In re: Miller v.

• Court: Court of Appeals for the Sixth Circuit
• Decided: July 28, 2004
• Docket: 03-5167
• Status: Published

Opinion

RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206 2 In re Miller No. 03-5167 ELECTRONIC CITATION: 2004 FED App. 0246P (6th Cir.) File Name: 04a0246p.06 _________________ UNITED STATES COURT OF APPEALS COUNSEL FOR THE SIXTH CIRCUIT ON BRIEF: Stephen P. Hale, HUSCH & EPPENBERGER, _________________ Memphis, Tennessee, Holly N. Knight, HUSCH & EPPENBERGER, Nashville, Tennessee, for Appellant. N. David Roberts, Jr., BAILEY, ROBERTS & BAILEY, In re: PATRICIA M. MILLER, X Knoxville, Tennessee, for Appellee. Debtor. - ________________________ - _________________ - No. 03-5167 - OPINION PATRICIA M. MILLER, > , _________________ Plaintiff-Appellee, - - JULIA SMITH GIBBONS, Circuit Judge. Plaintiff- v. - appellee Patricia Miller sought full discharge of her student - loan debt by filing an adversary complaint in bankruptcy PENNSYLVANIA HIGHER - court notwithstanding that over ninety-nine percent of her - outstanding student loan obligations remained unpaid. The EDUCATION ASSISTANCE bankruptcy court relied on 11 U.S.C. § 105(a) to grant Miller - AGENCY , STUDENT - a partial discharge by dismissing more than half of her student SERVICING CENTER , - loan debt. The district court upheld this discharge. The Defendant-Appellant. N guarantor of Miller’s student loans appealed, arguing that discharge of student loan debt is only available upon a finding of “undue hardship” pursuant to the bankruptcy code, Appeal from the United States District Court 11 U.S.C. § 523(a)(8). For the reasons set forth below, we for the Eastern District of Tennessee at Knoxville. reverse the decision of the district court, which affirmed the No. 02-00378—R. Leon Jordan, District Judge. order of the bankruptcy court, and remand this case for a determination of whether Miller has shown undue hardship Submitted: June 9, 2004 with respect to the portion of her student loans that the court discharged. Decided and Filed: July 28, 2004 I. Before: SILER and GIBBONS, Circuit Judges; REEVES, District Judge.* Miller received a Bachelor of Arts degree from Juniata College in 1988, a Masters of Arts in Philosophy from the University of Tennessee-Knoxville (“UT”) in 1992, and * The Hono rable Danny C. Reeves, United States District Judge for worked towards a Doctorate of Philosophy at UT from 1992 the Eastern D istrict of K entuck y, sitting by de signation.

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to 1997. She failed to complete the requirements for the her adversary action, Miller was employed full-time as an doctoral degree. To pay for her education, Miller received administrative assistant at a construction company and part- various student loans that are presently guaranteed by the time as a call center representative. Pennsylvania Higher Education Assistance Agency (“PHEAA”). After leaving UT, she requested and received The bankruptcy court held a trial on April 30, 2002. The forbearances and deferments on her student loans. court found that all of Miller’s student loan debts were not dischargeable pursuant to 11 U.S.C. § 523(a)(8) because the On May 30, 2001, Miller filed a Chapter 7 bankruptcy full amount of the debts did not impose an undue hardship petition. Shortly thereafter, she filed an adversary action in upon her. Notwithstanding this finding, the bankruptcy court the United States Bankruptcy Court for the Eastern District of granted Miller a partial discharge of her student loan Tennessee against PHEAA seeking discharge of all of her indebtedness. The court decided that Miller’s outstanding student loan debt, which totaled $89,832.16, as of nondischargeable student loan obligation was $34,200.00 and April 26, 2002. At the time that she filed the adversary accordingly dismissed the balance of her student loans, an action, Miller had made payments of only $368.00 towards amount of approximately $55,000.00. PHEAA appealed the her student loans, an amount that represented less than half of judgment of the bankruptcy court to the United States District one percent of her student loan obligations. Miller described Court for the Eastern District of Tennessee. Miller cross- her monthly expenses as follows: appealed. The district court adopted the opinion of the bankruptcy court and dismissed the appeals of both parties. rent: $395.00; PHEAA then filed a timely notice of appeal of the district utility payments: $75.00; court’s decision. cable television: $45.00; telephone charges: $90.00; II. cell phone expenses: $40.00; internet service expenses: $25.00; A discharge in Chapter 7 bankruptcy does not discharge an food: $275.00; individual debtor’s student loan obligations “unless excepting clothes: $75.00; such debt from discharge . . . will impose an undue hardship laundry: $30.00; on the debtor and the debtor’s dependents.” 11 U.S.C. prescriptions, herbs, medical expenses: $65.00; § 523(a)(8). In this case, the bankruptcy court found that magazines/books: $15.00; Miller had not made a showing of undue hardship. transportation (not including auto payments or repair Nevertheless, the court relied on 11 U.S.C. § 105(a), which work): $110.00; provides that a court “may issue any order, process, or auto payment with insurance: $250.00; judgment that is necessary or appropriate to carry out the auto repairs and maintenance: $100.00; and provisions of this title,” to grant Miller a partial discharge of other expenses: $115.10. her student loan obligations.

Miller is single and has no dependents. As of 2001, her gross PHEAA argues that a showing of undue hardship – as annual income was $26,464.00. In that same year, she provided by § 523(a)(8) – is the only means by which a court received a gift of $3,000.00 from a friend and a $300.00 can discharge student loan indebtedness. According to adjustment from the Internal Revenue Service. At the time of PHEAA, since Miller has not made a showing of undue No. 03-5167 In re Miller 5 6 In re Miller No. 03-5167

hardship, none of her educational loan debt is dischargeable. how bankruptcy courts provide debtors with the “benefit of a The central issues of this appeal are, therefore, whether a fresh start”: bankruptcy court can rely on § 105(a) to grant a partial discharge of student loan indebtedness and whether, before a Where a debtor’s circumstances do not constitute undue bankruptcy court grants such a discharge, it must first find hardship, some bankruptcy courts have thus given a that the portion being discharged satisfies the “undue debtor the benefit of a “fresh start” by partially hardship” requirement of 11 U.S.C. § 523(a)(8). In reviewing discharging loans, whether by discharging an arbitrary a bankruptcy case appealed from a district court, this court amount of the principal, interest accrued, or attorney’s reviews the bankruptcy court’s findings of fact for clear error fees; by instituting a repayment schedule; by deferring and conclusions of law de novo. City of White Plains v. A & the debtor’s repayment of the student loans; or by simply S Galleria Real Estate, Inc. (In re Federated Dep’t Stores, acknowledging that a debtor may reopen bankruptcy Inc.), 270 F.3d 994, 999 (6th Cir. 2001). proceedings to revisit the question of undue hardship.

Although the bankruptcy court found that Miller was not Id. Hornsby also explained the need for taking action short of entitled to a complete discharge of her educational loans, the full discharge of a debtor’s student loans in this way: “In a court utilized its § 105(a) powers to partially discharge her student-loan discharge case where undue hardship does not student loans. This court has sanctioned such a procedure. exist, but where facts and circumstances require intervention See Hornsby v. Tenn. Student Assistance Corp. (In re in the financial burden on the debtor, an all-or-nothing Hornsby), 144 F.3d 433, 439-40 (6th Cir. 1998). In Hornsby, treatment thwarts the purpose of the Bankruptcy Act.” Id. at we disagreed with the bankruptcy court’s finding that Chapter 439. 7 debtors had shown that repayment of the entire balance of their student loans would impose an undue hardship upon We construe the language of these passages as providing them. Id. at 438. While we concluded that the debtors were guidance to bankruptcy courts in circumstances where not entitled to a full discharge of their student loans pursuant granting a full discharge of student loan indebtedness is to § 523(a)(8), we found that § 105(a) empowered the unwarranted because the debtor cannot show that excepting bankruptcy court “to take action short of total discharge.” Id. the entire balance of her student loans from discharge would at 438-39. As will be explained below, we view Hornsby as impose undue hardship but where some form of relief seemed authorizing the grant of a partial discharge of a debtor’s warranted – the precise factual conclusion reached about the student loans but only when certain requirements are met. Hornsbys. Therefore, when a debtor does not make a showing of undue hardship with respect to the entirety of her Our holding in Hornsby was that, “pursuant to its powers student loans, a bankruptcy court may – pursuant to its codified in § 105(a), the bankruptcy court . . . may fashion a § 105(a) powers – contemplate granting the various forms of remedy allowing the Hornsbys ultimately to satisfy their relief discussed in Hornsby, including granting a partial obligations to [their loan guarantor] while at the same time discharge of the debtor’s student loans. See DeMatteis v. providing them some of the benefits that bankruptcy brings in Case W. Reserve Univ. (In re DeMatteis), No. 02-3003, 2004 the form of relief from oppressive financial circumstances.” WL 445167, at *3 (6th Cir. Mar. 8, 2004) (“Although the Id. at 440. While the Hornsby decision did not direct the Hornsby decision is not perfectly clear on the question of bankruptcy court as to what precise remedy should be partial discharge, the best reading is that Hornsby does in fact provided to the debtors in that case, the decision did explain contemplate partial discharge under § 105.”). Accordingly, No. 03-5167 In re Miller 7 8 In re Miller No. 03-5167

PHEAA’s assertion that a bankruptcy court must rely debt would be an undue hardship, some bankruptcy exclusively on § 523(a)(8) to grant any discharge of student courts have partially discharged student loans even while loans in bankruptcy must fail. finding the student loans nondischargeable. See, e.g., Griffin v. Eduserv (In re Griffin), 197 B.R. 144, 147 While Hornsby contemplated the grant of a partial (Bankr. E.D. Okla. 1996) (“[I]t would be an ‘undue discharge of student loan debt pursuant to § 105(a), our hardship’ for the Debtors to pay any of the accrued decision did not clearly address whether, in accordance with interest and attorneys’ fees associated with . . . student § 523(a)(8), the debtor must show that the portion of her loans.”); Bakkum v. Great Lakes Higher Educ. Corp. (In student loan debt being discharged would impose an undue re Bakkum), 139 B.R. 680, 684 (Bankr. N.D. Ohio 1992) hardship if that portion was not discharged in bankruptcy. (“The Court, at its discretion, may excuse any portion of Moreover, the decision did not address precisely when “facts the Debtor’s student loan obligation which would create and circumstances” require relief short of full discharge of a an undue hardship.”). debtor’s student loans. Hornsby acknowledged, however, the correct proposition that a bankruptcy court may only act 144 F.3d at 440. The limiting condition placed on this pursuant to § 105(a) “so long as such action is consistent with discussion – “[w]here a debtor’s circumstances do not the Bankruptcy Act.” 144 F.3d at 439. Although § 105(a) constitute undue hardship as to part of the debt but repayment permits a bankruptcy court to use its equity powers to “issue of the entire debt would be an undue hardship” – supports the any order, process, or judgment that is necessary or notion that bankruptcy courts discharge the portion of student appropriate to carry out the provisions of this title,” “[t]he loan debt for which payment would impose an undue equitable powers of section 105(a) may only be used in hardship on the debtor. For example, assume that a debtor furtherance of the goals of the Code.” Childress v. Middleton owes $100,000 in student loans, and repayment of the full Arms, L.P. (In re Middleton Arms, Ltd. P’ship), 934 F.2d 723, amount would impose undue hardship on the debtor but 725 (6th Cir. 1991). As the Supreme Court has recognized, repayment of $40,000 would not. Hornsby indicates that a “whatever equitable powers remain in the bankruptcy courts bankruptcy court would discharge $60,000 of the debt, the must and can only be exercised within the confines of the amount for which repayment would impose an undue Bankruptcy Code.” Norwest Bank Worthington v. Ahlers, hardship.1 The citations quoted by Hornsby also support the 485 U.S. 197, 206 (1988). Therefore, it cannot be true that conclusion that undue hardship must be shown for the Hornsby endorsed the idea that, while § 523(a)(8) sets the discharged amount. Accordingly, at a minimum, we do not condition for “[a] discharge” of student loan indebtedness, a read Hornsby as rejecting any interplay between the undue bankruptcy court could rely on § 105(a) to evade the plain hardship requirement of § 523(a)(8) and the partial discharge language of that provision by granting a partial discharge for of student loans pursuant to § 105(a). reasons other than undue hardship. Furthermore, we point out that, in leading up to its holding, Hornsby framed its discussion of how bankruptcy courts grant 1 In fact, other courts have read Hornsby in this fashion. See N ary v. a partial discharge in these terms: Comp lete Source (In re Nary), 253 B.R. 752, 767 (N.D. Tex. 2000) (“[This court] therefo re adopts the hold ing of Hornsby that § 105(a) Where a debtor’s circumstances do not constitute undue authorizes a bankruptcy court to grant a partial discharge where the undue hardship as to part of the debt but repayment of the entire hardship requirement of § 523(a)(8) is met as to part but no t all of a student loan.”). No. 03-5167 In re Miller 9 10 In re Miller No. 03-5167

We acknowledge that this understanding of Hornsby is at have not cited any authority from our sister circuits that odds with the unpublished opinion of this court in DeMatteis embraces the idea that a partial discharge of student loan debt v. Case Western Reserve University, a decision that we are can be granted without a finding of undue hardship, and not bound to follow. See Bell v. Johnson, 308 F.3d 594, 611 indeed we were unable to locate any such case law. In fact, & n.7 (6th Cir. 2002); Salamalekis v. Comm’r of Soc. Sec., the weight of authority fits squarely with our conclusion. See 221 F.3d 828, 833 (6th Cir. 2000) (both explaining that Saxman v. Educ. Credit Mgmt. Corp. (In re Saxman), 325 unpublished decisions are not binding on this court). The F.3d 1168, 1175 (9th Cir. 2003) (“We therefore conclude that court in DeMatteis rejected the conclusion of the bankruptcy before the bankruptcy court can partially discharge student appellate panel in that case that, in the context of discharging debt pursuant to § 105(a), it must first find that the portion student loans, § 105(a) acts as an “overlay” on § 523(a)(8). being discharged satisfies the requirements under 2004 WL 445167, at *2-3. Rather, the DeMatteis court § 523(a)(8).”); Hemar Ins. Corp. of Am. v. Cox (In re Cox), reasoned that Hornsby should be read as advocating an 338 F.3d 1238, 1243 (11th Cir. 2003) (rejecting debtor “independent § 105 equitable grounds theory.” Id. at *3. argument that § 105 allows a bankruptcy court to partially discharge student loans if the undue hardship burden is not This determination in DeMatteis suggests that the grant of met and instead holding that “[t]he bankruptcy court’s a partial discharge of student loan indebtedness pursuant to equitable powers . . . do not allow it to override the specific § 105(a) need not be made upon a showing of undue hardship statutory language found in § 523(a)(8)”); Educ. Credit with regard to the amount discharged. We cannot accept this Mgmt. Corp. v. Moore, No. 02-17519, 97 Fed. Appx. 88, 89 conclusion. First, we believe that the plain text of the (9th Cir. Mar. 15, 2004) (holding that debtor is not entitled to bankruptcy code as well as the language of Hornsby, as partial discharge of student loans when debtor has not shown already discussed, point to a contrary conclusion. Second, undue hardship pursuant to 11 U.S.C. § 523(a)(8)); Educ. besides ignoring that § 523(a)(8) specifically governs Credit Mgmt. Corp. v. Blair (In re Blair), 291 B.R. 514, 520 discharges of student indebtedness, relying on § 105(a) (B.A.P. 9th Cir. 2003) (finding that bankruptcy court erred in independently provides no rubric with which bankruptcy granting partial discharge of student loan debt when debtor courts are able to evaluate whether to grant a partial discharge had not established undue hardship); see also Tenn. Student of student loan indebtedness to a debtor in bankruptcy. Assistance Corp. v. Mort (In re Mort), 272 B.R. 181, 185 Pursuant to the reading of Hornsby given in DeMatteis, (W.D. Va. 2002) (concluding that “[t]he authority to grant the bankruptcy courts may grant a full discharge of student loan discharge of a student loan debt – whether of the whole debt debt only when the debtor shows that excepting her entire or only a portion thereof – must be conditioned upon a student loan burden would impose an undue hardship, but a finding of undue hardship”); cf. Banks v. Sallie Mae Servicing court may grant a partial discharge – including a discharge in Corp. (In re Banks), 299 F.3d 296, 300 (4th Cir. 2002) excess of fifty percent of outstanding student loan obligations (“Allowing the Debtor to pay off loan principal without first – for whatever reason it views as being encompassed by the permitting the application of the payment to satisfy court’s equitable authority under § 105(a). postpetition interest would reduce the overall amount that the Debtors would have to pay . . . thus allowing the Debtors to In sum, we stress that the requirement of undue hardship accomplish indirectly what they could not accomplish directly must always apply to the discharge of student loans in under the plain language of §523(a)(8), i.e., a partial bankruptcy – regardless of whether a court is discharging a discharge of the interest on their student loan debts without a debtor’s student loans in full or only partially. The parties showing of undue hardship.”) (alteration in original). No. 03-5167 In re Miller 11 12 In re Miller No. 03-5167

While the undue hardship requirement applies to any seeking or obtaining stable employment commensurate with discharge of student loan indebtedness, the bankruptcy code his educational background and abilities.” Id. at 1149-50. itself does not define “undue hardship.” As a result, this court has looked to the test enunciated by the Second Circuit in In considering whether to discharge Miller’s student loans, Brunner v. New York State Higher Education Services Corp., the bankruptcy court first analyzed whether Miller had shown 831 F.2d 395 (2d Cir. 1987), to decide if a debtor has made by a preponderance of the evidence that she satisfied all three the requisite showing of undue hardship. See, e.g., Hornsby, Brunner factors. The court found that Miller did not satisfy 144 F.3d at 437-38; Rice v. United States (In re Rice), 78 F.3d the second and third factors of the Brunner test. According 1144, 1149-50 (6th Cir. 1996). The Brunner test requires a to the bankruptcy court, Miller did not show that her financial three-part showing by the debtor: situation was more than temporary because she is intelligent and well-spoken, albeit underemployed. The court also (1) that the debtor cannot maintain, based on current concluded that Miller had not satisfied Brunner’s good faith income and expenses, a “minimal” standard of living for prong because in the five years since she had left school, she herself and her dependents if forced to repay the loans; had contributed only $368.00 towards repayment of her (2) that additional circumstances exist indicating that this student loans, which totaled almost $90,000, while using such state of affairs is likely to persist for a significant portion “non-essentials” as personal internet service, long distance of the repayment period of the student loans; and telephone service, cell phone service, and cable television. (3) that the debtor has made good faith efforts to repay the loans. Despite not meeting the Brunner factors for undue hardship, the court relied on its “§ 105(a) powers” to partially Brunner, 831 F.2d at 396. This court, however, has not discharge her student loans: formally adopted the Brunner test and may look to other factors, including “the amount of the debt . . . [and] the rate The Debtor, for the most part, leads a modest lifestyle. at which interest is accruing” as well as “the debtor’s claimed PHEAA’s sought-after reduction of the Debtor’s phone expenses and current standard of living, with a view toward expenses and the total elimination of her cable and ascertaining whether the debtor has attempted to minimize the internet services would barely generate a third of the expenses of himself and his dependents.” Hornsby, 144 F.3d funds necessary to meet even the most basic loan at 437 (quoting Rice, 78 F.3d at 1149) (first alteration in consolidation schedule. Further, earnings from original).2 In addition, “the debtor’s income, earning ability, additional hours worked at the Debtor’s second job are health, educational background, dependents, age, accumulated not a permanent solution to this dilemma. The court will wealth, and professional degree” may also be considered. not require the Debtor to work 56 hours per week for the Rice, 78 F.3d at 1149. Finally, a court may inquire into next 25 years in order to repay her student loans. To do “whether the debtor has attempted to maximize his income by so would make her a slave to the loans and would deprive her of any future hope for financial independence. The court also cannot place total reliance on the funds freed up by the discharge of the Debtor’s 2 As we noted in Hornsby, Rice concerned the standard governing credit card bills. Those funds, while substantial, are discharge of Health Education Assistance Loans, but these factors are partially offset by automobile payments and the nonetheless relevant to evaluate the discharge o f ordinary student loans. Hornsby, 144 F.3d at 437 n.7. No. 03-5167 In re Miller 13

inevitable maintenance and replacement costs associated with an older used car. Consequently, when determining whether Miller’s student loans should be partially discharged, the court did not apply the Brunner factors, or any other factors relied upon by this court in making a finding of undue hardship, but rather constructed its own framework for granting a partial discharge. In so doing, the bankruptcy court impermissibly used its equitable authority. Section 523(a)(8) permits the discharge of student loans only upon a finding that denying such discharge would impose undue hardship on the debtor. 11 U.S.C. § 523(a)(8). Relying on § 105 to discharge student loan indebtedness for reasons other than undue hardship impermissibly contravenes the express language of the bankruptcy code. See Ray v. City Bank & Trust Co. (In re C- L Cartage Co.), 899 F.2d 1490, 1494 (6th Cir. 1990) (“Bankruptcy courts . . . cannot use equitable principles to disregard unambiguous statutory language.”). Therefore, because we do not read Hornsby as rejecting the idea that the undue hardship requirement of § 523(a)(8) must be satisfied with the grant of a partial discharge, and because we believe that § 523(a)(8) must apply to all discharges of student loan debt, we remand this case so that the bankruptcy court can determine if Miller has shown undue hardship with respect to the portion of her educational loans that were discharged. III. For the foregoing reasons, we reverse the decision of the district court affirming the order of the bankruptcy court and remand this case to the district court with instructions to remand to the bankruptcy court for proceedings consistent with this opinion.