Jeffrey J. Graham, United States Bankruptcy Judge
Michael J. Norris, Mike Norris & Associates, P.C., Indianapolis, IN, for Plaintiff.
Rachana Fischer, Office of U.S. Attorney, Indianapolis, IN, for Defendant.
ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENTJeffrey J. Graham, United States Bankruptcy Judge
This matter comes before the Court on Defendant the United States Department of Education's ("DOE") Motion for Summary Judgment (the "Motion") on Plaintiff Matthew Richard Roth's ("Debtor") Complaint Regarding Dischargeability of Federal Student Loans (the "Complaint"). For the reasons stated below, the Court GRANTS the Motion.
Undisputed Facts1. After graduating from North Central High School in the top 15% of his class, Debtor matriculated to Butler University ("Butler") in Indianapolis, Indiana.
2. Debtor enrolled as a full-time student in Butler's pharmacy program. Students seeking a pharmacy degree at Butler must first complete two years of pre-pharmacy courses. If they earn at least a 3.0 grade point average ("GPA") in this coursework, they automatically advance to the four-year pharmacy program (the "Pharmacy Program"), which consists of three years of additional coursework and one year of clinical rotations. This auto-advancement feature is unique to Butler; other schools require student to compete for admission to the school's pharmacy program.
3. Debtor attended Butler from the Fall of 2009 to June of 2016.
4. Despite struggling in a couple of pre-pharmacy classes, Debtor's GPA was sufficient to auto-advance into the Pharmacy Program.
5. Once in the Pharmacy Program, Debtor was expected to maintain at least a 2.0 GPA.
6. During his enrollment at Butler, Debtor repeated eight courses: Calculus, Human Anatomy, Human Physiology, Intro to Principles of Drug Action, Therapeutics 1, Therapeutics 1 Case Studies, Therapeutics 2, and Therapeutics 2 and Case Studies. Debtor earned Fs in Therapeutics 1 and Therapeutics 2 and Case Studies, as well as an F in Pharmacy Practice Experience 3.
Based on Debtor's deposition, it appears that he repeated some of these classes by choice.
Debtor claims that he failed Therapeutics 1 as a result of an injury he sustained that semester. He testified at a deposition that medication he was prescribed affected his mental capacity. Debtor further explained that he failed the class by "10 points" and the professor refused his request to give him a passing grade in light of his injury. Debtor received Cs in his other classes that semester.
7. Debtor earned Ds in Organic Chemistry and Principles of Pathogenic Microbiology. He earned a D- in Cellular and Molecular Biology.
8. Because Debtor initially failed Therapeutics I, he was unable to advance to year three of the four-year pharmacy program. He was instead held back a year.
9. Plaintiff incurred additional student loans by having to repeat a year of the Pharmacy Program.
10. Debtor failed Therapeutics II and Case Studies after he missed the oral presentation. Debtor claims that he missed the oral presentation because an incorrect date was listed on the syllabus. By failing this course, Debtor would have been held back yet another year. But Debtor appealed and was allowed to retake the class and advance to his third year of studies.
11. Debtor claims that he failed Intro to Pharmacy Practice Experience 3 because the professor failed to communicate a project deadline.
12. On January 7, 2015, Butler informed Debtor by letter that he had been dismissed from the Pharmacy Program, as his failing grade in Pharmacy Practice Experience 3 meant that Debtor had not met the stipulations for remaining in the program.
13. Debtor continued to take classes at Butler while he appealed his dismissal from the Pharmacy Program. In the Spring of 2015, Debtor failed Pharmacy, Policy, and the Law. The professor for this class took issue with the fact that Debtor signed onto a group project without the group's express consent. The professor informed Debtor that he intended to refer the matter to Butler's academic affairs committee.
14. Debtor also took non-pharmacy classes in the Fall of 2015 and Spring of 2016. Although he did not meet all of the requirements, Butler allowed Debtor to graduate with a degree in Marketing from the Lacy School of Business.
15. Butler denied Debtor's multiple requests to be readmitted to the Pharmacy Program.
16. After leaving Butler, Debtor initially struggled to find work and lived with his father in Section 8 housing.
17. Debtor eventually took a position with CVS as a pharmacy technician in June of 2016. He also worked at CVS as a cashier.
18. In November of 2017, Debtor began working as a full-time computer technician at the American College of Education ("ACE"). He remains in that position and currently earns $49,000 a year at ACE. Debtor's income from ACE has increased every year in the time that he has worked there.
19. Debtor was terminated by CVS in July of 2020 for violating the company's cell phone social media policy. After his termination, Debtor took a part-time position with Walmart as a pharmacy technician. A recent Walmart paystub shows that he earns approximately $728.81 every two weeks from Walmart. Debtor asserts, however, that his salary at Walmart is not guaranteed as his hours often fluctuate. Debtor has also indicated a desire to eventually quit this job.
20. In 2017, Debtor earned $34,660, in 2018, he earned $47,818 and in 2019, he earned $51,560. His income increased further in 2020, although an exact figure has not been provided.
21. Debtor is not married and has no children.
22. Debtor has no disability.
23. As of June 19, 2020, Debtor owed the DOE $112,138.59 in principal and $16,409.14 in interest, for a total indebtedness of $128,747.73 (the "Federal Loans"). The Federal Loans are currently "frozen" and have not accrued interest or fees since November of 2017.
24. Debtor has not made any payments on the Federal Loans and has not applied for any income-based repayment plan.
25. Based on the income he earns at ACE, but excluding his income from Walmart, if Debtor were to apply for such a program, it is estimated that he would pay $373.00 a month. If he consolidated the Federal Loans and applied for the REPAYE program through the DOE, it is estimated that he would owe approximately $247.00 a month. Presumably, if his Walmart income was included, his monthly payment under either of these programs would be higher.
26. In the absence of a repayment program, Debtor's monthly student loan payment is approximately $1,403 per month if paid over 10 years and approximately $800 if paid over 25 years.
27. In May of 2018, Debtor initiated an adversary proceeding to discharge certain private student loans (the "Private Loan Litigation") in which he was eventually able to reduce approximately $80,000 of indebtedness to $10,000 to be paid over 15 years. He now pays only $55 per month on the remaining indebtedness.
28. The Private Loan Litigation came at a price in that Debtor incurred $42,500 in associated legal fees. During and after the Private Loan Litigation, Debtor has made significant payments to his now former attorney to pay off these fees. He also took out several short-term unsecured loans to pay the fees—debt that he continues to pay on a monthly basis.
29. He has incurred an additional $19,000 in legal fees associated with the present adversary proceeding. 30. Per Debtor's budget, he currently spends $818 per month on expenses related to his legal fees. At times, he has spent over $1,000 a month on these fees. At his deposition in June of 2021, Debtor indicated that he was not paying toward the Federal Loans because he was, instead, paying his attorney.
31. Debtor spends at least some of his income dining out at steakhouses. For instance, in 2019, he spent approximately $1,100 on these meals.
32. Starting in May of 2020, Debtor began spending a significant amount of his income on gun-related expenses. He apparently used COVID-related stimulus funds on these expenses in the wake of "riots" following the death of George Floyd.
Conclusions of Law Summary Judgment StandardSummary judgment is appropriate if the pleadings and affidavits on file show there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). At the summary judgment stage, the court's role is not to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine issue for trial—"whether, in other words, there are any genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A factual dispute is "genuine" only if there is sufficient evidence for a reasonable fact-finder to find in favor of the nonmoving party. Id. at 248, 106 S.Ct. 2505. For a fact to be material, it must be "outcome determinative under governing law." Contreras v. City of Chicago , 119 F.3d 1286, 1291-92 (7th Cir. 1997).
The moving party bears the burden of establishing that there is no genuine issue about any material fact and that the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In determining whether there is a genuine issue of material fact, the Court must view the evidence and draw all reasonable inferences in the light most favorable to the non-moving party. E.E.O.C. v. Sears, Roebuck & Co. , 233 F.3d 432, 436-37 (7th Cir. 2000). While the Court views the record in the light most favorable to the non-moving party, the non-moving party must still point to specific evidence that would be admissible at trial, which "could support judgment in [non-movant's] favor ...." Marr v. Bank of Am., N.A. , 662 F.3d 963, 966 (7th Cir. 2011).
The Court notes that it struck Debtor's initial response brief, certain of his designated evidence, and his supporting affidavit because they wholly failed to comply with applicable national and local rules and/or contained inadmissible evidence. Debtor was given an opportunity to file a new supporting brief but was cautioned that the Court would not tolerate any further deviance from applicable rules. Debtor, now acting pro se , has filed a new response brief, along with supporting designated evidence, that sufficiently complies with Federal Rule of Civil Procedure 56 and S.D. Ind. B-7056-1(b). On its part, DOE did not file a new reply brief to Debtor's refiled response. While the Court indicated that DOE could file a new reply brief, it was not required to do so.
The Court notes that in his refiled response, Debtor has largely abandoned an argument he made in his initial response that he was wrongly dismissed from Butler's pharmacy program out of personal animus. That argument was, at one time, central to this litigation and the Private Loan Litigation and was the subject of protracted discovery disputes in both proceedings.
JurisdictionThe Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(2)(I). The parties have consented to the Court's entry of final judgments and orders.
11 U.S.C. § 523(a)(8)On summary judgment, the DOE argues that Debtor cannot meet the standard applicable to Bankruptcy Code § 523(a)(8) for the discharge of student loan indebtedness. That provision of the Bankruptcy Code provides in relevant part:
A discharge under § 727 ... of this title does not discharge an individual debtor from any debt—(8) unless excepting such debtor from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for—
(A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in party by a governmental unit ...; or
(ii) an obligation to repay funds received as an educational benefit, scholarship or stipend;
(B) or any other educational loan that is a qualified loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.
The Bankruptcy Code does not define "undue hardship" as used in § 523(a)(8), but the statutory text suggests that Congress did not mean to permit "garden-variety" hardship of the kind accompanying all bankruptcy filings. O'Hearn v. Educ. Credit Mgmt. Corp. (In re O'Hearn) , 339 F.3d 559, 564 (7th Cir. 2003). In the Matter of Roberson , 999 F.2d 1132, 1135 (7th Cir. 1993), the Seventh Circuit Court of Appeals adopted the three-prong test for undue hardship articulated in Brunner v. New York State Higher Educ. Servs. Corp ., 831 F.2d 395, 396 (2d Cir. 1987).
Under Brunner , a debtor must establish by a preponderance of the evidence that: (1) the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for himself and his dependents if forced to repay the loans; (2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion for the repayment period of the student loans; and (3) the debtor has made good faith efforts to repay the loans. Brunner , 831 F.2d at 396. A debtor "has the burden of establishing each element of the test by a preponderance of the evidence." Goulet v. Educ. Credit Mgmt. Corp. , 284 F.3d 773, 777 (7th Cir. 2002) (citing Grogan v. Garner , 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ). The debtor must prove all three prongs; the failure to prove any one of them defeats their claim of dischargeability. Id.
Recently, the Seventh Circuit has cautioned against applying this multi-factor test so restrictively as to overtake the language of the statute itself, which requires only "undue hardship." Krieger v. Educ. Credit Mgmt. Corp. , 713 F.3d 882, 884-85 (7th Cir. 2013) (warning against allowing "judicial glosses, such as the language in Roberson and Brunner , to supersede the statute itself," and noting that the phrase "certainty of hopelessness" sounds more restrictive than the statutory term "undue hardship"). Other courts regard Krieger as softening the Brunner "certainty of hopelessness" framework for the second prong. See, e.g., Manion v. Modeen (In re Modeen) , 586 B.R. 298, 303-04 (Bankr. W.D. Wis. 2018) (explaining that the Seventh Circuit has "relented" on the high bar set out in Roberson , looking instead as to whether "there is not a brighter future in store" or "exceptional hopeless circumstances").
Of course, the Seventh Circuit could have abandoned the rather draconian standards of Brunner and its judicial evolution; alas, it did not.
The first prong of the Brunner test requires a showing that Debtor cannot maintain even a minimal standard of living, based on current income and expenses, if forced to repay the student loans. Brunner , 831 F.2d at 396 ; Roberson , 999 F.2d at 1135. The court must determine whether repaying the loans now "would cause [the debtor's] standard of living to fall below that minimally necessary." Clark v. U.S. Dep't of Educ. (In re Clark) , 341 B.R. 238, 249 (Bankr. N. D. Ill. 2006) (quoting O'Hearn , 339 F.3d at 564 ) (internal quotation marks omitted). This element requires showing "more than simply tight finances." Kehler v. Nelnet Loan Servs. (In re Kehler) , 326 B.R. 142, 147 (Bankr. N.D. Ind. 2005) (citing Penn. Higher Educ. Assistance Agency v. Faish (In re Faish) , 72 F.3d 298, 306 (3d Cir. 1995), cert. denied , 518 U.S. 1009, 116 S.Ct. 2532, 135 L.Ed.2d 1055 (1996) ).
Bankruptcy courts have routinely applied this requirement as the bare minimum to assert a claim of "undue hardship." Id . This prong requires the court to review Debtor's current financial circumstances to determine if repaying the student loans would cause his standard of living to fall below a standard that is minimally necessary. Id . A "minimally necessary" standard of living is one that meets the basic needs of the debtor and the debtor's dependents for food, shelter, clothing and medical treatment. In re Johnson , 577 B.R. 895, 903 (Bankr. D. Kan. 2017). "Simply put, it is living ‘within the strictures of a frugal budget in the foreseeable future.’ " In re Innes , 284 B.R. 496, 504 (D. Kan. 2002).
This prong does not require a debtor to live at or below the poverty level in order to repay the loan; however, the loan will still be nondischargeable even if the debtor shows that repayment would require the debtor to make major personal and financial sacrifices and to live within a restricted budget. In re Kehler , 326 B.R. 142, 147 (Bankr. N.D. Ind. 2005).
The DOE argues that Debtor has been able to pay $800 or more a month on legal fees since he initiated the Private Loan Litigation. The DOE further insists that he could afford to pay these fees even without the income from his position at Walmart. And because these legal fees and related debts have been, or soon will be repaid, DOE contends that Debtor will eventually be able to afford student loan payments of at least $800 a month.
Based on Debtor's current budget, it does not appear that Debtor could maintain a minimal standard of living if forced to repay the Federal Loans. Per the budget Debtor provided the DOE and included in his amended summary judgment response, Debtor nets $2,850 from "his full-time job." After expenses, Debtor asserts that he has a monthly deficient of $11. His budget does include some discretionary spending, e.g. , $13.99 for Netflix and $30 for a gym membership, but none of them (with the exception of his legal bills) strike the Court as excessive given that his living expenses are otherwise modest.
While his additional income from Walmart, which was seemingly excluded from his budget, would presumably allow him to pay something meaningful toward the Federal Loans, the Court agrees with Debtor that Brunner does not require Debtor to work more than 40 hours a week. See Mudd v. U. S. (In re Mudd) , 624 B.R. 676, 688 (Bankr. D. Neb. 2020) (citing Neal v. N.H. Higher Educ. (In re Neal) , 354 B.R. 583, 589 (Bankr. D.N.H. 2006) ). The Court concedes that Debtor will eventually pay off his legal fees, but until he does, the Court cannot definitively say, at least on summary judgment, that he can afford to concurrently pay both his student loans and legal fees.
Based on the foregoing, the Court concludes that the DOE is not entitled to summary judgment in its favor as to the first Brunner prong. In the very last, factual issues remain as to whether Debtor could maintain a minimal standard of living if forced to repay the Federal Loans.
Under the second prong of the Brunner standard, Debtor must also show that he is presently unable to repay the debt and that there are "additional, exceptional circumstances" making it improbable he will ever be able to pay. Roberson , 999 F.2d at 1136. This prong "properly recognizes the potential continuing benefit of an education, and imputes to the meaning of ‘undue hardship’ a requirement that the debtor show his dire financial condition is likely to exist for a significant portion of the repayment period." Id . at 1135.
As already observed, Debtor will soon pay off his legal fees. Per Debtor's budget, he is currently devoting $818 a month toward the payment of these fees (either directly to counsel or on short-term loans he obtained to pay counsel). Once these obligations are satisfied, Debtor will seemingly be able to devote $800 or more toward the repayment of the Federal Loans. The evidence before the Court also makes clear that Debtor's income from ACE has increased every year and likely will continue to increase, even if just modestly.
It is true that Debtor will likely incur additional living expenses, e.g ., the purchase of a new car, sometime in the near future, but that type of expense does not rise to the level of "exceptional" circumstance under Brunner . Debtor has a business degree from a respected university, has been gainfully employed for more than four years by the same employer, has marketable skills, and is able bodied and relatively young. Based on the record before it, the Court cannot conclude that Debtor has demonstrated "additional, exceptional circumstances" that make repayment of the Federal Loans improbable.
That leaves the third and final prong of Brunner under which the Court must determine whether Debtor has made a "good faith" effort to repay the Federal Loans. The good faith inquiry is guided by the precept that "undue hardship encompasses a notion that the debtor may not willfully or negligently cause his own default, but rather his condition must result from factors beyond his reasonable control." Roberson , 999 F.2d at 1136 (internal quotation omitted). The inquiry includes a determination of "whether the debtor was negligent or irresponsible in conducting his financial affairs such that the debtor's misfortune is self-imposed." Id . (internal quotation omitted). A debtor's good faith to repay a student loan is measured by his efforts to "obtain employment, maximize income, and minimize expenses." Id .
A debtor is not required to have paid a certain percentage or minimum amount of the loan in order to show good faith. Vang v. UW Stout Student Bus. Servs. (In re Vang) , 324 B.R. 76, 85 (Bankr. W.D. Wis. 2005). "If the debtor has not had the financial ability to pay the debt, he will not be penalized as a result." Id . A debtor's failure to make any payments does not prevent the court from making a finding of good faith where the debtor never had the resources to make such payments. Id . The issue, ultimately, is whether the defaults result, not from voluntary choices, but from factors beyond the debtor's reasonable control.
Based on the record before it, the Court cannot conclude that Debtor has made a good faith effort to repay the Federal Loans. A significant portion of Debtor's budget since 2018 has gone toward paying the hefty attorney fees incurred in in the course of the Private Loan Litigation and in the instant proceeding. Certainly, the Court does not wish to suggest that it is per se bad faith for a debtor to incur legal fees in an effort to obtain an undue hardship discharge. But the Court is compelled, at least here, to examine the reasonableness of the fees and how proportional they are to the Debtors’ student loan indebtedness and income.
The amount of fees at issue here strikes the Court as highly disproportionate. As previously indicated, Debtor spent $42,500 in fees in an effort to discharge $80,000 in private student loans. He incurred an additional $19,000 in his litigation with the DOE. In an effort to pay these fees, Debtor obtained several short-term loans and has, at times, paid in excess of $1,000 a month on legal fees—all while insisting that he cannot afford to pay a comparable amount to the DOE. Those payments constitute approximately one-third of his net monthly income (per his budget).
The Court emphasizes that one of the reasons that Debtor's legal fees were likely so high is that in both this proceeding and in the Private Loan Litigation, Debtor set out to establish that Butler wrongly dismissed him from the Pharmacy Program and that his student loans are, therefore, invalid. As attractive as that argument may have been to Debtor, it was a costly and challenging one to pursue, especially in light of his academic struggles in the Pharmacy Program. Had Debtor limited the litigation to the dischargeability of his student loans, rather than their alleged invalidity, he likely would have contained his litigation costs. The Court simply cannot overlook that Debtor voluntarily chose costly and difficult litigation at the expense of making even a single payment to the DOE.
Finally, the Court is not at all clear on how Debtor spent the income he has earned from his second job. His budget seemingly only reflects this income from ACE, which is largely sufficient to satisfy his expenses but for an $11 deficient. Debtor has offered no explanation as to how he has spent his additional earnings other than to afford some visits to steakhouses. As already noted, the complete failure to make even minimal payments on a student loan does not prevent a finding of good faith where the debtor never had the resources to make payments. But, here, it appears that Debtor did have resources to pay something toward the Federal Loans. While the Court will not require a debtor to work more than 40 hours a week to establish undue hardship, if a debtor chooses to do so, he must fully explain why none of this additional income was used to service his student indebtedness. Here, Debtor has failed to offer that explanation.
Despite earning additional income that seemingly exceeds his living expenses, Debtor has also refused to consider a loan repayment program, arguing that it makes little sense to pay any amount on the loans given the interest they bear and the potential tax implications of a loan forgiveness program. The Court disagrees. While participation in a repayment program is not required to show good faith, it is a factor the Court is permitted to consider. See Archibald v. U.S. Aid Funds, Inc. (In re Archibald) , 280 B.R. 222, 289 (Bankr. S.D. Ind. 2002). Furthermore, Debtor's concerns about possible tax consequences for loan forgiveness are unpersuasive given that this Court has previously held that any potential tax liability at the end a repayment period under an income contingent program is too speculative to constitute an undue hardship. See Echelbarger v. U.S. (In re Echelbarger) , 600 B.R. 39, 50-51 (Bankr. S.D. Ind. 2019) (citing Archibald , 280 B.R. at 229 ). The Court finds Debtor's refusal here to consider a repayment program—where he has seemingly had additional disposable income—to be suggestive of a lack of good faith.
The Court does not intend to suggest that the availability of an federal student loan repayment program in and of itself precludes a finding of good faith.
Debtor makes a decent living, lives well above the poverty level, has marketable skills and a college education, is relatively young, and has no dependents or physical disabilities. His failure to devote any income to his student loans or consider any alterative other than costly litigation—litigation that the Court again emphasizes exceeded the question of dischargeability in scope—strikes the Court as something less than the good faith required by Brunner . For this reason, the Court concludes that Debtor has failed to demonstrate a genuine issue of material fact as to the third Brunner prong.
ConclusionIn the absence of a genuine issue of material fact as to the second and third prongs of the Brunner standard, the Court must conclude that the DOE's Motion is well taken. The Court, therefore, GRANTS the Motion and concludes that Debtor's obligation to the DOE is not dischargeable as an undue hardship under § 523(a)(8). The Court will issue a Judgment consistent with this Order contemporaneously herewith.
SO ORDERED: April 27, 2022.
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