Ch. 13 "Undue Hardship" Student Loan Discharge Proceeding Need Not Wait Until End of Case; Ch. 13 Is Valid Way to Pay These Debtors' Attorney Fees

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com


Educational Credit Management Corp. v. Coleman (In re Coleman)
Ninth Circuit Court of Appeals Case No. 06-16477
March 25, 2009 (originally published August 1, 2008, vacated August 22, 2008 for lack of jurisdiction, opinion refiled after district court below certified the matter for interlocutory review)

The Issue
"We consider whether “undue hardship” determinations—whereby bankruptcy courts decide whether student loans qualify for discharge—are ripe in a Chapter 13 case substantially in advance of plan completion." This is an issue of first impression for this Circuit Court.

The Ninth Circuit's Rulings
Yes, in the right circumstances, a Chapter 13 debtor can file an adversary proceeding for an undue hardship discharge determination early in the case.

This adversary proceeding to determine hardship discharge was constitutionally ripe even though filed long before the anticipated discharge because 1) the discharge dispute constituted a “substantial controversy,” 2) the dispute was “definite and concrete” because it was about a specific debt, and 3) it was “of sufficient immediacy and reality” since it relied on only “a single factual contingency,” the completion of plan payments.

The "hardship discharge" was also prudentially ripe: applying the 1967 Supreme Court Abbott Labs opinion to this bankruptcy context, 1) the facts needed to determine if there was “undue hardship" were sufficiently developed in this case for the court to make this determination ("fitness of the issues") and 2) delaying the hardship determination would cause a series of hardships to the debtor, including having to go through the length of a Chapter 13 case without knowing whether a major creditor would be discharged in the case ("hardship of the parties").

In holding 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, the Court went against two other Circuits, the Fifth and the Eighth, and joined one, the Fourth. Interestingly, it buttressed its position by citing an earlier Ninth Circuit Bankruptcy Appellate Panel opinion, In re Taylor, 334 B.R. 747 (1998), which had been overturned on other grounds.

The Critical Facts
Coleman owed more than $100,000 in student loans and had been trying to pay on them since 1999. She filed a Chapter 13 case in 2004. She had worked as a substitute teacher and an art teacher, but was laid off in 2005. A little less than a year after plan confirmation Coleman asked for an "undue hardship" determination under 11 U.S.C.§ 523(a)(8) so that her student loans would be included in the discharge at the end of her case. The creditor, Educational Credit, filed a motion to dismiss for lack of subject matter jurisdiction on ripeness grounds, and the bankruptcy court denied the motion. The U.S. District Court affirmed, and Educational Credit appealed.

The Ninth Circuit's Rationale
The 3-judge panel distinguished between “constitutional ripeness” and “prudential ripeness," citing both Supreme Court and Ninth Circuit precedents.

Constitutional Ripeness
Constitutional ripeness is a jurisdictional prerequisite--a matter must be ripe for adjudication before it can be heard. 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
Even after the jurisdictional hurdle of constitutional ripeness is overcome, the Supreme Court has long held that “[p]roblems of prematurity and abstractness may well present ‘insuperable obstacles’ to the exercise of the Court’s jurisdiction, even though that jurisdiction is technically present" (citing Supreme Court decisions in 1947 and 1972). .

The Ninth Circuit panel at this point made the critical decision that a 1977 Supreme Court two-part test for determining the prudential component of ripeness in the administrative context was also applicable to this bankruptcy context. Under Abbott Labs. v. Gardner, 387 U.S. 136, 149
(1967), prudential ripeness turns on 1) “the fitness of the issues for judicial decision” and “2) the hardship of the parties of withholding judicial consideration.”

1) Fitness of the issues:
A case is not "fit" if facts need to be further developed before the court can make a decision in the case.

Here, 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, so that delaying that determination a relatively short time to the Chapter 13 discharge date “is unlikely to provide much, if any, additional benefit to the bankruptcy court’s resolution of the issue.”

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 facts 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. But here the facts were sufficiently well developed for the bankruptcy court to determine the undue hardship issue.

Importantly, the Court disagreed with the Eighth Circuit by holding that the hardship determination does NOT need to be made in reference to the debtor's circumstances at the time of discharge; there is no such timing requirement in § 523(a)(8).

2) Hardship of the parties:
On the “hardship of the parties” prong of the prudential ripeness test, the Court held that "[h]ardship to the debtor from postponing a decision in this situation supports a finding of ripeness."

Looking exclusively to the potential hardship to the debtor (without even a passing reference to any potential hardship to the student loan creditor), the Court was very understanding of a debtor's practical circumstances. 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 argued, some might say speculatively, that because the undue hardship exception is narrow and difficult for debtors to establish, they need an attorney to do so, and if they could not afford to pay up-front for that attorney in a Chapter 7 case they should be able to finance that representation through the mechanism for paying debtors' attorneys through Chapter 13. Because I believe the exact wording of the Court on this is so interesting, here is the entire pertinent excerpt, with all citations and footnotes deleted:

Theoretically, Coleman could convert her case to a Chapter 7 bankruptcy, assuming that she meets the requirements for filing under that Chapter, and receive a discharge under 11 U.S.C. § 727(a). However, it appears the reason Coleman filed under Chapter 13 rather than Chapter 7 was that she was unable to afford an up-front payment for the undue hardship litigation. In Chapter 7, debtors’ attorneys may not be paid from the estate, so unless the attorney is paid up-front, she is unlikely to be paid. In a Chapter 13, however, the attorney is often paid as part of the plan.

Because Coleman apparently cannot finance the undue hardship litigation up-front, she would have to proceed with the undue hardship litigation pro se, if at all.

A fundamental purpose driving the bankruptcy system is to “relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.” Debtors who are primarily burdened by student debt will not emerge from bankruptcy with a “fresh start” if those student loan debts are not dischargeable—and if they are forced to pursue the undue hardship matter pro se, the likelihood of a successful undue hardship hearing is probably substantially reduced given the complexity of the inquiry. Because the undue hardship standard is extremely difficult to meet, a debtor who would meet the undue hardship standard and yet is unable to obtain an undue hardship determination because it is not yet ripe may be forced to rely on public benefits—or may turn to credit as a means of meeting their basic needs. 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. [Emphasis added.]

The Bottom Line
This opinion gives debtors’ attorneys clear authority in Chapter 13 cases, in the appropriate circumstances, to file “undue hardship” adversary proceedings early in the case. This authority is particularly important in this Circuit to the extent that the 1998 In re Taylor BAP opinion has been uncertain authority, having been overturned on other grounds.

But the opinion also provides ammunition for attorneys of student loan creditors to argue lack of ripeness when the facts on hardship have not. been sufficiently developed, such as when a debtor brings the nondischargeability proceeding when her capacity for future income is unresolved or she does not have a sufficiently long history of attempted loan payments.

Finally, this opinion invites debtors’ attorneys confronted with a new client who has a strong “undue hardship” case, but no up-front attorney fees for litigating it, to think seriously about filing a Chapter 13 case instead of Chapter 7, when otherwise legally and ethically appropriate to do so.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

New Litigation Reports on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

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