Schatz v. Access Grp., Inc. (In re Schatz)

• Decision Date: 26 July 2019
• Docket Number: Adversary Proceeding No. 17-00093-MCF,Bankruptcy Case No. 14-30835-EDK,Adversary Proceeding No. 15-03001-EDK,BAP NO. MS 18-016
• Citation: 602 B.R. 411
• Parties: IN RE Audrey Eve SCHATZ, Debtor. Audrey Eve Schatz, Plaintiff-Appellant, v. Access Group, Inc., and Massachusetts Educational Financing Authority, Defendants-Appellees.
• Court: U.S. Bankruptcy Appellate Panel, First Circuit

602 B.R. 411

IN RE Audrey Eve SCHATZ, Debtor.Audrey Eve Schatz, Plaintiff-Appellant,

v.Access Group, Inc., and Massachusetts Educational Financing Authority, Defendants-Appellees.

BAP NO. MS 18-016

Bankruptcy Case No. 14-30835-EDK

Adversary Proceeding No. 15-03001-EDK

Adversary Proceeding No. 17-00093-MCF

United States Bankruptcy Appellate Panel of the First Circuit.

July 26, 2019

Francis C. Morrissey, Esq., Braintree, on brief for Plaintiff-Appellant.

Martin A. Mooney, Esq., Albany, on brief for Defendant-Appellee, Access Group, Inc. Melissa C. Donohoe, Esq., Boston, and Philip X. Murray, Esq., on brief for Defendant-Appellee,

Massachusetts Educational Financing Authority. Mark Polebaum, Esq., and Michael Sugar, Esq., Newport Beach, on brief of Amicus Curiae, Commonwealth of Massachusetts.

Before Godoy, Lamoutte, and Finkle, United States Bankruptcy Appellate Panel Judges.

Finkle, U.S. Bankruptcy Appellate Panel Judge.

The debtor Audrey Eve Schatz (hereinafter "Schatz" or the "Debtor") appeals from the bankruptcy court's May 2, 2018 Memorandum of Decision and Judgment (collectively, the "Order") excepting her student loan obligations from discharge under § 523(a)(8).¹ The bankruptcy court determined that repayment of approximately $106,000.00 in student loans would not result in an undue hardship for Schatz, finding as a dispositive factor that the exempt equity in her home was sufficient to pay the loans in full. As discussed below, we VACATE the Order and REMAND to the bankruptcy court for further proceedings consistent with this opinion.

RELEVANT PROCEEDINGS

I. Background

Schatz, a single mother now in her mid-60s, resides alone in the home she owns at 4 Pleasant Court, Great Barrington, Massachusetts (the "Property"). She purchased the Property in 1998 for $94,000.00. The parties stipulated that on April 1, 2014, Schatz recorded a declaration of exemption in the Property under the Massachusetts homestead exemption statute, Mass. Gen. Laws ch. 188, §§ 1, et seq. (the "Homestead Law").

Schatz has one child, who is a college student. Schatz earned an undergraduate degree in psychology from the University of Massachusetts in 1977, and received a law degree from Western New England College School of Law (now known as Western New England University School of Law) in 2009. She has been a licensed and practicing attorney in Massachusetts since 2010.

II. Bankruptcy Filing

Schatz filed a voluntary petition for chapter 7 relief, pro se, on August 29, 2014. On Schedule A-Real Property filed with her petition, she listed the value of the Property at $165,000.00 and disclosed that it was subject to a mortgage lien in the approximate amount of $59,000.00. Other than the Property, Schatz's assets as reflected on her Schedule B-Personal Property included a checking account with $2,000.00, a savings account with $8,710.00, and an Individual Retirement Account with approximately $1,800.00. By the time of trial in 2017, the savings account balance was substantially reduced. On her Amended Schedule C-Exemptions, Schatz claimed a homestead exemption in the Property under Mass. Gen. Laws ch. 188, § 1 in the amount of its listed value. Schatz's Amended Schedule F-Creditors Holding Unsecured Claims reflected that in addition to her student loan obligations,² she had two unsecured debts: a credit card debt of $1,700.00 and a $23,000.00 obligation owed to her child's former school for unpaid tuition.³ Schatz's schedules disclosed monthly income of $2,490.33 and monthly expenditures of $2,911.17. Schatz updated these schedules nearly three years later to reflect monthly income of $1,483.02, and monthly expenses of $1,559.13, resulting in a $76.11 deficit per month.

III. The Complaint for Discharge of Student Loans

Schatz received a chapter 7 discharge in December 2014. The following month, she filed a two-count complaint against ACS Loan Servicing Group, Inc., Access Group, Inc., the U.S. Department of Education (the "DOE"), and Massachusetts Educational Financing Authority ("MEFA"), seeking a discharge of her student loans. At the time of trial Schatz waived the second count of the complaint, which alleged that the loans did not fall under the definition of educational loans under section 221(d)(1) of the Internal Revenue Code. Accordingly, the trial only involved the first count—the allegation that repayment of those loans would result in an "undue hardship" and render her "unable to maintain a minimal standard of living ... and provide for her retirement."⁴ She further alleged that she suffered from several medical conditions, including lasting ill effects from a brain injury, chronic kidney disease, shingles, cellulitis, Hashimoto's disease, alopecia, psoriasis, and low blood pressure, all of which "interfere[d] with [her] ability to work." In her complaint, Schatz also described an austere lifestyle, identifying aspects of her personal health and home maintenance she had deferred due to lack of funds, and stated that she relied, or had relied upon, "public assistance" in the form of fuel assistance, MassHealth (Massachusetts Medicaid), reduced school lunch, and reduced utilities.

In her prayer for relief, Schatz requested the entry of a judgment in her favor under § 523(a)(8), discharging the student loans in their entirety on the basis of "undue hardship."

IV. Pretrial Stipulations

The defendants, Access Group, Inc. ("Access Group") and MEFA, filed answers to the complaint, asserting affirmative defenses to Schatz's claims. Shortly thereafter, Schatz obtained legal representation in the adversary proceeding and entered into stipulations with ACS Loan Servicing, Inc. ("ACS") and the DOE, agreeing to the voluntary dismissal of the complaint against those defendants. The stipulation with the DOE provided that Schatz would enter into an income-based repayment plan for a period of five years, at the end of which her debt to the DOE would be deemed discharged. The bankruptcy court approved the stipulations.

The parties identified the following questions of law for trial: (1) whether all or a portion of Schatz's student loan debt is dischargeable under § 523(a)(8); and (2) what is the proper legal standard for the bankruptcy court to apply in determining whether an undue hardship exists under § 523(a)(8).

V. The Trial

The trial took place over the course of three days, in October and November 2017. Schatz was the only witness to testify.

By that time, she owed Access Group and MEFA approximately $82,000.00 and $28,000.00, respectively. We summarize her testimony from the trial transcripts.

A. Schatz's Direct Examination

From 1977 to 2006, Schatz was employed in a variety of jobs, none of which earned her more than $35,000.00 annually. In 1993, she relocated from Florida to Great Barrington, Massachusetts. Proceeds from the sale of her Florida home enabled her to purchase the Property in Great Barrington. In 1999, Schatz adopted her child, who she raised single-handedly. In an effort to increase her earnings Schatz decided to attend law school. In 2005 she began law school at Western New England School of Law. At the time she entered law school, she suffered from several medical ailments, including Hashimoto's disease (a fatigue-inducing thyroid condition), and ongoing symptoms caused by an alleged brain injury she sustained in a car accident while in high school. This injury caused her to occasionally experience "brain fog," which necessitated law school test-taking accommodations. While in law school, she became ill with pneumonia and bronchitis and developed eczema and psoriasis. Nonetheless, she was able to complete her legal education without requiring any other accommodations.

Schatz financed nearly her entire law school education through student loans. She graduated in 2009, passed the state bar exam after three tries, and was admitted to the Massachusetts bar. Within the first year after law school, at the age of 56 or 57, Schatz submitted 75 job applications "in different fields." These applications yielded only a single interview, and no job offers. The following year she applied for 25 more jobs in the public and private sectors, with salaries ranging from $12.00 per hour to $90,000.00 per year. Her efforts included identifying job openings online, attending a Boston networking event, working with her law school's career office, and networking with people she knew in other states, all to no avail.

During the first two years following her law school graduation she made ends meet by performing housecleaning services, painting, and gardening. She also served as the director for an organization she founded while in law school—the Berkshire Center for Justice ("Berkshire Center")—which offered free legal clinics and reduced fee services for low income clients. Additionally, she provided pro bono legal services and reduced fee services to clients of the Berkshire Center.

About three years after her law school graduation Schatz realized she "wasn't going to get a job." She discontinued her job search and focused on establishing a private practice. Her few paying clients include friends who need assistance with will preparation or real estate closings. She continues to work for the Berkshire Center as its executive director, but only receives a salary of $50.00 per hour when its budget permits. She is also paid at the hourly rate of $100.00 for her legal services to paying clients of the Berkshire Center. Schatz testified that she is unable to work more hours to increase her income because of her "medical issues."

For the years 2011 through 2014, Schatz's tax returns list the following approximate annual income: $10,800.00 in net business income in 2011; $14,500.00 from self-employment in 2012; $61.00 in net rental income and $10,200.00 in net business income for 2013; and $14,800.00 from self-employment in 2014.

From 2012 to 2013, she continued to experience a number of medical issues which contributed to the reduction in her income during that...