Pena, In re

• Decision Date: 11 September 1998
• Docket Number: No. 97-16012,97-16012
• Citation: 155 F.3d 1108
• Parties: 40 Collier Bankr.Cas.2d 848, 129 Ed. Law Rep. 615, Bankr. L. Rep. P 77,793, 98 Cal. Daily Op. Serv. 7128, 98 Daily Journal D.A.R. 9839, 2 Cal. Bankr. Ct. Rep. 36 In re Ernest J. PENA; Julie Pena, Debtors, UNITED STUDENT AID FUNDS, INC., Appellant, v. Ernest J. PENA; Julie Pena, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1108

155 F.3d 1108

40 Collier Bankr.Cas.2d 848, 129 Ed. Law Rep. 615,

Bankr. L. Rep. P 77,793,

98 Cal. Daily Op. Serv. 7128,

98 Daily Journal D.A.R. 9839,

2 Cal. Bankr. Ct. Rep. 36

In re Ernest J. PENA; Julie Pena, Debtors,

UNITED STUDENT AID FUNDS, INC., Appellant, v. Ernest J. PENA; Julie Pena, Appellees.

No. 97-16012.

United States Court of Appeals,

Ninth Circuit.

Argued and Submitted July 16, 1998.

Decided Sept. 11, 1998.

Madeleine C. Wanslee, Phoenix, AZ, for appellant.

Ernest J. Pena and Julie Pena, Phoenix, AZ, pro se appellees.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel; Hagan, Jones and Russell, Judges, Presiding. BAP No. AZ-96-1568.

Before: REINHARDT, NOONAN and THOMPSON, Circuit Judges.

DAVID R. THOMPSON, Circuit Judge:

Debtor-Appellees Ernest and Julie Pena sought a bankruptcy court discharge of government insured student loans which were guaranteed by appellant United Student Aid Funds, Inc. (USA Funds). The Penas contended the loans were dischargeable in bankruptcy because payment of them would impose an undue hardship within the meaning of 11 U.S.C. § 523(a)(8)(B). The bankruptcy court agreed and discharged the loans. The BAP affirmed. USA Funds now appeals. We have jurisdiction pursuant to 28 U.S.C. § 158(d) and we affirm.

STANDARD OF REVIEW

"Because this court is in as good a position as the district court to review the findings of the bankruptcy court, it independently reviews the bankruptcy court's decision." Ragsdale v. Haller, 780 F.2d 794, 795 (9th Cir.1986). This court applies a clearly erroneous standard to the bankruptcy court's findings of fact and reviews conclusions of law de novo. In re Claremont Acquisition Corp., 113 F.3d 1029, 1031 (9th Cir.1997).

FACTS

Debtors and appellees Ernest J. Pena, Jr. and Julie Pena are husband and wife. On July 1, 1994, they filed a petition for relief under Chapter 7 of the Bankruptcy Code. Among the debts from which the Penas sought relief were federally guaranteed student loans incurred by Ernest to attend ITT Technical Institute (ITT) in Phoenix, Arizona. Ernest consolidated his loans under a single note for $9,399.60. The note bears an annual interest rate of 10%. The loans were guaranteed by appellant, United Student Aid Funds, Inc. (USA Funds), a private, non-profit guarantee agency under the Guaranteed Student Loan Program established by the Higher Education Act of 1965, Public Law No. 89-329, November 8, 1965, Title IV, 79 Stat. 1219 (20 U.S.C. §§ 1087-1087-4).

When Ernest completed his studies at ITT, he was awarded a credential as an "Associate of Specialized Technology." The credential was useless to him. It did not help him in his employment, and it was not accepted by other colleges for course work credit. Nevertheless, the Penas made several payments on the student loans. When Ernest became unemployed, they sought and obtained a 90-day deferral. At the end of that period, they were unable to resume payments and have made no payments since.

Julie suffers from a serious mental disability. Since the age of 13 she has experienced severe stabbing pains and occasionally hears voices. In 1992 she became psychotic and was hospitalized. She has not been able to hold a job longer than six months to a year. In or about August 1995, Julie received roughly $8,000 in a lump sum payment as an award of past-due disability benefits related to her mental condition. The Penas used the lump sum payment to buy a 1976 Oldsmobile Cutlass Supreme automobile and to pay other bills. The Penas said they needed to buy the Cutlass because their other car, a 1972 Buick, did not run well. At the time of trial, Julie was receiving $378 per month in disability payments.

When the Penas filed their bankruptcy petition, they listed net monthly income of $1,178.67 (entirely from Ernest's employment) and monthly expenses of $2,605. During discovery, the Penas' income had increased to $1,748.47 (Ernest's net wages had increased to $1,370.47 and Julie began receiving disability payments of $378.00), while their expenses had dropped to $1,803.78 and they anticipated a further drop to $1,570. By the time of trial, Ernest testified that his wages had increased an additional $1.57 per hour, and expenses, as anticipated, had decreased to approximately $1,570 per month.

The bankruptcy court granted a discharge of the student loans pursuant to the undue hardship provision in 11 U.S.C. § 523(a)(8)(B). The BAP affirmed in a published opinion. In re Pena, 207 B.R. 919 (9th Cir.BAP, 1997).

I THE UNDUE HARDSHIP STANDARD

Government guaranteed student loans cannot be discharged in bankruptcy unless, (A) more than seven years has elapsed between the time the loan first became due and the The Penas do not contend that at the time they filed their bankruptcy petition more than seven years had elapsed since Ernest's student loans first became due. They contend that if Ernest's student loans are not discharged, they will be subjected to "undue hardship" within the meaning of 11 U.S.C. § 523(a)(8)(B). Neither Congress nor this court has defined the term "undue hardship" in section 523(a)(8)(B). However, "The existence of the adjective 'undue' indicates that Congress viewed garden-variety hardship as insufficient excuse for a discharge of student loans...." In re Brunner, 46 B.R. 752, 753 (S.D.N.Y., 1985) (Aff'd by 831 F.2d 395 (2d Cir.1987)).

filing of the bankruptcy petition; or "(B) excepting such debt from discharge ... will impose an undue hardship on the debtor and the debtor's dependents." 11 U.S.C. § 523(a)(8) (emphasis added). ¹

A. In re Brunner

Brunner established a three-part test for a bankruptcy discharge of a student loan. First, the debtor must establish "that she cannot maintain, based on current income and expenses, a 'minimal' standard of living for herself and her dependents if forced to repay the loans." Brunner, 831 F.2d at 396. The court noted that this portion of the test "comports with common sense" and had already "been applied frequently as the minimum necessary to establish 'undue hardship.' " Id. (citing In re Bryant, 72 B.R. 913, 915 (Bankr.E.D.Pa.1987)).

Second, the debtor must show "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." Brunner, 831 F.2d at 396. This second prong is intended to effect "the clear congressional intent exhibited in section 523(a)(8) to make the discharge of student loans more difficult than that of other nonexcepted debt." Id.

The third prong requires "that the debtor has made good faith efforts to repay the loans...." Brunner, 831 F.2d at 396. The "good-faith" requirement fulfills the purpose behind the adoption of section 523(a)(8). Brunner, 46 B.R. at 754-55. Section 523(a)(8) was a response to "a 'rising incidence of consumer bankruptcies of former students motivated primarily to avoid payment of education loan debts.' " Id., (quoting the Report of the Commission on the Bankruptcy Laws of the United States, House Doc. No. 93-137, Pt. I, 93d Cong., 1st Sess. (1973) at 140 n. 14). This section was intended to "forestall students ... from abusing the bankruptcy system." Id.

The Brunner test has been adopted by the Third and Seventh Circuits. In re Faish, 72 F.3d 298, 306 (3d Cir.1995) cert. denied, 518 U.S. 1009, 116 S.Ct. 2532, 135 L.Ed.2d 1055 (1996); Matter of Roberson, 999 F.2d 1132 (7th Cir.1993). Although some confusion exists regarding the status of Brunner in the Sixth Circuit, ² it has been applied by the bankruptcy and district courts in every other circuit. ³

Notwithstanding this wide acceptance, the BAP in the present case preferred the test set forth in In re Cheesman, 25 F.3d 356 (6th Cir.1994). Pena, 207 B.R. at 922. The BAP stated, "The Cheesman standard ... is the

better test.... The Debtors should not be required to prove that 'exceptional circumstances' exist precluding an improved financial status in the future." Id.

B. In re Cheesman

Although the Sixth Circuit in Cheesman apparently applied Brunner to support its conclusion that the debtor did not meet any standard for undue hardship, the Sixth Circuit did not adopt any particular test. Cheesman, 25 F.3d at 359. Nor did the Cheesman court engage in any analysis regarding the various undue hardship tests then in use. Cheesman, however, did use slightly different language in applying the Brunner test to the Cheesman facts. Id. at 360. ⁴

It does not appear that the Sixth Circuit in Cheesman was proclaiming a test distinct from Brunner. In any event, we join the Second, Third and Seventh Circuits and adopt the Brunner test to determine whether, pursuant to 11 U.S.C. § 523(a)(8)(B), a debtor in bankruptcy may discharge a student loan.

II APPLYING BRUNNER

A. Maintaining a Minimal Standard of Living on Current Income and Repaying the Loans

The bankruptcy court found that the Penas' net monthly income totalled $1,748 (Ernest's take-home pay of $1,370 plus Julie's disability payments of $378). Although USA Funds points out that the bankruptcy court did not include an increase in Ernest's wages that occurred between discovery and the time of trial, this does not suggest that the bankruptcy court was clearly erroneous in its finding. There was evidence before the bankruptcy court that Ernest's income fluctuated. Accordingly, we accept as not clearly erroneous the bankruptcy court's finding that the Penas' monthly net income was $1,748.

USA Funds also challenges the bankruptcy court's finding of the Penas' monthly expenses. USA Funds contends the bankruptcy court clearly erred by averaging the differing monthly expense figures the Penas provided at various stages of the proceeding--at the time they filed their Chapter 7 bankruptcy schedules, at the time they responded to interrogatories, and at the time of trial.

We cannot say the bankruptcy court clearly erred in averaging the Penas' monthly expenses. The...