In re Pena
| Citation | 207 BR 919 |
| Decision Date | 11 April 1997 |
| Docket Number | Bankruptcy No. 94-6053-PHX-CGC,BAP No. AZ-96-1568-HJR,Adversary No. 94-994. |
| Parties | In re Ernest J. PENA, Jr. and Julie Pena, Debtors. UNITED STUDENT AID FUNDS, INC., Appellant, v. Ernest J. PENA, Jr. and Julie Pena, Appellees. |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Madeleine C. Wanslee, Gust Rosenfeld P.L.C., Phoenix, AZ, for United Student Aid Funds.
Ernest J. Pena, Jr., Julie Pena, Phoenix, AZ, in pro per.
Before: HAGAN, JONES, and RUSSELL, Bankruptcy Judges.
INTRODUCTION
The United Student Aid Funds, Inc. ("Appellant") appeals a judgment granting the Debtors, Ernest J. Pena, Jr. and Julie Pena ("Debtors") a hardship discharge of Ernest J. Pena's student loan. The Debtors appear as Appellees. We AFFIRM.
The Debtors filed their voluntary petition for relief under chapter 7 of title 11, United States Code, on July 1, 1994.1 The chapter 7 Trustee determined the case was a no asset case and the Debtors received their discharge on October 20, 1994.
The Debtors filed an adversary proceeding to determine the dischargeability of Debtor Ernest J. Pena, Jr.'s educational loans incurred while attending ITT Technical Institute. After trial a judgment was entered by the bankruptcy court holding the loans dischargeable as an undue hardship on the Debtors and their dependant under 11 U.S.C. § 523(a)(8)(B).
Ernest J. Pena, Jr. attended ITT Technical Institute from September 1987, through September 1988, and received an award of a Certificate of Associate of Specialized Technology. The educational loans he received to obtain the certificate were ultimately consolidated into a single loan bearing an annual interest rate of 10.0%.
The Debtors have one dependant, a 9 year old son. They live in a mobile home they own, located on a rental lot. Debtor Julie Pena has a medical condition that prevents her from working and for which she receives $378.00 per month in disability payments. Ernest J. Pena Jr. is currently employed and earns approximately $22,600.00 per year. He is 40 years old and is employed in the wafer fabrication room of a technical company. His current monthly take home pay is $1,370.00. The Debtors' total monthly income is $1,748.00.
The bankruptcy court found the Debtors' monthly expenses range from $1,570.00 to $1,993.00. A finding of monthly expenses of $1,789.00 was based on an average of three figures within that range. The Debtors' two older cars, a 1979 Buick and a 1976 Oldsmobile cause the Debtors additional expense due to repair problems from time to time. They have in the past lived on food stamps and in public housing.
The bankruptcy court found the Debtors have difficulty meeting their present living expenses, that there is little likelihood the Debtors' economic situation will improve, and that they have made a good faith effort to pay the student loan.
We review a bankruptcy court's findings of fact under the clearly erroneous standard. Tully v. Taxel (In re Tully), 202 B.R. 481, 483 (9th Cir. BAP 1996); In re Pizante, 186 B.R. 484, 488 (9th Cir. BAP 1995), aff'd, 107 F.3d 878 (9th Cir.1997). Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous. Anderson v. Bessemer City, 470 U.S. 564, 574, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985); United States v. Yellow Cab Co., 338 U.S. 338, 342, 70 S.Ct. 177, 179, 94 L.Ed. 150 (1949).
We review the bankruptcy court's application of a legal standard to facts reasonably found de novo. In re Tully, 202 B.R. at 483 (citing In re United States Trustee, 32 F.3d 1370, 1372 (9th Cir.1994)).
Whether the bankruptcy court erred in concluding the Debtors' student loan was dischargeable, based on a finding that the Debtors' circumstances constituted "undue hardship" under section 523(a)(8)(B).
11 U.S.C. § 523(a)(8)(B) (emphasis added).
The "undue hardship" exception has been narrowly construed:
Generally, there is no doubt that requiring repayment of the student loan would work a hardship on a debtor and the debtor\'s family. The fact that a debtor\'s budget may be tight for the foreseeable future is the norm rather than the exception. United States v. Collier, 8 B.R. 909, 911 (Bankr.S.D.Ohio 1981). However, the question is whether requiring repayment would work an undue hardship.
In re Bakkum, 139 B.R. 680, 682 (Bankr. N.D.Ohio 1992) (emphasis in the original); see also In re Norman, 25 B.R. 545 (Bankr. S.D.Cal.1982).
The Code, the legislative history of the exception, and the case law provide no clear definition of "undue hardship." Certain tests have developed to support a determination of whether an individual debtor's circumstances satisfy the undue hardship requirement. These tests usually require a court to consider: (1) whether it is reasonable, considering the debtor's current and future income and expenses, to require the debtor to repay some or all of the loan; (2) whether the debtor has made a good faith effort to repay the loan; and (3) whether allowing the discharge of the loan would thwart the legislative intent in passing section 523(a)(8). In re Bakkum, 139 B.R. at 683.2
Other decisions note:
Rigid adherence by the court to a particular test robs the court of the discretion envisioned by Congress in drafting section 523(a)(8)(B). The Court finds that the more equitable approach is to view each case in the totality of circumstances involved.
In re Johnson, 121 B.R. 91, 93 (Bankr. N.D.Okl.1990), (quoting Clay v. Westmar College (In re Clay), 12 B.R. 251, 255 (Bankr. N.D.Iowa 1981)); see also In re D'Ettore, 106 B.R. 715, 718 (Bankr.M.D.Fla.1989); In re Andrews, 661 F.2d 702, 704 (8th Cir.1981).
In determining whether the Debtors were experiencing "undue hardship" the bankruptcy court referred to the standards used by the Sixth Circuit Court of Appeals in Cheesman v. Tennessee Student Assistance Corporation (In re Cheesman), 25 F.3d 356, 359 (6th Cir.1994), cert. denied, 513 U.S. 1081, 115 S.Ct. 731, 130 L.Ed.2d 634 (1995):
(1) Whether the debtors are capable of paying the loan while maintaining a minimal standard of living; (2) Whether the debtor\'s financial circumstances are likely to persist for a significant portion of the repayment period; (3) The debtor has made a good faith effort to repay the loan.
Findings of Fact, Conclusions of Law, and Ruling, dated May 22, 1996, pg. 5.
The Appellant contends the bankruptcy court erred in the following particulars in reaching his decision:
1. The evidence showed that the Debtors' income exceeded their expenses and thus Debtors are incapable of paying the student loan while maintaining a minimal standard of living.
2. The Debtors failed to demonstrate additional or extraordinary circumstances that would lead to the conclusion their financial difficulties would persist for a significant portion of the loan pay off period.
3. The evidence does not satisfy the "good faith" requirement that the Debtors have made an attempt to pay the loan.
4. The court erred in considering the value of the Debtor Ernest J. Pena's education in making the determination of undue hardship.
Appellant argues the evidence shows the Debtors' monthly expenses were $1,570.00, had the bankruptcy court correctly applied the "mechanical test" of subtracting the monthly expenses from monthly income. Appellant contends that according to the interrogatories answered by the Debtors, their net monthly income was $1,748.47, thus leaving available $178.00 for payment on the student loan.
The bankruptcy court found the Debtors' expenses exceeded their income and thus there was no money available under the Debtors' present circumstances to make payments on the educational loans. The bankruptcy court used an average figure in determining the Debtors' monthly expenses. The averaging was supported by the facts, and the bankruptcy court's use of this technique, based on evidence, although conflicting, was not clearly erroneous.
The Appellant contends the Debtors did not demonstrate additional or extraordinary circumstances that would lead the court to conclude their financial difficulties would persist for a significant portion of the loan pay off period. The criteria urged by the Appellant is taken from the Second Circuit Court of Appeals decision, In re Brunner, 831 F.2d at 396.
The bankruptcy court did not require the Debtors to demonstrate that additional or extraordinary circumstances existed that would lead to the conclusion their financial difficulties would persist for a significant portion of the loan pay off period. Instead, the bankruptcy court found the Debtors' present financial circumstances would not improve sufficiently to allow them to pay the loan, pursuant to criteria listed under Cheesman.
The Cheesman standard used by the bankruptcy court is the better test. The Debtors' prospects for future economic gain are capable of determination by taking into consideration their present marketable skills, the extent of their education, the prospect of acquisition of further education or skill training at their age and in their present status. The Debtors should not be required to prove that ...
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