Chief Bankruptcy Judge Cecelia G. Morris of the Southern District of New York wrote an opinion in January 2020 where she said that some courts have incorrectly interpreted the Brunner test to impose “punitive standards” regarding the discharge of student loans. Rosenberg v. N.Y. State Higher Education Services Corp. (In re Rosenberg), 610 B.R. 454, 459 (Bankr. S.D.N.Y. Jan. 7, 2020).
On cross motions for summary judgment, Judge Morris followed her understanding of Brunner in discharging $220,000 in student loans because the debt had been accelerated and the debtor had negative monthly income of $1,500 after living expenses. She said that the lender had not proffered evidence to rebut the debtor’s factual allegations designed to comply with the Brunner standard. To read ABI’s report, click here.
On appeal, District Judge Philip M. Halpern of White Plains, N.Y., reversed, called for a trial and held that neither side was entitled to summary judgment.
Judge Halpern is giving the lender a second bite at the apple. His September 29 opinion is a roadmap for evidence the lender could submit at trial to overcome its inadequate response to the debtor’s motion for summary judgment. The opinion seems to require that debtors submit facts on summary judgment to counter defenses the lender never raised.
The Debtor’s Income and Debt
The debtor’s means test listed about $37,500 in annual pre-tax income. His Schedules I and J showed monthly net income after taxes of about $2,500 and expenses of some $4,000, giving him negative current monthly income of about $1,500. The lender did not object to the schedules, leading Judge Morris to say that the debtor’s “income and expenses [are] undisputed.” Id. at 460.
The 45-year-old debtor had incurred the student loans as an undergraduate and in law school. He passed the bar but worked as a lawyer less than three months before deciding that he couldn’t stomach being a lawyer. Recently, he ran a camping equipment retail store in Brooklyn that failed and was employed as a hiking and camping guide when the litigation took place.
The debtor received a general discharge in chapter 7 and filed a complaint to discharge his student loans as imposing an “undue hardship” under Section 523(a)(8). The lender and the debtor filed cross motions for summary judgment. In her 12-page opinion, Judge Morris granted the debtor’s motion and discharged the student loans.
The lender appealed.
Brunner Applied to the Facts
Judge Halpern evaluated the grant of summary judgment under the Brunner standard, beginning with the first test regarding the debtor’s income and his ability to maintain a minimal standard of living. See Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987).
Judge Halpern acknowledged that the debtor had negative monthly income of $1,500 after living expenses. He conceded that the numbers were “accurate.” Although the lender had not argued that the expenses were excessive, Judge Halpern said that the debtor offered “no substantive explanation as to why his expenses are necessary to maintain a minimal standard of living and points to no admissible evidence supporting his conclusory argument that they are, indeed, necessary.”
Judge Halpern also said that the debtor “failed to show how he would be unable to pay the Student Loan under a repayment plan available to him and maintain a minimal standard of living.”
Identifying disputed facts, Judge Halpern said the debtor was not entitled to summary judgment on the first prong.
On the other side of the fence, Judge Halpern said that the lender was not entitled to summary judgment for failure “to make a substantive showing regarding the necessity of Plaintiff’s expenses or his ability to maintain a minimal standard of living.” Curiously, therefore, Judge Halpern faulted the debtor for failing to answer defenses that he faulted the lender for failing to raise.
Judge Halpern next dealt with the second prong of the Brunner test, requiring the debtor to show “additional circumstances” indicating that the financial circumstances are likely to persist for a significant portion of the repayment period.
In that regard, Judge Morris said that the entire $220,000 loan had been accelerated, allowing the lender to garnish the debtor’s income, which was already insufficient to pay living expenses. In other words, in the opinion of Judge Morris, there was no “repayment period” because the loan had been accelerated.
Regarding future income-generating ability, Judge Halpern faulted the debtor for failing to show that he had “maximized his earning potential.” He said that the debtor had not “put forth admissible evidence establishing that there are no genuine issues of material fact that there are ‘exceptional circumstances, strongly suggestive of continuing inability to repay over an extended period of time,’” quoting In re Traversa, 444 F. App’x 472, 474 (2d Cir. 2011).
Similarly, the lender had not made a required showing for summary judgment in its favor, Judge Halpern said. The lender had harped on the debtor’s refusal to use his legal training but “has not addressed a variety of factual issues, including” those that the debtor had raised.
Thus, neither side was entitled to summary judgment on Brunner’s second prong.
Brunner’s third test examines the debtor’s good faith attempt at repaying the loans. On that issue, Judge Morris had said that the debtor sometimes had not paid installments in full but had missed only 16 payments since the consolidated loan was made in 2005. She noted that the debtor had requested and obtained forbearances on five occasions.
Judge Halpern faulted both sides for filing to educe “admissible evidence.” He said that the debtor admitted to filing bankruptcy to discharge student loans, and he referred to the debtor’s decision to abandon the practice of law. He also said that the debtor had “no interest in rehabilitating the debt through a repayment program.”
That “constellation of evidence,” Judge Halpern said, “certainly suggests a lack of good faith and that Plaintiff has, indeed, placed himself in this predicament.” He barred the debtor from summary judgment on the third Brunner test.
The lender likewise failed on the third test. Judge Halpern said the lender made no “argument concerning the reasons for Plaintiff’s various deferments and forbearances.”
Judge Halpern concluded that neither party was entitled to summary judgment on account of material factual disputes. He expressed “no opinion as to whether the Student Loan is dischargeable.”
Commentary
The following commentary and analysis were provided to ABI by Prof. Chrystin Ondersma of Rutgers Law School. A magna cum laude graduate of Harvard Law School, she is a Professor of Law and Judge Morris Stern Scholar:
Many “undue hardship” decisions have run away from the statutory language, requiring far more than undue hardship. Judge Morris’ opinion was consistent with both Brunner precedent and the statutory language. By contrast, Judge Halpern both ignores precedent under Brunner and seems to be looking for more than an undue hardship showing.
On prong 1, the correct test is whether a debtor can meet a minimum standard of living based on current income and expenses — not in some alternate universe. The debtor's income is negative under the means test — the very test designed to ascertain how much income the debtor has after meeting necessary/reasonable expenses. No one disputed those numbers — the fact that they come from the means test should be enough to show they are reasonable — that’s evidently what Congress thought when they crafted the means test anyway! (We can talk about all of the problems with the means test another day!)
On prong 2, the correct test is whether this situation will persist for a substantial portion of the repayment period — not forever! As Judge Morris explained, the repayment period has passed! So, of course, this element is met.
On prong 3, good faith, this one is tricky to interpret in a way that is consistent with the statutory language as Congress didn’t say anything about requiring good faith, only that the repayment would constitute an undue hardship. Judge Morris correctly said it would be inappropriate to consider things like reasons for filing, whether debtor consolidated, etc. Although some courts have gone too far in requiring the debtor to have made student loan payments even when they clearly couldn’t afford to have done so (doing so would require them to give up some basic necessity), that wasn’t even an issue here because the debtor had made almost all of the required payments, plus some extra payments when the loan was in forbearance. Halpern wants evidence of efforts to maximize income and minimize expenses (and laughably seems to conclude that moving OUT of New York City counts against efforts to minimize expenses).
I trust that Judge Morris will be able to craft a bulletproof opinion on remand, and I hope she can do so in a way that preserves her correct legal analysis but also gives the district court what it is insisting on. It shouldn’t be too difficult to establish why the expenses are reasonable, given that they come straight out of the means test, and it would be helpful (in terms of satisfying the district court) if the debtor has been applying for some higher paying jobs so that they can show they made the effort but cannot find a higher paying job.
Chief Bankruptcy Judge Cecelia G. Morris of the Southern District of New York wrote an opinion in January 2020 where she said that some courts have incorrectly interpreted the Brunner test to impose “punitive standards” regarding the discharge of student loans. Rosenberg v. N.Y. State Higher Education Services Corp. (In re Rosenberg), 610 B.R. 454, 459 (Bankr. S.D.N.Y. Jan. 7, 2020).
On cross motions for summary judgment, Judge Morris followed her understanding of Brunner in discharging $220,000 in student loans because the debt had been accelerated and the debtor had negative monthly income of $1,500 after living expenses. She said that the lender had not proffered evidence to rebut the debtor’s factual allegations designed to comply with the Brunner standard. To read ABI’s report, click here.
On appeal, District Judge Philip M. Halpern of White Plains, N.Y., reversed, called for a trial and held that neither side was entitled to summary judgment.
Judge Halpern is giving the lender a second bite at the apple. His September 29 opinion is a roadmap for evidence the lender could submit at trial to overcome its inadequate response to the debtor’s motion for summary judgment. The opinion seems to require that debtors submit facts on summary judgment to counter defenses the lender never raised.