Michael Hedlund v. the Educational Resources Inst

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
MICHAEL ERIC HEDLUND, No. 12-35258
Plaintiff-Appellant,
D.C. No.
v. 6:11-cv-6281-
AA
THE EDUCATIONAL RESOURCES
INSTITUTE INC.; and PENNSYLVANIA
HIGHER EDUCATION ASSISTANCE OPINION
AGENCY,
Defendants-Appellees.
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
2 HEDLUND V. EDUCATIONAL RESOURCES INST.
SUMMARY*
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 11 U.S.C.
§ 523(a)(8).
The panel held that the district court erred by reviewing
the bankruptcy court’s good faith finding de novo, rather than
for clear 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 prepared by court staff for the convenience of the reader.
HEDLUND V. EDUCATIONAL RESOURCES INST. 3
OPINION
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
11 U.S.C. § 523(a)(8). The bankruptcy court granted a partial
discharge, but, on appeal, the district court reinstated the
student loan debt in full as non-dischargeable. Specifically,
the district court ruled that Hedlund had not acted in good
faith, which is one of three prerequisites for relief under
§ 523(a)(8).
We hold that the district court erred in reviewing the
bankruptcy court’s good faith finding de novo. In a
§ 523(a)(8) proceeding, the good faith finding should be
reviewed for clear error. Under the proper standard of
review, we affirm the bankruptcy court’s ruling.
I.
Hedlund was thirty-three years old at the time of the
bankruptcy proceedings. He had earned a bachelor’s degree
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
4 HEDLUND V. EDUCATIONAL RESOURCES INST.
the Klamath County District Attorney. He failed the exam,
re-sat in February 1998, and failed again. He lost his job at
the District Attorney’s office for failure to pass the bar exam
on his second try. He then obtained full-time employment as
a Juvenile Counselor with the Klamath County Juvenile
Department. While employed full time as a Juvenile
Counselor, he enrolled in another bar preparation course and
took two months off to study. En route to the exam, however,
when he stopped for coffee, he inadvertently locked his keys
in his car. He missed the exam. Hedlund married in 2000
and became a father in 2001.
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
reduce 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
1
Student loan recipients typically are not required to begin making
payments to pay back their loans until some point after the borrower has
completed his or her educational program.
2
Under the ICRP, the debtor pays the lesser of: (1) payments based on
a 12-year amortization derived by application of an annually adjusted
percentage of the debtor’s adjusted gross income; or (2) 20% of the
HEDLUND V. EDUCATIONAL RESOURCES INST. 5
loan provider’s representation that he was ineligible for
consolidation due to the default – Hedlund concluded that he
would not qualify for the ICRP.
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 approximately $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 collection 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
debtor’s annually adjusted discretionary income, defined as adjusted gross
income less applicable federal poverty guidelines. See 34 C.F.R.
§ 685.209.
3
The record is unclear on when precisely these negotiations took place.
6 HEDLUND V. EDUCATIONAL RESOURCES INST.
discharge of his loans under 11 U.S.C. § 523(a)(8). He
settled with TERI before trial, agreeing to pay down
$17,718.15 at a rate of $50 per month. In other pretrial
negotiations, PHEAA offered three potential repayment plans
“if the Loans [were] determined not to be dischargeable . . . .”
All three options called for payment of the entire loan balance
over the course of 30 years. The first option called for
monthly payments of approximately $420; the remaining
options began with monthly payments of $307 and rose to
$430 and $440 respectively. Hedlund did not, and has not,
pursued any of these options.
After trial, the bankruptcy court granted a partial
discharge of all but $30,000 of the PHEAA debt. On appeal,
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.
4
We adopted the Brunner test in United Student Aid Funds, Inc. v. Pena
(In re Pena), 155 F.3d 1108, 1111–12 (9th Cir. 1998).
HEDLUND V. EDUCATIONAL RESOURCES INST. 7
Applying the three-factor Brunner test, Judge Brandt found
that: (1) Hedlund could not have maintained a minimal
standard of living, if required to repay the full loans; (2)
“additional circumstances” indicated that Hedlund’s inability
to repay his loans would persist into the future; and (3)
Hedlund had made good faith efforts to repay his loans.
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 28 U.S.C. § 158(d), and we reverse the district court.
II.
A.
Student loan obligations are presumptively
nondischargeable in bankruptcy absent a showing of “undue
hardship.” 11 U.S.C. § 523(a)(8). To determine if a debtor
has shown undue hardship, we follow the three-part test from
Brunner. See In re Pena, 155 F.3d at 1111–12. Under
Brunner,
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 state 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.
8 HEDLUND V. EDUCATIONAL RESOURCES INST.
Educ. Credit Mgmt. Corp. v. Mason (In re Mason), 464 F.3d
878, 882 (9th Cir. 2006). “[T]he burden of proving undue
hardship is on the debtor, and the debtor must prove all three
elements before discharge can be granted.” Rifino v. United
States (In re Rifino), 245 F.3d 1083, 1087–88 (9th Cir. 2001).
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, good 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, although 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
5
PHEAA makes a passing argument that the bankruptcy court’s rulings
on the first two Brunner prongs were erroneous. Without making any
cogent argument, PHEAA simply asks us to rely on the BAP’s 2004
reversal of the bankruptcy court during the first round of litigation, which
reviewed an entirely different bankruptcy court order and was vacated by
this Court’s remand order. Accordingly, PHEAA has waived these
arguments. See Leer v. Murphy, 844 F.2d 628, 634 (9th Cir. 1988)
(“Issues raised in a brief which are not supported by argument are deemed
abandoned.”).
HEDLUND V. EDUCATIONAL RESOURCES INST. 9
omitted). The bankruptcy court considered each of these
factors.
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 licensed 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 necessary to maintain a minimal standard of
living.6 Specifically, the court found that Hedlund’s clothing,
6
The court’s analysis of Hedlund’s expenses relied in part on its
findings under the first Brunner prong. There, the court had ruled that the
majority of Hedlund’s expenses were reasonably necessary, and thus that
10 HEDLUND V. EDUCATIONAL RESOURCES INST.
recreation (including cable and internet), and “miscellaneous”
budgets (including childcare and haircuts) could all be
reduced. By contrast, the court found no fault with Hedlund’s
budget for two cell phones (given that the Hedlunds had a
small child) and for the lease of a second car (given that the
Hedlund’s other car was older and unreliable). Taken
together, the court found that the failure fully to minimize
expenses did not “tip the balance away from a good faith
finding” because Hedlund and his family “have always lived
frugally.”
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.
he could not maintain a minimal standard of living if required to repay the
loans in full.
HEDLUND V. EDUCATIONAL RESOURCES INST. 11
The court did not fault Hedlund for failing to apply for the
ICRP. Hedlund had investigated the ICRP option online but
concluded that he was not eligible because he was in default.
Moreover, PHEAA had conceded that payments under the
ICRP would have been more per month than the three options
PHEAA had offered just before trial. Finally, the court found
that Hedlund was justified in rejecting the three repayment
options PHEAA had offered. The court stressed that the three
options all had monthly payments over $300, which was more
than Hedlund could afford without undue hardship.7 The
court also noted that each option called for a thirty-year plan,
and thus held that Hedlund was justified in refusing to
obligate himself “into his mid-60s” when his children would
likely be seeking to attend college.
Considering all of this evidence together, the bankruptcy
court found that Hedlund’s situation was not “self-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
7
$300 per month exceeded the bankruptcy court’s finding, on the first
Brunner prong, of how much income Hedlund could devote to student
loan payments.
12 HEDLUND V. EDUCATIONAL RESOURCES INST.
lack of effort in negotiating a repayment plan “even more
vexatious.” Id. at 910, 915. In that regard, the court felt that
Hedlund was “less than diligent” in exploring the ICRP
option, and it viewed Hedlund’s $5,000 payment offer as
unrealistic. Id. at 915. The court also faulted Hedlund for
rejecting the three pre-trial repayment plans offered by
PHEAA. Id. Finally, the court observed that Hedlund and
his wife had chosen to live as a single-income family, “a
lifestyle that few today can afford.” Id. at 916. Thus, the
district court reversed the bankruptcy court’s good faith
finding.
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 de 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 faith
prong for clear error. See In re Mason, 464 F.3d at 885
 HEDLUND V. EDUCATIONAL RESOURCES INST. 13
(“[T]he bankruptcy court clearly erred in finding that Mason
demonstrated good faith efforts to repay his loans.”); In re
Pena, 155 F.3d at 1114 (“[T]he bankruptcy court did not
clearly err in finding that the Penas exhibited good faith in
attempting to pay back the student loans.”).8 We have also
applied the deferential clear error standard of review to good
faith inquiries in other settings. See Figter Ltd. v. Teachers
Ins. & Annuity Assoc. of Am. (In re Figter Ltd.), 118 F.3d
635, 638 (9th Cir. 1997) (collecting cases and noting that
because good faith is “an essentially factual inquiry” this
Court has “in various contexts, declared that [it] will review
good faith determinations for clear error” (internal quotation
marks and citations omitted)). Accordingly, we now confirm
that a good faith finding under Brunner should be reviewed
for clear error.9
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
8
At least one other circuit has expressly applied clear error to the § 523
good faith inquiry. See Krieger v. Educ. Credit Mgt. Corp., No. 12-3592,
2013 WL 1442305, at *2 (7th Cir. Apr. 10, 2013) (“[The good faith]
standard combines a state of mind (a fact) with a legal characterization (a
mixed question of law and fact). Findings of fact must stand unless
clearly erroneous, and . . . .mixed questions likewise are treated as factual
in nature.”).
9
We also note that under our established standard of review of
bankruptcy court rulings, after review by the district court or by the BAP,
see Ragsdale, 780 F.2d at 795, the district court’s ruling on the good faith
issue would not have been entitled to any deference, but would be
reviewed “independently.”
14 HEDLUND V. EDUCATIONAL RESOURCES INST.
the bankruptcy court had failed to consider all factors relevant
to good faith. Instead, it had found good faith based solely on
the evidence of voluntary payments. Id. at 499. Thus,
although good faith is primarily a question of fact reviewed
for clear error, it can encompass questions of law that must be
reviewed de novo.10
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 erroneous.11
10
Similarly, clear error review is consistent with our observation that
“undue hardship requires a determination of the legal effect of the
bankruptcy court’s findings regarding the student’s circumstances, a
question of law which we review de novo.” In re Mason, 464 F.3d at 881
(internal quotation marks omitted). This is simply another way of stating
that we review the application of Brunner de novo, i.e., whether the
bankruptcy court properly applied the three-prong test. For instance, if the
bankruptcy court had granted a discharge based only on the first two
prongs of Brunner, we would reverse under de novo review.
11
Clear error applies even though Judge Brandt based his findings on the
trial transcript and other documentary evidence. See Anderson v. City of
Bessemer City, N.C., 470 U.S. 564, 574 (1985) (“Where there are two
permissible views of the evidence, the factfinder’s choice between them
cannot be clearly erroneous. This is so even when the [trial] court’s
findings do not rest on credibility determinations, but are based instead on
physical or documentary evidence or inferences from other facts.”
(internal citations omitted)); see also Fed. R. Civ. P. 52(a)(6).
HEDLUND V. EDUCATIONAL RESOURCES INST. 15
There was considerable evidence showing that Hedlund
had maximized his income, and the court properly declined
to attribute Mrs. Hedlund’s underemployment to Hedlund’s
bad faith. Although Hedlund had not fully minimized his
expenses, the court permissibly interpreted the excess
expenses as marginal. And although we might have viewed
certain expenses more skeptically – such as the new car lease
and the two cell phones – the court’s view of the expenses
was not clearly erroneous.
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 upon 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
12
We need not determine if, as the bankruptcy court ruled, uncontested
garnishments demonstrate good faith. Even if this view of the evidence
was improper, the court’s interpretation of the record as a whole was not
clearly erroneous.
16 HEDLUND V. EDUCATIONAL RESOURCES INST.
eligibility. Moreover, unlike Hedlund, the debtor in In re
Birrane had maintained only part-time employment and thus
had failed to maximize her income. Id. at 499–500.
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. Specifically, 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, therefore, 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.