In re Alderete
| Decision Date | 29 June 2005 |
| Docket Number | No. 04-2109.,04-2109. |
| Citation | 412 F.3d 1200 |
| Parties | In re Robert ALDERETE and Linda D. Alderete Debtors. Robert Alderete; Linda D. Alderete, Plaintiffs-Appellees, v. Educational Credit Management Corporation, Defendant-Appellant. U.S. Department of Education; Colorado Student Loan Program for State of Colorado, Defendants-Appellees, and OSI Collection Service; Education Loan Service Center; State of Colorado; Whindam Professionals, Defendants. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Daniel Fisher, Educational Credit Management Corporation, St. Paul, MN, (Troy Gunderman, Educational Credit Management Corporation, St. Paul, MN, Scott M. Browning and Craig R. Welling, Rothgerber Johnson & Lyons, LLP, Denver, CO, with him on the briefs), appearing for Appellant.
George M. Moore, Moore & Berkson, P.C., Albuquerque, NM, appearing for Appellees.
Before TACHA, Chief Circuit Judge, ANDERSON, and O'BRIEN, Circuit Judges.
Plaintiffs-Appellees Robert and Linda Alderete filed for Chapter 7 bankruptcy and sought to discharge their student loans. The Bankruptcy Court found that these loans did not impose an "undue hardship" as required by 11 U.S.C. § 523(a)(8) but nonetheless granted a partial discharge of these loans. Defendant-Appellant Educational Credit Management Corp. ("ECMC") appealed this decision to the United States Bankruptcy Appellate Panel for the Tenth Circuit ("BAP"). The BAP held that the Bankruptcy Court erred in not finding that an "undue hardship" existed and affirmed the partial discharge on the ground that the court would have had discretion to order a partial discharge had it properly found undue hardship. Because we conclude that the Bankruptcy Court properly determined that no undue hardship exists, and that the court cannot grant any discharge without making such a finding, we take jurisdiction under 28 U.S.C. § 1291, REVERSE, and REMAND with instructions to reinstate the full amount of the debt.
The Alderetes met and married while attending the Colorado Institute of Art. Both Mr. and Ms. Alderete received associate degrees in visual communications from the school and financed their education by taking student loans. They now live in Albuquerque, New Mexico, with their three children.
Although both Mr. and Ms. Alderete are employed, neither has a job utilizing their visual communications degree. Mr. Alderete does landscape maintenance and earns $8.50 per hour. The Bankruptcy Court found that Mr. Alderete has neither looked for employment in the visual arts field nor has he sought higher paying employment opportunities in the landscaping business. Ms. Alderete works as an educational assistant in a kindergarten class for the Albuquerque Public Schools during the school year and does not work during the summer. The Bankruptcy Court found that Ms. Alderete cannot advance within the public school system without going back to college.
When the Alderetes filed for bankruptcy, their student loans, including interest and collection costs, totaled nearly $78,000. This amount represented over 98% of their total unsecured debt. The Alderetes then initiated the instant adversarial proceeding seeking to discharge these loans on the ground that they created an "undue hardship," and therefore the debt should be discharged under § 523 of the Bankruptcy Code. See 11 U.S.C. § 523(a)(8).
The Bankruptcy Court held a trial on this issue and found that the Alderetes failed to establish that the loans created an undue hardship. Despite this finding, the court used its equitable power to discharge a portion of the loans. Specifically, the Bankruptcy Court discharged the interest and fee associated with the loans and required only the principal to be repaid. ECMC appealed this partial discharge to the BAP.
The BAP affirmed the partial discharge; however, it did not determine that the Bankruptcy Court had the power to order a discharge in the absence of a finding of undue hardship. Instead, the BAP held that the Bankruptcy Court erred in finding that an undue hardship did not exist, and had the court properly determined that hardship existed, it would have had the authority to issue the partial discharge. ECMC timely appeals this ruling, arguing that the Bankruptcy Court correctly found that no undue hardship exists, and in the absence of a hardship finding, the Bankruptcy Court lacks the power to grant a partial discharge.
Although this appeal is from a decision by the BAP, we review only the Bankruptcy Court's decision. See In re Albrecht, 233 F.3d 1258, 1260 (10th Cir. 2000) (). We accept the Bankruptcy Court's factual findings unless they are clearly erroneous. Educational Credit Mgmt. Corp. v. Polleys, 356 F.3d 1302, 1305 (10th Cir.2004). See id. (internal citations omitted). Because none of the bankruptcy court's factual findings are contested on appeal, we simply review de novo whether the facts support a finding that an undue hardship does not exist.
Section 523 of the Bankruptcy Code limits a debtor's ability to discharge federal student loans. Section 523 states:
(a) A discharge under [the Bankruptcy Code] 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 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. § 523(a)(8) (emphasis added). Thus, the Bankruptcy Code permits discharge of student loans only when failure to discharge this debt would "impose an undue hardship on the debtor."
When the Bankruptcy Court decided this case, this Court had not adopted a definition of "undue hardship" under § 523. The Bankruptcy Court considered the tests adopted by other circuits and chose to apply the three-part test developed by the Second Circuit in Brunner v. New York State Higher Education Servs. Corp., 831 F.2d 395 (2d Cir.1987). This Court has since considered this question and adopted the Brunner test as well. See Polleys, 356 F.3d at 1309 ().
The Alderetes argue that this case should be remanded to the Bankruptcy Court for reconsideration in light of Polleys. Although Polleys clarified what is required to satisfy the Brunner test, the Bankruptcy Court applied the correct test and made factual findings on all three prongs of the Brunner test. Because the Bankruptcy Court applied the correct test, we have a sufficient record to determine whether the Bankruptcy Court erred in concluding that an undue hardship had not been established and do not need to remand for reconsideration in light of Polleys.
In Polleys, we held that under the Brunner test in order to establish an undue hardship a debtor must prove:
(1) that the debtor 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 the debtor has made good faith efforts to repay the loans.
Under the Brunner analysis, if the court finds against the debtor on any of the three parts, the inquiry ends and the student loan is not dischargeable.
Id. at 1307 (internal citation omitted).
The Bankruptcy Court found that the first prong was satisfied, and ECMC does not contest this finding on appeal. The Bankruptcy Court, however, found that the Alderetes had failed to meet either the second or the third prongs. The Alderetes argue that the Bankruptcy Court erred on both of these findings. We disagree.
The second prong of the Brunner test considers whether there are other circumstances making it likely that the debtor will not be able to pay his loans for a significant portion of the repayment period. The reason for this requirement is simple: A recent graduate's salary might be so low that it is difficult to pay the loans now, but it is clear that his salary will increase in the future and therefore his loans should not be discharged.
In Polleys, we clarified how a court should decide if the second prong is met. In order to decide whether "additional circumstances" exist, "a realistic look must be made into [the] debtor's circumstances and the debtor's ability to provide for adequate shelter, nutrition, health care, and the like." Id. We further noted that "courts should base their estimation of a debtor's prospects on specific articulable facts, not unfounded optimism, and the inquiry into future circumstances should be limited to the foreseeable future, at most over the term of the loan." Id. (internal quotation marks omitted). We now consider whether the Bankruptcy Court in this case took a "realistic look" and based its findings on "specific articulable facts."
The Bankruptcy Court made numerous factual findings to support its conclusion that the second prong has not been satisfied. The court found:
In this case, Plaintiffs are relatively young and have no health conditions that impede their ability to work. As their children reach the age of majority, Plaintiffs will have less strain on their family budget....
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