In re Kelly

• Decision Date: 21 July 2004
• Docket Number: BAP No. MW 03-029.,Adversary No. 02-04196-JBR.,Bankruptcy No. 02-40158-JBR.
• Citation: 312 B.R. 200
• Parties: Nancy KELLY, Debtor. Educational Credit Management Corporation, Appellant, v. Nancy Kelly, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, First Circuit

Page 200

312 B.R. 200

Nancy KELLY, Debtor Educational Credit Management Corporation, Appellant, v. Nancy Kelly, Appellee.

BAP No. MW 03-029.

Bankruptcy No. 02-40158-JBR.

Adversary No. 02-04196-JBR.

United States Bankruptcy Appellate Panel of the First Circuit.

July 21, 2004.

COPYRIGHT MATERIAL OMITTED

John F. White, Topkins & Bevans, Quincy, MA, on brief for the Appellant.

Nancy Kelly, pro se, on brief for the Appellee.

Before DE JESUS, VAUGHN, and KORNREICH, U.S. Bankruptcy Appellate Panel Judges.

KORNREICH, Bankruptcy Judge.

This matter is before us on appeal by Educational Credit Management Corporation ("ECMC") from the April 7, 2003 order (the "Order") of the United States Bankruptcy Court for the District of Massachusetts ("Bankruptcy Court" or "Court") determining the dischargeability of six of the Debtor's seven ECMC student loans under 11 U.S.C. § 523(a)(8).¹ The Bankruptcy Court decided that two loans totaling $10,225.31 were not dischargeable and that four loans totaling $63,109.87 were dischargeable.² We agree with the Bankruptcy Court that repayment of the four loans would impose an undue hardship on the Debtor and her dependants, and we affirm the Order. Because the Bankruptcy Court did not make a decision concerning the dischargeability of the seventh loan, we remand for disposition of that loan consistent with this opinion.

BACKGROUND

Nancy Kelly (the "Debtor"/"Appellee") filed for protection under Chapter 7 of the Bankruptcy Code (the "Code") on January 8, 2002, and subsequently filed a complaint to determine the dischargeability of her student loans. The following facts were established at trial. The Debtor is a 41-year-old woman with a 17-year-old son and two teenaged foster children. The foster children, a brother and sister, came to live with the Debtor and her son in August of 2002. One of the foster children, Courtney, was the Debtor's goddaughter. The foster children began living with the Debtor at the request of a friend of the Debtor, and the children's adoptive mother.

The Debtor holds a Bachelor's Degree in education and a Juris Doctor degree from Suffolk University. To finance her education, she took out several student loans, represented by notes held by ECMC as follows: (1) a $4,000 loan disbursed 6/14/91; (2) a $7,500 loan disbursed 9/12/92; (3) a $7,500 loan disbursed 7/31/91; (4) a $1,000 loan disbursed 5/4/94; (5) a $10,000 loan disbursed 8/27/93; (6) a $4,000 loan disbursed 9/11/92; and (7) a $7,500 loan disbursed 8/27/93. The Bankruptcy Court was presented with a repayment schedule of the seven loans, individually and collectively, over periods of 15, 20 and 25 years. There was no evidence that these loans have been merged or consolidated. Four loans held by ECMC which were determined to be dischargeable are the subject of the present appeal.

The Debtor made five unsuccessful attempts to pass the Massachusetts bar exam, the last attempt having been made in 1996. At the time of trial, the Debtor worked three part-time jobs. Her primary job was driving a school bus, seasonal employment lasting from late August to late June, which she has done for about 7 years. She earned $14.10 per hour, and worked 20 to 22 hours per week. Her second job was as a teacher with the alternative night school program for the City of Fitchburg, Massachusetts, working 14 to 15 hours per week, and earning $23 per hour. Third, she served as an after-school teacher for the Memorial Intermediate School in Fitchburg, working approximately 12 hours per week at $25 per hour. The Debtor's second and third jobs were not very secure due to the question of ongoing funding for those positions.

The Debtor received a stipend from the state of $17.16 per day per child for the care of each of the two foster children. She also received a quarterly clothing allowance for each foster child of $288. She testified that the stipend and clothing allowance were insufficient to reimburse her fully for the expenses she incurs for their care.

The Debtor estimated at one time that her income for the year 2003 would be $56,000, and that her income for the two prior years was under $40,000, and about $32,700 respectively. According to the Debtor, her monthly expenses during the months prior to trial were $3,486. The Debtor did not maintain health insurance for herself or her son, although the two foster children did have medical coverage through Mass Health. She testified that she owed just under $1,000 to the Internal Revenue Service. She was paying $200 per month towards that obligation, but most of the payments were applied to penalties and fees. Additionally, the Debtor testified that her internet service charge was $44 per month, but would soon be reduced to approximately $21 per month.

Following trial, the Bankruptcy Court found the Debtor's current income to be volatile, but had been relatively constant at $30,000 per year. It also found that her expenses were exceedingly modest, that she had virtually no disposable income, and that her circumstances were not likely to change in the near future or in the long term. The Bankruptcy Court concluded that "the Debtor has some ability to pay her student loans, but that it would cause her undue hardship to pay all of her student loans collectively." Applying § 523(a)(8), it excepted from discharge ECMC Loan Nos. 1 and 4, totaling $10,225.31, and discharged ECMC Loan Nos. 2, 3, 5, and 6, totaling $63,109.87. The TERI loan(s), the amount of which is not part of the record on appeal, was discharged. There appears to have been no determination regarding ECMC Loan No. 7 in the amount of $15,702.82.

JURISDICTION

Pursuant to 28 U.S.C. §§ 158(a) and (b), we may hear appeals "from final judgments, orders, and decrees." 28 U.S.C. § 158(a)(1). A final judgment "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment." Catlin v. United States, 324 U.S. 229, 233, 65 S.Ct. 631, 89 L.Ed. 911 (1945). The Bankruptcy Court's order determining the dischargeability of six of the Debtor's student loan obligations is final as to those loans. See Fleet Data Processing Corp. v. Branch (In re Bank of New England Corp.), 218 B.R. 643, 646-47 (1st Cir. BAP 1998).

STANDARD OF REVIEW

Generally, we evaluate a bankruptcy court's findings of fact pursuant to the "clearly erroneous" standard of review and its conclusions of law de novo. Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 30 (1st Cir.1994); see also Fed. R. Bankr.P. 8013; Palmacci v. Umpierrez, 121 F.3d 781, 785 (1st Cir.1997). Several circuits have concluded that an "undue hardship" determination is a question of law that requires the application of a de novo standard of review, but that the factual findings underlying that determination are reviewed under the clearly erroneous standard. See, e.g., U.S. Dept. of Educ. v. Gerhardt (In re Gerhardt), 348 F.3d 89 (5th Cir.2003); Brightful v. Pa. Higher Educ. Assistance Agency (In re Brightful), 267 F.3d 324, 327 (3d Cir.2001); Rifino v. United States (In re Rifino), 245 F.3d 1083, 1087 (9th Cir.2001); Tennessee Student Assistance Corp. v. Hornsby (In re Hornsby), 144 F.3d 433, 436 (6th Cir.1998); Woodcock v. Chemical Bank (In re Woodcock), 45 F.3d 363, 367 (10th Cir.), cert. denied, 516 U.S. 828, 116 S.Ct. 97, 133 L.Ed.2d 52 (1995); In re Roberson, 999 F.2d 1132, 1134 (7th Cir.1993); Brunner v. New York State Higher Educ. Serv. Corp., 831 F.2d 395, 396 (2d Cir.1987).

The First Circuit has not adopted its own specific approach to the review of § 523(a)(8) determinations. Therefore, we will apply the de novo standard to the legal conclusion of undue hardship, and the clearly erroneous standard to findings of fact.

DISCUSSION

ECMC raises two primary arguments on appeal. First, it asserts that the Bankruptcy Court should have applied the Brunner test to the Debtor's nondischargeability complaint. Second, it argues that the Bankruptcy Court erred in concluding that the Debtor had met her burden of proving that the nondischargeability of the student loans would cause her an undue hardship.

Pursuant to § 523(a)(8),³ student loans are dischargeable in bankruptcy if the failure to do so would cause a debtor and his or her dependents "undue hardship." 11 U.S.C. § 523(a)(8). Undue hardship is measured as of the date of trial. Pollard v. Superior Cmty. Credit Union (In re Pollard), 306 B.R. 637 (Bankr.D.Minn.2004). The burden of proof by a preponderance of the evidence is upon a debtor. See Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (employing a preponderance of the evidence standard to the issue of dischargeability).

Congress did not define "undue hardship." See generally United Student Aid Funds, Inc. v. Pena (In re Pena), 155 F.3d 1108, 1111 (9th Cir.1998); Dolan v. American Student Assistance (In re Dolan), 256 B.R. 230, 237 (Bankr.D.Mass.2000) (noting that "[o]ther courts have frequently pointed out that Congress, despite articulating a standard for excepting student loans from the discharge exception, did not define or otherwise guide the courts on what constitutes `undue hardship'"). We look to the text of the statute to determine the congressional intent, and to legislative history only if the text is ambiguous. Where statutory language is plain or unambiguous, "`the sole function of the court is to enforce it according to its terms.'" United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (quoting Caminetti v. U.S., 242 U.S. 470, 485, 37 S.Ct. 192, 61 L.Ed. 442 (1917)). Plain meaning is therefore conclusive," `except in the rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.'" Id. at 242, 109 S.Ct. 1026 (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571, 102 S.Ct. 3245, 73 L.Ed.2d 973 (1982)).

While the Code offers little guidance as to what constitutes ...