Cheryl Craig v. Educational Credit Management , 579 F.3d 1040 ( 2009 )


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  •                  FOR PUBLICATION
    UNITED STATES COURT OF APPEALS
    FOR THE NINTH CIRCUIT
    In the Matter of: CHERYL LEE         
    CRAIG,
    Debtor,
    No. 08-15451
    CHERYL LEE CRAIG,
    Plaintiff-Appellant,           D.C. No.
    06-cv-00466-CKJ
    v.                              OPINION
    EDUCATIONAL CREDIT MANAGEMENT
    CORPORATION,
    Defendant-Appellee.
    
    Appeal from the United States District Court
    for the District of Arizona
    Cindy K. Jorgenson, District Judge, Presiding
    Argued and Submitted
    June 12, 2009 San Francisco, California
    Filed August 26, 2009
    Before: Stephen S. Trott, M. Margaret McKeown and
    Sandra S. Ikuta, Circuit Judges.
    Opinion by Judge Trott
    11817
    11820               IN THE MATTER OF CRAIG
    COUNSEL
    Kasey C. Nye, Quarles & Brady, LLP, Tucson, Arizona, for
    the appellant.
    Madeleine C. Wanslee, Gust Rosenfeld P.L.C., Phoenix, Ari-
    zona, and A.L. Brown, Oakdale, Minnesota, for the appellee.
    OPINION
    TROTT, Judge:
    This case requires us to address the dischargeability of a
    student loan in bankruptcy under 
    11 U.S.C. § 523
    (a)(8) based
    on “undue hardship.”
    FACTS AND PROCEDURAL HISTORY
    Cheryl Lee Craig took out student loans beginning in 1990
    to attend Pima Community College and the University of Ari-
    zona. She obtained an AA in paralegal studies in 1992, and
    a BA in sociology in 1996. In 2003, she consolidated her stu-
    dent loans through a consolidation loan with Educational
    Credit Management Corporation (“ECMC”). It is this consoli-
    dated loan that is at issue in these proceedings.
    Craig obtained various deferments and forbearances on her
    student loans, both before and after consolidation. As a result,
    IN THE MATTER OF CRAIG                     11821
    she has never made a payment on the loans. In October 2004,
    she petitioned for Chapter 7 bankruptcy relief and initiated
    this adversary proceeding against ECMC, seeking to have her
    student loan debt discharged under 
    11 U.S.C. § 523
    (a)(8)
    based on undue hardship. As of April 10, 2005, she owed
    $81,575 on the consolidated student loan.
    A one day trial was held on April 25, 2005. At the time of
    trial, Craig was forty-seven years old. She worked full-time as
    a customer service representative for Anderson Financial Net-
    work, Inc. (“AFN”).1 She earned $10 per hour, and typically
    worked approximately fifty to sixty-five hours each two week
    pay period. AFN also provided Craig with certain benefits,
    including health insurance.
    Craig’s employment at AFN was protected under the Fam-
    ily Medical Leave Act, which permits Craig to miss up to 400
    hours of work per year as a result of doctor certified medical
    issues and still keep her full-time employment status. This is
    significant because Craig suffers from numerous serious med-
    ical problems, including asthma, diabetes, chronic bronchitis,
    heart problems (she had a heart attack in 2002), acid reflux,
    irritable bowel syndrome, and chronic back problems. These
    medical problems require the monthly intervention of, and
    monitoring by, several physicians, and a daily regime of pre-
    scription drugs. Even with the benefit of health insurance,
    Craig’s out-of-pocket medical costs were approximately $350
    per month in 2004.
    Craig’s income in 2004 was $16,815. The bankruptcy court
    found it unlikely that Craig would be able to materially
    change her employment status in the future, and thus used the
    $16,815 income figure in determining whether Craig demon-
    strated that she would suffer “undue hardship” if required to
    repay her student loan.
    1
    She also occasionally worked as a substitute teacher, earning $80 per
    day, and as a paralegal.
    11822                   IN THE MATTER OF CRAIG
    Craig claimed monthly expenses totaling $1,873, which
    included (1) a $150 monthly mortgage payment on Craig’s
    mobile home and (2) a $68 monthly contribution to her
    employer’s 401(k) plan. These monthly expenses also
    included $427 for an automobile payment and miscellaneous
    automobile expenses. The bankruptcy court noted that, at the
    time of trial, Craig did not own a vehicle but that this was a
    temporary condition and that Craig intended to acquire a vehi-
    cle and would thus incur automobile expenses.
    After considering the evidence, the bankruptcy court found
    a more realistic total monthly expense budget for Craig to be
    $1,785. The court reached this budget by adjusting Craig’s
    claimed monthly expenses as follows: a $75 reduction for
    food; a $75 increase added by the court as a contingency fund
    for things such as home repairs, occasional clothing, gifts, and
    unforeseeable emergencies; and a $90 reduction in the pay-
    ment on an automobile.2 The bankruptcy court recognized,
    however, that when Craig obtained a vehicle, her total budget
    would exceed her total monthly income by $384.
    The bankruptcy court then found that, other than the $68
    monthly 401(k) plan contribution, the items included in
    Craig’s $1,785 adjusted monthly budget were reasonably nec-
    essary to maintain a minimal standard of living and that Craig
    should be required to pay on her student loan debt the $68 per
    month that she had been contributing to the 401(k) plan. The
    bankruptcy court further found that because Craig’s mobile
    home mortgage payment of $150 would end in December
    2006, beginning in January 2007, Craig should be required to
    pay on her student loan debt the $150 per month that she had
    2
    Subtracting $90 from Craig’s proposed $1,873 budget would result in
    an adjusted budget of $1,783 rather than $1,785. Further, a line-by-line
    addition of the adjusted budget results in a total adjusted budget of $1,788
    rather than $1,785. Because, however, this slight mathematical error does
    not affect our decision, we will use the adjusted budget amount of $1,785
    used by the bankruptcy and district courts.
    IN THE MATTER OF CRAIG                 11823
    been paying on her mortgage. The bankruptcy court thus
    declared Craig’s student loan debt discharged, except that her
    debt was not discharged as to: $68 per month from May 1,
    2005, forward, plus an additional $150 per month from Janu-
    ary 1, 2007, forward.
    Craig requested clarification of the bankruptcy court’s rul-
    ing, pointing out that the bankruptcy court had not indicated
    what portion of the total student loan debt was discharged; the
    number of payments Craig would be required to make; and
    whether interest was to continue to accrue and, if so, the por-
    tion of the student loan on which interest would accrue. In
    response, the bankruptcy court clarified that interest was to
    continue to accrue on the entire student loan debt.
    The district court, although unable clearly to rationalize the
    bankruptcy court’s analysis, affirmed the bankruptcy court on
    the obligation of Craig to pay $68 per month from May 1,
    2005, forward, and on the accrual of interest on the entire stu-
    dent loan debt, but reversed the bankruptcy court on Craig’s
    obligation to pay $150 per month from January 1, 2007, for-
    ward. Craig timely appeals. We vacate and remand for recon-
    sideration.
    STANDARD OF REVIEW
    We review de novo the district court’s decision on appeal
    from a bankruptcy court. Educ. Credit Mgmt. Corp v. Cole-
    man (In re Coleman), 
    560 F.3d 1000
    , 1003 (9th Cir. 2009).
    We review the bankruptcy court’s findings of fact for clear
    error and its conclusions of law de novo. 
    Id.
     We review its
    choice of remedies for an abuse of discretion. Bankr. Receiv-
    ables Mgmt. v. Lopez (In re Lopez), 
    345 F.3d 701
    , 705 (9th
    Cir. 2003).
    11824                IN THE MATTER OF CRAIG
    ANALYSIS
    I.   Does the bankruptcy court’s remedy violate 
    11 U.S.C. § 523
    (a)(8)?
    [1] Under 
    11 U.S.C. § 523
    (a)(8), a student loan debt is non-
    dischargeable in bankruptcy “unless excepting such debt from
    discharge under this paragraph would impose an undue hard-
    ship on the debtor and the debtor’s dependents . . . .” 
    11 U.S.C. § 523
    (a)(8). Under this provision, a bankruptcy court
    may discharge a student loan debt in full or in part. Saxman
    v. Educ. Credit Mgmt. Corp. (In re Saxman), 
    325 F.3d 1168
    ,
    1173-74 (9th Cir. 2003). To obtain a discharge, a debtor must
    demonstrate that she meets the “undue hardship” requirement
    of § 523(a)(8) as to that portion of the debt to be discharged.
    Id. at 1174.
    [2] We apply a three-part test, known as the Brunner test,
    to determine whether excepting all or part of a student loan
    debt from discharge will impose an “undue hardship” under
    § 523(a)(8). See United Student Aid Funds, Inc. v. Pena (In re
    Pena), 
    155 F.3d 1108
    , 1112 (9th Cir. 1998) (citing Brunner
    v. New York State Higher Educ. Servs. Corp., 
    831 F.2d 395
    ,
    396 (2d Cir. 1987)). Under the Brunner test, a debtor must
    demonstrate:
    (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 indicat-
    ing that this state of affairs is likely to persist for a
    significant portion of the repayment period of the
    student loans; and (3) that the debtor has made good
    faith efforts to repay the loans.
    Saxman, 
    325 F.3d at
    1173 (citing Pena, 
    155 F.3d at 1111
    ;
    Brunner, 
    831 F.2d at 396
    ).
    IN THE MATTER OF CRAIG               11825
    The bankruptcy court found that Craig met all three prongs
    of the Brunner test: (1) that (with the exception of the $68
    monthly 401(k) contribution), Craig was maintaining her exis-
    tence at a minimal standard of living and had no discretionary
    income with which to repay her student loan in whole or in
    part; (2) that based upon her age, health, current low-paying
    employment, and lack of possibilities for improving her
    employment status, Craig’s current financial condition was
    likely to persist for a significant portion of any repayment
    period imposed by the court; and (3) that Craig made a good
    faith effort to repay the loan by keeping the lender informed
    as to her whereabouts and employment status, and seeking
    and obtaining deferments and forbearances such that she was
    not in default when she filed her bankruptcy petition. The sec-
    ond and third prongs of the Brunner test are not at issue in
    this appeal.
    A.   Did the bankruptcy court err by failing to fully dis-
    charge Craig’s student loan debt?
    Craig argues that because she did not have the present abil-
    ity on the facts found by the bankruptcy court to make a pay-
    ment in any amount on her student loan debt without
    experiencing undue hardship, (1) that it was error for the
    bankruptcy court to order her to pay $68 a month (plus an
    additional $150 a month beginning in January 2007) against
    her student loan, and (2) that she was entitled to a full dis-
    charge of her student loan debt under § 523(a)(8).
    The bankruptcy court found that, with the exception of the
    $68 monthly 401(k) contribution, a budget for Craig of
    $1,785 per month was realistic for Craig to maintain a mini-
    mal standard of living. Assuming the $68 monthly 401(k)
    contribution is not “reasonably necessary” for Craig to main-
    tain a minimal standard of living, this simply means that
    Craig’s monthly budget should have been reduced by $68 to
    determine whether she had discretionary income left over to
    pay her student loan. The bankruptcy court did not, however,
    11826                 IN THE MATTER OF CRAIG
    directly address whether Craig had discretionary income left
    over if her budget was reduced by the $68 per month. Instead,
    the bankruptcy court simply concluded that because the $68
    monthly 401(k) contribution was not necessary for maintain-
    ing a minimal standard of living and Craig had been making
    such payments, she could afford to pay $68 on her student
    loan.
    [3] A review of Craig’s expenses to maintain a minimal
    standard of living and her income demonstrates that the bank-
    ruptcy court probably erred because—accepting the bank-
    ruptcy court’s findings of fact at face value—Craig cannot
    afford to pay any amount, let alone $68 a month, on her stu-
    dent loan without incurring undue hardship.
    [4] Reducing Craig’s monthly budget of $1,785 by the dis-
    puted $68 monthly 401(k) contribution results in an adjusted
    monthly budget of $1,717. The bankruptcy court found
    Craig’s monthly income to be $1,401. This left Craig with a
    monthly deficit of $316 as of the time of trial based on the
    bankruptcy court’s own findings of Craig’s income and her
    expenses “necessary” to maintain a minimal standard of living.3
    Because Craig’s monthly expenses necessary to maintain her-
    self at a minimal standard of living exceeded her monthly
    income, she may have had no discretionary income with
    which to pay her student loan in whole or in part. See Pena,
    
    155 F.3d at 1113
     (holding that where debtors’ average
    monthly expenses subtracted from their average monthly
    income resulted in a monthly deficit of $41, debtors could not
    maintain a minimal standard of living and pay off their stu-
    dent loans). It thus appears that Craig met her burden on the
    first prong of the Brunner test by establishing that she is not
    able to maintain a minimal standard of living if she is forced
    3
    This $316 monthly deficit should have been reduced to $166 per month
    as of January 2007 because Craig was scheduled to pay off the mortgage
    on her mobile home in December 2006 and thus would no longer have a
    $150 monthly mortgage payment.
    IN THE MATTER OF CRAIG                      11827
    to repay any portion of her student loan. See id.; Brunner, 
    831 F.2d at 396
    .
    We note that the district court was perplexed by the bank-
    ruptcy court’s conclusion that Craig could pay $68 per month
    even though her necessary expenses were $384 greater than
    her income. The district court said, “Craig’s argument is not
    without merit, . . .” The court added that “the bankruptcy
    court must have erred in finding that the $68 and $150 pay-
    ments did not impose an undue hardship if indeed it also
    found that the $384 income deficiency necessarily meant that
    any payment at all would impose an undue hardship.” The
    district court, however, then speculated that the bankruptcy
    court must have found that Craig “presumably makes ends
    meet with a $384 monthly income deficit.”
    [5] However, we have no way of knowing how the bank-
    ruptcy court arrived at its conclusion regarding Craig’s ability
    to pay $68 a month towards her student loan debt, and thus,
    we have no way of reviewing this issue. Craig appears to have
    met her burden of establishing that excepting any portion of
    her student loan debt from discharge would impose an “undue
    hardship” within the meaning of § 523(a)(8), and that she
    might be entitled to a discharge of her entire student loan
    debt. Cf. Saxman, 
    325 F.3d at 1174
     (holding that a debtor is
    entitled to a discharge of that portion of the student loan that
    meets the requirements of § 523(a)(8)). In light of the lack of
    clarity in the bankruptcy court’s analysis on this issue, we
    vacate and remand to the district court with instructions to
    remand to the bankruptcy court for reanalysis and clarification.4
    4
    Our remand for reconsideration of Craig’s ability to pay renders unripe
    Craig’s argument that the bankruptcy court’s remedy—which simply
    reduced her monthly payments but extended into perpetuity her obligation
    to make those payments—is not a partial discharge and exceeded the
    bankruptcy court’s authority.
    11828                  IN THE MATTER OF CRAIG
    B.    Did the bankruptcy court err in determining Craig’s
    contribution to a 401(k) plan was not an expense nec-
    essary to maintain a minimal standard of living and
    that Craig could thus make monthly payments on her
    student loan in the amount she had been contributing
    to her 401(k)?
    The bankruptcy court determined that Craig’s $68 monthly
    contribution to her employer’s 401(k) plan, “[w]hile under-
    standable, . . . does not pass muster as a ‘necessary’ expense.”
    In making this determination, the bankruptcy court relied on
    cases that applied a per se rule that voluntary contributions to
    retirement plans are not a reasonably necessary expense.
    [6] Soon after the bankruptcy court issued its decision we
    rejected the application of a per se rule that voluntary contri-
    butions to retirement plans are never a reasonably necessary
    expense. See Hebbring v. U.S. Trustee, 
    463 F.3d 902
     (9th Cir.
    2006).5 Under Hebbring, the determination of whether retire-
    5
    Hebbring is a pre-Bankruptcy Abuse Prevention and Consumer Protec-
    tion Act (“BAPCPA”) case, see 
    463 F.3d at
    904 n.1, that addresses essen-
    tially the same standard at issue here—whether an expense is reasonably
    necessary—albeit in a different context. Because Craig’s case was decided
    on April 27, 2005, before BAPCPA went into effect on October 17, 2005,
    we therefore hold the test in Hebbring for determining whether a volun-
    tary 401(k) contribution is a reasonably necessary expense to be viable
    and applicable to the pre-BAPCPA determination of whether Craig’s
    401(k) contribution is an expense reasonably necessary to maintain a mini-
    mal standard of living.
    In Egebjerg v. Anderson (In re Egebjerg), No. 08-55301, 
    2009 WL 2357706
     (9th Cir. 2009), a post-BAPCA case, this circuit held, in the con-
    text of determining whether a debtor’s Chapter 7 filing was presumptively
    abusive under BAPCPA’s “means test,” 
    11 U.S.C. § 707
    (b)(2), that a
    debtor’s voluntary contribution to a retirement plan is per se not an
    “[o]ther [n]ecessary [e]xpense.” See Egebjerg, 
    2009 WL 2357706
    , at *5-
    *6. In so holding, the Egebjerg decision noted that the test at issue in
    Hebbring—the totality of the circumstances test, which now appears, as
    modified by BAPCPA, at 
    11 U.S.C. § 707
    (b)(3)—is distinct from the
    § 707(b)(2) “means test,” and that the holding in Hebbring was thus inap-
    plicable to the case before it. Id. at *6.
    IN THE MATTER OF CRAIG                      11829
    ment contributions are a “reasonably necessary” expense is to
    be made using a “a case-by-case approach.” Id. at 906. Under
    this approach, “bankruptcy courts have discretion to deter-
    mine whether retirement contributions are a reasonably neces-
    sary expense for a particular debtor based on the facts of each
    individual case.” Id. at 907.
    In making this fact-intensive determination, courts
    should consider a number of factors, including but
    not limited to: the debtor’s age, income, overall bud-
    get, expected date of retirement, existing retirement
    savings, and amount of contributions; the likelihood
    that stopping contributions will jeopardize the debt-
    or’s fresh start by forcing the debtor to make up lost
    contributions after emerging from bankruptcy; and
    the needs of the debtor’s dependents. Courts must
    allow debtors to seek bankruptcy protection while
    voluntarily saving for retirement if such savings
    appear reasonably necessary for the maintenance or
    support of the debtor or the debtor’s dependents.
    Id. (citations omitted).
    [7] Here, because it did not have the benefit of our holding
    in Hebbring, the bankruptcy court did not address Craig’s par-
    ticular circumstances in determining that the 401(k) contribu-
    tions were not necessary, but instead simply applied a per se
    rule. Accordingly, on remand, the bankruptcy court will need
    to make the fact-intensive determination under Hebbring of
    whether Craig’s retirement contributions are a reasonably
    necessary expense based on her individual circumstances. See
    Hebbring, 
    463 F.3d at 907
    .
    Because we are examining a pre-BAPCPA question, namely, whether
    Craig’s 401(k) contribution is reasonably necessary to maintain a minimal
    standard of living to, in turn, determine whether requiring Craig to repay
    her student loan would impose an undue hardship under 
    11 U.S.C. § 528
    (a)(8), the Egebjerg decision is not applicable to our analysis here.
    11830                IN THE MATTER OF CRAIG
    II.    Does the remedy set forth by the bankruptcy court violate
    the Thirteenth Amendment of the U.S. Constitution?
    Craig’s final argument is that the bankruptcy court’s rem-
    edy imposes an unconstitutional peonage in violation of the
    Thirteenth Amendment to the U.S. Constitution because (1)
    her expenses exceed her income, and (2) as a result of the
    bankruptcy court’s order, she will be making payments on her
    student loan into perpetuity while the balance on the student
    loan continues to increase, making it impossible for Craig to
    ever pay off that loan. We reject this argument as patently
    specious.
    CONCLUSION
    We vacate and remand to the district court with instructions
    to remand to the bankruptcy court for a determination of (1)
    whether, under Craig’s particular circumstances, the $68
    monthly 401(k) contribution is “necessary,” and (2) what por-
    tion of Craig’s outstanding student loan debt is subject to dis-
    charge based on Craig’s monthly income and her monthly
    expenses necessary for maintaining a minimal standard of liv-
    ing.
    VACATED and REMANDED.