by Andrew Toth-Fejel, Bankruptcy Litigation Services for Attorneys, Andy@BLSforAttorneys.com
Educational Credit Management Corp. v. Coleman, (9th Cir 2008)
Case # 06-16477
Published 8/1/08
***ON AUGUST 22, 2008 THE 9TH CIRCUIT COURT OF APPEALS VACATED THIS AUGUST 1, 2008 OPINION BECAUSE IT APPARENTLY DETERMINED IN THE INTERIM THAT IT DID NOT HAVE JURISDICTION TO CONSIDER THE APPEAL FROM THE DISTRICT COURT, SINCE THE BANKRUPTCTY COURT'S ORDER BEING APPEALED FROM WAS AN INTERLOCUTORY ORDER. LINK HERE TO SEE THE CIRCUIT COURT'S VACATING ORDER. THE CASE WAS REMANDED TO THE DISTRICT COURT TO DETERMINE WHETHER IT WOULD CERTIFY THE CASE FOR APPEAL. IF THAT COURT DOES SO, AND THE 9TH CIRCUIT THEN DETERMINES IT DOES INDEED HAVE JURISDICTION, THIS NOW-VACATED OPINION MAY BE RE-PUBLISHED. IN THE MEANTIME IT IS NOT GOOD LAW. AT BEST IT IS SOME INDICATION OF HOW THE 9TH CIRCUIT MAY RULE ON THIS ISSUE IN THE FUTURE, IN THIS CASE OR OTHERWISE.***
On August 1, 2008 the 9th Circuit Court of Appeals ruled that a Chapter 13 debtor could get a judicial determination whether her student loans constituted an “undue hardship” and were thus dischargeable without waiting until close to or after the discharge at the end of the case. Going against two other Circuits, the Fifth and the Eighth, and joining one other Circuit, the Fourth, the 9th Circuit held that the matter was ripe for adjudication, although the debtor’s Chapter 13 case was less than a year past confirmation of debtor’s five-year plan. Interestingly, it buttressed its position by citing an earlier 9th Circuit Bankruptcy Appellate Panel opinion, In re Taylor, 334 B.R. 747, 751-52 (1998), which had been overturned on other grounds.
The panel applied U.S. Supreme Court standards for “constitutional ripeness” and “prudential ripeness”.
Constitutional ripeness existed here because 1) a “substantial controversy” arose from debtor’s attempt to discharge the debt and the student loan creditor’s objection to the discharge, 2) this controversy was “definite and concrete, not hypothetical or abstract” because it was about a specific debt, and 3) was “of sufficient immediacy and reality” and not “impermissibly speculative” since it relied on only “ a single factual contingency,” her completion of plan payments, instead of a “series of contingencies.”
Prudential ripeness turns on “the fitness of the issues for judicial decision” and “the hardship of the parties of withholding judicial consideration.”
On the “fitness” issue the Court of Appeals determined that the undue hardship issue requires a bankruptcy court to look usually far into the future to weigh the debtor’s ability to repay the debt during the lengthy term of the loan, and that delaying a relatively short time “is unlikely to provide much, if any, additional benefit to the bankruptcy court’s resolution of the issue.” And as for whether there has been enough time to determine whether the debtor has made a sufficient good faith efforts to repay the debt, that depends on the timing of each case—here the Court determined that debtor’s attempts to repay from 1999 until her Chapter 13 filing in 2004 was a sufficient time for the bankruptcy court to make this evaluation. (The Court strongly implied that a debtor who files her Chapter 13 case soon after becoming liable on her student loans would not have a ripe controversy.) Importantly, the Court disagreed with the Eighth Circuit in holding that the “hardship” determination does NOT need to be made IN REFERENCE TO THE TIME OF DISCHARGE; there is no such timing requirement in § 523(a)(8).
On the “hardship of the parties” prong of the prudential ripeness test, the Court became very pragmatic and frank, at least as to the hardship to the debtor. It stated that subjecting a debtor to committing all her disposable income for five years is “a considerable burden to bear without any guarantee that the debt will be ultimately discharged.” Fascinatingly, the Court acknowledged that the primary reason the debtor was still in her Chapter 13 case, instead of converting to Chapter 7 when her income was reduced, was because she could not pay the up-front attorney fees in a Chapter 7 case to fight the “undue hardship” battle whereas in a Chapter 13 case these fees could be spread out over time. The Court concluded by relying on the “fresh start” purpose of bankruptcy in candidly stating: “In a case where a debtor faces genuine undue hardship from student loan debt, the debtor’s best shot at a fresh start may be to litigate the matter in a Chapter 13 case.”
BOTTOM LINE: To the extent that the 1998 In re Taylor BAP opinion has been uncertain authority, having been overturned albeit on other grounds, and given that there has been apparently NO OTHER Circuit ruling on this, this brand new 9th Circuit opinion gives Chapter 13 debtors’ attorneys, in the appropriate circumstances, strong ammunition to file “undue hardship” adversary proceedings earlier rather than later. And this case also provides some guidance for student loan creditors to argue lack of ripeness in the appropriate cases. Finally, this opinion virtually invites debtors’ attorneys confronted with a new client who had a good “undue hardship” case but no way to pay up-front attorney fees to litigate it, to think seriously about filing a Chapter 13 case instead of Chapter 7, when it is legally and ethically fitting to do so.
On August 1, 2008 the 9th Circuit Court of Appeals ruled that a Chapter 13 debtor could get a judicial determination whether her student loans constituted an “undue hardship” and were thus dischargeable without waiting until close to or after the discharge at the end of the case. Going against two other Circuits, the Fifth and the Eighth, and joining one other Circuit, the Fourth, the 9th Circuit held that the matter was ripe for adjudication, although the debtor’s Chapter 13 case was less than a year past confirmation of debtor’s five-year plan. Interestingly, it buttressed its position by citing an earlier 9th Circuit Bankruptcy Appellate Panel opinion, In re Taylor, 334 B.R. 747, 751-52 (1998), which had been overturned on other grounds.
The panel applied U.S. Supreme Court standards for “constitutional ripeness” and “prudential ripeness”.
Constitutional ripeness existed here because 1) a “substantial controversy” arose from debtor’s attempt to discharge the debt and the student loan creditor’s objection to the discharge, 2) this controversy was “definite and concrete, not hypothetical or abstract” because it was about a specific debt, and 3) was “of sufficient immediacy and reality” and not “impermissibly speculative” since it relied on only “ a single factual contingency,” her completion of plan payments, instead of a “series of contingencies.”
Prudential ripeness turns on “the fitness of the issues for judicial decision” and “the hardship of the parties of withholding judicial consideration.”
On the “fitness” issue the Court of Appeals determined that the undue hardship issue requires a bankruptcy court to look usually far into the future to weigh the debtor’s ability to repay the debt during the lengthy term of the loan, and that delaying a relatively short time “is unlikely to provide much, if any, additional benefit to the bankruptcy court’s resolution of the issue.” And as for whether there has been enough time to determine whether the debtor has made a sufficient good faith efforts to repay the debt, that depends on the timing of each case—here the Court determined that debtor’s attempts to repay from 1999 until her Chapter 13 filing in 2004 was a sufficient time for the bankruptcy court to make this evaluation. (The Court strongly implied that a debtor who files her Chapter 13 case soon after becoming liable on her student loans would not have a ripe controversy.) Importantly, the Court disagreed with the Eighth Circuit in holding that the “hardship” determination does NOT need to be made IN REFERENCE TO THE TIME OF DISCHARGE; there is no such timing requirement in § 523(a)(8).
On the “hardship of the parties” prong of the prudential ripeness test, the Court became very pragmatic and frank, at least as to the hardship to the debtor. It stated that subjecting a debtor to committing all her disposable income for five years is “a considerable burden to bear without any guarantee that the debt will be ultimately discharged.” Fascinatingly, the Court acknowledged that the primary reason the debtor was still in her Chapter 13 case, instead of converting to Chapter 7 when her income was reduced, was because she could not pay the up-front attorney fees in a Chapter 7 case to fight the “undue hardship” battle whereas in a Chapter 13 case these fees could be spread out over time. The Court concluded by relying on the “fresh start” purpose of bankruptcy in candidly stating: “In a case where a debtor faces genuine undue hardship from student loan debt, the debtor’s best shot at a fresh start may be to litigate the matter in a Chapter 13 case.”
BOTTOM LINE: To the extent that the 1998 In re Taylor BAP opinion has been uncertain authority, having been overturned albeit on other grounds, and given that there has been apparently NO OTHER Circuit ruling on this, this brand new 9th Circuit opinion gives Chapter 13 debtors’ attorneys, in the appropriate circumstances, strong ammunition to file “undue hardship” adversary proceedings earlier rather than later. And this case also provides some guidance for student loan creditors to argue lack of ripeness in the appropriate cases. Finally, this opinion virtually invites debtors’ attorneys confronted with a new client who had a good “undue hardship” case but no way to pay up-front attorney fees to litigate it, to think seriously about filing a Chapter 13 case instead of Chapter 7, when it is legally and ethically fitting to do so.
THIS OPINION WAS VACATED BY THE 9TH CIRCUIT ON 8/22/08--SEE NOTE AT THE TOP OF THIS REPORT
by Andrew Toth-Fejel, Bankruptcy Litigation Services for Attorneys, Andy@BLSforAttorneys.com
© 2008 Bankruptcy Litigation Support for Attorneys
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