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In Re: Richard Dean Carter v. United States Department of Education

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT


November 8, 2011

IN RE: RICHARD DEAN CARTER,
DEBTOR.
RICHARD DEAN CARTER, APPELLANT,
v.
UNITED STATES DEPARTMENT OF EDUCATION, APPELLEE.

Appeal from the United States Bankruptcy Court for the District of Oregon Honorable Trish M. Brown, Bankruptcy Judge, Presiding Bk. No. 10-30555-tmb7 Adv. No. 10-03136-tmb

SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

MEMORANDUM*fn1

Argued and Submitted on October 20, 2011 at Portland, Oregon

Filed - November 8, 2011

Before: Clarkson*fn2 , Pappas and Jury, Bankruptcy Judges.

This appeal arises from the bankruptcy court's judgment denying Chapter 7 debtor and appellant Richard Carter's ("Carter" or "Debtor") request that his student loans, in the current amount of approximately $26,000.00, be discharged pursuant to 11 U.S.C. §523(a)(8).*fn3

The Debtor has a compelling personal story consisting of several decades of substance abuse, related crimes and punishments, the eventual recovery from that dark abyss, and his re-entry as a productive member of mainstream society. For the past seven years, the Debtor has been steadily employed and currently holds a position as a service station manager at a gas station in the Portland, Oregon area.

Filing his chapter 7 petition on January 26, 2010, and thereafter commencing his adversary proceeding, the Debtor asserted that, based upon his current income and living expenses, he was unable to pay his student loans and maintain a minimal standard of living. After trial, and with sympathetic acknowledgment of the Debtor's destructive past and remarkable recovery, the bankruptcy court determined that the Debtor had a current ability to repay his student loans under the government administered Income Contingent Repayment Plan and at the same time continue to maintain a minimal standard of living. Thus, the bankruptcy court concluded that the Debtor's student loans could not be discharged. For the reasons discussed below, we AFFIRM the bankruptcy court's judgment.

1 I. FACTS

2 a. Pre-Bankruptcy Events

Carter is fifty years old and has no dependents. In 1991, 4 Carter graduated from ITT Technical Institute in Portland, Oregon 5 with an Associate of Applied Science, Electronics Engineering 6 Technology Degree, and in 1992, he received his Bachelor of 7 Applied Science Degree in Automated Manufacturing Technology.

8 Between 1989 and 1992, Carter originally financed his education 9 through two student loans. In April 2003, Carter consolidated 10 these student loans (the "Consolidated Loan"), which resulted in a 11 principal amount of $21,122.19, with an interest rate of 4.5%. 12 Prior to consolidating his student loans, Carter had made no 13 payments on either, and his student loans were in default. 14 Commencing before his education at ITT, Carter used and 15 became addicted to various illicit substances. This use continued 16 until approximately January, 2004. Carter also engaged in 17 criminal activities associated with his drug addiction, including 18 selling drugs. As a result of those activities Carter was 19 arrested and imprisoned on many occasions.

20 From August 1992 to March 2003, Carter worked as an 21 electronics technician, and from March 1999 to 2004, Carter 22 obtained a second job as a field service technician. From 1999 to 23 2004, he was earning between $10.00 and $15.00 per hour performing 24 field technical services.

In January 2004, Carter entered into a six month rehabilitation program,*fn4 and in June 2004, completed his treatment and moved into the Oxford House.*fn5

After completing his treatment, Carter worked part-time at a furniture manufacturing company and in December 2004, commenced working for his present employer, WSCO Petroleum. Clean and sober, Carter advanced from a part-time employee to a full-time employee, then to an assistant manager and finally became a service station manager. Carter's commute to work is approximately twenty miles each way.

The Trial record is clear that as a service station manager, Carter receives $9.00 per hour, periodic bonuses based on performance of his service station, vacation benefits, health benefits, and overtime pay. Carter's monthly bonuses are based upon unit sales of gasoline and cigarettes. However, Carter is also financially liable for any and all cash shortages, and if inventory is short, it results in a reduction of his monthly bonus. Interestingly, any overtime (time in excess of forty hours per week) that Carter or any of his employees work is deducted from Carter's monthly bonus. As Carter describes the situation, he basically pays himself to work overtime.

Beginning in 2003, Carter's monthly payment on the Consolidated Loan was $78.25 under the Income-Contingent Repayment Plan ("ICRP") program.*fn6 Following the consolidation in April 2003, Carter failed to make any payments on the Consolidated Loan and in September 2004, the Department of Education ("DOE") declared his loan in default. On December 14, 2005, Carter submitted to DOE an offer to settle the Consolidated Loan for $1,000.00, which was rejected, and on January 6, 2006, Carter offered to commence paying $25.00 per month on the Consolidated Loan. He made a single payment of $25.00. On July 18, 2006, Carter renewed his offer to settle the Consolidated Loan for $1,000.00, which was also rejected. No further payments on the Consolidated Loan were made until June 15, 2009, when eight consecutive monthly payments were made, each in the amount of $230.00.*fn7

b. Procedural History

On January 26, 2010, Carter filed a voluntary chapter 7 petition, and on May 5, 2010, Carter filed a complaint initiating an adversary proceeding against DOE to determine the dischargeability of the Consolidated Loan under § 523(a)(8) (the "Complaint"). Carter alleged that excepting the student loans from discharge would impose an undue hardship on him.

1 On June 9, 2010, DOE filed its answer (the "Answer") which 2 further contained a counterclaim against Carter, alleging that 3 Carter is indebted on the Consolidated Loan in the principal 4 amount of $20,866.12, plus interest of $4,915.80, for a total of 5 $25,781.92 and interest continues to accrue at a daily rate of 6 $2.57, and that the DOE had received $1,865.00 in payments on the 7 loan. DOE's counterclaim further alleged that the Consolidated 8 Loan was not dischargeable and non-discharge of Carter's student 9 loan would not create an undue hardship on Plaintiff.

10 On March 31, 2011, the bankruptcy court conducted trial, 11 taking testimony from Carter regarding, inter alia, his income and 12 expenses. Carter testified that (1) his transportation costs had 13 increased, (2) his utilities had increased, (3) he has forgone 14 certain medical procedures because he does not have the available 15 funds, (4) his car insurance premium was $148.00 per month, (5) he 16 estimated that a reasonably reliable car would cost approximately 17 $346.00 per month, and (6) he anticipated a decrease in earnings 18 of approximately $100.00 to $200.00 per month because of slower 19 business at the station. Also, Carter testified that he is in 20 line for a promotion to work at another store which is closer to 21 his home in The Dalles.

22 Carter testified regarding his current health condition that 23 he suffers from right foot tremor disorder, Hepatitis C, and 24 chronic fatigue syndrome.

25 The bankruptcy court also took testimony from Carter's 26 witness, Clariner Boston. Ms. Boston testified that, considering 27 Carter's background, legal history, previous drug abuse, and 28 education, it would be "highly improbable" within a short amount 1 of time for him to obtain an alternative better and more lucrative 2 position.

Ms. Boston testified that "given everything that we 3 know about his background, that considering his own disposition, 4 and given the competitiveness out there of people looking for 5 jobs, I think it's great that he's doing everything that he can to 6 hold onto his position because if he lost it, he even in The 7 Dalles would have to stand in line, and I don't know if he could 8 get something that would be as lucrative as this has been for him, 9 and that's even in a limited way."

10 The bankruptcy court further took testimony from DOE's 11 witness, Sheryl Davis, who testified that based on Carter's 12 Adjusted Gross Income of $35,500.00, his monthly payment on the 13 Consolidated Loan under the ICRP would be $203.98 per month.

14 The bankruptcy court, instructed by the Ninth Circuit case 15 United Aid Funds v. Pena (In re Pena), 155 F.3d 1108, 110 (9th 16 Cir. 1998), identified and applied the three factors set forth 17 under the Brunner test to determine "undue hardship" under 18 § 523(a)(8). Brunner v. N.Y. State Higher Educ. Services, Corp. 19 (In re Brunner), 831 F.2d 396 (2d Cir. 1987). The bankruptcy 20 court made the following findings with respect to the first prong 21 of the Brunner test:

22 So I - so I'm going to find that [Carter] can make payments under the income-contingent repayment plans, 23 so he doesn't meet the first criteria under the Brunner test...I think he does have an ability to - a current 24 ability to pay under the ICRP, so I'm finding against the debtor on the first prong of the Brunner test. I 25 know it's tight, but I mean the budget that he filed with the Bankruptcy Court showed that he could make 26 $230 a month payments.

27 Transcript, 31 March 2011, pages 98-99. 28 With respect to the second prong of the Brunner test, the bankruptcy court found, "And I don't find that in the future - I mean, if he has that ability to for the next 15 years, he has the ability to pay, so I don't think - I understand it's going to be difficult, and I understand what I'm telling you." Id. at 99-100.

As to the third prong of the Brunner test, the bankruptcy court found, "With respect to good faith, though, I think he probably did make good faith efforts to pay once he started making payments. I can't find that he didn't, so I can't find with respect to the third prong of the Brunner test." Id. at 100.

The bankruptcy court found that Carter could not satisfy all three prongs of the Brunner test. Apparently addressing DOE's counsel, the bankruptcy court said, "[Y]ou win on the first two, and (apparently addressing Carter's counsel) you have to win on all three in order to - Mr. Greene would have had to win on all three." Id. at 100. Accordingly, on April 12, 2011, the bankruptcy court entered a judgment in favor of DOE (the "Judgment"). At the same time, the bankruptcy court reinstated Carter's loan to a non default status and re-enrolled Carter into the ICRP program.*fn8

Carter timely filed this appeal asserting that the bankruptcy court erred in (1) holding that the Consolidated Loan did not impose an undue hardship, and (2) not performing "an 1 individualized analysis" to determine Carter's necessary expenses, 2 but instead applying a mechanical test relying on the National 3 Poverty Guidelines and DOE's ICRP.

II. JURISDICTION

5 The bankruptcy court had jurisdiction via 28 U.S.C. § 1334 6 and § 157(b)(1) and (b)(2)(I), and we do so under 28 U.S.C. 7 § 158(c).

III. ISSUES

9 Whether the bankruptcy court erred in:

10 1. its findings regarding undue hardship; and

11 2. in relying on the National Poverty Guidelines and the IRCP under the first prong of the Brunner test.

13 IV. STANDARDS OF REVIEW

14 We review the bankruptcy court's finding of fact for clear 15 error. In re Pena, 155 F.3d at 1110. "Where there are two 16 permissible views of evidence, the factfinder's choice between 17 them cannot be clearly erroneous." Anderson v. City of Bessemer 18 City, N.C., 470 U.S. 564 (1985). We review de novo the bankruptcy 19 court's application of the legal standard to decide whether a 20 student loan debt is dischargeable as an undue hardship. Pa. 21 Higher Educ. Assistance Agency v. Birrane (In re Birrane), 22 287 B.R. 490 (9th Cir. BAP 2002).

V. DISCUSSION

24 a. Carter's Request for Judicial Notice

25 Carter requests that we take judicial notice of the IRS 26 National Standards for a single person living in Hood River, 27 Oregon. DOE objects to Carter's request for judicial notice 28 because this evidence was not brought before the bankruptcy court.

1 Save in unusual circumstances, an appellate court can only 2 consider the record on appeal. See Barilla v. Ervin, 886 F.2d 3 1514, 1521 n.7 (9th Cir. 1989). There are exceptions to the 4 general rule. For instance, we may correct inadvertent omissions 5 from the record (See Fed. R. App P. 10(e)(2)(C)), and we may take 6 judicial notice (See Fed. R. Evid. 201(f); EEOC v. Ratliff, 7 906 F.2d 1314, 1318 n.6 (9th Cir. 1990)).

8 We must first determine why Carter requests that we take 9 judicial notice of the IRS National Standards for a single person 10 living in Hood River, Oregon. It appears that Carter wants us to 11 notice that his living expenses are lower than the IRS National 12 Standards. From this observation, Carter wants us to determine 13 that the bankruptcy court inappropriately analyzed his income and 14 expense. He would ask that we find that his living expenses are 15 reasonable (that they are approximately $66.00 a month less than 16 the local National Standards, not including his medical expenses 17 and telephone and internet access cost) and that his living 18 expenses are simply more than his income. Therefore, he argues 19 that the bankruptcy court incorrectly determined that he could 20 maintain a minimal standard of living and repay the student loans.

21 We may not take Carter's request to take judicial notice for 22 purposes of reviewing the bankruptcy court's factual findings for 23 clear error, especially since this information was not before the 24 bankruptcy court. It is inappropriate to use judicial notice to 25 cure failure to present relevant evidence to trial courts. Yagman 26 v. Republic Ins. Co., 987 F.2d 622, 626 fn. 3 (9th Cir. 1993). 27 Therefore, Carter's request for judicial notice is DENIED.

1 b. Dischargeability of student loans under § 523(a)(8)

2 A debtor may not discharge government-funded or guaranteed 3 student loans "unless excepting such debt from discharge . . 4 will impose an undue hardship on the debtor and the debtor's 5 dependents[,]" § 523(a)(8), which is further explained in 6 In re Nys:

7 Congress' main purpose in enacting the bankruptcy code was to ensure insolvent debtors a fresh start by 8 discharging prepetition debts. However, under § 523(a)(8), there is a presumption that educational 9 loans extended by or with the aid of a governmental unit or nonprofit institution are non-dischargeable in 10 bankruptcy in the absence of undue hardship to the debtor or the debtor's dependents. This law furthers 11 congressional policy to ensure that such loans, extended solely on the basis of the student's future 12 earnings potential, cannot be discharged by recent graduates who then pocket all of the future benefits 13 derived from their education.

14 The Debtor bears the burden to prove by a preponderance of the evidence that he or she is 15 entitled to a discharge of the student loan. 16 Neither the code nor the legislative history for § 523(a)(8) defines "undue hardship," but case law has 17 held that it is something more than "garden-variety hardship" Pena, 155 F.3d at 111. Cases involving "real 18 and sustained" hardship may merit discharge.

19 Nys v. Educ. Credit Mgmt. Corp. (In re Nys), 308 B.R. 436 (9th 20 Cir. BAP 2004) (some citations omitted). 21 The Brunner Test 22 The Ninth Circuit has adopted a three-part test to determine 23 "undue hardship":

24 First, the debtor must establish "that she cannot maintain, based on current income and 25 expenses, a 'minimal' standard of living for herself and her dependants if forced to repay 26 the loans. . . ."

27 Second, the debtor must show "that additional circumstances exist indicating that 28 this state of affairs is likely to persist for a 1 significant portion of the repayment period of the student loans. . . ."

The third prong requires "that the debtor 3 has made a good faith effort to repay the loan ." Pena, 155 F.3d at 1111 (quoting 4 Brunner, 831 F.2d at 396).

5 Debtor must satisfy all three parts of the Brunner test before her student loans can be 6 discharged. See Saxman v. Educ. Credit Mgmt. Corp. (In re Saxman), 325 F.3d 1168, 1173 (9th 7 Cir. 2003). Failure to prove any of the three prongs will defeat a debtor's case.

In re Nys, 308 B.R. at 441-42.

10 i. Minimal Standard of Living

11 The first prong of the Brunner test requires a debtor to 12 prove "that the debtor cannot maintain, based on current income 13 and expenses, a 'minimal' standard of living for herself and her 14 dependants if forced to repay the loans." In re Brunner, 831 F.2d 15 at 396.

16 To meet this requirement, the debtor must demonstrate more than simply tight finances. In re Nascimento, 17 241 B.R. 440, 445 (9th Cir. BAP 1999). "In defining undue hardship, courts require more than temporary 18 financial adversity, but typically stop short of utter hopelessness." Id.

Rifino v. United States (In re Rifino), 245 F.3d 1083 (9th Cir. 21 2001).

22 The "minimal standard of living" must be determined "in light 23 of the particular facts of each case." Cota v. U.S. Dep't of 24 Educ. (In re Cota), 298 B.R. 408, 415 (Bankr. D. Ariz. 2003) 25 (quoting In re Afflitto, 273 B.R. 162, 170 (Bankr. W.D. Tenn. 26 2001)). We have held that the IRS standards for living may be 27 considered as evidence in evaluating the first prong of the 28 Brunner test, but it should not be the sole measure of what is necessary to maintain a minimal standard of living. Educ. Credit Mgmt. Corp. v. Howe (In re Howe), 319 B.R. 886, 892 (9th Cir. BAP 2004). "The method for calculating a debtor's average monthly expenses is a matter properly left to the discretion of the bankruptcy court." In re Pena, 155 F.3d at 1112.

Carter argues that the bankruptcy court committed error because it did not perform an individualized analysis of his income with a mechanical application of the Poverty Guidelines and the ICRP. Specifically Carter argues the bankruptcy court erred in finding that because his income was above the National Poverty Guidelines he qualified for the ICRP, and because he qualified for the ICRP, he did not meet the first prong under the Brunner test.*fn9 However, a review of the record indicates that the bankruptcy court was given significant evidence to consider and evaluate the first prong of the Brunner test.

Further, Carter argues that the bankruptcy court failed to perform an individualized analysis of his necessary expenses.

However, the record reflects that the bankruptcy court received considerable evidence from Carter regarding his income and expenses. Prior to trial, Carter and DOE stipulated that Carter's average monthly net income on his Bankruptcy Schedule I, after payroll deductions, was approximately $2,357.00, and his necessary expenses, as listed on Schedule J, were $2,361.00 per month. (Carter's Schedule J included a $230 monthly payment on the Consolidated Loan.) Prior to trial, the parties also stipulated that there had been no significant changes in Carter's financial situation since the bankruptcy petition date.

At trial, the bankruptcy court took evidence consisting of (1) Carter's Schedules I and J, (2) Carter's post petition changes to his income and expenses, (3) the testimony of Ms. Boston regarding Carter's ability to find other employment, and (4) the testimony of Ms. Davis regarding Carter's payment on the Consolidated Loan under the ICRP. The bankruptcy court's ruling with respect to the first prong references Carter's schedules filed in connection with his bankruptcy: ". . . the budget that [Carter] filed with the Bankruptcy Court showed that he could make $230 a month payments." Transcript, 31 March 2011, page 99. Thus the record reflects that the bankruptcy court did not mechanically apply the Poverty Guidelines and the ICRP, but conducted an individualized analysis of Carter's income and expenses.

We conclude, therefore, that the bankruptcy court did not commit clear error in finding that Carter failed to meet the first prong of the Brunner test.*fn10

ii. Persistent Additional Circumstances

The second prong of the Brunner test requires a debtor to prove "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." In re Brunner, 1 831 F.2d at 396. The debtor must provide evidence that he or she 2 will be unable to repay for several years, because of psychiatric 3 problems, lack of useable job skills, severely limited education, 4 physical problems, or any other circumstances which will 5 persistently interfere with the debtor's ability to repay."

6 In re Birrane, 287 B.R. at 497. See, also, In re Nys, 308 B.R. at 7 444-45.

8 We have held, based upon prior case law, that "additional 9 circumstances" may include the following nonexhaustive list of 10 factors: (1) serious mental or physical disability of the debtor 11 or the debtor's dependents which prevents employment or 12 advancement; (2) the debtor's obligations to care for dependents; 13 (3) lack of, or severely limited, education; (4) poor quality of 14 education; (5) lack of usable or marketable job skills; 15 (6) underemployment; (7) maximized income potential in the chosen 16 education field, and no other more lucrative job skills; 17 (8) limited number of years remaining in work life to allow 18 payment of the loan; (9) age or other factors that prevent 19 retraining or relocation as a means for repayment of the loan; 20 (10) lack of assets, whether or not exempt, which could be used to 21 pay the loan; (11) potentially increasing expenses that outweigh 22 any potential appreciation in the value of the debtor's assets 23 and/or likely increases in the debtor's income; and (12) lack of 24 better financial options. In re Nys, 308 B.R. at 446.

25 Both Carter and DOE argue that they prevailed on the second 26 prong of the Brunner test. Carter's view that he prevailed 27 resulted in his failure to specifically address the second prong 28 in his appeal brief. However, a careful review of the record is 1 consistent with DOE's view that the bankruptcy court found against 2 Carter on the second prong.

3 The hearing transcript clearly indicates that the bankruptcy 4 court found against Carter as to the second prong. The bankruptcy 5 court stated, ". . . I mean if he has that ability to pay for the 6 next 15 years, he has the ability to pay, so I don't think. . . ." 7 Transcript, 31 March 2011, page 99. Here, the bankruptcy court 8 found that Carter had the ability to pay his student loans for the 9 next 15 years and thus found against Carter under the second prong 10 of the Brunner test.

11 The bankruptcy court took evidence regarding (1) Carter's age 12 and education, (2) his previous drug and legal issues, 13 (3) Carter's previous and current employment, (4) his growth and 14 responsibilities at his current job, (5) his current physical 15 condition, and (6) his prospects of finding another job near the 16 Portland area. Carter did not provide any evidence that his 17 current economic situation would change in the next several years 18 which would prevent him from repaying his student loans. On the 19 contrary, Carter presented evidence that he was next in line for a 20 promotion which would result in some pay increase and a potential 21 decrease in transportation expenses. Thus, the record indicates 22 that Carter's current state of financial affairs (current ability 23 to repay his student loan while maintaining a minimal standard of 24 living) would persist for a significant portion of the repayment 25 period. We conclude that the bankruptcy court did not commit 26 clear error in finding that Carter did not meet the second prong 27 of the Brunner test.

1 iii. Good Faith Effort to Repay

2 The final prong of the Brunner test requires a debtor to 3 prove "that the debtor has made a good faith effort to repay the 4 loans." In re Brunner, 831 F.2d 396. Two common factors are 5 considered in evaluating good faith. In re Birrane, 287 B.R. at 6 499-500. Those are the debtor's efforts (1) to obtain employment, 7 maximize income, and minimize expenses, and (2) to negotiate a 8 repayment plan. Id. The bankruptcy court found that Carter met 9 his burden of the third prong of the Brunner test, and because 10 Carter does not dispute the bankruptcy court's findings in his 11 favor regarding good faith, we will not disturb them.

VI. CONCLUSION

The bankruptcy court's decision is amply supported by the 14 record. Applying the Brunner test, the bankruptcy court did not 15 commit clear error in finding that (1) Carter could maintain a 16 minimal standard of living and repay the consolidated loan, and 17 (2) Carter's financial situation was likely to continue for a 18 substantial portion of the repayment period. Carter was unable to 19 establish "undue hardship" within the meaning of § 523(a)(8) and 20 was not entitled to a bankruptcy discharge of the Consolidated 21 Loan.

For the reasons set forth above, we AFFIRM.


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