Richardson v. College Foundation et al

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
LORENZO DOMINIC RICHARDSON
DEBTOR
CASE NO.
07-01504-5-ATS
LORENZO DOMINIC RICHARDSON
Plaintiff
v.
NORTH CAROLINA STATE EDUCATION
ASSISTANCE AUTHORITY
Defendant.
ADVERSARY PROCEEDING NO.
S-07-00096-5-AP
MEMORANDUM OPINION
The trial of this adversary proceeding to determine, pursuant to 11 U.S.C. § 523(a)(8), the
dischargeability of student loans owed by the chapter 7 debtor, Lorenzo Dominic Richardson, to
the North Carolina State Education Assistance Authority ("NCSEAA"), was held in Raleigh, North
Carolina on August 12, 2008.
This bankruptcy court has jurisdiction over the parties and the subject matter of this
proceeding pursuant to 28 U.S.C. §§ 151, 157, and 1334, and the General Order of Reference
SO ORDERED.
SIGNED this 14 day of August, 2008.
________________________________________
A. Thomas Small
United States Bankruptcy Judge
____________________________________________________________
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1 The complaint was initially filed against College Foundation, but NCSEAA was allowed
to intervene as the proper party on September 25, 2007.
2
entered by the United States District Court for the Eastern District of North Carolina on August 3,
1984. This is a "core proceeding" within the meaning of 28 U.S.C. § 157(b)(2)(I), which this court
may hear and determine.
Lorenzo Dominic Richardson filed a pro se petition for relief under chapter 7 of the
Bankruptcy Code on July 13, 2007. 	On July 30, 2007, he filed, without the assistance of counsel,
the complaint in this adversary proceeding pursuant to 11 U.S.C. § 523(a)(8) to discharge his student
loans.1 Pursuant to a master promissory note dated April 26, 2005, Mr. Richardson borrowed funds
that he used to earn a certificate in Digital Audio Production and Design I from the School of
Communication Arts. 	The balance of the loans as of August 12, 2008, is $7,138.10, including
principal of $6,142.20, interest of $398.90, and projected fees of $597. Ex. 46, Affidavit of Wayne
E. Johnson. Mr. Richardson seeks a discharge of the debt, contending that the loans are not valid
and that excepting the loans from discharge will create an undue hardship. The court entered an
order granting partial summary judgment in favor of NCSEAA with respect to the validity of the
debt on May 14, 2008, leaving for trial the issue of undue hardship.
Section 523(a)(8) provides that “unless excepting such debt from discharge under this
paragraph would impose an undue hardship on the debtor and the debtor's dependents,” the
following debts may not be discharged:
(A)(i) an educational benefit overpayment or loan made, insured or guaranteed by
a governmental unit, or made under any program funded in whole or in part by a
governmental unit or nonprofit institution; or
(ii) an obligation to repay funds received as an educational benefit, scholarship or
stipend; or
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(B) any other educational loan that is a qualified education loan, as defined in section
221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an
individual[.]
11 U.S.C. § 523(a)(8). There is no dispute that the student loans made by the defendant in this
adversary proceeding are the type of loans that would be not be discharged if the debtor cannot
establish an “undue hardship.”
Section 523(a)(8) of the Bankruptcy Code makes it extremely difficult for debtors to
discharge student loans. "Debtors receive valuable benefits from congressionally authorized loans,
but Congress in turn requires loan recipients to repay them in all but the most dire circumstances."
Educational Management Corp. v. Frushour (In re Frushour), 433 F.3d 393, 399 (4th Cir. 2005)
(citing Pa. Higher Educ. Assistance Agency v. Faish (In re Faish), 72 F.3d 298, 306 (3d Cir. 1995)).
Debtors must show "exceptional circumstances," and must prove that "they are in the limited class
of debtors for which § 523(a)(8) is meant to allow discharge." Educational Credit Mgmt. Corp. v.
Mosko (In re Mosko), 515 F.3d 319, 324 (4th Cir. 2008) (citing Frushour, 433 F.3d at 404)
(emphasis added in Mosko). "Congress sought to ensure repayment of educational loans through
its use of the term 'undue' and the courts are obligated to follow its imperative." Frushour, 433 F.3d
at 396. A "garden-variety hardship" is an "insufficient excuse for a discharge of student loans."
Frushour, 433 F.3d at 399 (quoting Rufino v. United States (In re Rufino), 245 F. 1083, 1087 (9th
Cir. 2001)). See Vujovic v. Direct Loans (In re Vujovic), 388 B.R. 664 (Bankr. E.D.N.C. 2008).
The term "undue hardship," as used in § 523(a)(8), is not defined, but most courts have
looked for guidance to the three-part Brunner test developed by the United States Court of Appeals
for the Second Circuit more than twenty years ago in Brunner v. New York State Higher Education
Services, 831 F.2d 395 (2d Cir. 1987). The Court of Appeals for the Fourth Circuit applies the
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2 Mr. Richardson received a $3,000 workers compensation settlement in July 2008. He used
the funds to rent an apartment, paying 2 months' rent in advance and signing a 6-month lease at $575
per month.
4
Brunner test. See Ekenasi v. Education Res. Inst. (In re Ekenasi), 325 F.3d 541 (4th Cir. 2003)
(adopting the Brunner test in chapter 13 cases); Frushour, 433 F.3d 393 (adopting the Brunner test
in chapter 7 cases). 	The Brunner test requires debtors to establish, by a preponderance of the
evidence, the following factors:
(1) they cannot maintain, based on current income and expenses, a minimal standard
of living for themselves and their dependent[s] if forced to repay the loans; (2)
additional circumstances exist indicating that this state of affairs is likely to persist
for a significant portion of the repayment period of their student loans; and (3) they
have made good-faith efforts to repay their student loans.
Mosko, 515 F.3d at 323. A debtor must meet all three of the Brunner standards for the debtor's
student loans to be dischargeable.
Mr. Richardson meets the first prong of the Brunner test because he can not, based on his
current income and expenses, pay his student loans while maintaining a minimal standard of living
for himself. Mr. Richardson is currently unemployed, and he has been only periodically employed
in temporary jobs since he obtained his certificate from the School of Communication Arts on June
22, 2006. He does not appear to have obtained any employment related to the certificate, but instead
has worked a number of warehouse jobs. Due to the nature of the temporary employment, most of
Mr. Richardson's jobs have lasted only a few days or a couple of weeks, and he testified that he has
worked at most a month and a half in 2008. He receives $162 per month in food stamps, and he has
no assets except a fully-encumbered vehicle. Mr. Richardson lived with his parents until recently,
did not pay rent and did not contribute to the costs of utilities. 2 He was unable to pay the filing fee
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in this case, and was unable to hire an attorney to represent him in the case and in this adversary
proceeding.
Mr. Richardson's only scheduled monthly expenses include a car payment of $400, which
has been reduced to $333 pursuant to a reaffirmation agreement; $200 for food; $50 for clothing;
$275 for transportation, car taxes and car insurance; $20 for recreation; $50 for charitable
contributions; and $50 for payments for his daughter (though he testified in his deposition that he
is not required to pay child support, and he is currently not making any contributions toward his
daughter's needs). Though his expenses are minimal, he has difficulty meeting those needs due to
his lack of income, and he is, in fact, behind on his car payments. Because of Mr. Richardson's lack
of income and assets, he has shown an inability to meet a minimal standard of living if he is forced
to repay the loans.
The second Brunner prong is often the most difficult of the three prongs to prove. It requires
debtors to show that "additional circumstances exist indicating that this state of affairs is likely to
persist for a significant portion of the repayment period of their student loans." Mosko, 515 F.3d
at 323. Courts have described this factor as requiring "'a total incapacity . . . in the future to pay [the
debtor's] debts for reasons not within [the debtor's] control.'" Gerhardt, 348 F.3d at 92 (quoting In
re Faish, 72 F.3d 298, 307 (3d Cir. 1995)). 	The Court of Appeals for the Fourth Circuit has
observed that the second Brunner prong presents "'a demanding requirement,' . . . and necessitates
that a 'certainty of hopelessness' exists that the debtor will not be able to repay the student loans."
Frushour 433 F.3d at 401 (quoting Brightful v. Pa. Higher Educ. Assistance Agency (In re Brightful,
267 F.3d 324, 328 (3rd Cir. 2001). According to the Frushour court, "[o]nly a debtor with rare
circumstances will satisfy this factor." Frushour, 433 F.3d at 401.
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Mr. Richardson contends that his circumstances are not likely to change. He believes that
the certification he received from the School of Communication Arts is worthless because he has
been unable to find a job in the fields of music production and graphic design. According to the
debtor, he is has been listed with employment agencies and has unsuccessfully applied for hundreds
of jobs. Mr. Richardson believes he has been "blacklisted" from employment in the Raleigh area
as a result of "standing up for what he believes in," though his only evidence of this is that he has
been unable to find work. He has had difficulty keeping jobs, either because the jobs are intended
to be temporary or because he has been fired or laid off. He attributes some of this to his criminal
record, which consists of 2 misdemeanor bad check charges and a misdemeanor conviction for
carrying a concealed weapon. Mr. Richardson also maintains that he has a back injury from a prior
job that limits his employment options, but he admits that the back injury would not prevent him
from working in the field in which he was trained. His belief that his situation is likely to persist
is based primarily on his past experience in the job market.
Mr. Richardson is 25 years old and has a high school education plus the certificate in Digital
Audio Production and Design I. He has no physical disability other than the back injury for which
he attributes a 20% disability rating, and which he agrees does not significantly impair his
employment options. All of his debts have been discharged except for the student loan, which has
a balance of $7,138.10. The monthly loan payments are only $89 per month, and even that amount
could be reduced if his loans were consolidated.
A significant problem for Mr. Richardson, by his own admission, seems to be his attitude
toward his ability to find or maintain employment. He believes that he has been "blacklisted" and
is the object of discrimination. The debtor is apparently quick to complain when he believes he has
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3 The court makes no suggestion that Mr. Richardson's employment issues are related to
mental health issues, though a debtor's mental health often is a factor in student loan cases. The
court's website, www.nceb.uscourts.gov, has mental health information including where low income
individuals can obtain mental health services. Mental illness has been a factor in a number of student
loan cases before this court. See Stevens v. Education Credit Management Corp. (In re Stevens),
Adv. Pro. No. S-04-00038-5-AP (Bankr. E.D.N.C. April 8, 2005); Hudson v. U.S. Dep't of
Education, Direct Loans (In re Hudson), Adv. Pro. No. S-02-00160-5-AP (Bankr. E.D.N.C. Mar.
12, 2004); Blanchard v. EFG Technologies (In re Blanchard), Adv. Pro. No. S-01-00049-5-AP
(Bankr. E.D.N.C. April 25, 2003). 	Mental illness and its effect on future employment is very
difficult to prove and usually requires expert testimony. This court has established a pro bono panel
of mental health experts who are available, at no cost to debtors, on application, to evaluate debtors
and provide testimony on these issues for the court's consideration. The debtors in the Stevens and
Hudson cases both took advantage of this program in conjunction with their efforts to discharge their
student loans.
7
been treated unjustly, and he believes that this accounts for his lack of employment security.
Although his courtroom demeanor was respectful, the pleadings he has filed show the depth of his
anger, and it appears that Mr. Richardson's situation stems in part from his negative expectations and
the argumentative, sometimes combative attitude that accompanies them. 	These aspects of Mr.
Richardson's current mindset are very likely interfering with his ability to acquire and retain
employment, and hopefully Mr. Richardson will investigate any resources and counseling available
to him in order to alleviate these obstacles. 	Fortunately, there are many books, courses, and
counseling available to someone with an argumentative disposition, and usually a combative attitude
can be kept under control unless caused by a mental health condition. The court is not suggesting
that that is the case here, but even if it were, help is available.3 The court finds that Mr. Richardson
has not demonstrated that his situation is hopeless and that he will not be able to find steady
employment in the future.
The third Brunner prong requires a debtor to have made good faith efforts to repay the
debtor's student loans. One aspect of that inquiry involves review of the debtor's payment history
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and the debtor's use of loan consolidation options. Frushour, 433 F.3d at 402. Mr. Richardson has
made no payments toward this debt, but the loans, which were not payable while he was in school,
had not come due as of the petition date and technically Mr. Richardson was not in default when he
filed for bankruptcy protection. Mr. Richardson was given the option to consolidate his loans, but
he refused, contending that consolidation is merely an opportunity for lenders to collect more
interest, and confers no benefit on debtors.
Several Circuit Courts of Appeals, including the Court of Appeals for the Fourth Circuit, also
include in the third Brunner prong an examination of the debtor's "efforts to obtain employment,
maximize income, and minimize expenses.'" Frushour, 433 F.3d at 402 (quoting O'Hearn v. Educ.
Credit Mgmt. Corp., 339 F.3d 559, 564 (7th Cir. 2003)). This component of the third Brunner prong
frequently overlaps with the analysis of the second prong, under which the court must determine
whether the debtor's state of affairs is likely to persist. See, e.g., In re Gerhardt, 348 F.3d 89, 93 n.3
(5th Cir. 2003). 	As noted above, the court is not persuaded that Mr. Richardson's employment
situation is likely to persist into the future, and Mr. Richardson has not met his burden of proof of
the third element of the Brunner test.
Because Mr. Richardson has not met elements two and three of the Brunner test, he has not
shown that not discharging the student loans would cause an "undue hardship." Consequently, the
court concludes that the student loans are not excepted from discharge under § 523(a)(8).
However, as the court has done in several other student loan proceedings, the court will give
the debtor an opportunity to have this decision reconsidered in the future based on changed
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4 The court has provided for reconsideration in several student loan cases. See Hudson v.
U.S. Dep't of Educ. (In re Hudson), Adv. Pro. No. S-02-00160-5-AP (Bankr. E.D.N.C. Mar. 12,
2004); Hundley v. Sallie Mae Servicing Corp. (In re Hundley), Adv. Pro. No. S-02-00010-8-AP
(Bankr. E.D.N.C. Feb. 18, 2003); Vujovic v. Direct Loans (In re Vujovic), 388 B.R. 664 (Bankr.
E.D.N.C. 2008).
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circumstances provided that the debtor makes a request for reconsideration between December 1,
2009, and January 29, 2010. 4
Judgment shall be entered accordingly.
END OF DOCUMENT
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