In re Barrett

• Decision Date: 02 March 2006
• Docket Number: No. 05-8011.,05-8011.
• Citation: 337 B.R. 896
• Parties: In re Thomas Francis BARRETT, Jr., Debtor. Educational Credit Management Corporation, Appellant, v. Thomas Francis Barrett, Jr., Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Sixth Circuit

Page 896

337 B.R. 896

In re Thomas Francis BARRETT, Jr., Debtor.

Educational Credit Management Corporation, Appellant, v. Thomas Francis Barrett, Jr., Appellee.

No. 05-8011.

United States Bankruptcy Appellate Panel of the Sixth Circuit.

Argued: February 1, 2006.

Decided and Filed: March 2, 2006.

COPYRIGHT MATERIAL OMITTED

Frederick S. Coombs III, Harrington, Hoppe & Mitchell, Youngstown, Ohio, for Appellant.

Robert A. Ciotola, Canfield, Ohio, for Appellee.

Before: AUG, LATTA, and SCOTT, Bankruptcy Appellate Panel Judges.

OPINION

LATTA, Bankruptcy Judge.

Educational Credit Management Corporation ("ECMC") appeals an order of the bankruptcy court discharging the debtor's student loans as the result of undue hardship pursuant to 11 U.S.C. § 523(a)(8). For the reasons set forth below, we AFFIRM the decision of the bankruptcy court.

I. ISSUES ON APPEAL

Whether the second prong of the Brunner test requires corroborating evidence in the form of expert medical proof to establish that the circumstances that cause a debtor's inability to repay his loans will likely continue for a substantial portion of the repayment period. Whether the third prong of the Brunner test requires participation in the Income Contingent Repayment Plan to establish that a debtor has made good faith efforts to repay the loans.

II. JURISDICTION AND STANDARD OF REVIEW

The United States District Court for the Southern District of Ohio has authorized appeals to the Bankruptcy Appellate Panel for the Sixth Circuit ("BAP"). A "final order" of a bankruptcy court may be appealed by right under 28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment." Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citations omitted); In re Copper, 314 B.R. 628, 629-30 (B.A.P. 6th Cir. 2004), aff'd, 426 F.3d 810 (6th Cir. 2005). A bankruptcy court order discharging student loans on the basis of undue hardship is a final order. Dolph v. Pa. Higher Educ. Assistance Agency v. Dolph (In re Dolph), 215 B.R. 832, 834 (6th Cir. BAP 1998). The BAP has jurisdiction to decide this appeal.

Whether repayment of student loans will pose an undue hardship is a question of law that is reviewed de novo. Cheesman v. Tenn. Student Assistance Corp. (In re Cheesman), 25 F.3d 356, 359 (6th Cir. 1994). De novo review means that the Panel determines questions of law independently of the bankruptcy court. First Union Mortgage Corp. v. Eubanks (In re Eubanks), 219 B.R. 468, 469 (B.A.P. 6th Cir. 1998). The bankruptcy court's factual findings, however, are reviewed for clear error. The factual findings of the bankruptcy court will not be set aside unless the Panel has "the definite and firm conviction that a mistake has been committed." Tenn. Student Assistance Corp. v. Hornsby (In re Hornsby), 144 F.3d 433, 436 (6th Cir. 1988) (quoting Cheesman, 25 F.3d at 359). Due regard is to be given to the opportunity for the bankruptcy court to judge the credibility of witnesses. Fed. R. Bankr. P. 8013.

III. FACTS

Thomas Barrett ("Debtor") obtained student loans in the amount of $94,751 while acquiring a masters degree in Health Administration and in Business Administration. Although the Debtor had prior medical problems, he was able to graduate from the programs in 1999. After graduation, he became ill, with unexplained fevers, night sweats, and weight loss. The illness continued and was eventually diagnosed as Hodgkin's lymphoma during the summer of 2000. According to a letter from his physician, the Debtor was treated with chemotherapy called ABVD and is currently in remission. The Debtor testified that the treatment caused adverse effects on his lungs and circulatory system.

In October of 2002, the Debtor began experiencing pain in his shoulders and was diagnosed with avascular necrosis, a condition that causes the patient's bones to die from lack of blood supply. The Debtor was prescribed 20 mg of Oxycontin, to be taken twice a day, for pain. In April of 2004, he underwent surgery to replace the joint in his right shoulder. He also testified that he suffered from pain in his shoulders, knees, and hips. In August of 2004, he again had surgery on his right shoulder to repair the shoulder replacement cap. At the time of the trial, the Debtor's medication had been increased to 40 mg of Oxycontin three times per day as well as two other medications. The Debtor testified that the pain in his left shoulder, hips, and knees has increased, and he expects that further surgery will be required. The Debtor testified for some five hours before the bankruptcy judge who therefore was uniquely able to observe his demeanor and judge his credibility.

The Debtor testified that the pain he experiences has prevented him from working full time, and, because of anticipated surgeries, he does not expect to be able to work in the foreseeable future. He had worked at some part-time positions, and at the time of trial, was self-employed doing computer-related work using his left hand (while his right shoulder heals) to move a computer mouse. He testified that he had attempted to find other work, but that potential employers lost interest when they learned of his health problems.

The Debtor's student loans have been deferred on the basis of his health problems and minimal income. As a result, no payment has come due on his student loans and the loans are not in default. The Debtor testified that he had not participated in the Income Contingent Repayment Program ("ICRP") because of his fear of adverse tax consequences. The Debtor testified that he had used an Interactive Repayment Calculator to determine possible outcomes under the ICRP. He testified that, based upon a loan amount of $100,000, an interest rate of 4%, and annual income of $15,000, at the end of 25 years he would have made only minimal payments on the loan. At that time, he would owe $268,761, which would be written off and treated as taxable income to him.

The Debtor's schedules and statement of financial affairs were admitted into evidence. The Debtor listed no real property and minimal personal property consisting of household goods, wearing apparel, a computer, cash and other financial accounts, all of which had an aggregate value of $1,120. The Debtor listed no secured debts and no priority debts. He listed unsecured, nonpriority debts of $302,342. The bankruptcy court found that approximately 60% ($183,781) of these debts were described as medical bills. The Debtor scheduled two student loans in the total amount of $94,751, approximately one-half of his scheduled medical debt.

The bankruptcy court found that the Debtor's medical condition had deteriorated between the filing of his bankruptcy petition and the trial on his adversary complaint. The Debtor had incurred $20,000 in additional medical debt that he was unable to pay. He testified that he goes to the Cleveland Clinic for doctor visits five times per month, incurring a $20 co-pay for each visit. He also incurs travel and parking expenses for each visit. The Debtor testified that his cost for prescription medications is $600 per month, and that his cost for health insurance is $1,000. The Debtor receives some financial assistance from his parents who are in their mid-60s. He testified that he could not be assured of their financial help into the future. The court found that the Debtor had not been able to make payments on his debts for medical bills, and could not make payments on his student loans.

ECMC presented no rebuttal proof. It merely relied upon its assertion that the Debtor failed to carry his burden of proof with respect to the second prong of the Brunner test because he failed to corroborate his testimony with expert medical evidence, and failed to carry his burden of proof with respect to the third prong of the Brunner test because he failed to enroll in the ICRP.

ANALYSIS

Prior to amendment effective October 17, 2005, with respect to the discharge of student loans, the Bankruptcy Code provided:

A discharge under section 727, 1141, 1228(a), or 1328(b) of this title does not discharge an individual debtor from any debt . . . 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) (pre-BAPCPA)¹. The Sixth Circuit has explicitly adopted the so-called Brunner test for determining whether the repayment of a student loan would impose an undue hardship on a debtor. Oyler v. Educ. Credit Mgmt. Corp. (In re Oyler), 397 F.3d 382 (6th Cir. 2005); see Brunner v. New York State Higher Educ. Serv. Corp., 831 F.2d 395 (2d Cir.1987). As summarized by the court, the Brunner test requires a three-part showing by the debtor:

(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.

Fields v. Sallie Mae Serv. Corp. (In re Fields), 326 B.R. 676, 681 (6th Cir. BAP 2005) (quoting Miller v. Pa. Higher Educ. Assistance Agency (In re Miller), 377 F.3d 616, 623 (6th Cir.2004)). To obtain a discharge of student loans, a debtor must show by a preponderance of the evidence that he has satisfied all three prongs of the Brunner test. In re Miller, 377 F.3d at 623.

The bankruptcy court...