Rice, In re

• Decision Date: 25 March 1996
• Docket Number: No. 94-4210,94-4210
• Citation: 78 F.3d 1144
• Parties: 107 Ed. Law Rep. 589, Bankr. L. Rep. P 76,923 In re Ronald L. RICE and Deborah F. Rice, Debtors. Ronald L. RICE, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1144

78 F.3d 1144

107 Ed. Law Rep. 589, Bankr. L. Rep. P 76,923

In re Ronald L. RICE and Deborah F. Rice, Debtors Ronald L. RICE, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 94-4210.

United States Court of Appeals Sixth Circuit.

Submitted Feb. 1, 1996.

Decided March 25, 1996.

On Appeal from the United States District Court for the Northern District of Ohio.

Holly Taft Sydlow (briefed), Office of U.S. Atty., Western Div., Toledo, OH, for U.S.

Gordon R. Barry (briefed), Barry & Feit, Toledo, OH, for Ronald L. Rice.

Before: NORRIS and MOORE, Circuit Judges; MILES, District Judge. ^*

MILES, District Judge.

Ronald L. Rice appeals from an order of the district court which reversed the bankruptcy court's partial discharge of Rice's Health Education Assistance Loans ("HEAL loans") pursuant to 42 U.S.C. § 294f(g), recodified at 42 U.S.C. § 292f(g). ¹ Rice argues that repayment of the full amount of the debt would be unconscionable, and that the bankruptcy court therefore properly granted a partial discharge. For the reasons to follow, we affirm the district court's judgment reinstating the full debt.

I

In 1979 and 1980, while a student at the Medical College of Ohio, Ronald Rice obtained HEAL loans from the Chase Manhattan Bank. The principal amounts of the promissory notes, which were guaranteed by the Department of Health, Education and Welfare (now Health and Human Services), totalled $20,000. Rice subsequently left medical school without obtaining a degree. He received three forbearances, and was scheduled to begin repayment in 1986. Rice, however, defaulted on the loans. His default ultimately resulted in Chase Manhattan's interest in the notes being assigned to the United States.

On December 18, 1989, the United States obtained a default judgment against Rice in the amount of $60,526.92, representing principal, interest, and late charges which had accrued through June 30, 1989. At the time of the judgment, Rice had made payments on the HEAL debt totalling a mere $55.00.

On May 1, 1992, Rice and his wife Deborah filed a Chapter 7 petition in the bankruptcy court. At the time they filed the petition, Mr. Rice's student loans comprised 78 percent of his total indebtedness. ² The Rices were granted a discharge on September 14, 1992. Notwithstanding the discharge, the United States made continued efforts to collect the HEAL debt, contending that the discharge was ineffective against this obligation. Accordingly, on December 9, 1992, Rice filed a complaint in the bankruptcy court to determine the dischargeability of the HEAL debt on the grounds of unconscionability, pursuant to 42 U.S.C. § 292f(g). ³ As of that time, Rice's indebtedness had grown to over $77,000.

Mr. Rice, who is 41 years old, holds a master's degree and is employed as a teacher with the Toledo Public Schools. Mrs. Rice, who also holds a master's degree, is employed as an administrator for Bowling Green State University. The parties have stipulated that the Rices' combined gross annual income is $60,253.32, or $5,021.11 monthly, resulting in a total net monthly income of $3,854.57. ⁴ The parties have also stipulated that the Rices, who have three children, jointly own their own home in Toledo, on which a mortgage of $14,000 is due in five years; that Mr. Rice owns a 1976 Dodge automobile free and clear; and that neither the Rices nor their children have any major health problems.

In the bankruptcy court, both parties moved for summary judgment on the issue of dischargeability. In connection with the motions, Rice filed a brief in which he claimed monthly household expenses for his family totalling $3,810. The bankruptcy court noted that these exceeded, by over 45 percent, the monthly expenditures of $2,624.38 which the Rices had claimed in their Chapter 7 petition filed less than one year earlier. Applying various analytical tests, the bankruptcy court found "no justification" for granting the discharge under any test. However, the bankruptcy court then proceeded to discharge $50,194.46 of the debt--leaving only $27,500 remaining--concluding that it had the equitable power to reduce the debt "to a level which will not inflict unconscionable hardship upon [Rice's] dependents." At the time the bankruptcy court issued its decision, Rice had paid only $1,604.39 toward satisfying the debt, at least some of which appears to have been collected through garnishments.

Both parties appealed the bankruptcy court's decision to the district court. The district court concluded that the bankruptcy court's decision contravened the controlling statutory authority, which did not authorize discharge absent a determination that nondischarge would be unconscionable. The district court thus reversed the bankruptcy court's order to the extent that it reduced Rice's HEAL obligation, but it affirmed the bankruptcy court's decision in all other respects and dismissed the action. Rice filed this appeal.

II

Title 42 U.S.C. § 292f(g) provides as follows:

A debt which is a loan insured under the authority of this subpart may be released by a discharge in bankruptcy under any chapter of Title 11, only if such discharge is granted--

(1) after the expiration of the seven-year period beginning on the first date when repayment of such loan is required, exclusive of any period after such date in which the obligation to pay installments on the loan is suspended;

(2) upon a finding by the Bankruptcy Court that the nondischarge of such debt would be unconscionable; and

(3) upon the condition that the Secretary [of Health and Human Services] shall not have waived the Secretary's rights to apply subsection (f) of this section to the borrower and the discharged debt.

The parties do not dispute that subsections (1) and (3) of this statute are satisfied. Therefore, the sole question before us is whether the nondischarge of Rice's HEAL loans is "unconscionable" under 42 U.S.C. § 292f(g)(2). This is a question of law which we review de novo. See Cheesman v. Tennessee Student Assistance Corp. (In re Cheesman) 25 F.3d 356, 359 (6th Cir.1994) (holding that determination of whether "undue hardship" standard for student loan discharge contained in 11 U.S.C. § 523(a)(8)(B) is satisfied is a question of law subject to de novo review), cert. denied, --- U.S. ----, 115 S.Ct. 731, 130 L.Ed.2d 634 (1995). ⁵

Although Congress has not defined the term "unconscionable" as used in § 292f(g), we have little doubt that in using this term it intended to severely restrict the circumstances under which a HEAL loan could be discharged in bankruptcy. We therefore conclude, as have other courts, that in employing the term "unconscionable," Congress intended to adopt the ordinary usage of the term as "excessive, exorbitant," "lying outside the limits of what is reasonable or acceptable," "shockingly unfair, harsh, or unjust," or "outrageous." See, e.g., Matthews v. Pineo, 19 F.3d 121, 124 (3d Cir.) (applying term "unconscionable" as used in 42 U.S.C. § 254 o(d)(3)(A)), which establishes conditions for discharge in bankruptcy of National Health Service Corps scholarship obligations), cert. denied, --- U.S. ----, 115 S.Ct. 82, 130 L.Ed.2d 35 (1994). We find the standard imposed by this definition of "unconscionability" to be significantly more stringent than the "undue hardship" standard established for the discharge of educational loans under 11 U.S.C. § 523(a)(8)(B), which we recently addressed in Cheesman, 25 F.3d at 359-60. See In re Malloy, 155 B.R. 940, 945 (E.D.Va.1993) (finding the unconscionability standard to be "stricter" than the undue hardship standard), aff'd, 23 F.3d 402 (4th Cir.1994) (Table); see also Hines v. United States (In re Hines), 63 B.R. 731, 736 (Bankr.D.S.D.1986) (finding unconscionability to be a "higher standard" than undue hardship). We also conclude that the imposition of such a standard for the discharge of HEAL loans indicates that Congress intended to place the burden on the debtor to prove his entitlement to a discharge. See Malloy, 155 B.R. at 945; see also Matthews, 19 F.3d at 124 (applying 42 U.S.C. § 254o(d)(3)(A)). Given the strict nature of the unconscionability standard, this burden is a heavy one. See United States v. Kephart, 170 B.R. 787, 791 (W.D.N.Y.1994) (applying 42 U.S.C. § 254o(d)(3)(A)).

In Cheesman, although we noted that courts have used a variety of tests in determining what constitutes "undue hardship" under § 523(a)(8)(B), we did not find the occasion to adopt any single test for making this determination. 25 F.3d at 359. In this case, we likewise find the adoption of a single test to be inappropriate. Instead, we believe that bankruptcy courts should examine the totality of the facts and circumstances surrounding the debtor and the obligation to determine whether nondischarge of the obligation would be unconscionable. Barrows v. Illinois Student Assistance Comm'n (In re Barrows), 182 B.R. 640, 650 (Bankr.D.N.H.1994); Malloy, 155 B.R. at 945; Emnett v. United States (In re Emnett), 127 B.R. 599, 602 (Bankr.E.D.Ky.1991). We therefore focus on some of the considerations which we find to be relevant in deciding whether nondischarge would be unconscionable.

In determining whether nondischarge of the debtor's HEAL obligation would be unconscionable, the bankruptcy court should be guided principally by such objective factors as the debtor's income, earning ability, health, educational background, dependents, age, accumulated wealth, and professional degree. Barrows, 182 B.R. at 650; Malloy, 155 B.R. at 945; United States v. Quinn (In re Quinn), 102 B.R. 865, 867 (Bankr.M.D.Fla.1989). Of course, the court should consider the amount of the debt (which here, though not in all cases, has been reduced to judgment), as well as the rate at which interest is accruing. We also believe that the court should examine the debtor's claimed expenses and current standard of living, with a view toward ascertaining whether...