Court Opinion

ID: 3031107
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:45:25.043606+00
Date Added: 2024-06-11T09:53:02.011246
License: Public Domain

United States Court of Appeals
                         FOR THE EIGHTH CIRCUIT
                                ___________

                                No. 02-1426
                                ___________

In re: Nanci Anne Long             *
                                   *
             Debtor.               *
________________                   *
                                   *
                                   *
Nanci Anne Long,                   * Appeal from the United States
                                   * Bankruptcy Appellate Panel
             Appellee,             * for the United States Court of
                                   * Appeals for the Eighth Circuit.
      v.                           *
                                   *
Educational Credit Management      *
Corporation,                       *
                                   *
             Appellant.            *
                                   *
                              ___________

                          Submitted: October 11, 2002

                               Filed: March 11, 2003
                                ___________

Before McMILLIAN, BOWMAN, and SMITH, Circuit Judges.
                         ___________

SMITH, Circuit Judge.

     Educational Credit Management Corporation (“ECMC”) appeals the
Bankruptcy Appellate Panel's (“BAP”) decision affirming the Bankruptcy Court's
discharge of Nanci Long’s student loan debt. This case requires us to address the
undue hardship provision found in 11 U.S.C. § 523 (a)(8)(B). ECMC argues that the
Bankruptcy Court erred in its determination that repayment of the debt would impose
an “undue hardship” on appellee. ECMC also contends that the BAP relied on an
incorrect review standard to reach its decision. We reverse and remand.

                                           I.
                                     Background
       Appellee, Nanci Long, is a thirty-nine-year old, single-mother. Appellee
matriculated through Northwestern College of Chiropractic. She financed her
education there, in part, through substantial student loans, which are the subject of
this case. In 1987 she passed her state-board examination. Until 1990 she worked as
a chiropractor in various clinics. Appellee owned and operated a successful
chiropractic practice from 1990 until 1993. At some point in 1993, appellee began to
experience extreme fatigue, depression, and diminution of her mental faculties. These
symptoms increasingly affected her work, causing a substantial drop in her clientele.
In 1995, appellee terminated her chiropractic practice altogether, citing an inability
to handle life changes. She continued in a downward economic and emotional spiral.1
At one point, she attempted suicide. Fortunately, in 1997, appellee obtained
appropriate professional help and has begun a recovery process. She is now gainfully
employed and is pursuing an additional college degree.

      According to appellee, her symptoms currently include “severe, short-term
memory loss,” persistent ache, dramatic weight gain, and anxiety about being in
public places. In order to treat her condition, appellee takes various prescription

      1
          Appellee’s chiropractic license lapsed in 1999.

                                          -2-
drugs2 and sleeps in excess of twelve hours per day.3 The Bankruptcy Court found
that appellee’s medical condition will persist into the future and will interfere with
her future earning potential.

       Appellee currently works (as a laboratory manager at a community college)
nine months of the year, for approximately thirty-two hours per week. She is paid
$12.59 per hour and earns approximately $1,163 per month. Appellee’s monthly wage
covers all of her existing expenses. She currently resides in her parents’ home and
pays them $500 to $600 per month. This amount–in addition to the subsidies her
parents provide–covers her and her ten-year old child’s rent, utilities, car payment,
car insurance, health insurance, cellular phone bill, child care, and food. Appellee’s
additional monthly expenses include approximately $50 for personal expenses, $100
for entertainment and dining-out, and $100 to $275 for gasoline. She also pays $80
per month towards her child’s private-school tuition. Lastly, appellee covers her
tuition costs–related to her pursuit of a four-year degree–which vary depending on
the particular course, credits, and college.4

       The debt in question originated shortly after appellee’s graduation from
chiropractic college with the disbursement of a $35,322.81 consolidated student
loan.5 Appellee made approximately ten years’ of payments towards this debt, but

      2
          These medications include: Welbutrin, Serzone, Prozac, and Glucophase.
      3
       On a typical day, appellee will awake at 6:00 a.m., return to bed for a one or
two hour morning nap, arrive at work at 9:00 a.m., return home to nap between 3:30
p.m. and 6:00 p.m., and conclude her day at 8:30 p.m.
      4
     Appellee takes courses at Metropolitan State University and Cambridge
Community College. Her annual tuition costs range between $500 and $800.
      5
       The debt owing to ECMC results from a guaranteed student loan originally
made to appellee by Sallie Mae on December 11, 1987, that was subsequently
consolidated and transferred to Great Lakes Higher Education Corporation and

                                         -3-
defaulted after she became ill. She filed her bankruptcy petition in 2000.6 With
principal, interest, and collection costs, appellee now owes ECMC over $61,000.
Additionally, appellee still owes $15,000 of a separate, non-dischargeable Health
Education Assistance Loan (“HEAL loan”).

       In its collection efforts, ECMC urged appellee to consider the Income
Contingent Repayment Plan (“ICRP”),7 which the Department of Education8
administers. Under the ICRP, the Department of Education will cancel any balance
the appellee owed on her total student loan obligation–HEAL or ECMC–after twenty-
five years of repayment has occurred. See 34 C.F.R. § 685.209(c)(4)(iv) (“If a
borrower has not repaid a loan in full at the end of the 25-year repayment period
under the income contingent repayment plan, the Secretary cancels the unpaid portion
of the loan.”) Appellee acknowledged familiarity with the ICRP. However, she did
not apply because she believed that she could not “handle things” and because her
circumstances continued to be overwhelming.

       After its hearing, the Bankruptcy Court granted appellee an undue hardship
discharge. It reasoned that requiring appellee’s ECMC loan repayment would
essentially impose a “sentence of [twenty-five] years in payments on an obligation
that she could never realistically expect to retire or reduce.” The Bankruptcy Court
concluded that the severity and “historical intensity”of appellee’s illness and “overall

thereafter assigned to ECMC.
      6
       At the time appellee filed her bankruptcy petition, the debt was owned by
Great Lakes Higher Education Corporation. Shortly thereafter, the loan was assigned
to ECMC.
      7
          See 34 C.F.R. § 685.209.
      8
       This plan is a part of the William D. Ford Direct Loan Consolidation
Program. See 34 C.F.R. § 685.200, et. seq.

                                          -4-
prognosis” would prevent appellee from earning enough money to “dig herself out
of these. . .loans.” Conversely, the Bankruptcy Court also noted that “there is some
good reason to believe that [appellee] will ultimately get herself substantially out of
this unfortunate situation and circumstance.” It also optimistically stated that “there
is good reason to believe that [appellee’s] medical situation will improve.”

      After conducting a review for “clear error,” a divided BAP summarily affirmed
the Bankruptcy Court’s decision. On appeal, ECMC argues that the BAP should have
used the de novo standard in its review of the Bankruptcy Court’s “undue hardship”
determination. ECMC also contends that appellee’s student loans were not
dischargeable under § 523(a)(8)(B), because the loans did not impose an undue
hardship.

                                         II.
                                Standard of Review
       This Court has not previously specified the appropriate “undue hardship”
review standard for Eighth Circuit reviewing courts. Perhaps for this reason, the
Eighth Circuit BAP has applied a clearly erroneous review standard. See Andresen
v. Nebraska Student Loan Program, Inc. (In re Andresen), 232 B.R. 127 (B.A.P. 8th
Cir. 1999). ECMC argues that the Eighth Circuit BAP should not have applied the
clearly erroneous standard and should have applied a de novo standard of review. All
other circuit courts, who have addressed this issue, have concluded that an “undue
hardship” determination is a question of law, which requires a de novo review. In re
Brightful, 267 F.3d 324, 327 (3d Cir. 2001); In re Rifino, 245 F.3d 1083, 1087 (9th
Cir. 2001); Tennessee Student Assistance Comm’n v. Hornsby, 144 F.3d 433, 436 (6th
Cir. 1998); In re Woodstock, 45 F.3d 363, 367 (10th Cir. 1995); In re Roberson, 999
F.2d 1132, 1134 (7th Cir. 1993); Brunner v. New York State Higher Educ. Serv.

                                         -5-
Corp., 831 F.2d 395, 396 (2d Cir. 1987).9 Whether declining to discharge appellee’s
student loans would impose on her “undue hardship” under 11 U.S.C. § 523(a)(8)(B)
is a question of law. It requires a conclusion regarding the legal effect of the
Bankruptcy Court’s findings as to her circumstances. Questions of law are reviewed
de novo. In re Papio Keno Club, Inc., 262 F.3d 725, 728 (8th Cir. 2001). Therefore,
we agree with our sister circuits. The conclusion that appellee’s student loans impose
an “undue hardship” is a legal question to be reviewed de novo.

                                         III.
                                 Undue Hardship Test
       ECMC also urges this Court to adopt the three-part test articulated in Brunner
v. New York State Higher Educ. Serv. Corp., in a determination of “undue hardship.”
831 F.2d at 396. For the reasons set forth below, we decline to do so. Instead, we
reaffirm the totality-of-the-circumstances test as set forth in Andrews v. South Dakota
Student Loan Assistance Corp. (In re Andrews), 661 F.2d 702, 704 (8th Cir. 1981).

      9
         Neither the First Circuit Court of Appeals, nor the Bankruptcy Appellate
Panel for the First Circuit has published an opinion regarding the review standard for
“undue hardship” determinations under 11 U.S.C. § 523(a)(8). However, in the
related context of legally defining the term “governmental unit” under § 523(a)(8),
the First Circuit concluded that “[a]ppellate courts review bankruptcy court findings
of fact under the clearly erroneous standard, but subject legal conclusion[s] drawn by
such courts to de novo review.” T.I. Fed. Credit Union v. Delbonis, 72 F.3d 921, 928
(B.A.P. 1st Cir. 1995).

      Although the Fourth Circuit Court of Appeals has not decided the standard of
review for § 523(a)(8) hardship discharges, the district courts within the Fourth
Circuit have unanimously reviewed such cases under the de novo standard. See In re
Ekenasi, 271 B.R. 256, 261 (S.D. W.Va. 2002); In re Coulson, 253 B.R. 174, 175–76
(W.D.N.C. 2000); In re Dillon, 189 B.R. 382, 384 (W.D. Va. 1995); In re Malloy, 155
B.R. 940, 945 (E.D. Va. 1993).

                                         -6-
       Section 523(a)(8)(B) provides that an educational loan is not dischargeable
unless "excepting such debt from discharge . . . will impose an undue hardship on the
debtor and the debtor's dependents." Congress excepted student loans from discharge
in order to close what it deemed a loophole in the student loan program. See Raymond
L. Woodcock, Burden of Proof, Undue Hardship, and Other Arguments for the
Student Debtor Under 11 U.S.C. § 523(A)(8)(B), J.C. & U.L. 377, 381–84 (1998); see
also Johnson v. Missouri Baptist Coll. (In re Johnson), 218 B.R. 449, 451–54 (B.A.P.
8th Cir. 1998). The policy of this provision was clear. Congress intended to prevent
recent graduates who were beginning lucrative careers and wanted to escape their
student loan obligation from doing so.

       However, the clarity that is found in the legislative purpose and policy
surrounding §523(a)(8)(B) is decidedly absent in the meaning Congress ascribed to
the term “undue hardship.” The Bankruptcy Code does not define the phrase and
courts have struggled with its meaning. A divergent body of appellate authority has
attempted to unwrap the “undue hardship” enigma. See Pennsylvania Higher Educ.
Assistance Agency v. Faish (In re Faish), 72 F.3d 298, 303–305 (3d Cir. 1995);
Chessman v. Tennessee Student Assistance Corp. (In re Chessman), 25 F.3d 356, 359
(6th Cir. 1994); In re Roberson, 999 F.2d 1132, 1135 (7th Cir. 1993); Brunner v. New
York State Higher Educ. Serv. Corp., 831 F.2d 395, 396 (2d Cir. 1987); Andrews v.
South Dakota Student Loan Assistance Corp. (In re Andrews); 661 F.2d 702, 704 (8th
Cir. 1981); United Student Aid Funds, Inc. v. Pena (In re Pena), 207 B.R. 919, 922
(B.A.P. 9th Cir. 1997)

       Many bankruptcy courts, including several in the Eighth Circuit, have adopted
the Brunner test. See e.g., In re Rose, 227 B.R. 518, 524 n. 7 (Bankr. W.D. Mo 1998)
(citations omitted); Hawkins v. Buena Vista Coll. (In re Hawkins), Zlotopolski v.
Dressel (In re Dressel), 212 B.R. 611, 615–616 (Bankr. E.D. Mo. 1997); 187 B.R.
294, 297–298 (Bankr. N.D. Iowa 1995). To date, the Eighth Circuit has not. Andrews,
661 F.2d at 704. The Brunner test requires the debtor to make a three-part showing

                                        -7-
in order to prove undue hardship: (1) that the debtor cannot maintain, based on
current income and expenses, a “minimal standard" of living for herself and her
dependents if forced to repay the loans; (2) 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; and (3) that the debtor has made good faith
efforts to repay the loans. Brunner, 831 F.2d at 396. However, under a Brunner
analysis, if the bankruptcy court finds against the debtor on any of the three prongs
of the test, the inquiry ends and the student loan is not dischargeable. Id.

       We prefer a less restrictive approach to the “undue hardship” inquiry. See
Andrews, 661 F.2d at 704. We are convinced that requiring our bankruptcy courts to
adhere to the strict parameters of a particular test would diminish the inherent
discretion contained in § 523(a)(8)(B). Therefore, we continue–as we first did in
Andrews–to embrace a totality-of-the-circumstances approach to the “undue
hardship” inquiry. We believe that fairness and equity require each undue hardship
case to be examined on the unique facts and circumstances that surround the
particular bankruptcy.

       In evaluating the totality-of-the-circumstances, our bankruptcy reviewing
courts should consider: (1) the debtor’s past, present, and reasonably reliable future
financial resources; (2) a calculation of the debtor’s and her dependent’s reasonable
necessary living expenses; and (3) any other relevant facts and circumstances
surrounding each particular bankruptcy case. Id.; Andresen, 232 B.R. at 132. Simply
put, if the debtor’s reasonable future financial resources will sufficiently cover
payment of the student loan debt–while still allowing for a minimal standard of
living–then the debt should not be discharged. Certainly, this determination will
require a special consideration of the debtor’s present employment and financial
situation–including assets, expenses, and earnings–along with the prospect of future
changes–positive or adverse–in the debtor’s financial position. Id. at 141.

                                           -8-
       We take special note that some bankruptcy courts in our circuit have not
acknowledged and followed the controlling Andrews standard in an “undue hardship”
determination. We trust that this opinion will serve to clarify the applicable analysis
in future cases.10

                                        IV.
                                    Conclusion
       Given the level of confusion as to the applicable standard of review and the
viability of Andrews, we remand this case to the BAP. On remand, the BAP shall
consider the Bankruptcy Court’s “undue hardship” determination applying a de novo
standard of review.

      A true copy.

             Attest:

                CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.

      10
        We favorably note that in the instant case the Bankruptcy Court utilized
the controlling totality-of-the-circumstances approach in its “undue hardship”
determination.

                                         -9-