Educational Credit Management Corp. v. ColemanEducational Credit Management Corp. v. Coleman
Case Information
*1 FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT (cid:252)
In the Matter of: C ATHY C OLEMAN , Debtor. No. 06-16477
E DUCATIONAL C REDIT ANAGEMENT (cid:253) D.C. No. C ORPORATION , CV-05-05231-SC Appellant, OPINION v. C ATHY OLEMAN , (cid:254) Appellee.
Appeal from the United States District Court for the Northern District of California Samuel Conti, District Judge, Presiding Argued and Submitted May 14, 2008—San Francisco, California Filed March 25, 2009 Before: Diarmuid F. O’Scannlain and Michael Daly Hawkins, Circuit Judges, and James V. Selna,* District Judge.
Opinion by Judge Hawkins *The Honorable James V. Selna, United States District Judge for the Central District of California, sitting by designation.
COUNSEL Curtis P. Zaun (argued) and Miriam Hiser (briefed), Educa- tional Credit Management Corporation, St. Paul, Minnesota, for the appellant.
Lars T. Fuller (argued and briefed), The Fuller Law Firm, San Jose, California, for the appellee.
OPINION
HAWKINS, Circuit Judge:
We consider whether “undue hardship” determinations— whereby bankruptcy courts decide whether student loans qualify for discharge—are ripe in a Chapter 13 case substan- tially in advance of plan completion.
FACTUAL AND PROCEDURAL HISTORY
Cathy Coleman filed for bankruptcy under Chapter 13 in
2004, and the bankruptcy court confirmed a five-year repay-
ment plan. Coleman owes over $100,000 in student loans to
Educational Credit. Since graduating from college, Coleman
has been irregularly employed as a substitute teacher and art
teacher, and was laid off in March of 2005. Just under a year
after the plan was confirmed, Coleman sought a determination
that it would constitute an undue hardship under 11 U.S.C.
§ 523(a)(8) for her to repay her student loans, and that her stu-
dent loans should therefore not be excepted from discharge.
Educational Credit moved to dismiss for lack of subject mat-
ter jurisdiction on ripeness grounds. The bankruptcy court
denied the motion,
In re Coleman
,
STANDARD OF REVIEW
We review the district court’s decision on an appeal from
a bankruptcy court de novo.
In re Daily
,
STATUTORY BACKGROUND Debtors who seek Chapter 13 relief commit to a three-
to five-year period of repayment, after which their remaining debts are discharged. [1] Unlike Chapter 7 debtors, who are enti- tled to a discharge of debt as soon as their estate is liquidated and distributed, [2] Chapter 13 debtors are not entitled to a dis- charge of debts unless and until they complete payments to creditors under a three- to five-year plan. 11 U.S.C. With the exception, of course, of those debts that are excepted from discharge under 11 U.S.C. § 523. See 11 U.S.C. § 727. In Chapter 7, the debtor’s assets are liquidated
and distributed among creditors, and there is no repayment plan. Id. § 726. Unless the difficult standard of 11 U.S.C. § 1328(b) is met, a discharge may be granted if the debtor fails to complete plan payments only if: (1) the debtor’s failure to complete such payments is due to
circumstances for which the debtor should not justly be held accountable; (2) the value, as of the effective date of the plan, of property
actually distributed under the plan on account of each allowed unsecured claim is not less than the amount that would have been paid on such claim if the estate of the debtor had been liquidated under chapter 7 of this title on such date; and (3) modification of the plan under section 1329 of this title is not practicable.
11 U.S.C. § 1328(b).
§ 1328(a)(2). Student loans are excepted from discharge unless the debtor can show “undue hardship.” Id. §§ 523(a)(8), 1328(a)(2). Coleman is currently making pay- ments under her five-year Chapter 13 plan. She will not be entitled to discharge any of her debts until she completes this plan, and will not be entitled to discharge her student loans unless she can show “undue hardship.” To show undue hardship, the debtor must show “(1) that she cannot maintain, based on current income and expenses, a ‘minimal’ 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 persist for a significant portion of the repayment portion of the student loans; and (3) that the debtor has made good faith efforts to Section 1328(a)(2) provides:
(a) . . . [a]s soon as practicable after completion by the debtor of all payments under the plan, . . . the court shall grant the debtor a discharge of all debts provided for by the plan . . . except any debt—
. . . .
(2) of the kind specified in section 507(a)(8)(C) or in paragraph (1)(B), (1)(C), (2), (3), (4), (5), (8), or (9) of sec- tion 523(a).
11 U.S.C. § 1328(a). Section 523(a) provides in relevant part:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
(1) for tax or a customs duty— . . . .
(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for [qualified educational loans].
11 U.S.C. § 523(a).
3780
repay the loans.”
In re Saxman
,
The question before us is one of timing: may Coleman obtain this undue hardship determination substantially in advance of the time she completes payments under her Chap- ter 13 plan?
[3] Federal Rule of Bankruptcy Procedure 4007(a) provides that “A debtor or any creditor may file a complaint to obtain a determination of the dischargeability of any debt.” Under Federal Rule of Bankruptcy Procedure 4007(b), “[a] com- plaint other than under § 523(c) [6] may be filed at any time.” Coleman argues that this Rule shows that the undue hardship determination is ripe at any time, while Educational Credit argues that, because Coleman cannot obtain a discharge unless and until she completes payments under the plan, the undue hardship determination is not ripe until at or near the time Coleman completes plan payments.
1.
Constitutional Ripeness
Ripeness has two components: constitutional ripeness
and prudential ripeness.
Thomas v. Anchorage Equal Rights
Comm’n
,
tion and is not appealing the component of the bankruptcy court’s decision
that holds the court will not exercise its discretion to delay determination
of undue hardship until discharge is imminent; however, some of the
bankruptcy court’s analysis is relevant to our ripeness determination.
3781
stances, show that there is a substantial controversy, between
parties having adverse legal interests, of sufficient immediacy
and reality to warrant the issuance of a declaratory judg-
ment.’ ”
United States v. Braren
,
[5]
The issues presented must be “definite and concrete, not
hypothetical or abstract.”
Thomas
,
[6] A “substantial controversy” arose between Coleman and Educational Credit when Coleman filed for bankruptcy protection under Chapter 13: Coleman’s purpose in filing was to seek the discharge of her student loans, and Educational Credit seeks to prevent this. Further, the controversy here is certainly “definite and concrete, not hypothetical or abstract,” because it is a controversy between Coleman and Educational Credit over a specific and defined debt. It is true that Coleman’s actual discharge of her student
loans will only occur, if at all, when she completes payments
under the plan. 11 U.S.C. § 1328(a)(2). If she does not com-
plete her plan payments, there will be no discharge.
Thomas
,
But plan completion is a single factual contingency — not
a “series of contingencies” rendering the decision “imper-
missibly speculative.”
See Portland Police
,
2. Prudential Ripeness Test
The Supreme Court has held that “[p]roblems of prematu-
rity and abstractness may well present ‘insuperable obstacles’
to the exercise of the Court’s jurisdiction, even though that
jurisdiction is technically present.”
Socialist Labor Party v. Gil-
ligan
,
In
Yahoo!
, eight judges agreed that the issue was constitutionally ripe
for adjudication, although three of the eight judges concluded that the
issue was not prudentially ripe. Three judges voted to dismiss for lack of
personal jurisdiction.
date existed because several years remained before the party would be
required to perform. 94 F.3d at 572. There, however, the parties
agreed
that the issue was not ripe because it appeared likely that the company
would liquidate regardless of the decision.
Id.
Here, by contrast, there is
not a substantial likelihood that Coleman will be able to pay all of her stu-
dent loans regardless of the outcome of the undue hardship decision.
Socialist Labor Party
dealt with the constitutionality of Ohio’s elec-
tion laws.
[8]
The Supreme Court has developed a two-part test for
determining the prudential component of ripeness in the
administrative context: “the fitness of the issues for judicial
decision” and “the hardship to the parties of withholding court
consideration.”
Abbott Labs. v. Gardner
, 387 U.S. 136, 149
(1967),
overruled on other grounds by Califano v. Sanders
,
430 U.S. 99 (1977). Originally, we generally applied this
two-part test in making prudential ripeness determinations
without strictly limiting the test to the administrative law con-
text. , ,
Nat’l Audubon Soc’y, Inc. v. Davis
, 307 F.3d
835, 850 (9th Cir.),
amended on denial of reh’g
,
394 F.3d 665 (9th Cir. 2005), we held that Abbott does not apply to private contract disputes, and suggested that the test may only be appropriate in the administrative law context. The court noted, because an administrative action “has conse- quences for many members of the general public,” it is “pru- dent for courts to limit their review of such actions to those involving the possibility of concrete injury greater than specu- lative or remote financial contingencies.” Id. at 670-71. The court also observed that the concerns expressed in Abbott over “judicial entanglement,” “allocation of authority,” and the risks of “wide-ranging and remote adverse consequences” in administrative agency actions do not apply to private party contract disputes. Id. at 671.
The court then declined to apply the
Abbott
test to a private
party contract dispute over a rent-adjustment provision, find-
ing the matter ripe even though the provision was contingent
The dispute at issue in
Abbott
was over a prescription drug labeling
statutory requirement, namely, whether the established name of the drug
must be used every time the propriety name is employed.
upon future property value. Noting that “the fundamental role
of the courts is to resolve concrete and present disputes
between parties,” the court held that the proper test for ripe-
ness in private party contract disputes is “the traditional ripe-
ness standard, namely, whether ‘there is a substantial
controversy, between parties having adverse legal interests, of
sufficient immediacy and reality to warrant the issuance of a
declaratory judgment.’ ”
Id.
at 671 (quoting
Md. Cas. Co.
,
Principal
does not tell us whether the
Abbott
test would be
appropriate in this context—a private party dispute that is
governed not by contract but by the Bankruptcy Code. How-
ever, prior to
Principal
, disputes in the bankruptcy context
were subjected to the
Abbott
ripeness test. , ,
Domi-
nelli
,
Because this standard is the constitutional component of ripeness, Principal ’s holding essentially eliminated the prudential component from ripeness determinations in private party contract disputes. We note, however, that there is considerable tension between the rea-
soning in Principal and Dominelli ’s application of Abbott . The reasoning Principal employed to reject the Abbott test in private party disputes applies to many disputes in the bankruptcy context. Generally there will not be a risk of “judicial entanglement in administrative agency actions” nor “allocation of authority concerns.” Principal , 394 F.3d at 671. Of course, where the bankruptcy court must interpret a Code provision, for example, the decision may “ha[ve] consequences for many members of the general public,” or even potentially “wide-ranging and remote adverse consequences,” id. , necessitating the searching prudential inquiry provided by Abbott . Cases like this, however, which involve a unique case-specific 3. Prudential Ripeness Here
A. Background
Turning to the specific inquiry at hand, we note that Courts
of Appeal are currently split as to whether student loan dis-
chargeability determinations are ripe substantially in advance
of plan completion. Most courts to address the issue do not
specify which ripeness standard they are employing. The
Ninth Circuit Bankruptcy Appellate Panel (“BAP”) has held
that the issue of student loan dischargeability is ripe before
the completion of plan payments.
In re Taylor
,
F.2d 548, 550 (9th Cir. 1988). There, the debtor sought a dischargeability determination for criminal restitution debt. However, whether that debt was excepted from discharge depended on whether the debtor completed plan payments, because the standards for dischargeability of criminal resti- tution differed depending on whether the debtor completed the plan. 858 F.2d 548 at 550. The court reasoned, “Because the plan is still in progress, the bankruptcy court could not have known which discharge provision [§§1328(a) or (b)] would apply,” and it was highly unlikely the restitution payments would be dischargeable in any event. Id. However, this reason- ing does not apply in the student loan context. In the student loan context, the standard for nondischargeability is the same whether it is excepted Abbott test or any particular ripeness standard, the BAP rea- soned that the issue was ripe because Bankruptcy Rule 4007(b) expressly permits the filing of a § 523(a)(8) com- plaint “at any time,” and no statute or policy conflicts with the filing of such a complaint at any time. Taylor , 223 B.R. at 751-752.
The Fourth Circuit has also held that undue hardship deter- minations may be ripe in advance of plan completion. In re Ekenasi , 325 F.3d 541, 547 (4th Cir. 2003). The court expressly “decline[d] to adopt a hard and fast rule which would preclude bankruptcy courts from ever entertaining a proceeding to discharge student loan obligations until at or near the time the debtor has completed payments under a con- firmed Chapter 13 plan.” A bankruptcy court in the Southern District of Ohio also took this approach. In re Strahm , 327 B.R. 319, 323-24 (Bankr. S.D. Ohio 2005).
under §§ 1328(a) or (b). 11 U.S.C. §§ 523(a), 1382(a)(2). In other words, in Heincy , the court had no legal framework to apply to the dis- chargeability determination prior to plan completion. Not so with student loan dischargeability determinations. Because Heincy ’s ripeness conclu- sion was determined by the bankruptcy court’s inability to decide the dis- chargeability question at that point, and because the court found it highly unlikely that criminal restitution would ever be dischargeable, the holding has no bearing on the ripeness of undue hardship determinations prior to plan completion. Heincy did not conclude that no case or controversy existed, and we assume that the ripeness conclusion was a prudential one —the court understandably declined to undertake an inquiry that both lacked an applicable standard and would more than likely never take effect. Educational Credit faults these courts for failing to address the juris-
dictional question, but, again, the question is jurisdictional only if it speaks to constitutional ripeness rather than prudential ripeness—if a matter is constitutionally ripe, the court may decline to consider it for prudential reasons, but it does not lack jurisdiction to consider the case. The courts taking the opposite approach do not address the jurisdictional question either.
Two Courts of Appeal disagree with
Taylor
. The Eighth
Circuit, without applying any particular ripeness test,
[19]
held
that, in undue hardship determinations, “the factual question
is whether there is undue hardship at the time of discharge,
not whether there is undue hardship at the time that a
§ 523(a)(8) proceeding is commenced.”
In re Bender
, 368
F.3d 846, 848 (8th Cir. 2004). The court reasoned that student
loan dischargeability proceedings “should take place rela-
tively close to [the date of discharge] so that the court can
make its determination in light of the debtor’s actual circum-
stances at the relevant time.”
Id.
Similarly, the Fifth Circuit
has held, in contrast to
Taylor
, that the undue hardship deter-
mination is not ripe until plan completion because dischargea-
bility is not available until plan completion.
[20]
In re Rubarts
,
with the Ninth Circuit BAP that an undue hardship determina-
tion can be ripe substantially in advance of plan completion.
The bankruptcy court below did employ the
Abbott
test.
In re Bender
,
“Under both the express wording of section 1328(a) and Bankr.R.
4007(d), an objection to dischargeability cannot be filed nor heard prior
to the occurrence of one of those two events.”
Rubarts
,
250 B.R. 694, 697 (Bankr. D. Minn. 2000); In re Raisor , 180 B.R. 163, 166 (Bankr. E.D. Tex. 1995).
B. Fitness
[11]
The purpose of the “fitness” test under
Abbott
is to
delay consideration of the issue until the pertinent facts have
been well-developed in cases where further factual develop-
ment would aid the court’s consideration. , ,
Nat’l Park
Hospitality Ass’n v. Dep’t of the Interior
,
“pure legal questions that require little factual development,” San Diego County Gun Rights Committee , 98 F.3d at 1132, fact-intensive inquiries that depend on further factual devel- opment may nevertheless be ripe if, as here, that development would do little to aid the court’s decision. In the bankruptcy context, there are many situations in which the factual context may never be ideally well-developed. Congress has given bankruptcy courts the task of undertaking complex factual inquiries that depend, by their very nature, on future events and contingencies. Whether a bankruptcy court decides to lift an automatic stay depends upon its assessment of the debtor’s ability to adequately protect against future decline in the col- lateral’s value and ultimately successfully reorganize. 11 U.S.C. §§ 362(d), 363(e); United Sav. Ass’n of Tex. v. Tim- bers of Inwood Forest Assocs., Ltd. , 484 U.S. 365, 377 (1988). At that moment the bankruptcy court essentially must predict whether the debtor is doomed or has some reasonable chance of rehabilitation. Whether a bankruptcy court decides to confirm a Chapter 13 plan depends upon the likelihood that the debtor will be able to make all required payments under the plan. 11 U.S.C. § 1325(a)(6). In all of these situations, delay is unlikely to provide much, if any, additional benefit to the bankruptcy court’s resolution of the issue.
[13]
The same is true here: The undue hardship inquiry
itself contemplates factual contingencies many years into the
future.
See Coleman
, 333 B.R. at 847. Under the second
prong of the undue hardship test, the debtor must show that
“additional circumstances exist indicating that this state of
affairs is likely to persist for a significant portion of the repay-
ment period of the student loans.”
Saxman
,
[15]
We disagree with the Eighth Circuit’s conclusion that
bankruptcy courts should not make an undue hardship deter-
mination until the time of discharge because “the factual
question is whether there is undue hardship at the time of dis-
charge, not whether there is undue hardship at the time that
a § 523(a)(8) proceeding is commenced.”
Bender
,
This approach is consistent with the statute and makes sense in light of Bankruptcy Rule 4007(b). While that rule could not, of course, render a constitutionally unripe matter ripe, it counsels in favor of a finding of prudential ripeness.
C. Hardship Hardship to the debtor from postponing a decision in this situation supports a finding of ripeness. Abbott , 387 U.S. at 149. Here, the hardship to Coleman is committing to a Chapter 13 plan for three to five years without any guarantee that her student loans will be discharged at the end of this time period. Because debtors must commit all of their dispos- able income to payments under a Chapter 13 plan, 11 U.S.C. § 1325(b)(1)(2), five years repayment is a considerable bur- den to bear without any guarantee that the debt will be ulti- mately discharged. 11 U.S.C. § 1328(a)(2). Theoretically, Coleman could convert her case to a Chapter 7 bankruptcy, assuming that she meets the requirements for filing under that Chapter, [22] and receive a discharge under 11 U.S.C. § 727(a). However, it appears the reason Coleman filed under Chapter 13 rather than Chapter 7 was that she was unable to afford an up-front payment for the undue hardship litigation. In Chapter 7, debtors’ attorneys may not be paid from the estate, so unless the attorney is paid up-front, she is unlikely to be paid. [23] In a Chapter 13, however, the attorney is often paid as part of the plan.
Because Coleman apparently cannot finance the undue hardship litigation up-front, she would have to proceed with the undue hardship litigation pro se, if at all.
A fundamental purpose driving the bankruptcy system is to
“relieve the honest debtor from the weight of oppressive
indebtedness, and permit him to start afresh free from the
obligations and responsibilities consequent upon business
misfortunes.”
Local Loan v. Hunt
,
mally paid out of the plan as an administrative expense. Bankruptcy Code
11 U.S.C. § 503(b)(2) allows administrative expense status for compensa-
tion awarded under Code § 330(a). Bankruptcy Code § 330(a) allows com-
pensation for a professional person employed under § 327. Although
compensation under those provisions is limited to attorneys for the trustee,
not for the debtor,
Lamie
,
successful undue hardship hearing is probably substantially reduced given the complexity of the inquiry. See generally , Feather D. Baron, The Nondischargeability of Student Loans in Bankruptcy: How the Prevailing “Undue Hardship” Test Creates Hardship of Its Own , 42 U.S.F. L. Rev. 265 (2007). Because the undue hardship standard is extremely difficult to meet, a debtor who would meet the undue hardship standard and yet is unable to obtain an undue hardship determination because it is not yet ripe may be forced to rely on public benefits—or may turn to credit as a means of meeting their basic needs. See generally , Elizabeth Warren, Less Stigma or More Financial Distress: An Empirical Analysis of the Extraordinary Increase in Bankruptcy Filings , 59 Stan. L. Rev. 213 (2006). In a case where a debtor faces genuine undue hardship from student loan debt, the debtor’s best shot at a fresh start may be to litigate the matter in a Chapter 13 case.
, , Brunner v. N.Y. State Higher Educ. Serv. Corp. ( In re Brun- ner ), 46 B.R. 752, 753 (Bankr. S.D.N.Y. 1985), aff’d , 831 F.2d 395 (2d Cir. 1987) (noting that “[t]he existence of the adjective ‘undue’ indicates that Congress viewed garden-variety hardship as [an] insufficient excuse for a discharge of student loans”). An additional reason for permitting undue hardship determinations to
be made closer to the time of filing is that the amount of repayment to the student loan creditor through the plan may vary depending upon whether the loans are dischargeable. Section 1322(b)(1) provides that a plan may create a class of claims that is treated differently from other unsecured claims if the plan does not discriminate unfairly. Section 1322(b)(1) pro- vides that a debtor’s plan may “designate a class or classes of unsecured claims, as provided in section 1122 of this title, but [the plan] may not dis- criminate unfairly against any class so designated.” The debtor or trustee may wish to seek to confirm a plan that classifies the student loan creditor differently from other creditors depending on whether the student loan creditor is entitled to payments after the completion of the plan and subse- quent discharge. Although non-dischargeability alone is not a sufficient reason for permitting debtors to classify student loans differently from other debt, if discrimination furthers the goals of the debtor, satisfies the purposes behind Chapter 13, and does not require any creditor or group of creditors to bear an unreasonable burden, the debtor may be able to Prudential ripeness considerations do not warrant tak- ing the undue hardship determination away from the bank- ruptcy court at the time when its resolution may be integral to successful completion of the plan. Absent a constitutional ripeness impediment to the undue hardship determination— which does not exist here—we see no prudential reason to delay the determination where the record, as here, is suffi- ciently well-developed for the bankruptcy court to undertake the analysis.
AFFIRMED.
make greater payments to the student loan creditors under the plan.
In re
Sperna
,