In re Reynolds

• Decision Date: 10 October 2005
• Docket Number: No. 04-3722.,No. 04-3192.,04-3192.,04-3722.
• Citation: 425 F.3d 526
• Parties: In re: Laura Susan REYNOLDS, Debtor, Laura Susan Reynolds, Plaintiff-Appellee, v. Pennsylvania Higher Education Assistance Agency; Defendant-Appellant, The Education Resource Institute; Hemar Insurance Corporation of America; Defendants, Educational Credit Management Corporation, Defendant-Appellant. In re: Laura Susan Reynolds, Debtor, Laura Susan Reynolds, Plaintiff-Appellee, v. Pennsylvania Higher Education Assistance Agency; The Education Resource Institute; Hemar Insurance Corporation of America; Educational Credit Management Corporation; Defendants, U.S. Department of Education, Defendant-Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 526

425 F.3d 526

In re: Laura Susan REYNOLDS, Debtor,

Laura Susan Reynolds, Plaintiff-Appellee, v. Pennsylvania Higher Education Assistance Agency; Defendant-Appellant, The Education Resource Institute; Hemar Insurance Corporation of America; Defendants, Educational Credit Management Corporation, Defendant-Appellant.

In re: Laura Susan Reynolds, Debtor,

Laura Susan Reynolds, Plaintiff-Appellee, v. Pennsylvania Higher Education Assistance Agency; The Education Resource Institute; Hemar Insurance Corporation of America; Educational Credit Management Corporation; Defendants, U.S. Department of Education, Defendant-Appellant.

No. 04-3192.

No. 04-3722.

United States Court of Appeals, Eighth Circuit.

Submitted: June 24, 2005.

Filed: October 10, 2005.

Curtis P. Zaun, argued, St. Paul, Minnesota, for appellant Educational Credit.

Edward Himmelfarb, argued, Washington, D.C., for appellant U.S. Department of Education.

Jonathan A. Strauss, argued, Minneapolis, Minnesota, for appellee.

Before RILEY, BRIGHT, and JOHN R. GIBSON, Circuit Judges.

JOHN R. GIBSON, Circuit Judge.

The United States Department of Education, Pennsylvania Higher Education Assistance Agency, and Educational Credit Management Corporation appeal from the district court's¹ affirmance of the bankruptcy court's² order, which held that Laura Susan Reynolds's student loans were discharged in bankruptcy. The creditors contend that the bankruptcy court erred in discharging the debts on the ground of undue hardship when that court had previously found that Reynolds had the financial resources to pay some portion of the student loans. Reynolds contends that undue hardship is not a strictly pecuniary test and that the bankruptcy court correctly held that the detrimental effect of the loans on Reynolds's precarious mental health warranted discharging the debts. We affirm.

Reynolds began suffering from depressive symptoms as early as middle school and high school, but did not receive treatment or diagnosis at that time. During her junior year at Claremont McKenna College, she suffered a mental health crisis while traveling in Scotland and had to drop out of a study abroad program; on arriving home, she was treated by a psychiatrist for agoraphobia and depression. She received counseling, and, despite a continuing struggle with depression and panic attacks, she was able to make up the missed coursework and to graduate cum laude in 1992. She went on to attend the University of Michigan law school, where her depression worsened, but she nevertheless graduated in 1995, in the middle of her class. She passed the Colorado bar exam and was admitted to practice law in that state.

She undertook an extensive search for a job as a lawyer, participating in on-campus interviews, sending out more than 400 resumes, contacting Michigan alumni, and eventually using a legal employment consultant. Unfortunately, she was never able to find any work as an attorney, other than two hours' work for a friend of her father's. She finally began taking temporary assignments through an employment agency, working as a secretary or administrative assistant. In October 1999, she took a permanent job as an administrative assistant at the St. Paul Foundation, where she worked until the spring of 2001. She left that job, but began another permanent job as secretary-receptionist at a roofing contractor, where she still works, earning about $30,000 per year. She is married, and her husband makes about $29,000 per year driving a school bus.

After leaving school, Reynolds began payments on the loans, but she was only able to make the payments by paying for "everything else" with credit cards. Eventually, she stopped making payments.

Since graduating from law school, Reynolds has seen a number of mental health professionals and has taken a number of medications, such as anti-depressants, mood-stabilizers, and anti-psychotic medications. In August 2001, she was diagnosed with major depressive illness and chronic dysthymic disorder, which is a depression that does not meet the full criteria for major depressive illness. She also suffers from anxiety and panic disorders. In addition to the anxiety, panic attacks and depression, Reynolds has a persistent personality disorder. Her psychiatric expert, Dr. Robert Jones, reported that the "combination of major depression and personality dysfunction often present with the personality disorder being more dysfunctional than would actually be the case if adaptation were not impaired by the affective disorder." Her medications reduce her symptoms, but their effectiveness tends to wane the longer she takes them. Dr. Jones opined that no regimen of medication has been able to bring about a sustained partial remission of her mental illness. Reynolds said that at the time of trial she habitually slept at least ten hours a night during the week and sixteen hours a night on weekends, and she testified that she engaged in self-injury, such as cutting herself. Reynolds suffers side effects from her various medications, including numbness in her extremities, drowsiness, distraction, and itching.

Dr. Jones testified that Reynolds's student loans caused her stress, and that stress "can make it more difficult for an individual to respond to treatment for a mood disorder." He stated, "To the extent that she is overwhelmed by indebtedness and can't see the possibilities of her life beyond that indebtedness," the debts made it harder for her to sustain improvement in her depressive illness. Reynolds herself testified that her inability to pay the loans made her feel "like a failure and hopeless and ashamed."

Dr. Jones opined that Reynolds was not able to practice law because she would not be able to provide "interpersonal consultative services" due to personality characteristics and because of the "cognitive deficits associated with intermittent exacerbations of depressive illness." Although Reynolds could be expected to suffer exacerbations of her depression, she ought to be able to function in a job setting similar to that of her most recent administrative-secretarial jobs. But he concluded, "Despite her capacity to return to employment, the inconsistencies in her performance as a result of both depressive illness and characterologic instability, may present challenges to employers who rely on consistency at the level of teamwork and work group membership."

Reynolds owed outstanding student loans to five creditors amounting to more than $142,000 in March 2002. If amortized over ten years, the monthly payments would be $1,641.04, and if amortized over twenty years, $1,021.55. Two of the student-loan creditors, Hemar Insurance Corporation of America and The Educational Resource Institute, did not appeal from the discharge order, so Reynolds is no longer responsible for those debts, which would account for $715.50 of her monthly liability under a ten-year payment plan or $408.06 under a twenty-year plan. The debts to the three remaining creditors are eligible for consolidation under the William D. Ford Direct Loan Program, which would allow Reynolds to pay the loans over a thirty-year period, beginning with an initial monthly payment amount of $502.49.

Reynolds's and her husband's combined monthly income was about $3,300, and the bankruptcy court found their household expenses were $2,600, 303 B.R. at 834, although as we will discuss later, both sides dispute those figures.

Reynolds filed a voluntary bankruptcy petition under Chapter 7 on June 20, 2000. She initiated an adversary proceeding for a determination of dischargeability of the student loans under 11 U.S.C. § 523(a)(8)(2000).³ Under section 523(a)(8) (2000), a discharge in bankruptcy does not discharge a debtor for an educational 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, "unless excepting such debt from discharge . . . will impose an undue hardship on the debtor." The bankruptcy court therefore was required to determine whether exempting the student loans from Reynolds's discharge in bankruptcy would impose an undue hardship on her.

The bankruptcy court applied the "totality of the circumstances" test this court set out for determining undue hardship in In re Long, 322 F.3d 549, 554 (8th Cir.2003). Reynolds v. Pa. Higher Educ. Assistance Agency, 303 B.R. 823, 836 (Bankr.D.Minn.2004). Under that test, the court considers (1) the debtor's past, present and future financial resources, (2) the debtor's reasonable and necessary living expenses, and (3) any other relevant circumstances. See Long, 322 F.3d at 554. The bankruptcy court observed that the burden of proving undue hardship lay with Reynolds. Id. at 826.

To determine probable financial resources, the bankruptcy court examined the medical evidence and found that there was no prospect that Reynolds's condition would improve to such an extent that she could practice law or even work as a paralegal.⁴ Id. at 832. The court found that the best Reynolds could do was to remain in the type of job she currently holds, if indeed she is able to perform that job without lapsing into depression or engaging in behavioral incidents connected with her personality disorder, which would be likely to cause her to lose her job or quit. Id. Therefore, the court used Reynolds's current income and expense figures to decide whether Reynolds could pay any or all of the debts without undue hardship. Id. at 834. The court figured that Reynolds and her husband had $700 per month of income in excess of their expenses. Id. The bankruptcy court stated:

In the last instance, the Debtor did not establish, as a matter of fact, that she lacked all means to pay down all of the component loans in her educational debt structure.

. . .

So this proceeding presents a debtor who has some repayment ability in fact, which could be applied to a portion of the...