Coleman v. Educational Credit Management Corporation

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re No. 04-43327
Chapter 13
CATHY COLEMAN,
Debtor
____________________________/
CATHY COLEMAN, A.P. No. 05-4297
Plaintiff,
vs.
EDUCATIONAL CREDIT
MANAGEMENT CORPORATION,
Defendant.
____________________________/
MEMORANDUM OF DECISION RE EDUCATIONAL CREDIT
MANAGEMENT CORPORATION’S MOTION TO DISMISS
Before the Court is defendant Educational Credit Management
Corporation’s (“ECMC”) motion to dismiss the complaint in the
above-captioned adversary proceeding. The motion was opposed by
Signed: November 23, 2005
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
November 23, 2005
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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1The Bankruptcy Code is contained in Title 11 of the United
States Code. Hereinafter, all statutory references are to
Title 11 unless otherwise specified.
2The Ninth Circuit has held that a bankruptcy court has the
authority to grant a partial discharge of a student loan
debt. In re Saxman, 325 F.3d 1168, 1173-74 (9th Cir.
2003).
2
the debtor, Cathy Coleman (“Coleman”). Having considered the
applicable law and argument of the parties, both oral and
written, for the reasons stated below, the motion is denied.
SUMMARY OF FACTS AND CONTENTIONS
On June 16, 2004, Coleman filed a voluntary petition
seeking relief under Chapter 13 of the Bankruptcy Code.1 The
Court confirmed Coleman’s first amended plan on August 26, 2004,
providing for payments over a five year period. ECMC filed a
timely proof of claim in the amount of $102,393.46, including
unpaid interest and collection costs, for the balance due on
Coleman’s student loans (the “Student Loan Debt”). On June 23,
2005, Coleman filed this adversary proceeding, seeking a partial
discharge of the Student Loan Debt on the ground that excepting
the entire Student Loan Debt from her Chapter 13 discharge would
constitute an undue hardship.2 As of August 3, 2005, the
principal and interest balance on the promissory notes was
$106,139.11. Prior to filing her petition, Coleman had made
repayments totaling $1,000.00.
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To support her claim of undue hardship, Coleman relied
primarily on her history of irregular employment and current
unemployed status. Specifically, Coleman alleged that she holds
a bachelor’s degree in art and attended graduate school, seeking
a master’s degree in cultural anthropology, but did not complete
the degree program. Coleman holds a single subject teaching
credential and has worked intermittently as a teacher since
1999, having been laid off four times. Her income has ranged
from $1,800 to $4,000 per month as a teacher, but she was laid
off in June 2005 and currently receives $410 per month on
unemployment. Coleman has sought employment in related fields
to no avail.
On August 19, 2005, ECMC filed the instant motion to
dismiss the complaint on two grounds. First, ECMC argued that
the Court lacks subject matter jurisdiction because the issue of
the dischargeability of Coleman’s Student Loan Debt is not ripe
for adjudication until Coleman has completed her Chapter 13 plan
payments and obtained a discharge. Second, ECMC argued that,
even if the Court has subject matter jurisdiction, as a
discretionary matter, the Court should wait to rule on the
hardship issue until Coleman receives a discharge because a
determination at an earlier time is too speculative. Coleman
opposed ECMC’s motion.
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4
DISCUSSION
I. WHETHER COURT LACKS SUBJECT MATTER JURISDICTION TO
DETERMINE UNDUE HARDSHIP PRIOR TO COMPLETION OF PLAN
PAYMENTS
Section 1328 provides that a Chapter 13 debtor is entitled
to a discharge of his or her debts “as soon as practicable after
completion...of all payments under the plan....” However,
certain categories of debts are excepted from the discharge. 11
U.S.C. § 1328(a). Among the excepted debts are those debts
excepted from an individual chapter 7 debtor’s discharge under §
523(a)(8). 11 U.S.C. § 1328(a)(2). Section 523(a)(8) provides
that student loan debts are nondischargeable unless repayment of
the debt would impose an undue hardship on the debtor and the
debtor’s dependents. 11 U.S.C. § 523(a)(8). ECMC contends that
the bankruptcy court lacks subject matter jurisdiction to
determine whether excepting the Student Loan Debt from a Chapter
13 debtor’s discharge would impose an undue hardship because the
issue is not “ripe” until the debtor has earned her right to a
discharge by completing the plan payments.
Ripeness is a concept rooted in the “case and controversy”
clause of the Constitution and is a prerequisite to the Court’s
subject matter jurisdiction. See U.S. Const. art. III, § 2, cl.
1. The basic rationale of the ripeness doctrine “is to prevent
the courts, through avoidance of premature adjudication, from
entangling themselves in abstract disagreements over
administrative policies, and also to protect the agencies from
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judicial interference until an administrative decision has been
formalized and its effects felt in a concrete way by the
challenging parties.” Abbott Labs. v. Gardner, 387 U.S. 136,
148—49 (1967). In analyzing ripeness, a federal court must
“evaluate both the fitness of the issues for judicial decision
and the hardship to the parties of withholding court
consideration.” Id. at 149; see also American-Arab Anti-
Discrimination Committee v. Thornburgh, 970 F.2d 501, 510 (9th
Cir. 1992).
In In re Taylor, 223 B.R. 747 (Bankr. 9th Cir. 1998), the
Bankruptcy Appellate Panel (the “BAP”) held that a court may
determine whether a student loan debt should be discharged as an
undue hardship prior to the completion of a Chapter 13 debtor’s
plan payments. In Taylor, the debtors filed their complaint
less than six months after filing their Chapter 13 petition and
almost three months before the Chapter 13 plan was confirmed.
In concluding that the issue could be determined before the
debtor’s discharge was imminent, the Taylor court relied on
Federal Rule of Bankruptcy Procedure (hereinafter “FRBP”)
4007(b) which provides that “a § 523(a)(8)[] action can be
brought at any time.” Taylor, 223 B.R. at 751 (emphasis added);
see FRBP 4007(b).
The Taylor court observed that the “filing of a complaint
at any time to discharge a student loan based on undue hardship
does not conflict with any statutory right or procedure or with
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public policy.” See Taylor, 223 B.R. at 751. Consequently, it
concluded that the debtors “had a right to file the Complaint
when they did, and the issues were ripe for adjudication at that
time.” Taylor, 223 B.R. at 752 (emphasis added). However, it
does not appear from the text of the decision that the term
“ripe” was used in its constitutional sense.
ECMC contends that Taylor is contrary to two Ninth Circuit
Court of Appeals decisions and thus should not be followed by
this Court: i.e., In re Heincy, 858 F.2d 548 (9th Cir. 1988) and
In re Beaty, 306 F.3d 914 (9th Cir. 2002). In Heincy, prior to
confirmation of the Chapter 13 plan, the debtor sought a
determination regarding the dischargeability of a criminal
restitution debt, and the bankruptcy court held the debt to be
dischargeable. Heincy, 858 F.2d at 549. The Ninth Circuit
reversed, concluding that the dischargeability issue was “not
ripe for resolution until the court knows whether the Heincys
have successfully completed payments under the plan.” Id. at
550. At the time of the Ninth Circuit’s decision in Heincy,
criminal restitution debts were not dischargeable under
§ 1328(b), but were arguably dischargeable under § 1328(a). See
11 U.S.C. § 1328 (1989); Pub. L. No. 101-581 (1990) (amending
§ 1328(a) to except criminal restitution debts from discharge).
The Heincy court applied the following reasoning:
If the Heincys ultimately complete payments under
the plan, their discharge would be controlled by 11
U.S.C. § 1328(a). If they do not, their discharge
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would be controlled by 11 U.S.C. § 1328(b). Under
the latter section, the restitution order would not
be dischargeable. Under the former section, there
is considerable doubt whether the restitution order
would be dischargeable in light of the Supreme
Court’s recent decision in Kelly v. Robinson []
(expressing “serious doubts” as to whether
restitution orders are ever dischargeable.) We need
not now decide that issue. Because the plan is
still in progress, the bankruptcy court could not
have known which discharge provision would apply.
Id. (citations omitted).
The Taylor court found Heincy distinguishable because the
rationale recited above did not apply to the issue of the
dischargeability of student loan debt. See Taylor, 223 B.R. at
751. Unlike a criminal restitution obligation at the time of
Heincy, whether a student loan debt is excepted from discharge
under either § 1328(a) and § 1328(b) is governed by the same
standard: i.e., “undue hardship.” See 11 U.S.C. §§ 523(a),
1328(a)(2).
ECMC argued that it is irrelevant that student loan debts
are excepted from discharge under both § 1328(a) and § 1328(b)
because the Heincy court concluded that a criminal restitution
obligation could probably not be discharged under either
provision. See Heincy, 858 F.2d at 550. However, the Heincy
court expressly refused to resolve the question of whether
criminal restitution debt was in fact excepted from the
discharge under either provisions. To the contrary, it relied
on the ostensibly disparate treatment of criminal restitution
debt under § 1328(a) and § 1328(b). See id. As a result, the
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3The Ninth Circuit rejected the applicability of the Supreme
Court’s interpretation of the phrase “at any time” in Heflin v.
United States, 358 U.S. 415, 420 (1959). In Heflin, the Supreme
Court held that a statute providing that a motion to vacate a
sentence “may be made at any time” rendered the doctrine of
laches inapplicable. The Ninth Circuit distinguished Heflin on
the ground that, there, the language was contained in a statute
8
Taylor court correctly distinguished the Heincy decision from
the issue before it.
In Beaty, the issue was whether laches could be raised as a
defense to a complaint to determine that a debt should be
excepted from the debtor’s discharge under § 523(a)(3)(B).
Section 523(a)(3)(B) excepts an unscheduled debt from the
debtor’s discharge if the creditor has a claim that would have
been entitled to be excepted from the debtor’s discharge under §
523(a)(2), (4), or (6) if the creditor had received notice of
the bankruptcy in time to file a timely action to have the debt
excepted from the debtor’s discharge, as required by § 523(c).
11 U.S.C. §§ 523(a)(3)(B), 523(c). Rule 4007(b) provides that a
complaint seeking a determination that an unscheduled debt of
this sort is nondischargeable may be filed “at any time.”
Beaty, 306 F.3d at 917. Notwithstanding this language, the
Beaty court held that laches could be asserted as a defense to
such an action. It observed that “the bankruptcy court is a
court of equity and should invoke equitable principles and
doctrines, refusing to do so only where their application would
be ‘inconsistent’ with the Bankruptcy Code.” Id. at 922-23.3
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rather than a procedural rule. It noted that Rule 4007 “cannot
create an exception to the Bankruptcy Code, and cannot abridge,
enlarge, or modify any substantive right.” Beaty, 306 F.3d at
924 (internal quotations omitted).
9
Beaty is clearly distinguishable. ECMC does not contend
that Coleman’s claim is barred by laches. To the contrary, it
contends that the action is premature. Moreover, the question
is not whether a procedural rule could create subject matter
jurisdiction where it does not exist. Clearly, it cannot.
Thus, the question remains whether the issue is ripe as a
constitutional matter.
ECMC contends that the issue of undue hardship is not ripe
as a constitutional matter because it would require the
bankruptcy court to speculate as to Coleman’s financial
situation at a future time: i.e., when she completes her plan
payments. Unless she modifies her plan to shorten its term,
Coleman will not complete her plan payments until 2009. The
Court finds this argument without merit.
In the Ninth Circuit, as in most circuits, the test for
undue hardship under § 523(a)(8) is governed by In re Brunner,
831 F.2d 395 (2d Cir. 1987). See In re Pena, 155 F.3d 1108,
1112 (9th Cir. 1998)(adopting Brunner test). To establish that
excepting a student loan debt from the discharge would impose an
undue hardship, a debtor must prove three things: “(1) that she
cannot maintain, based on current income and expenses, a
“minimal” standard of living for herself and her dependents if
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4See also In re Pair, 269 B.R. 719 (Bankr. N.D. Ala. 2001);
In re Soler, 250 B.R. 694 (Bankr. D. Minn. 2000); In re
Raisor, 180 B.R. 163 (Bankr. E.D. Tex. 1995).
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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.” Saxman, 325 F.3d at 1172.
Unless the repayment period is close to completion at the
time a Chapter 13 discharge is due, the second prong of the
Brunner test always requires the Court to speculate as to the
debtor’s future financial prospects. Granted, the Court may be
required to speculate to a greater degree if it makes the
determination a few years prior to the debtor’s discharge.
However, the Court does not view this difference of degree as of
constitutional significance.
The majority of circuit courts that have addressed this
issue have disagreed with Taylor. See In re Bender, 368 F.3d
846 (8th Cir. 2004); In re Rubarts, 896 F.2d 107 (5th Cir.
1990); In re Hochman, 853 F.2d 1547 (11th Cir. 1988).4 These
courts concluded that the express language of § 1328(a) requires
the determination to be made at the time of discharge. One
lower court observed that, while FRBP 4007(b) permits the
dischargeability action to be filed at any time, it does not
provide that the issue of dischargeability may be determined at
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5See also In re Strahm, 327 B.R. 319 (Bankr. S.D. Ohio
2005); In re Craine, 206 B.R. 598 (Bankr. M.D. Fla. 1997);
In re Goranson, 183 B.R. 52 (Bankr. W.D.N.Y. 1995).
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any time. See, e.g., Raisor, 180 B.R. at 165—67. One circuit
court has agreed with Taylor. See In re Ekenasi, 325 F.3d 541
(4th Cir. 2003).5
However, with the exception of Craine and Bender, none of
these courts addressed the issue from a constitutional
standpoint. The Craine court discussed the Article III “case or
controversy” requirement and held that an actual controversy existed.
See Craine, 206 B.R. at 600—01. The Bender court decided the issue
on prudential grounds. Bender, 368 F.3d at 847-48. The Court
agrees with Craine that the issue of the dischargeability of a
student loan presents a “case and controversy” from a
constitutional standpoint as soon as the Chapter 13 case is
filed. Thus, the Court concludes that it has subject matter
jurisdiction to determine whether a student loan debt should be
discharged as an undue hardship prior to the completion of a
chapter 13 debtor’s plan payments. ECMC’s motion to dismiss on
the grounds of lack of subject matter jurisdiction will be
denied.
II. SHOULD COURT EXERCISE ITS DISCRETION TO DELAY DETERMINATION
OF UNDUE HARDSHIP UNTIL DISCHARGE IS IMMINENT?
As noted above, in order to establish “undue hardship” a
debtor must demonstrate that: (1) given her current income and
expenses, she cannot maintain a minimal standard of living if
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required to repay the loans; (2) her inability to repay is
likely to persist for a significant portion of the repayment
period; and (3) she has made good faith efforts to repay the
loan. See In re Pena, 155 F.3d 1108, 1111—12 (9th Cir. 1998)
(adopting Brunner test). The debtor has the burden of proving
all three prongs by a preponderance of the evidence. See In re
Nys, 308 B.R. 436, 441 (Bankr. 9th Cir. 2004).
ECMC argues that the Court should wait until Coleman has
completed her Chapter 13 plan to determine the dischargeability
issue because “it would be difficult, if not impossible, for the
Court to adjudicate her undue hardship claim until she receives
her discharge.” Specifically, ECMC argues that, while the
second prong of the Brunner test always requires some
speculation regarding the debtor’s future circumstances, a
greater degree of speculation would be required here because the
future, that is, the time period following discharge, is further
off. Further, ECMC argues, a court does not normally have to
speculate as to the first prong because it can use the debtor’s
current income at the time of plan completion. Here, however,
the Court would be required to speculate as to Coleman’s current
income when Coleman completes the plan in 2009.
ECMC also suggests that the third prong of the Brunner test
cannot be met because Coleman has demonstrated a lack of good
faith by attempting to obtain an undue hardship determination
while her Chapter 13 case is pending. Finally, ECMC argues that
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a trial at this time is a waste of judicial resources because
Coleman may not complete her Chapter 13 plan. ECMC contends
that Coleman will not be prejudiced by waiting for a
determineation until her discharge is imminent because that
determination will not have any effect on her Chapter 13 plan.
At least one court has characterized the above arguments as
“more prudential, rather than jurisprudential.” See Strahm, 327
B.R. at 321. The Taylor court did not discuss these
“prudential” arguments. However, courts that have followed
Taylor have discussed and rejected them. See Ekenasi, 325 F.3d
541; Strahm, 327 B.R. 319; Goranson, 183 B.R. 52.
In Goranson, the court concluded that a debtor “may select
any snapshot date during or after [the case] as the date on
which to prove undue hardship.” Goranson, 183 B.R. at 56. The
court acknowledged that it may be a challenge to apply the
Brunner test to the debtor’s chosen “snapshot date,” but “[t]o
do otherwise would be to penalize a debtor for electing Chapter
13 over Chapter 7.” Id.
The Fourth Circuit, in Ekenasi, has also permitted a debtor
to choose the “snapshot date” for determining undue hardship on
the grounds that the “text of the pertinent statute does not
prohibit such an advance determination.” Ekenasi, 325 F.3d at
547. The court, however, provided the following caution:
[I]t will be most difficult for a debtor, to
prove with the requisite certainty that the
repayment of his student loan obligations
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will be an “undue burden” on him during a
significant portion of the repayment period
of the student loans when the debtor chooses
to make that claim far in advance of the
expected completion date of his plan.
Id. The Strahm court adopted the reasoning of the Ekenasi court
in rejecting arguments identical to those here. See Strahm, 327
B.R. at 325.
Moreover, two published decisions from courts within the
Ninth Circuit have applied the Brunner test in Chapter 13 cases
where the debtors had not yet completed payments under the plan.
See In re Cota, 298 B.R. 408 (Bankr. D. Ariz. 2003); In re
Ritchie, 254 B.R. 913 (Bankr. D. Idaho 2000). Both courts, when
determining the first prong, looked at evidence of the debtor’s
current income and expenses at the time of trial. See Cota, 298
B.R. at 414—15; Ritchie, 254 B.R. at 918. This is consistent
with the language of the first prong, which requires a court,
when applying the test, to consider “current income and
expenses,” see Pena, 155 F.3d at 1111. It is contrary to ECMC’s
argument that a court is required to look at a debtor’s income
at the date of discharge under the first prong. Further, this
approach mirrors that of those courts that permit the debtor to
choose the “snapshot date” for the dischargeability
determination. See Ekenasi, 325 F.3d at 546—47; Goranson, 183
B.R. at 56.
With respect to the second prong, as noted above,
consideration of additional circumstances indicating whether the
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debtor’s state of affairs is likely to persist for a significant
portion of the repayment period “always requires the court to
consider a future time period where certainty is never
available, whether evidence in regard to this factor is
presented in the early stages, or the later stages, of a chapter
13 case.” Strahm, 327 B.R. at 322. In Cota, for example, while
the court lamented that it did “not have a crystal ball to
assist in determining what will happen in the future,” the court
nevertheless analyzed the second prong over a twenty-five year
repayment period. Cota, 298 B.R. at 417—18. The court looked
to evidence presented at trial regarding the debtor’s current
physical condition, education, and number and ages of his
children in determining the debtor’s future ability to maintain
a minimal standard of living. See id.
In accord with ECMC’s position, however, are Bender, 368
F.3d 846; Pair, 269 B.R. 719; Soler, 250 B.R. 694; and Raisor,
180 B.R. 163. The Eighth Circuit points out, for example, that
“the factual question is whether there is undue hardship at the
time of discharge, not whether there is undue hardship at the
time that a § 523(a)(8) proceeding is commenced.” Bender, 368
F.3d at 848. For this reason, it concludes, the proceeding
should take place relatively close to the date of discharge so
the court can examine the debtor’s actual circumstances at that
time. Id.
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ECMC also quotes United States v. Lee, 89 B.R. 250 (N.D.
Ga. 1987), aff’d, United States v. Hochman (In re Hochman), 853
F.2d 1547 (11th Cir. 1988), as stating, “No debt is
dischargeable under § 1328(a) until successful completion of all
payments under a Chapter 13 plan.” Lee, 89 B.R. at 257. In
Lee, the issue was the timeliness of the proceeding to determine
dischargeability of a health education assistance loan. Id. at
251. Title 42 U.S.C. § 294f(g) imposed requirements beyond
§ 523(a)(8) for discharge of a health education loan, and the
debtors there failed to satisfy the requirements of 42 U.S.C.
§ 294f(g). In dicta, however, the court acknowledged that “[i]f
the debt the dischargeability of which is at issue [] is
arguably one of two exceptions provided for in § 1328(a) . . .
then it would be appropriate for a court to determine, before
completion of the Chapter 13 plan, whether that debt is
nondischargeable under § 1328(a).” Id. at 257.
The Soler court responded to the Lee court’s assertion.
Soler, 250 B.R. at 696. The court there pointed out that, at
the time of Lee, a debt under § 523(a)(8) was not an exception
to Chapter 13 discharge but was added as an exception in 1990.
Id. At the time of Lee, the only exceptions to discharge under
§ 1328(a) were for certain long term debts and alimony and child
support. See Lee, 89 B.R. at 257. The Soler court concluded
that the “nature of the exception of student loan debt from
discharge” distinguished it from the two types of exceptions
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that existed at the time of Lee. See Soler, 250 B.R. at 696.
Specifically, the Soler court, somewhat circularly, relied on
“the fact that dischargeability cannot be determined absent a
discharge that has been granted or is imminent.” Id. The court
clarified that whether a debtor suffers from undue hardship
“depends on the debtor’s situation at the time of discharge.”
Id.
However, the Bender and Soler courts appear to be adding a
judicial gloss to § 523(a)(8) by defining the issue as whether
undue hardship exists at the time of discharge. The issue
defined by the statute does not include the italicized words.
There is no express statutory prohibition on determining this
issue before the discharge is granted.
As the Goranson court pointed out, to require the
dischargeability determination to be postponed until the
debtor’s Chapter 13 plan payments are completed would make
Chapter 13 less attractive to debtors with student loans than
Chapter 7 where the determination could be made promptly. This
would be contrary to congressional intent to encourage debtors
to choose Chapter 13 over Chapter 7. See Goranson, 183 B.R. at
56. Further, a determination at a relatively early stage of the
bankruptcy case may be of significant import to a Chapter 13
debtor. As the Strahm court noted, “if the Debtor prevails, in
whole, or in part, a number of options may be available to the
Debtor, which may impact future collective proceedings in the
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chapter 13 case.” Strahm, 327 B.R. at 325. If the debtor does
not prevail, early resolution of the issue may enable a debtor
to modify its plan to propose payment to the creditors, and
thereby prevent the accrual of additional interest and
penalties. See Craine, 206 B.R. at 601.
Coleman understandably would like to know before she makes
plan payments for five years whether her remaining student loan
debt will be discharged upon a successful completion of her
plan. Given the potential impact of the dischargeability
determination at this stage in the proceedings, the Court does
not believe that such a determination would be a waste of
judicial resources. Therefore, the Court concludes that it
should exercise its discretion to consider the issue at this
time and will deny ECMC’s motion to dismiss on prudential
grounds as well.
CONCLUSION
ECMC’s motion to dismiss Coleman’s complaint will be
denied. Counsel for Coleman is directed to submit a proposed
form of order in accordance with this decision.
END OF DOCUMENT
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COURT SERVICE LIST
Lars T. Fuller
The Fuller Law Firm
60 N. Keeble Ave.
San Jose, CA 95126
Miriam E. Hiser
Law Offices of Miriam E. Hiser
3330 Divisadero
San Francisco, CA 94123
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