Chelsea Conway v. National Collegiate Trust ( 2013 )


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  •        United States Bankruptcy Appellate Panel
    For the Eighth Circuit
    ___________________________
    No. 13-6016
    ___________________________
    In re: Chelsea A. Conway
    lllllllllllllllllllllDebtor
    ------------------------------
    Chelsea A. Conway
    lllllllllllllllllllll Plaintiff - Appellant
    v.
    National Collegiate Trust; First Marblehead Corp., Inc.
    lllllllllllllllllllll Defendants - Appellees
    ____________
    Appeal from United States Bankruptcy Court
    for the Eastern District of Missouri - St. Louis
    ____________
    Submitted: July 19, 2013
    Filed: August 21, 2013
    ____________
    Before KRESSEL, SALADINO and SHODEEN, Bankruptcy Judges.
    ____________
    SALADINO, Bankruptcy Judge.
    The Plaintiff, Chelsea Conway, appeals the decision of the bankruptcy court
    finding her student loan obligations to National Collegiate Trust (“NCT”) and First
    Marblehead Corp., Inc.1 to be nondischargeable. For the reasons stated below, we
    reverse and remand.
    FACTUAL BACKGROUND
    Many of the underlying facts are uncontroverted.2 On December 7, 2009, Ms.
    Conway filed for Chapter 7 bankruptcy protection and received a discharge on March
    16, 2010. On December 16, 2011, Ms. Conway filed a motion to reopen her case,
    which motion was granted on December 20, 2011. On January 24, 2012, Ms. Conway
    filed an adversary proceeding against NCT pursuant to 
    11 U.S.C. § 523
    (a)(8) for the
    purpose of determining dischargeability of her student loans.3
    Ms. Conway is single and has no dependents. She graduated from Webster
    University in 2005 with a Bachelor of Arts degree in media communications. She also
    attended St. Louis Community College both prior to and after attending Webster
    University. From October 21, 2003, through September 2006, Ms. Conway entered
    into 15 separate student loan notes with NCT. All 15 notes are educational loans as
    defined in 
    11 U.S.C. § 523
    (a)(8) and were incurred for higher education expenses.
    1
    First Marblehead Corp. is the loan servicer for NCT, the holder of the loans,
    and will not be separately referenced herein.
    2
    The parties filed a fact stipulation in the bankruptcy court. Also, exhibits were
    received at trial, but copies are not on the bankruptcy court docket and only an
    incomplete set of certain exhibits were included in Ms. Conway’s appendix filed with
    her brief on appeal.
    3
    The initial complaint was also filed against Sallie Mae/SLM Corporation and
    Key Bank. Those defendants were later dismissed from the proceeding after
    stipulating that their debts were dischargeable.
    -2-
    The total original balance of all 15 loans was $70,100.00. As of November 5, 2012,
    the total balance owed, with interest, was $118,579.66. The interest rates on the 15
    student loans range from 3.25% to 5.150%.
    Since August 22, 2005, NCT has granted to Ms. Conway part-time deferments,
    temporary forbearances, and forbearances on all 15 notes. She has repaid a total of
    $5,734.48 to NCT on the 15 student loans. Ms. Conway had additional student loan
    obligations to Key Bank, N.A. in the amount of $9,000.00, and Sallie Mae/SLM
    Corp. in the amount of $11,000.00, both of which were discharged pursuant to
    stipulations and bankruptcy court orders approving the stipulations. Ms. Conway also
    has federally-guaranteed student loans of approximately $18,000.00 that are not part
    of this proceeding.4
    In October 2005, Ms. Conway began working at American Equity Mortgage
    as a loan sales analyst. In July 2007, she was laid off from that job and began working
    part-time in various temporary office positions. In December 2007, she began
    working full-time at Administaff of Texas as a guest specialist. She was laid off from
    that job in September 2008, and again began working part-time in temporary office
    positions. In April 2009, she began part-time work as a waitress and held a position
    at a bank for a short time. Currently, she works two part-time jobs as a restaurant
    server and, as indicated by the fact stipulation, she earned monthly net income of
    $2,040.36 as of July 2012 and $1,379.97 as of December 2012. Her income tends to
    fluctuate due to the seasonal business at one of the establishments. Ms Conway states
    that her monthly expenses (without the NCT debt) are $1,737.25 and has provided a
    detailed breakdown of those expenses.
    4
    According to Ms. Conway’s brief, these federal loans are consolidated and are
    being paid through the Income Contingent Repayment Plan available under the
    William D. Ford Federal Direct Student Loan Program. Ms. Conway states that no
    such program is available for the private student loans at issue in this case and NCT
    does not suggest that any similar program is available for its loans.
    -3-
    STANDARD OF REVIEW
    “Undue hardship ‘is a question of law which we review de novo. Subsidiary
    findings of fact on which the legal conclusion is based are reviewed for clear error.’”
    Educ. Credit Mgmt. Corp. v. Jesperson, 
    571 F.3d 775
    , 779 (8th Cir. 2009) (quoting
    Reynolds v. Pennsylvania Higher Educ. Assistance Agency (In re Reynolds), 
    425 F.3d 526
    , 531 (8th Cir. 2005)). We will not upset the bankruptcy court’s findings of fact
    unless, after reviewing the entire record, we are left with the definite and firm
    conviction that a mistake has been made. Walker v. Sallie Mae Servicing Corp. (In
    re Walker), 
    650 F.3d 1227
    , 1230 (8th Cir. 2011) (citing Cumberworth v. U.S. Dep’t
    of Educ. (In re Cumberworth), 
    347 B.R. 652
    , 657 (B.A.P. 8th Cir. 2006)).
    DISCUSSION
    Dischargeability of student loans is governed by 
    11 U.S.C. § 523
    (a)(8), which
    provides, in relevant part, that a discharge under § 727 does not discharge an
    individual debtor from any debt for student loans, “unless excepting such debt from
    discharge under this paragraph would impose an undue hardship on the debtor and
    the debtor’s dependents[.]” In contrast to many other types of debts, § 523(a)(8)’s
    exclusion of student loans from discharge is “self-executing” in the sense that,
    “[u]nless the debtor affirmatively secures a hardship determination, the discharge
    order will not include a student loan debt.” Tennessee Student Assistance Corp. v.
    Hood, 
    541 U.S. 440
    , 450 (2004). A debtor’s obligation on a student loan remains
    unless there has been an express determination that the loan is dischargeable because
    it imposes an undue hardship on the debtor and the debtor’s dependents.
    A debtor seeking a determination that her educational loan debt is
    dischargeable under § 523(a)(8) bears the burden of proving, by a preponderance of
    the evidence, that repayment of those loans would impose an undue hardship. Parker
    v. Gen. Revenue Corp. (In re Parker), 
    328 B.R. 548
    , 552 (B.A.P. 8th Cir. 2005).
    -4-
    “Undue hardship” is not defined in the Bankruptcy Code, so courts have devised their
    own methods of determining whether an undue hardship exists. In the Eighth Circuit,
    the “totality of the circumstances” test is used.
    We apply a totality-of-the-circumstances test in
    determining undue hardship under § 523(a)(8). Reviewing
    courts must consider the debtor’s past, present, and
    reasonably reliable future financial resources, the debtor’s
    reasonable and necessary living expenses, and “any other
    relevant facts and circumstances.” The debtor has the
    burden of proving undue hardship by a preponderance of
    the evidence. The burden is rigorous. “Simply put, if the
    debtor’s reasonable future financial resources will
    sufficiently cover payment of the student loan debt – while
    still allowing for a minimal standard of living – then the
    debt should not be discharged.”
    Jesperson, 
    571 F.3d at
    779 (citing Long v. Educ. Credit Mgmt. Corp. (In re Long),
    
    322 F.3d 549
    , 554-55 (8th Cir. 2003)) (footnote omitted).
    Our de novo review is somewhat hampered by the failure of both parties to
    comply with Federal Rule of Bankruptcy Procedure 8006. That rule requires the
    appellant to file with the clerk a designation of the items to be included in the record
    on appeal within 14 days after filing a notice of appeal, and the appellee has 14 days
    thereafter to file a supplemental designation. Neither party did so; therefore, the
    exhibits received into evidence at trial were not forwarded to us for review as part of
    this appeal. However, Ms. Conway did file an appendix along with her initial brief
    which included at least partial copies of some (but not all) of the exhibits received at
    trial. Further, while we have a transcript of the trial, it does not appear that any
    witnesses were sworn in to testify. Instead, Ms. Conway and the attorney for NCT
    simply filed their fact stipulation, introduced exhibits, and provided oral argument.
    Because the appellant has the burden to demonstrate the merits of her appeal, she
    -5-
    must bear the burden of deficiencies in the record. Bergman v. Webb (In re Webb),
    
    212 B.R. 320
    , 322 n.1 (B.A.P. 8th Cir. 1997); Burgs v. Sissel, 
    745 F.2d 526
    , 528 (8th
    Cir. 1984) (per curiam) (stating that pro se litigants are not excused from compliance
    with substantive and procedural law).
    In any event, the bankruptcy court’s conclusion regarding undue hardship must
    be reviewed de novo based on the record we have. In her brief, Ms. Conway raises
    three assignments of error, all of which essentially assert error in the bankruptcy
    court’s assessment of her ability to pay under its undue hardship analysis. Therefore,
    we will separately examine each factor of the totality-of-the-circumstances test.
    A.     Ms. Conway’s Past, Present, and Reasonably Reliable Future
    Financial Resources.
    Reviewing first Ms. Conway’s past financial situation, the bankruptcy court
    found that her tax returns from 2008 through 2011 indicated that her average annual
    adjusted gross income was $21,972.00, or an average monthly adjusted gross income
    of $1,831.00. The bankruptcy court’s findings indicated that Ms. Conway’s adjusted
    gross income was slightly more than $25,000.00 per year for 2010 and 2011 after
    lower amounts in 2008 and 2009. The bankruptcy court also found that Ms. Conway
    received average annual tax refunds of $778.30 during that same period. Thus, based
    on the fact stipulation, the appendix and the bankruptcy court’s findings, Ms.
    Conway’s average monthly gross income – before payroll deductions – was
    $2,115.00 per month in 20115 and less in prior years.
    In the joint fact stipulation filed in the bankruptcy court, Ms. Conway agreed
    that as of July 7, 2012, her combined monthly “net” income (gross income less
    payroll deductions) from her two part-time jobs was $2,040.36, but that her income
    5
    This is based on her 2011 Adjusted Gross Income of $25,390.00 divided by
    12 months.
    -6-
    fluctuates due to seasonal hours of operation at one of the part-time jobs. As of
    December 3, 2012, Ms. Conway’s “monthly income” was $1,379.97 according to the
    fact stipulation.6 The fact stipulation establishes that her monthly net income in 2012
    fluctuated between $1,379.97 and $2,040.36. Included in Ms. Conway’s appendix is
    a one-page document entitled “Current Income Status.” Based on the transcript of the
    trial, this appears to be the first page of what was received into evidence as Exhibit
    2. It identifies her gross income, payroll deductions, and her net income from both
    jobs as of November 27, 2012, and as of the date of bankruptcy filing. That exhibit
    shows net income of $701.76 from one job and $781.65 from the other, for a total net
    income of $1,483.41 shortly before trial. This coincides with the bankruptcy court’s
    finding that her present income is “stable.” There is nothing in the record to
    controvert that fact finding.
    To support her position that her reasonably reliable future income is no greater
    than her recent past, Ms. Conway argues that her college degree in media
    communications does not provide her with the requisite academic credentials or
    experience to enable her to obtain a job paying more than she currently earns. She
    asserts that she has sent out more than 200 job résumés and job applications in an
    attempt to find full-time employment suitable for her education level, but has been
    unsuccessful. Ms. Conway also notes that she has experienced numerous career and
    financial setbacks, including two layoffs from full-time jobs (one in the travel
    industry and one in the mortgage industry) in the eight years since she graduated
    college.
    6
    The July 2012 and December 2012 monthly income figures set forth in the fact
    stipulation generally coincide with the figures set forth on an income summary
    exhibit attached to the appendix filed by Ms. Conway. Therefore, despite the different
    terms used in the fact stipulation, these amounts represent net income after payroll
    deductions.
    -7-
    Ms. Conway also argues that various medical issues preclude her from working
    more than 40 hours per week and that her medical issues will persist into the future.
    Unfortunately, Ms. Conway failed to include any evidence regarding her medical
    history in the record on appeal. The bankruptcy court dismissed those arguments as
    being without evidentiary support. The record on appeal is also without any
    evidentiary support regarding Ms. Conway’s medical conditions, so those arguments
    will not be considered.
    The bankruptcy court specifically found that Ms. Conway’s written
    submissions “evidence well-developed writing and reasoning skills” and that
    “Debtor’s demeanor and exceptional focus during trial reveals that Debtor is
    articulate, poised, intelligent and quite capable.” Ultimately, the bankruptcy court
    found that “Debtor has at least 30 years left to navigate the job market and upon this
    Court’s evaluation of the facts, Debtor has reasonably reliable future financial
    resources to pay NCT.”
    While we certainly cannot dispute the bankruptcy court’s fact findings as to
    Ms. Conway’s capabilities, we disagree as to her reasonably reliable future financial
    resources. The record, limited as it may be, is clear that despite graduating from
    college eight years ago, Ms. Conway has never made much more than $25,000.00 per
    year.7 This is not a case of a debtor who is intentionally under employed. She has
    made diligent efforts to find higher paying work – having sent out over 200
    applications – to no avail. She has twice been laid off from full-time jobs through no
    apparent fault of her own. Despite those setbacks, she has consistently pursued
    employment and has not been unemployed for any significant period of time. Ms.
    7
    “Never” is used loosely – the limited record does not reveal anything about
    Ms. Conway’s income prior to 2008, though it does have specific information in the
    bankruptcy court’s findings of fact regarding her income for 2008 through 2012.
    -8-
    Conway has actually increased her income somewhat in recent years when she has
    been working two part-time jobs as a server at restaurants.
    Further, NCT argued that Ms. Conway had monthly net income of $2,040.36
    and disposable income (after expenses of $1,737.25, discussed below) of around
    $300.00 per month. She does not. The fact stipulation states that she had net income
    of $2,040.36 in July 2012, but that was just a one-month snapshot, not a monthly
    average. Her income fluctuates due to seasonal business at one of the restaurants
    where she works, and her monthly net income was as low as $1,379.97 per month in
    December 2012. Thus, while she may have had disposable income of around $300.00
    in July 2012, her disposable income was negative by approximately $357.00 in
    December 2012.
    Of course, even if Ms. Conway’s disposable income does average around
    $300.00 per month, it is uncontroverted that the minimum principal and interest
    payment due to NCT is substantially higher – $846.16 per month. It is also
    uncontroverted that the loans are severely in default and have grown from
    approximately $70,000.00 to more than $118,000.00 at the present time. Ms. Conway
    has been unable to pay the loan obligations in the past, although she has attempted
    to do so, having repaid a total of $5,734.48 according to the fact stipulation. It is also
    uncontroverted that Ms. Conway has no further deferment or loan restructuring
    options available.
    Thus, Ms. Conway’s past and present financial resources have been and are
    presently clearly insufficient to service the entire debt owed to NCT. While Ms.
    Conway may have the “possibility” of earning a higher income in the future, there is
    no evidence to support that possibility. We will not substitute assumptions or
    speculation for reasonably reliable facts. Walker, 
    650 F.3d at 1233
    . Ms. Conway’s
    earning history, lack of disposable income, and inability to land a higher paying job
    despite diligent efforts since graduating from college in 2005 suggest that her ability
    -9-
    to earn a substantially higher income in the future is not reasonably reliable.
    Therefore, the bankruptcy court’s finding that she has reasonably reliable future
    financial resources with which to pay the entire debt to NCT is clearly erroneous.
    B.     Reasonable and Necessary Living Expenses.
    The second factor of the totality-of-circumstances test is to review a debtor’s
    reasonable and necessary living expenses. “To be reasonable and necessary, an
    expense must be ‘modest and commensurate with the debtor’s resources.’” Jesperson,
    
    571 F.3d at 780
     (quoting DeBrower v. Pa. Higher Educ. Assistance Agency (In re
    DeBrower), 
    387 B.R. 587
    , 590 (Bankr. N.D. Iowa 2008)). The bankruptcy court
    found that Ms. Conway’s current monthly expenses total $1,737.25, and further found
    that her monthly expenses were not excessive, except for the $158.00 per month
    expense for cell phone service. The bankruptcy court stated that Ms. Conway could
    likely find a more modest cell phone plan, but there are no facts in the record to
    suggest what is included as part of her plan or what a more modest plan should cost.
    Further, the bankruptcy court indicated that Ms. Conway may be able to reduce out-
    of-pocket medical expenses (listed at $100.00 to $142.00 per month) if she is able to
    find a job with medical benefits. Ms. Conway does not presently have medical
    insurance, and we will not speculate whether she would have lower out-of-pocket
    medical expenses on a monthly basis even if she were able to find a job that has an
    insurance benefit. As stated in Jesperson, “[a] court may not engage in speculation
    when determining net income and reasonable and necessary expenses.” 
    Id.
     (citing In
    re Rose, 
    324 B.R. 709
    ,712 (B.A.P. 8th Cir. 2005)).
    After a review of the expenses listed in the bankruptcy court’s findings of fact
    and the expense listing included in Ms. Conway’s appendix on appeal, we agree that
    Ms. Conway’s expenses are modest and commensurate with her resources. In any
    event, NCT does not challenge Ms. Conway’s living expenses in its response to her
    appeal; its arguments are based solely on her future income potential.
    -10-
    C.     Other Relevant Facts and Circumstances.
    The final factor in the totality-of-circumstances test requires consideration of
    any other facts and circumstances relevant to the undue hardship inquiry. Ms.
    Conway apparently was injured in a car accident that resulted in certain medical
    problems for which she has received a small settlement – approximately $625.00. The
    bankruptcy court’s findings of fact indicate Ms. Conway is likely to receive another
    $1,000.00 as a result of the settlement of the car accident. However, there is nothing
    in the record to support the possibility of receiving another $1,000.00 payment and,
    in any event, that amount will not significantly improve her ability to service the NCT
    debt of more than $118,000.00.
    Finally, we are mindful that the parties and the bankruptcy court applied the
    undue hardship analysis as if the indebtedness due to NCT were a single obligation
    having a monthly payment of $846.16 instead of 15 separate loans. NCT argued at
    the bankruptcy court hearing and in its brief on appeal that Ms. Conway’s disposable
    income was sufficient for at least a “partial repayment” of the loans. However, there
    is no case law in this circuit that would authorize the court to “partially discharge” a
    student loan.
    The court does not have the authority to modify the
    payment terms of a student loan or to discharge a partial
    amount of principal or accrued interest. Hawkins v. Buena
    Vista College (In re Hawkins), 
    187 B.R. 294
    , 300–01
    (Bankr. N.D. Iowa 1995); see also Andresen v. Nebraska
    Student Loan Program, Inc. (In re Andresen), 
    232 B.R. 127
    , 136–37 (B.A.P. 8th Cir. 1999) (criticizing “partial
    discharge” theory without deciding the issue).
    Faktor v. United States (In re Faktor), 
    306 B.R. 256
    , 262-63 (Bankr. N.D. Iowa
    2004).
    -11-
    The Andresen court acknowledged that courts in other jurisdictions have
    adopted the theory of partial discharge of student loan debt, but explained the
    “unpredictability,” “lack of uniformity of outcomes,” and potential inequities inherent
    in the subjective application of § 523(a)(8), as well as the lack of authority “in the
    Code or elsewhere” for the judicial revision of the terms of debtors’ student loans.
    
    232 B.R. at 129-136
    .
    Although partial discharge of a single loan is unavailable, NCT actually holds
    15 separate loans. According to NCT’s billing statement included in Ms. Conway’s
    appendix, the monthly installment obligations on those 15 loans range from $39.63
    to $98.58 per month. The Andresen court held that where multiple loans are
    involved, “application of § 523(a)(8) to each of . . . [the] loans separately was not
    only allowed, it was required.” Id. at 137. In other words, a bankruptcy court can
    find that some loans are discharged while repayment of one or more others does not
    constitute an undue hardship. A separate loan-by-loan analysis was not conducted
    by the bankruptcy court in this case because the court made a fact finding that Ms.
    Conway had reasonably reliable future financial resources to pay the entire debt. In
    light of our determination that Ms. Conway has established by a preponderance of
    the evidence that she does not have reasonably reliable future financial resources to
    pay the entire debt, a loan-by-loan undue hardship analysis is “required.” Id. Thus,
    NCT’s “partial repayment” argument is essentially an argument that the court should
    not allow discharge of the individual loans that Ms. Conway is able to pay without
    undue hardship.
    The record reveals that Ms. Conway’s income fluctuates – she had positive
    disposable income of about $300.00 in July 2012 and negative disposable income
    of about $357.00 in December 2012. However, those are snapshots of her situation
    only at those two points in time. The record on appeal does not reveal (at least
    without using assumptions and speculation) the amount of her present disposable
    income, if any, available to service a loan or loans of NCT over the course of an
    -12-
    entire year. Therefore, we must remand this matter to the bankruptcy court to
    determine whether Ms. Conway’s present disposable income, if any, over the course
    of an entire year is sufficient to service any of the individual loan payments due to
    NCT.8
    CONCLUSION
    Since the record reveals that Ms. Conway’s past, present, and reasonably
    reliable future financial resources are not sufficient to meet all of the monthly
    payment obligations to NCT while maintaining a minimum standard of living, we
    conclude on de novo review that excepting all of the obligations to NCT from
    discharge would be an undue hardship on Ms. Conway. Therefore, we reverse the
    decision of the bankruptcy court and remand for further proceedings in accordance
    with this opinion.
    ______________________________
    8
    In other words, it is insufficient to say that Ms. Conway is able to pay a
    particular loan when she had positive disposable income in one month but negative
    disposable income in another. Since Ms. Conway’s income fluctuates, the entire year
    must be considered to determine if she has sufficient disposable income averaged
    over the course of the year.
    -13-