Bankruptcy Court Case No.10-20120-C-7 Adversary Proceeding No. 10-2144-C
The opinion of the court was delivered by: Morrison C. England, Jr. United States District Judge
Through the present action, Educational Credit Management Corporation ("ECMC") appeals in case 2:11-cv-00770-MCE the order of the United States Bankruptcy Court for the Eastern District of California discharging the majority of Appellee Darrell Lynn Whitman's ("Whitman") student loan debt.
Whitman cross-appeals, via a notice of appeal he filed in case 2:11-cv-00924-MCE, on several grounds, seeking either a full discharge of his debt or, alternatively, remand to the bankruptcy court for proper adjudication. For the following reasons, the bankruptcy court's decision is reversed.*fn1
A. Factual Background Underlying the Adversary Proceeding.
Whitman is a sixty-six year old man who suffers from diabetes and hypertension. Whitman currently lives in Berkeley, California, with his fifty-seven year old wife, who is unemployed, and his eighteen-year old daughter, whom Whitman claims as a dependent.
Whitman is highly educated having collected a variety of graduate degrees, including a bachelor's degree in sociology from Sonoma State University in 1973, a master's degree in social science from Southern Oregon University in 1976, another master's degree in government from California State University, Sacramento ("CSUS") in 2003, a law degree from the University of Santa Clara in 1989 and a Ph.D. in politics from Keele University in London in 2008. Whitman has been a member of the California Bar since 1993.
Whitman financed his education, at least in part, by acquiring federally-insured student loans. On or about December 14, 2006, Whitman executed a Loan Consolidation Application and Promissory Note payable to Sallie Mae in the principal amount of $180,419.08 to consolidate the loans taken to attend Santa Clara University, CSUS and Keele University. ECMC later acquired the loan from Sallie Mae and now holds all right, title and interest in Whitman's education-related debt.
Whitman's consolidated loan went into repayment upon disbursement on or about January 19, 2007, and interest accrues on that loan at a fixed rate of 7% per annum. Whitman has not made any payments on the consolidated loan and has instead obtained deferments. Accordingly, as of July 6, 2010, principal and interest on Whitman's consolidated note had reached a combined total of $218,589.61.
For obvious reasons, upon completion of his Ph.D. in 2008, Whitman thus began to look for employment, but despite applying for over 200 jobs, could not find work from June of 2008 through April of 2010. Subsequently, from April of 2010 to June of 2010, Whitman worked part-time for the U.S. Census Bureau, making a total of $3,000.00. By that time, Whitman had already filed a petition for relief under Chapter 7 of the Bankruptcy Code.
Eventually, however, in June of 2010, Whitman was offered a position as an investigator with the U.S. Department of Labor ("DOL"). Whitman's new employment was conditioned on his relocation from Davis, California, to the San Francisco Bay Area.
Whitman's daughter was also scheduled to move to the Bay Area in August of 2010 to attend the University of California at Berkeley. Accordingly, in July of 2010, Whitman and his wife opted to rent a home for $2,950.00 per month near affordable public transportation in Berkeley to minimize both Whitman's commuting costs and their daughter's living costs.
Whitman began work at the DOL on July 19, 2010, earning a gross salary of $81,460.00. Whitman's monthly net income was thus $4,637.00. His current monthly expenses, on the other hand, totaled $4,155.00, which was comprised of $2,950.00 for rent, $230.00 for electricity and gas, $75.00 for phone and internet, $600.00 for food and home maintenance, $150.00 for medical expenses and $150.00 for auto-related expenses. In addition, at the adversary proceeding, Whitman testified that the monthly expenses outlined in his declaration did not capture all of his current expenses. Whitman thus offered a new list of monthly expenses which included daily commuting costs (BART and transit fares), $200 a month in additional medical expenses, and two bills for unexpected dental expenses totaling $1,100.00 and $1,457.00, respectively.
Whitman avers he accumulated additional debt since he filed his bankruptcy petition. Specifically, he borrowed $6,000.00 from his daughter's personal college fund to cover his moving costs. He has also purportedly incurred various additional medical, dental and other miscellaneous expenses. Finally, Whitman contends he is now expected to contribute $5,000.00 per year to his daughter's college education. ER 30; Whitman Decl. ¶ 25.
Unfortunately, however, Whitman is nearing the end of his working life and believes that he can potentially work only five more years. According to Whitman, his monthly income will then drop by fifty percent, and he has no substantial savings capable of supplementing that decrease.
B. The Adversary Proceeding.
On March 12, 2010, Whitman filed the underlying adversary proceeding in this case against ECMC seeking discharge of his student loan obligation pursuant to 11 U.S.C. § 523(a)(8). The bankruptcy court entered a Pretrial Scheduling Order on June 30, 2010, which set October 29, 2010, as the date upon which discovery closed and November 23, 2010, as the date for the pretrial conference. Whitman timely submitted his pretrial statement, direct testimony and documentary evidence to the bankruptcy court.
The bankruptcy court held a trial in the adversary proceeding on February 16, 2011. Whitman, who appeared pro se, was given the opportunity to present evidence and was questioned by ECMC's counsel, Mr. Barry Spitzer. To determine if Whitman's student loan debt was dischargeable, the bankruptcy court applied the "undue hardship" test from the Second Circuit decision in In re Brunner, 831 F.2d 395, 396 (2d Cir. 1987), which the Ninth Circuit adopted in 1998 in United Student Aid Funds, Inc., (In re Pena), 155 F.3d 1108 (9th Cir. 1998). To qualify for a student loan discharge, Brunner requires a debtor to prove:
(1) that the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for himself and his 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; Pena, 155 F.3d at 1111.
In applying Brunner, the bankruptcy court found, as is pertinent here, that Whitman failed to meet the first prong of the test. More specifically, the court stated:
Now, the three-prong test is basically that the debtor cannot maintain a minimal standard - - and I stress the word "minimal" standard of living if the debtor is required to make payments on the loan. Now, the courts have not been clear. I mean, basically the test comes down to the facts and circumstances of each case what is a minimal standard of living.
And, frankly, here, Mr. Whitman, you've got a pretty good standard of living. I've heard cases where people are reduced to Social Security, a minimum amount of income, like $8 - or $9,000 a year, and even in those instances, I held that not all of the student loan would be discharged.
You have spent an incredible amount of time in school and little time in active working, which I don't understand. I mean, wow. If you'd started working 20 years earlier, you wouldn't be in this situation. But, you know, you make a decision, I guess, and sometimes you're not aware of what the consequences of the decision are.
Trial Transcript, 48:5-48:22.
Shortly thereafter, the court stated: So, however, you know, the other side of the coin is that you are much older. You're over 65. You don't have much more time left in your working career, so it's going to be short.
But I don't think under the circumstances you're living a minimal - - in a minimal survival mode, which is kind of what I think the standard is, minimal standard of ...