In re Malloy
| Decision Date | 09 July 1993 |
| Docket Number | Civ. No. 2:92cv779. |
| Parties | In re Harderison Edward MALLOY, Jr., Debtor. |
| Court | U.S. District Court — Eastern District of Virginia |
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George M. Kelley, III, U.S. Atty's Office, Norfolk, VA, for U.S. Dept. of Health & Human Services.
Daniel G. Bloor, Office of Atty. Gen., Richmond, VA, for Com. of VA, State Educ. Assistance Agency.
George M. Kelley, III, U.S. Atty's Office, Norfolk, VA, for U.S. Dept. of Educ.
George M. Kelley, III, U.S. Atty's. Office, Norfolk, VA, for U.S.
Carlene Marie Isabella, Rutter & Montagna, John James McNally, Weisberg and Stein, P.C., Norfolk, VA, for debtor.
The United States ("government") appeals from a final order, 144 B.R. 38, entered by the United States Bankruptcy Court for the Eastern District of Virginia, Norfolk Division, (Hal J. Bonney, Jr., Judge) following an adversary proceeding, discharging Harderison E. Malloy's indebtedness for Health Education Assistance Loans ("HEAL") under 42 U.S.C. § 294f(g), recodified at 42 U.S.C. § 292f(g) (West Supp.1993), based on the Bankruptcy Court's conclusion that not to discharge the indebtedness would be "unconscionable" within the meaning of the statute.1 For the reasons set forth below, the order of the Bankruptcy Court is reversed.
On November 25, 1991, Malloy filed the underlying voluntary petition under Chapter 7 of the Bankruptcy Code. At the time of filing, Malloy had outstanding student loans for undergraduate and graduate school, comprising principal and accrued interest, in excess of $90,000. Specifically, Malloy owed $26,524.73 to the Virginia Education Loan Authority ("VELA") and $7,600 to the United States Department of Education for undergraduate loans, and owed $62,759.22 to the Department of Health and Human Services ("HHS") for HEAL loans used to finance Malloy's unsuccessful pursuit of a medical degree.
To finance his medical education, Malloy had borrowed $32,228 in HEAL loans, and had repaid $9,585 of this amount by the time he left medical school, without completing his degree, in December 1984. Through HHS, the government purchased Malloy's HEAL loans from Malloy's lender, Chase Manhattan Bank, N.A., on April 7, 1988, when the outstanding principal and accrued interest on the loans totaled $43,230.12. On six occasions from August 1985 through September 1987, Chase had granted Malloy's requests for forbearance. During these periods of forbearance, interest continued to accrue and was added to principal. The last forbearance request contained in the record indicates that Malloy was to begin repayment in June 1987. Malloy did not, however, commence voluntary payments at the end of the forbearance period. Because no voluntary payments were forthcoming from Malloy, the government deducted $74 and $300, respectively, from Malloy's 1990 and 1991 federal income tax refund and applied these sums to reduce Malloy's debt. In light of Malloy's persistent failure to service his debt, on November 6, 1991, the government commenced an action in the United States District Court for the Eastern District of Virginia for judgment on the notes representing Malloy's HEAL indebtedness. By that time, Malloy had not made a voluntary payment on these loans in over eight years, and, because of accrued interest, Malloy's debt stood at over $62,000. The government's collection action appears to have precipitated Malloy's Chapter 7 petition, which he filed less than three weeks later. Malloy's bankruptcy filing stayed the district court proceedings. See 11 U.S.C. § 362.
Thereafter, on March 4, 1992, Malloy commenced an adversary proceeding against the Commonwealth of Virginia, the United States Department of Education, and HHS seeking discharge of his educational indebtedness. According to Malloy's amended complaint, discharge of the loans made or guaranteed by VELA and the United States Department of Education was necessary because nondischarge would constitute an "undue hardship" on him. See 11 U.S.C. § 523(a)(8) (). Malloy contended that discharge of the HEAL loans was appropriate because nondischarge would be "unconscionable." See 42 U.S.C. § 292f(g) ()
In its answer, the United States Department of Education agreed that the $7,600 owed to it was dischargeable, and an order to that effect was entered by the Bankruptcy Court on June 11, 1992. Because the Commonwealth and HHS continued to object to discharge of the debt Malloy owed to them, an evidentiary hearing was held on August 4, 1992, to determine whether the VELA and HEAL loans also should be discharged, i.e., whether nondischarge would be an "undue hardship" with respect to the VELA loans or would be "unconscionable" with respect to the HEAL loans.
The facts established at the hearing regarding Malloy's age, health, educational and employment history, and financial condition are all relevant factors in determining "unconscionability" see, e.g., In re Quinn, 102 B.R. 865, 867 (Bankr.M.D.Fla. 1989), and are largely undisputed. At the time of the hearing, Malloy was a healthy 39 year-old with no dependents. As for his educational background and training, Malloy entered Luther Rice College in 1972, but soon withdrew and matriculated to George Mason University. Malloy later withdrew from George Mason as well, apparently for academic reasons. In 1974, however, Malloy was graduated from Virginia Community College with a two-year Associates Degree in general sciences. The following year, Malloy entered Virginia Commonwealth University, and, in 1979, received a Bachelor of Sciences Degree in Biology, earning a grade average of 2.4 in sciences and a 2.79 overall.
Intent on becoming a physician, Malloy attended a summer program for prospective medical students at Eastern Virginia Medical School ("EVMS") in 1979 and also worked as a microbiologist for the Commonwealth. In the fall of 1980, he entered EVMS as a full-time medical student and began the 15-month basic science program. Unfortunately, Malloy encountered academic difficulties, apparently failing four out of five science courses. As a result, Malloy was placed on a reduced course load and was given an additional fifteen months to repeat and complete the basic science curriculum. After successfully completing this course work, Malloy began the clinical phase of his training, which comprised four clinical rotations. Malloy failed three of the rotations and withdrew voluntarily from EVMS in July 1983. By that time, Malloy had amassed $32,228 in HEAL loans.2
Undeterred, Malloy participated in a program at the Medical College of Virginia designed for medical students with academic difficulties from September 1983 until May 1984. After completing this remedial program, Malloy returned to EVMS to complete the remainder of his clinical rotations. However, when Malloy again failed the internal medicine rotation, he was required to leave EVMS in December 1984.
Malloy stipulated that he suffers from no mental or physical disability. This self-assessment was reinforced by the deposition testimony of two doctors on the EVMS staff, who observed no mental, physical or psychological problems with Malloy. Moreover, the remedial program at MCV did not diagnose that Malloy had learning disabilities. The EVMS doctors agreed, however, that Malloy was not suited for medical school. Among other things, one doctor testified that he was concerned with Malloy's test taking skills and ability (or lack thereof) to work successfully through clinical problems. Malloy also apparently stutters, though that alone would not have prevented him from becoming a physician.
Unable to gain admission to another medical school, Malloy began employment at Sears, Roebuck, and Co. in 1985 as a part-time telephone sales representative, earning $3,753.83 in 1985, $6,316 in 1986, and $3,453.44 in 1987. Sometime in 1987, Malloy apparently left Sears, worked briefly for the Norfolk City Schools teaching autistic children, and began work, initially on a substitute basis, at a nursing home. From these endeavors, as well from work at another convalescent facility, Malloy earned $7,492.55 in 1988. From 1988 to the present, Malloy has been employed by the Sentara Nursing Home system, currently in the capacity of Assistant Activities Director at Sentara's facility in Chesapeake, Virginia, earning $8,154.55 in 1989, $11,420.41 in 1990, $11,462.19 in 1991, and $11,533.80 in 1992.3
Although Malloy obviously is not in a high income position, his income has increased steadily since 1987. At the time of his bankruptcy, Malloy claimed a monthly gross income of $961.15, a net income of $693.55, and monthly expenses of $683.36. Included within these expenses are $200 per month for rent and $43.36 for car insurance. Malloy's mother apparently helps him with clothing expenses; his health and dental insurance are provided through work.
Based on these facts, the Bankruptcy Court ordered Malloy's educational debts discharged, concluding that nondischarge of the VELA debt would be an "undue hardship" under 11 U.S.C. § 523(a)(8), and that nondischarge of the HEAL debt would be "unconscionable" under 42 U.S.C. § 292f(g).4 To support its ultimate conclusion that nondischarge of the HEAL loans would be unconscionable, the Bankruptcy Court found "from the record and from observing the demeanor of the debtor," among other things: that Malloy held a "menial job"; that his living expenses were "subminimal"; that he had no car; that he budgeted nothing "for...
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