Cosio v. United States Of America et al

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cae 2:06-ap-01487-TD Doc 34 Filed 11/20/07 Entered 11/26/07 11:13:36 Desc

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FILED
{ | NOV ? 0 2007
ENTERED
2 rs u we
; NOV > 6 2007 —
CLERK U.S. BANKRUPTCY GOURT
4 By TRAL DISTRICT OF Besuey oleh
5 UNITED STATES BANKRUPTCY COURT
6 CENTRAL DISTRICT OF CALIFORNIA
7 LOS ANGELES DIVISION
8
In re: Chapter 7
9
JOSE A. COSIO, Case No. 2:05-bk-41326-TD
10 Adv. No. 2:06-ap-01487-TD
Debtor.
11 FINDINGS OF FACT AND CONCLUSIONS
OF LAW AFTER TRIAL
12
13
14 WJOSE A, COSIO, Date: October 10, 2007
Plaintiff, Time: 1:30 p.m.
15 Courtroom: 1345
VS.
16
UNITED STATES OF AMERICA (etc.);
17 J|EDUCATIONAL CREDIT MANAGEMENT
CORPORATION,
18
Defendants.
19
20
21 NATURE OF PROCEEDINGS
22 The Debtor and Plaintiff, Jose A. Cosio (“Plaintiff”), filed a voluntary Chapter 7 Petition on
23 }October 14, 2005. Plaintiff was granted a discharge on June 16, 2006. Thereafter, on July 6, 2006,
24 }|Plaintiff filed a First Amended Complaint For Declaratory Relief And To Determine Debt
25 }|Dischargeable Pursuant To (1) 11 U.S.C. Section 523(a)(8); (2) Health Education Assistance Loan
26 |Program, 42 U.S.C. Section 292f(g)(2); (3) 11 U.S.C. 105 (the “Complaint”), later amended to
27 substitute Educational Credit Management Corporation (“ECMC”) as a defendant, seeking to
28 |discharge his educational student loans. A non-jury trial was held on October 10, 2007.

AUTHENTICATED /f
U.S. GOVERNMENT
INFORMATION
GPO

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The Court, having considered the record before it, including the evidence received at trial, the
statements and arguments of counsel, and the contents of the trial briefs, files the following Findings
of Fact and Conclusions of Law.

FINDINGS OF FACT

1. On or about January 25, 1984, Plaintiff executed a Wisconsin Guaranteed Student Loan
Program Promissory Note (the “First Note’). (Stipulation of Admitted Facts and Exhibits for Trial
(“SAF”), Admitted Fact (“AF”) No. 1)

2. On or about November 1, 1984, there was a $5,000 disbursement made pursuant to the
First Note for Plaintiff's benefit. (SAF, AF No. 2)

3. On or about August 30, 1983, Plaintiff executed a Wisconsin Guaranteed Student Loan
Program Promissory Note (the “Second Note’). (SAF, AF No. 3)

4. On or about September 13, 1983, there was a $5,000 disbursement made pursuant to the
Second Note for Plaintiff's benefit. (SAF, AF No. 4)

5, On or about September 30, 1982, Plaintiff executed a Wisconsin Guaranteed Student Loan
Program Promissory Note (the “Third Note”). (SAF, AF No. 5)

6. On or about October 25, 1982, there was a $5,000 disbursement made pursuant to the
Third Note for Plaintiff's benefit. (SAF, AF No. 6)

7. On or about August 20, 1981, Plaintiff executed a Wisconsin Guaranteed Student Loan
Program Promissory Note (the “Fourth Note”). (SAF, AF No. 7)

8. On or about October 16, 1981, there was a $5,000 disbursement made pursuant to the
Fourth Note for Plaintiff's benefit. (SAF, AF No. 8)

9. Great Lakes Higher Education Corp. f/k/a Wisconsin Higher Education Corp. obtained a
judgment against Plaintiff for the amounts due under First Note, Second Note, Third Note and Fourth
Note from the Circuit Court, Branch 12, Dane County, State of Wisconsin, on or about September 6,
1989 (the “Judgment”’). (SAF, AF No. 9)

10. The Judgment accrues interest at the rate of 12.00% per annum pursuant to the laws of the
State of Wisconsin. (SAF, AF No. 10)

11, ECMC is the current holder of the Judgment. (SAF, AF No. 1 1)

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12. On or about October 25, 1980, Plaintiff executed a California Guaranteed Student Loan
Program Student Aid Commission Promissory Note and Disclosure Statement (the “Fifth Note”).
(SAF, AF No. 12)

13. On or about November 30, 1980, there was a $2,500 disbursement made pursuant to the
Fifth Note for Plaintiff's benefit. (SAF, AF No. 13)

14. The interest rate on the Fifth Note is a fixed rate currently set at 7% per annum.

(SAF, AF No. 14)

15. ECMC is the current holder of the Fifth Note. (SAF, AF No. 15)

16. The First, Second, Third, Fourth and Fifth Notes (collectively “the Notes”) represent
student loans made, insured or guaranteed by a governmental unit, or made to Plaintiff under a
program funded in whole or in part by a governmental unit or nonprofit institution within the meaning
of 11 U.S.C. § 523(a\(8). (SAF, AF No. 16)

17. Plaintiff filed a voluntary Chapter 7 petition on or about October 14, 2005 (the “Petition
Date”), (SAF, AF No. 17)

18. Plaintiffs four student loans represented by the First Note, Second Note, Third Note and
Fourth Note were previously held by the Department of Education, and because of this Plaintiff and
ECMC entered into a Stipulation to Substitute ECMC as real party in interest on behalf of the
Department of Education (the “Stipulation to Substitute”), The Court entered an Order approving the
Stipulation to Substitute resulting in ECMC becoming a defendant in the adversary case. (SAF, AF
No. 19)

19. Plaintiff has additional student loans known as HEAL Loans, which loans were a part of
this adversary case and were defended by the United States of America through the United States
Attorneys Office. Plaintiff and the United States of America entered into a Stipulation resolving
those loans (SAF, AF No. 20) by a Stipulation providing that Plaintiff is to make monthly payments
of $567.20 for 20 years to repay a his HEAL Loans. (Plaintiff's trial testimony)

20. Plaintiff received his Chapter 7 discharge on June 16, 2006. (SAF, AF No. 21}

21. The only remaining defendant in the adversary case is ECMC. (SAF, AF No. 22)

22, On or about August 30, 2006, ECMC filed and served its Answer to Plaintiff's

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1 |Complaint. (SAF, AF No, 23)
23. Although Plaintiff, as part of this lawsuit, made an agreement to repay his HEAL loans,

Plaintiff has not applied to the U.S. Department of Education for a William D. Ford Direct

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Consolidation Loan. (SAF, AF No. 24) Defendant believes Plaintiff's ECMC balance is about

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$82,323.44 as of March 11, 2007.

24. Plaintiff has not established the balance owing on his student loans owed to ECMC.

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(Plaintiff's trial testimony)
8 25. Plaintiff is 49 years old. (SAF, AF No. 26)
9 26. Plaintiff received a Bachelors of Science in Biology from the University of San Francisco
10 jin 1981. (SAF, AF No. 27)
11 27. Plaintiff received a Masters in Public Health from UCLA in 2004. (SAF, AF No. 28)
12 28. Plaintiff has worked steadily for Kaiser Permanente Health Plan from September 23,
13 2002, to the present as a Medicare Compliance Administrative Specialist. (SAF, AF No. 29)
14 29, Plaintiff does not have any dependents. (SAF, AF No. 30)
15 30. Plaintiff receives medical, dental, and vision insurance through employer-sponsored

16 programs. (SAF, AF No. 31)

17 31. Plaintiff has life insurance. (SAF, AF No. 32)

18 32. Plaintiff has disability insurance. (SAF, AF No. 33)

19 33. Plaintiff does not suffer from any physical disabilities. (SAF, AF No. 34)

20 34, Plaintiff does not suffer from any mental disabilities. (SAF, AF No. 35)

21 35. From each of Plaintiff's bi-weekly paychecks Plaintiff makes a pre-tax contribution of

22 {$86.94 to his TSA Employee retirement plan, the name and the terms of which were not discussed in
23 |Ithe testimony. I infer that this is a voluntary contribution because the testimony did not suggest

24 |jotherwise.

25 36. Plaintiff's testimony was somewhat vague regarding his payroll deductions. Thus, from
26 |leach of Plaintiff's bi-weekly paychecks he testified there are three post-tax deductions made for

27 repayment of loans Plaintiff took from his retirement plans. Those three deductions total $215.00

28 jjevery two weeks. (Plaintiff's trial testimony)

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] 37. From each of Plaintiff's bi-weekly paychecks Plaintiff makes a post-tax contribution of
$289.81 to a retirement plan. (Plaintiff's trial testimony)

38. In all, Plaintiff's voluntary pre-tax and post-tax deductions for loan repayment and

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retirement contributions from his paychecks total $1,183.70 every four weeks, and on a monthly basis

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they total $1,282.34. (Plaintiff's trial testimony)

39. Plaintiffs Schedule J to his Bankruptcy Petition details his monthly expenses and
concludes that Plaintiff's total monthly expenses were $2,283 as of October 27, 2005. (ECMC's
Exhibit G)

40. Plaintiff's Responses to Interrogatories state that Plaintiff's total monthly expenses were

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$2,520.00 as of December 7, 2006. (Plaintiffs trial testimony)

1] 41. Plaintiff states that his monthly expenses as of the time of trial total $2,910. (Plaintiff's

12 |tral testimony)

13 42. Plaintiff's current annual gross income is about $77,000. (Plaintiff's trial testimony)

14 43. ECMC offered Plaintiff a repayment plan of $450 a month until his loan balance is paid in
15 |/full or 20 years, whatever occurs first, but Plaintiff has not responded with any effort to explore the

16 |[possibility of ECMC loan repayment. (SAF, AF No. 25)

17 44, Plaintiff also may be eligible for payment under the Income Contingent Repayment Plan

18 |fof the Wilham D. Ford Federal Direct Loan Program (the “Ford Program’) based upon his estimated
19 2007 Adjusted Gross Income of $77,000, and taking into account his agreement to repay his HEAL
20 ||Loans and a balance of about $82,000 on his ECMC loans,

2] 45. Plaintiffs might qualify for the Graduated Repayment Plan of the Ford Program based

22 |jupon his estimated 2007 Adjusted Gross Income of $77,000 and a balance of about $82,000 on his
23 |ECMC loans. (Request For Judicial Notice, Exhibit 2).
24 46. Plaintiffs might be eligible for the Graduated and Extended Repayment Plans of the Ford

25 ||Program based upon his estimated 2007 Adjusted Gross Income of $77,000 and a balance of about
26 [$82,000.00 on his ECMC loans.
27 47. Although the record contains scattered testimony concerning previous repayment efforts

28 |[by Plaintiff, his testimony in this regard was vague and largely based on hearsay or uncorroborated

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1 jassertions and reflects no effort on Plaintiff's part regarding any Ford Program repayment options.

2 48. Any conclusion of law deemed to constitute a finding of fact is incorporated herein as a
3 |/finding of fact.

4 CONCLUSIONS OF LAW

5 1. This court has jurisdiction over this proceeding under 28 U.S.C. § 157(a) and General

6 Order No. 266, filed October 9, 1984. This adversary action is a core proceeding under 28 U.S.C. §
7 1157(2)().
8 2. Venue for this proceeding lies within the Central District of California pursuant to 28
9 U.S.C. § 1409, as Plaintiff's Chapter 7 case was filed within the Central District of California.
10 3. Student loans are presumptively nondischargeable in bankruptcy under 11 U.S.C.
11 1§523(a)(8). Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440, 124 S. Ct. 1905 (2004).

12 Section 523(a)(8) excepts from discharge any debt “for an educational benefit overpayment or loan
13 made, insured or guaranteed by a governmental unit, or made under any program funded in whole or
14 jin part by a governmental unit or nonprofit institution, or for an obligation to repay funds received as
15 |jan educational benefit, scholarship or stipend; unfess excepting such debt from discharge under this
16 paragraph will impose an undue hardship on the debtor and the debtor’s dependents.” (Emphasis
17 Jladded.)

18 4. In In Re Pena, 115 F.3d 1108, 1112 (9" Cir. 1998), the Ninth Circuit adopted the test set
19 |{forth in In Re Brunner, 831 F.2d 395 (2 Cir. 1987) to determine whether a student loan should be

20 excepted from discharge as an undue hardship. Under that test, the debtor bears the burden of

21 |[proving:
22

1) That he or she cannot maintain, based on current income and expenses, a “minimal”
23 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
24 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.
25

In re Pena, 155 F, 3d at 1111.
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27 _. .; ; , ,
' This is the pre-BAPCPA version of §523(a)(8) that was in effect at the time Plaintiff filed his

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Chapter 7 petition.

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5. The Ninth Circuit Court of Appeals noted that “neither Congress nor this court has
defined the term ‘undue hardship’ .... 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 Pena, 155 F.3d at 1111. (Citations omitted),

6. “Current financial adversity, characteristic of all debtors in bankruptcy court, is not a
determinative factor in establishing dischargeability.” In re Barrows, 182 B.R. 640, 648-49 (Bankr.
D. N.H. 1994). “The mere fact that repayment of the student loan may impose a hardship on the
debtor is not enough to permit dischargeability.” In re Holmes, 205 B.R. 336, 339 (Bankr. M.D. Fla.
1997). The bottom line is that “Congress has seen fit to erect a high hurdle to debtors seeking to
discharge student loan obligations. While it commits to the court's discretion the finding of ‘undue
hardship,’ that discretion has been circumscribed by case law which, in an attempt to give structure to

the Congressional enactment, reserves discharge for the extraordinary case.” In re Wegrzyniak, 241

B.R. 689, 696 (Bankr. D. Id. 1999).

7. The debtor has the burden to satisfy all three of the elements of the Brunner test

before a student loan can be discharged. In re Faish, 72 F. 3d 298, 306 (3d Cir. 1995). If the debtor
fails to meet one of the requirements, the bankruptcy court’s inquiry must end there, with a finding of
no dischargeability.

8. The first prong of the Brunner test requires more than a showing of tight finances.
In re Farsh, 72 F. 3d at 306. As stated by the Ninth Circuit Bankruptcy Appellate Panel in In re
Birrane, 287 B.R. 490, 495 (9" Cir. BAP 2002), “[t}he first prong of the Brunner test requires an
examination of Birrane’s current income and expenses to see if payments of the loan would cause her
standard of living to fall below that minimally necessary.”

9. According to the Courts in Birrane and in In re Nascimento 241 B.R. 440, 445 (9" Cir.

BAP 1999), the proper inquiry is “whether it would be ‘unconscionable’ to require the debtor to take
any available steps to earn more income or to reduce his expenses.”

10. Plaintiff testified concerning Plaintiffs monthly expenses, and in general, the expenses he
lists appear to be reasonable, with some unexplained exceptions.

11. Plaintiff fails to provide any explanation to support his statement that he incurs $100 in

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monthly out-of-town non-reimbursable employment expenses and $65 monthly for tax preparer fees.
In addition, he claims a $75 church contribution.

12. Based on Plaintiffs direct testimony, he contributes $504.11, bi-weekly, to his 401(k).
This total includes “Other payroll deductions/401(k) contributions” in the amount of $149.98 and
“Other payroll deductions/401(k) loan repayment” in the amount of $354.83. (Dec. of Jose A. Cosio
as Direct Testimony, p.18)

13. In addition, J note that Plaintiff is paying off several personal loans in preference to his
loans held by ECMC, including his HEAL loan and UCLA loan, all apparently in preference to his
loans held by ECMC.

14. I conclude there is a reasonable possibility that Plaintiff could, with some adjustment of
other voluntary payments, maintain a minimal standard of living and repay his student loans owed to
ECMC, either pursuant to the repayment plan offered by ECMC or a repayment plan offered by the
William D. Ford Federal Direct Loan Program.

15. It would not be “unconscionable” to expect the Plaintiff to lower these voluntary
expenses. Moreover, Plaintiffs $250 per month dental payment is a short term obligation and will
end shortly, perhaps before 2008.

16. In order to satisfy the second prong of the Brunner “undue hardship” test, the debtor must
show that his present inability to pay will likely persist throughout a substantial portion of the loan
repayment period. Proof of “undue hardship” does not require proof of an “exceptional circumstance
beyond an inability to pay,” now or in the future. In re Nys, 446 F.3d 938, 941 (9" Cir. 2006).

17. The 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.’ ” In re Birrane, 287 B.R. at 497, quoting In re Rifino, 245 F.3d 1083 (9" Cir.
2001).

18. Plaintiff has not satisfied his burden of proof under the second prong of the Brunner test.
Plaintiff has not established that he has barriers of the type necessary to meet the second prong of the

Brunner test. Rather, the evidence persuades me that Plaintiffs income has stabilized and improved

over a long period of time and is likely to improve in the future, however modestly. Thus, Plaintiff

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has not proven that he suffers an inability to pay which will likely persist throughout a substantial
portion of the loan repayment period.

19. In fact, the evidence does not show that Plaintiff has an tnability to pay now or in the
future. Plaintiff's trial testimony shows that Plaintiff's income has increased every year since 2001.
He testified to having a fairly stable source of income since 1998. He has maintained steady
employment with Kaiser since 2002. There is no evidence that the debtor is hindered by any barrier
that would lead the court to believe he will lack the ability to repay for several years. In re Birrane,
287 B.R. at 497. Plaintiff seems to be a healthy, wholesome, reliable employee with good prospects
for his future employment at similar compensation.

2(). Under the third prong of the Brunner test, Plaintiff must establish that he has made good

faith efforts to repay his student loans.

21. Lack of bad faith is not the applicable test. Plaintiff's burden is to show good faith efforts
to repay requiring efforts to satisfy the debt by all means, or at least by some means, within Plaintiff's
reasonable control. In re Ulm, 304 B.R. 915, 922 (S.D. Ga 2004).

22. There are two measures of good faith. The Birrane court, 287 B.R. at 499, describes the
first measure as follows: “Good faith is measured by the debtor’s efforts to obtain employment,
maximize income, and minimize expenses.”

23. While Plaintiff has accounted for generally modest living expenses, on balance I conclude
that Plaintiff has not made adequate efforts to adjust his voluntary expenditures to provide for
consistent efforts to repay his ECMC loans along with other obligations.

24. Plaintiff's claimed monthly expenses have increased over $600 since the time of filing his
bankruptcy petition. His monthly tax preparer expense of $65 and his church contribution of $75 may
not be entirely appropriate in light of his student loan debt. Plaintiffs monthly dental expense of $250
specifically set aside for 2007 will terminate within one year, maybe before 2008.

25. Plaintiff's voluntary pre-tax and post-tax deductions from his paycheck totaling $1,282.34
a month are not entirely appropriate either, under the circumstances.

26. Plaintiff's repayment of loans taken from his retirement plans to repay some but not all of

his student loans falls somewhat short of proving Plaintiff's good faith here,

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27. The entering into a settlement to repay a portion of Plaintiff's HEAL loans amounts to a

preferential plan on Plaintiffs part as to which loans should be repaid and which loans do not need to

3 |lbe repaid. The 523(a)(8) case law does not support Plaintiff's selective repayment approach.

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28. The second measure of good faith, as stated by the Birrane court is the debtor’s effort, or

lack thereof, to negotiate a repayment plan with ECMC. The Ninth Circuit's decision in In re Nys,
446 F.3d 938 (9" Cir. 2006) and the Ninth Circuit BAP's decision in Birrane bring the Ninth Circuit

in line with other jurisdictions across the country which are increasingly requiring debtors to explore
the Ford Program before obtaining an undue hardship discharge. The Birrane court found the debtor
showed a lack of good faith by failing to take reasonable steps towards exploring and renegotiating a
repayment schedule under the Income Contingent Repayment Plan. There are available repayment
alternatives for Plaintiff's ECMC loans under an Income Contingent Repayment Plan (the William D.
Ford Federal Direct Loan Program) that Plaintiff has ignored. (See, SAF, AF No. 24)

29. ECMC offered Plaintiff a repayment plan of $450 per month until his loan balance is
paid in full or 20 years, whatever occurs first. (SAF, AF No. 25)

30. ECMC has offered other repayment alternatives for Plaintiff's ECMC loans.

31. Since the Plaintiff has not demonstrated that he has made a meaningful effort to pursue
any repayment alternative with respect to his ECMC loans, he fails the third prong of the Brunner test:
Plaintiff has not demonstrated a good faith attempt to repay these student loans, his past somewhat
vaguely described efforts nothwithstanding.

32. Plaintiff's evidence does not prove that his circumstances are unique, extraordinary, or
that they support a finding of undue hardship. Plaintiff's unwillingness to repay his ECMC loans
precludes Plaintiff on the record before me, from proving good faith as contemplated by Brunner and
the other case law discussed.

33. Plaintiffhas failed to prove (a) that he cannot maintain, based upon current income
and expenses, a minimal standard of living for himself, if forced to repay the ECMC loans; (b) that
there are additional circumstances to support the discharge of his ECMC loans, or (c) that he has
made a good faith effort to repay his ECMC loans. Plaintiff has not satisfied any of the 3

requirements of the Brunner test necessary to establish that his student loans should be discharged

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based on undue hardship. Therefore, judgment should be entered in favor of ECMC on Plaintiff’s
Complaint.

34, Pursuant to the ruling in In re Saxman, 325 F.3d 1168 (9" Cir. 2003), without a finding of
undue hardship, the Court cannot grant a partial discharge.

35. ECMC is entitled to a judgment reciting that Plaintiff's indebtedness to ECMC is
nondischargeable under 11 U.S.C. § 523(a)(8).

36. Any finding of fact deemed to constitute a conclusion of law is incorporated herein as a

conclusion of law.

Dated: it[ao/o 7
Thea B. Donovan

United States Bankruptcy Judge

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1 NOTICE OF ENTRY OF JUDGMENT OR ORDER
2 AND CERTIFICATE OF MAILING
3
TO ALL PARTIES IN INTEREST LISTED BELOW:
4
1, You are hereby notified that a judgment or order entitled:
5

FINDINGS OF FACT AND CONCLUSIONS OF LAW AFTER TRIAL

° was entered on NOV 26 2007

2. I hereby certify that I mailed a true copy of the order or judgment to the persons and entities

8
listed below on NOV 26 2007:

Debtor/Plaintiff

10 [Jose A. Cosio

330 E. Cordova Street, Apt. 169
11 ||Pasadena, CA 91101

12 ||Attorney for Plaintiff

Silvio Nardoni

13 535 N. Brand Blvd., Ste. 501
Glendale, CA 91203

14
Attomey for Defendant

15 [Scott A. Schiff

Soukup & Schiff, LLP

16 |/1880 Century Park East, Ste. 1108
Los Angeles, CA 90067-1600

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United States Trustee

18 |/Emst & Young Plaza

725 S. Figueroa St., 26" Floor

19 ||Los Angeles, CA 90017

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Miiano *

9 Sonny

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