United States Court of Appeals, Third Circuit.

Submitted Pursuant to Third Circuit

LAR 34.1(a)

Oct. 19, 1995.

Decided Nov. 28, 1995.

Sur Petition for Rehearing Jan. 16, 1996.

Marjorie Jo Faish, Harrisburg, PA, Pro Se.

K. Kevin Murphy, Pennsylvania Higher Education Assistance Agency, Harrisburg, PA, for Appellee Pennsylvania Higher Education Assistance Agency.

Before: SCIRICA, COWEN and ROTH Circuit Judges.

OPINION OF THE COURT

COWEN, Circuit Judge.

In this case we must decide whether appellant Marjorie Jo Faish is entitled to have her student-loan obligation discharged in a Chapter 7 bankruptcy proceeding. If Faish can establish that repayment of her student-loan debt would result in "undue hardship" under Sec. 523(a)(8)(B) of the Bankruptcy Code, she is entitled to have her entire debt discharged. 11 U.S.C. Sec. 523(a)(8)(B).

The Bankruptcy Court for the Middle District of Pennsylvania, citing equitable considerations, held that Faish need repay only $15,000.00, less than half of her loan obligation. On appeal, the District Court for the Middle District of Pennsylvania, applying a modified version of the "undue hardship" test set forth in In re Johnson, 5 Bankr.Ct.Dec. 532 (Bankr.E.D.Pa.1979), reversed the bankruptcy court. The district court held that because Faish had failed to establish that the repayment of her entire student-loan obligation would impose "undue hardship," no discharge was appropriate here.

We must also decide what legal standard bankruptcy courts within the Third Circuit will now apply when they consider whether the facts presented give rise to "undue hardship," as that term is to be construed under Sec. 523(a)(8)(B). This area of the law is presently in a state of considerable confusion, with bankruptcy courts within our Circuit

                applying a broad range of standards. 1  For the reasons stated herein, we adopt the standard for "undue hardship" set forth by the Court of Appeals for the Second Circuit in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir.1987) (per curiam ).  Pursuant to this standard, although different from the one applied by the district court below, we will affirm the district court's order that Faish's student-loan debt must be deemed nondischargeable in its entirety
                

I.

Marjorie Jo Faish obtained a Master's Degree in Public Health and Community Health Services Administration from the University of Pittsburgh in 1989. To help defer the costs of her education, Faish obtained $31,879.31 in guaranteed student loans from the Pennsylvania Higher Education Assistance Agency ("PHEAA"). Under the terms of the loan agreements, Faish was required to commence payments on her student-loan obligation on October 1, 1991.

On September 27, 1993, Faish filed a Chapter 7 bankruptcy petition with the Bankruptcy Court for the Middle District of Pennsylvania. On the same day, Faish filed a complaint to determine the dischargeability of her student loan debt to PHEAA. A trial on the issue of dischargeability was conducted on December 22, 1993.

On July 12, 1994, the bankruptcy court rendered its decision, making the following factual findings. See In re Faish, No. 93-01686, slip op. at 2-3 (Bankr.M.D.Pa. July 12, 1994). Faish has a job working for the Commonwealth of Pennsylvania in the Department of Public Welfare, Bureau of Financial Operations, as a budget analyst. She earns a yearly gross salary of approximately $27,000.00. Faish does not own an automobile and commutes to and from work by bus. She has been unsuccessful in her pursuit of a higher-paying job.

Faish is thirty-years-old, unmarried and has an eleven-year-old son. Faish does not receive any child support payments from the father of her child. She is concerned about the quality of the neighborhood and school district that she lives in and is now saving money for an automobile and a new apartment in a better area.

Faish suffers from Crohn's disease, a chronic condition affecting the bowel. She also has back problems. The bankruptcy court found, however, that although Faish's health problems are "significant," they "are not interfering with her ability to work." Id. at 5.

Faish's original principal debt to PHEAA amounted to $31,879.31. From November 13, 1991, through June 2, 1993, Faish repaid $4,629.92 of her loan obligation. As of September 1993, Faish owed PHEAA $32,989.33. Id. at 2.

After setting forth these factual findings, the bankruptcy court observed that "[o]ur district court has adopted the test for undue hardship set forth in In re Johnson.... The Johnson test divides the undue hardship inquiry test into three prongs: a mechanical test, a good faith test, and a policy test." Id. at 4. Applying the first prong of the Johnson test, the bankruptcy court concluded that "Faish has failed to establish a lack of a financial ability to repay for the foreseeable future and therefore fails the mechanical prong of the Johnson test." Id. at 5.

Although the Johnson court expressly held that if a student-loan debtor fails to satisfy the mechanical test, "discharge of the student loan must be denied," Johnson, 5 Bankr.Ct.Dec. at 544, the bankruptcy court below went on to apply Johnson 's good faith and policy tests. As to the Johnson "good faith" test, the bankruptcy court found that Faish had "established a sufficient degree of good faith." Faish, No. 93-01686, slip op. at Even though Faish had failed the Johnson "undue hardship" test, the bankruptcy court went outside the Johnson framework and considered what it deemed to be equitable considerations. The court cited a bankruptcy court decision from another jurisdiction, Woyame v. Career Education & Management (In re Woyame), 161 B.R. 198 (Bankr.N.D.Ohio 1993), as authority for the proposition that bankruptcy courts have "some latitude in the amount of the nondischargeability determination even where individual prongs of the Johnson test are not met on their face." Faish, No. 93-01686, slip op. at 7.

                6.   However, Faish failed the "policy test" because "avoidance of the obligation was a significant consideration in the filing."  Id
                

The bankruptcy court concluded that "[b]ased upon the equities involved, Faish will be given partial relief." Id. at 8. ² The court observed that it was "especially influenced ... by Faish's need to support a young dependent, and her desire to accumulate some savings in order to provide a better life for him." Id. at 7-8. Accordingly, the bankruptcy court held that "$15,000.00 of Faish's student loan debt will be deemed to be nondischargeable, and the remainder of the obligation, including accrued and future interest, will be deemed to be dischargeable." Id. at 8.

On February 21, 1995, the District Court for the Middle District of Pennsylvania issued a memorandum opinion reversing the bankruptcy court. The district court expressly rejected the bankruptcy court's assumption that it was bound by Johnson. Faish, No. 94-1353, slip op. at 4 n. 2 (M.D.Pa. Feb. 21, 1995). The district court noted, however, that while it "would not rigidly confine itself to Johnson 's tripartite analysis," it would abide by Johnson 's "general framework." Id. at 4.

The district court observed that it was "the bankruptcy judge's step beyond Johnson which has given rise to PHEAA's appeal." Id. at 6. The district court then reviewed the propriety of the bankruptcy judge's consideration of equitable factors not contemplated by Johnson 's three-pronged inquiry. The court stated in dictum that "the bankruptcy court must be prepared to move beyond Johnson to the extent that the Johnson analysis fails to capture scenarios requiring some form of student debt relief to alleviate undue hardship." Id. at 7. However, "the circumstances necessary to justify discharge must be unusual, and the hardship faced in the event of full repayment must be substantial." Id. Citing Faish's favorable employment prospects, the court concluded that "the continued viability of governmentally guaranteed student loans is simply incompatible with discharging student debt on the instant facts." Id. at 7-8. Accordingly, the district court ordered that "Faish's student debt must be deemed nondischargeable in its entirety." Id. at 8. This appeal followed.

II.

We have jurisdiction under 28 U.S.C. Sec. 158(d). Our review of the district court's interpretation of the Bankruptcy Code is plenary. Leeper v. Pennsylvania Higher Educ. Assistance Agency, 49 F.3d 98, 100 (3d Cir.1995); In re Pelkowski, 990 F.2d 737, 739 (3d Cir.1993). The debtor has the burden of demonstrating undue hardship. Woodcock v. Chemical Bank, NYSHESC (In re Woodcock), 45 F.3d 363, 367 (10th Cir.), cert. denied, --- U.S. ----, 116 S.Ct. 97, 133 L.Ed.2d 52 (1995); In re Roberson, 999 F.2d 1132, 1137 (7th Cir.1993).

III.

Section 523(a)(8)(B) of the Bankruptcy Code provides as follows:

(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) for 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 for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless--

(A) such loan, benefit, scholarship, or stipend overpayment first became due more than 7 years (exclusive of any applicable suspension of the repayment period) before the date of the filing of the petition; or

(B) excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents;

11 U.S.C. Sec. 523(a)(8)(B) (emphasis added).

Section 523(a)(8)(B) was passed as part of the Bankruptcy Reform Act of 1978. As one...