Hedlund v. The Educational Resources Institute Inc.

Summarized by Dean Rallis , Hahn & Hahn, LLP
12 years 9 months ago

Citation:

No. 12-35258/D.C. No. 6:11-cv-6281-AA (for publication)

Tag(s):

Ruling:

The Ninth Circuit held that the Bankruptcy Court's findings in support of its order granting a partial discharge of the debtor's student loans under §523(a)(8) were not clearly erroneous, reversing the District Court's order reversing the Bankruptcy Court.

Procedural context:

After filing bankruptcy, the debtor commenced an adversary proceeding seeking a partial discharge of his student loans. After trial, the Bankruptcy Court determined that the debtor satisfied the 3-prong test for "undue hardship" and granted a partial discharge of all but a portion of his student loans. On appeal, the District Court, applying a de novo standard of review of the Bankruptcy Court's finding of the debtor's "good faith," reversed and reinstated the entirety of the student loans. The debtor appealed such ruling to the Ninth Circuit.

Facts:

The debtor incurred student loans approximating $100,000 to finance his law school education. After three unsuccessful attempts to pass the bar exam, the debtor secured employment with a modest compensation of $10/hour. After considerable effort and time, the debtor was unable to reach agreement with his student loan lenders to structure a repayment plan consistent with his income. The lenders sought enforcement through wage garnishment and attaching the debtor's bank account. Shortly thereafter, the debtor filed a chapter 7 petition and commenced an adversary proceeding seeking a partial discharge of his student loans. After trial, the Bankruptcy Court applied the 3-prong test for "under hardship" under Brunner v New York Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987) and found that (i) the debtor could not have maintained a minimal standard of living, if required to repay the full loans, (ii) circumstances indicated that the debtor's inability to repay his loans would persist into the future, and (iii) the debtor made a good faith effort to repay his loans. Based on such findings, the Bankruptcy Court ruled in the debtor's favor and discharged all but $32,080 of his student loans. On appeal, the District Court, applying a de novo standard of review of the Bankruptcy Court's finding of "good faith," concluded that such finding was erroneous, reversed the Bankruptcy Court's ruling and reinstated the full amount of the student loans. The debtor appealed to the Ninth Circuit. The Ninth Circuit determined that the District Court's application of a de novo standard of review was improper, and that the correct standard of review of the "good faith" prong is "clear error." The Ninth Circuit, being in "as good a position as the district court to review the findings of the bankruptcy court," then considered the Bankruptcy Court's "good faith" ruling. The Ninth Circuit determined that (a) the Bankruptcy Court properly applied the 3-prong test, and (b) the factual findings supporting the Bankruptcy Court's ruling that the debtor satisfied the "good faith" prong were not clearly erroneous. Accordingly, the Ninth Circuit reversed the District Court's holding and reinstated the partial discharge ordered by the Bankruptcy Court.

Judge(s):

PREGERSON, TASHIMA and SMITH, Circuit Judges

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