559 B.R. 746
D. Colo.2016Background
- Richard W. Palmer and Dar Mae Palmer filed Chapter 7 on Aug. 27, 2014 and scheduled $91,312 in student loan debt.
- U.S. Trustee (UST) moved to dismiss under 11 U.S.C. § 707(b)(1)/(b)(2)/(b)(3), arguing the debts were primarily consumer debts and triggered a presumption of abuse.
- Parties narrowed the dispute to whether Mr. Palmer’s student loans are "consumer debt" under 11 U.S.C. § 101(8) (debt incurred primarily for a personal, family, or household purpose).
- Bankruptcy Court adopted a narrow "profit-motive" test requiring a tangible benefit to an existing business or an employer requirement for advancement and found the loans were consumer debt; it granted the UST’s motion to dismiss.
- On appeal, the District Court reviewed legal conclusions de novo, found the Bankruptcy Court’s profit-motive formulation inconsistent with Tenth Circuit precedent, credited Mr. Palmer’s testimony that he incurred loans to advance his business prospects (including owning his employer), and reversed and denied dismissal.
Issues
| Issue | Plaintiff's Argument (Palmer) | Defendant's Argument (UST) | Held |
|---|---|---|---|
| Whether student loans are "consumer debt" under § 101(8) | Loans were incurred with a profit motive as a business investment in himself (to advance in and ultimately own/run his employer), so not consumer debt | Student loans are consumer debt; the profit-motive must be narrowly construed (requiring tangible benefit to employer or employer-mandated advancement) and thus Palmer’s loans are consumer debt | Reversed Bankruptcy Court. Court held §101(8) depends on debtor’s primary purpose; profit motive need not be tied to employer requirement or direct employer benefit; Palmer’s testimony showed a profit motive and UST failed to meet its burden to prove the debts were primarily consumer debts. |
Key Cases Cited
- Stewart v. U.S. Trustee, 175 F.3d 796 (10th Cir.) (adopts a "profit motive" distinction between consumer and non-consumer debt)
- In re Burns, 894 F.2d 361 (10th Cir. 1990) (credit incurred with an "eye toward profit" is not consumer debt)
- In re Stewart, 215 B.R. 456 (10th Cir. BAP 1997) (student loans not consumer debt per se; primary purpose of debt is determinative)
- In re Cherrett, 523 B.R. 660 (9th Cir. BAP 2014) (borrower’s purpose in incurring debt is the key factor in consumer-debt analysis)