MICHAEL ERIC HEDLUND, Plаintiff-Appellant, v. THE EDUCATIONAL RESOURCES INSTITUTE INC.; and PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY, Defendants-Appellees.
No. 12-35258
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
May 22, 2013
D.C. No. 6:11-cv-6281-AA
Opinion by Judge Tashima
Appeal from the United States District Court for the District of Oregon
Ann L. Aiken, Chief District Judge, Presiding
Argued and Submitted March 11, 2013-Pasadena, California
Filed May 22, 2013
Before: Harry Pregerson, A. Wallace Tashima, and Milan D. Smith, Jr., Circuit Judges.
Opinion by Judge Tashima
Bankruptcy
Reversing the district court‘s judgment, the panel held that the bankruptcy court did not err in granting a partial discharge of the debtor‘s student loans under
The panel held that the district court erred by reviewing the bankruptcy court‘s good faith finding de novo, rather than for сlear error. The panel concluded that the good faith finding was not clearly erroneous, and remanded the case to the district court with instructions to reinstate the partial discharge ordered by the bankruptcy court.
COUNSEL
Yonatan Braude (argued) and Derek Foran, Morrison & Foerster LLP, San Francisco, California; and Natalie Scott, The Scott Law Group, Eugene, Oregon, for Plaintiff-Appellant.
Daniel Steinberg (argued) and Sanford Landress, Greene & Markley, P.C., Portland, Oregon, for Defendant-Appellee.
* This summary constitutes no part of the opinion of the court. It has been prеpared by court staff for the convenience of the reader.
TASHIMA, Circuit Judge:
Michael Hedlund is a law school graduate who asserts that he cannot pay off his student loans. After filing for bankruptcy, he sought a discharge of his student loans under
We hold that the district court erred in reviewing the bankruptcy court‘s good faith finding de novo. In a
I.
Hedlund was thirty-three years old at the time of the bankruptcy proceedings. He had earned a bachelor‘s degrеe in business administration from the University of Oregon and a law degree from Willamette Law School. Hedlund financed his education with Stafford loans, which were held in part by The Education Resources Institute (“TERI“) and in part by the Pennsylvania Higher Education Assistance Agency (“PHEAA“).
After law school, Hedlund took a bar preparation course for the Oregon bar and then took the bar examination in July 1997. While awaiting the results, he worked as an intern for
Hedlund‘s loans went into repayment in January 1999,1 while he was working as an intern at the District Attorney‘s office. He owed PHEAA over $85,000, on which the monthly payments exceeded $800. Because he was making only $10 per hour, he sought and obtained various hardship forbearances. After the extensions ended and in an effort to reducе his monthly payments, Hedlund applied to consolidate his loans. When he later called to verify the status of his consolidation application, he was told that it had never been received and that, because he was now in default, he was ineligible for consolidation. Hedlund then researched his potential eligibility for the Income Contingent Repayment Plan (“ICRP“).2 Based on his online research - and on the
In September 1999, Hedlund received a $5,000 inheritance. He paid $954.72 to PHEAA, and the rest went to other creditors. Still unable to make his monthly payments, Hedlund tried to negotiate a less onerous payment schedule. According to Hedlund, PHEAA offered two options: (1) pay $10,000 up front, then $1,300 a month for ten months, and then an adjusted monthly payment; or (2) pay a lump sum of аpproximately $80,000. Neither option was feasible for Hedlund, but he did offer to make a $5,000 payment - which he would have borrowed from his parents - in exchange for a more lenient payment schedule. PHEAA declined Hedlund‘s offer.3
PHEAA began garnishing Hedlund‘s wages in January 2002 at the rate of about $250 per month. These garnishments continued uncontested until May 2003 and amounted to $4,272.52. At that time, Hedlund‘s other student loan creditor, TERI, obtained a collectiоn action judgment against Hedlund and garnished $1,100 directly from Hedlund‘s bank account. On May 7, 2003, Hedlund filed a Chapter 7 bankruptcy petition.
On June 16, 2003, Hedlund commenced an adversary proceeding against PHEAA and TERI, seeking partial
After trial, the bankruptcy court granted a partial discharge of all but $30,000 of the PHEAA debt. On apрeal, the Bankruptcy Appellate Panel (“BAP“) reversed and reinstated the debt in its entirety. Hedlund appealed to this Court, and we vacated the BAP decision and remanded for further proceedings. We held that the bankruptcy court failed to consider all of the evidence and properly to apply the three factors from Brunner v. New York Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987).4 See Hedlund v. Penn. Higher Educ. Assistance Agency (In re Hedlund), 368 F. App‘x 819 (9th Cir. 2010).
On remand to the bankruptcy court, the parties agreed to proceed on the original 2003 record and the case was re-argued and submitted. After the case was submitted for decision, however, the originally assigned judge, Judge Albert Radcliffe, passed away, and the case was reassigned to Judge Philip Brandt. Judge Brandt ruled in Hedlund‘s favor and discharged all but $32,080 of his debt to PHEAA.
PHEAA appealed and the district court reversed, finding no error under the first two prongs, but concluding that the bankruptcy court‘s good faith ruling was erroneous. Accordingly, the district court reinstated the entirety of the PHEAA loan. Hedlund timely appeals. We have jurisdiction under
II.
A.
Student loan obligations are presumptively nondischargeable in bankruptcy absent a showing of “undue hardship.”
the debtor must prove that: (1) he cannot maintain, based on current income and expenses, a “minimal” standard of living for himself and his dependents if required to repay the loans; (2) additional circumstances exist indicating that this stаte of affairs is likely to persist for a significant portion of the repayment period; and (3) the debtor has made good faith efforts to repay the loans.
This appeal concerns only the good faith prong of Brunner. The bankruptcy court ruled in Hedlund‘s favor on all three prongs, and the district court found error only with respect to the last prong, goоd faith.5 Before addressing the proper standard of review, we begin with a summary of the bankruptcy court and district court rulings.
B.
“Good faith is measured by the debtor‘s efforts to obtain employment, maximize income, and minimize expenses.” Penn. Higher Educ. Assistance Agency v. Birrane (In re Birrane), 287 B.R. 490, 499 (B.A.P. 9th Cir. 2002) (internal quotation marks and citation omitted). “Courts will also consider a debtor‘s effort - or lack thereof - to negotiate a repayment plan, аlthough a history of making or not making payments is, by itself, not dispositive.” In re Mason, 464 F.3d at 884 (internal quotation marks and citations
1. Efforts to obtain employment, maximize income, and minimize expenses.
The bankruptcy court found that Hedlund was “well-placed for his skills” and that there were no higher paying jobs available to him in the Klamath Falls area. It also noted that Hedlund had unsuccessfully applied for two higher-paying jobs. Finally, the court cited expert testimony showing that, although higher paying jobs might be available outside of Klamath Falls, the potential increase in salary would be offset by increased living expenses.
Noting that Hedlund had tried three times to take the bar exam, the bankruptcy court also found that Hedlund‘s failure to pass was not “within his control.” In any event, the court found no evidence suggesting that Hedlund could make a higher wage as a liсensed attorney. The court also rejected PHEAA‘s argument that Hedlund should seek an additional part time job, although the court did find that his wife could be expected to work three days per week rather than one. Thus, the court found that Hedlund had sufficiently maximized his income.
The bankruptcy court then reviewed Hedlund‘s personal budget, and concluded that certain expenses exceeded what was reasonably necеssary to maintain a minimal standard of living.6 Specifically, the court found that Hedlund‘s clothing,
2. Efforts to negotiate a repayment plan; history of payments; and timing of the attempt to discharge the loan.
Under these factors, the court noted with approval that Hedlund had waited four years before filing for bankruptcy and that he had, in that time, made a voluntary payment of approximately $950. The court also credited Hedlund for “endur[ing],” without challenge, sixteen and a half months of wage garnishments.
With regard to alternative repayment plans, the court found that Hedlund had made adequate efforts to pursue one. The court noted that Hedlund had sought to consolidate loans, but that the lender had lost his application. The court also took into account Hedlund‘s offer to make an immediate payment of $5,000 in exchange for more lenient repayment terms.
Considering all of this evidence together, the bankruptcy court found that Hedlund‘s situation was not “sеlf-inflicted” and that he had carried his burden of showing good faith.
C.
The district court reviewed the good faith ruling de novo and reversed. Although the district court agreed that Hedlund had made sufficient efforts to obtain employment, it concluded that Hedlund “ha[d] not used his best efforts to maximize his income or minimize his expenses.” Hedlund v. Educ. Res. Inst., Inc., 468 B.R. 901, 914 (D. Or. 2012). That conclusion was apparently based on the court‘s findings under prong one that some of Hedlund‘s expenses were “immoderate.” Id. at 910. The court then found Hedlund‘s
III.
A.
“Because this court is in as good a position as the district court to review the findings of the bankruptcy court, it independently reviews the bankruptcy court‘s decision.” Ragsdale v. Haller, 780 F.2d 794, 795 (9th Cir. 1986). As a threshold matter, we must resolve a dispute over the proper standard of review of the bankruptcy court rulings. The district court reviewed the good faith determination dе novo, but Hedlund contends that it should have applied clear error review. We agree with Hedlund.
Although we review “the bankruptcy court‘s interpretation of the Bankruptcy Code de novo and its factual findings for clear error,” Miller v. Cardinale (In re DeVille), 361 F.3d 539, 547 (9th Cir. 2004) (internal quotation marks and citations omitted), we have not expressly stated which standard applies to the good faith prong of Brunner. Nevertheless, we have consistently reviewed the good fаith prong for clear error. See In re Mason, 464 F.3d at 885
This directive does not preclude a reviewing court from correcting errors of law that may arise in the midst of a good faith analysis. For example, in In re Birrane the BAP held that “the bankruptcy court erred as a matter of law in finding that Birrane met the good faith prong.” 287 B.R. at 500. The error in that case was one of law, reviewed de novo, because
We now consider the good faith ruling in question.
B.
As an initial matter, the bankruptcy court properly applied all three Brunner prongs, and it considered the various factors that are relevant to good faith. Thus, its ruling withstands our de novo review of the legal questions involved. What remains are the bankruptcy court‘s factual findings. As discussed below, those were not clearly errоneous.11
The record regarding efforts to negotiate and to make voluntary payments is less favorable to Hedlund. Although he did submit a consolidation application, his efforts thereafter were minimal. His offer to pay $5,000 in exchange for a more lenient plan was at best unrealistic, and his research into ICRP eligibility could have been more searching. Hedlund has also declined to pursue the three revised repayment plans that PHEAA offered just before trial. Finally, in the four years prior to bankruptcy, Hedlund made only a single voluntary payment of approximately $950.12
Although this evidence could be interpreted to support a finding of lack of good faith, it was not so strong as to demand such a finding. Indeed, the evidence of Hedlund‘s good faith is more substantial than in the two primary cases relied upоn by PHEAA. In In re Birrane, the debtor had “failed to take any steps towards renegotiating a repayment schedule under the ICRP program.” 287 B.R. at 500. In contrast, Hedlund at least made an effort to research his
In In re Mason, the debtor had failed to pursue the ICRP option “with diligence.” 464 F.3d at 885. Although the same might be said of Hedlund‘s efforts, other factors present in In re Mason are not present here. Spеcifically, Mason had not pursued full time employment and had only taken and failed the bar exam once. In contrast, Hedlund has maximized employment, made three attempts at the bar exam and, in any event, submitted evidence that a law license would not materially improve his financial situation. Also weighing in Hedlund‘s favor is the fact that he waited four years from the beginning of his repayment obligations, during which period he was subject to wage garnishments, before filing for bankruptcy. See Brunner, 831 F.2d at 397 (finding bad faith in part because debtor filed for discharge one month after first payment date).
In sum, even though some might disagree with the bankruptcy court‘s good faith finding, it was not clearly erroneous. The court relied on substantial evidence in the record, and its factual inferences were permissible.
IV.
The bankruptcy court‘s good faith finding was not clearly erroneous; we, therefоre, reverse the district court‘s contrary holding. We remand to the district court with instructions to reinstate the partial discharge ordered by the bankruptcy court.
REVERSED and REMANDED with directions.