Skelly v. U.S. Department of Education

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6 UNITED STATES DISTRICT COURT

7 SOUTHERN DISTRICT OF CALIFORNIA

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9 MARSHA D. SKELLY, Case No.: 19-cv-1812-GPC-BLM

10 Plaintiff,

ORDER:

11 v.

(1) GRANTING PLAINTIFF’s

12 U.S. DEPARTMENT OF EDUCATION;

MOTION FOR LEAVE TO

FEDERAL STUDENT AID

13 PROCEED IFP, AND

COMMISSION; FEDLOAN

14 SERVICING,

(2) DENYING PLAINTIFF’S

15 Defendants. MOTION FOR APPOINTMENT OF

COUNSEL.

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18 On September 20, 2019, Plaintiff Marsha D. Skelly (“Plaintiff”), proceeding pro

19 se, filed the instant action against Defendants U.S. Department of Education, Federal

20 Student Aid Commission, and FedLoan Servicing (“Defendants”). Plaintiff seeks relief

21 from further collection of her student loan debt and the return of money deducted from

22 her Social Security Disability Benefits. (ECF No. 1.)1 On September 20, 2019, Plaintiff

23 also filed a motion to proceed in forma pauperis (“IFP”) pursuant to 28 U.S.C. § 1915(a),

24 (ECF No. 2), and a motion for the appointment of counsel. (ECF No. 3.) For the

25 following reasons, the Court GRANTS Plaintiff’s motion to proceed IFP, but DENIES

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27 1 The instant action repeats claims made by Plaintiff in 2017 that ultimately resulted in the sua sponte

28 dismissal of the action for failure to state a claim. See Skelly v. United States Dep’t of Educ., No. 17-cv-

1 the motion for appointment of counsel.

2 I. Factual Background

3 Plaintiff earned a degree in business administration and accounting in 1988. (ECF

4 No. 1 at 2.) Plaintiff incurred $16,000 in student loan debt during her studies. (Id.)

5 Plaintiff has been unable to work since 1993 due to physical ailments. (Id.) Plaintiff

6 subsequently filed for Chapter 7 Bankruptcy and asserts her debts were discharged in

7 1994. (Id.) Plaintiff is unsure if she was afforded the opportunity to request an adversary

8 hearing during her bankruptcy proceedings.2 (Id.)

9 In 1997, the Social Security Administration awarded Plaintiff disability benefits.

10 (Id.) There was a settlement from which the County of San Diego recovered money

11 Plaintiff owed. (Id.) The U.S. Treasury did not challenge the disbursement of the

12 remaining disability settlement funds from Social Security. (Id.)

13 In 2008 and 2013, Plaintiff attempted to discharge her loans due to disability but

14 was denied. (Id.) After contacting a U.S. Department of Education ombudsman in 2013,

15 Plaintiff attempted to consolidate her loans. (Id.) However, the Federal Student Aid

16 Commission contests that the loans were consolidated, and the loan summary shows two

17 sets of loans. (Id.) Plaintiff contends that there is only one set of loans outstanding. (Id.)

18 In March of 2017, Plaintiff spoke to a second ombudsman who noted the account was

19 problematic and referred Plaintiff to a third ombudsman without resolution. (Id.)

20 On May 18, 2017, Plaintiff received a letter from the Federal Student Aid

21 Commission. (ECF No. 1-2 at 4–6.) Plaintiff was informed her loans could not have been

22 discharged in bankruptcy without an undue hardship determination from the court and

23 that Plaintiff has not provided evidence of such a ruling. (Id. at 4.) The Commission thus

24 concluded Plaintiff’s student loan debt was not discharged in bankruptcy.3 (Id.)

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2 In Bankruptcy Court, a plaintiff seeking to determine the dischargeability of a debt must request an

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adversary proceeding. See Fed. R. Bankr. P. 7001(6).

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3 Plaintiff interpreted this letter as an instruction to “seek legal action through civil court for a ruling by

1 Plaintiff asserts her student loan debt, now more than $83,000, is an extreme

2 financial hardship. (ECF No. 1 at 2; ECF No. 1-2 at 3.) Plaintiff notes that she has been

3 subject to U.S. Treasury offsets to her Social Security and IRS refund checks. (ECF No. 1

4 at 2.) These offsets to Plaintiff’s limited income caused her to relocate multiple times to

5 more affordable properties. (Id.) During the pendency of these offsets, Plaintiff received

6 Medicaid health benefits and Supplemental Nutrition Assistance Program benefits. (Id.)

7 II. Whether Plaintiff Has the Ability to Pay Her Filing Fee.

8 All parties instituting any civil action, suit, or proceeding in a district court of the

9 United States, except an application for writ of habeas corpus, must pay a filing fee of

10 $400. 28 U.S.C. § 1914(a). An action may proceed despite a plaintiff’s failure to prepay

11 the entire fee only if she is granted leave to proceed IFP. Andrews v. Cervantes, 493 F.3d

12 1047, 1051 (9th Cir. 2007). “The granting or refusing of permission to proceed [IFP] is a

13 matter committed to the sound discretion of the district court.” Smart v. Heinze, 347 F.2d

14 114, 116 (9th Cir. 1965). To proceed IFP, a plaintiff must submit an affidavit that

15 contains a complete statement of her assets and demonstrates her inability to pay the fee.

16 28 U.S.C. § 1915(a)(1). The plaintiff need not demonstrate that she is completely

17 destitute. Adkins v. E. I. DuPont de Nemours & Co., 335 U.S. 331, 339–40 (1948).

18 Here, Plaintiff declares her current monthly income is insufficient to meet her

19 current expenses. (ECF No. 2.) The Court finds Plaintiff has sufficiently demonstrated

20 her inability to pay the required filing fee pursuant to 28 U.S.C. § 1915(a).

21 III. Whether the Complaint States a Claim for Which Relief May Be Granted.

22 A. Legal Standard for Court’s Sua Sponte Review.

23 When a Plaintiff proceeds IFP, the Court has a sua sponte duty to screen the

24 complaint. 28 U.S.C. § 1915(e)(2). If the complaint is “frivolous or malicious; fails to

25 state a claim on which relief may be granted; or seeks monetary relief against a defendant

26 who is immune from such relief” the court must dismiss the action. See 28 U.S.C. §

27 1915(e)(2)(B); Calhoun v. Stahl, 254 F.3d 845, 845 (9th Cir. 2001) (“[T]he provisions of

28 28 U.S.C. § 1915(e)(2)(B) are not limited to prisoners.”) “The language of §

1 1915(e)(2)(B)(ii) parallels the language of Federal Rule of Civil Procedure [“Rule”]

2 12(b)(6).” Barren v. Harrington, 152 F.3d 1193, 1194 (9th Cir. 1998).

3 Dismissal is warranted under Rule 12(b)(6) if the complaint lacks a cognizable

4 legal theory. Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 534 (9th Cir. 1984);

5 see Neitzke v. Williams, 490 U.S. 319, 326 (1989) (“Rule 12(b)(6) authorizes a court to

6 dismiss a claim on the basis of a dispositive issue of law.”). A complaint may also be

7 dismissed if it presents a cognizable legal theory yet fails to plead essential facts under

8 that theory. Robertson, 749 F.2d at 534. While a plaintiff need not give “detailed factual

9 allegations,” a plaintiff must plead sufficient facts that, if true, “raise a right to relief

10 above the speculative level.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 545 (2007).

11 On a Rule 12(b)(6) motion, a court must accept as true all allegations of material

12 fact and must construe those facts in the light most favorable to the plaintiff.” Resnick v.

13 Hayes, 213 F.3d 443, 447 (9th Cir. 2000). Furthermore, the court has a duty to liberally

14 construe a pro se plaintiff’s pleadings. Id. The court, however, may not “supply essential

15 elements of claims that were not initially pled.” See Ivey v. Board of Regents of the

16 University of Alaska, 673 F.2d 266, 268 (9th Cir. 1982).

17 B. Legal Standard for Plaintiff’s Claim of Undue Hardship.

18 Plaintiff requests relief from the further collection of her student loans, which now

19 exceed $83,000. (ECF No. 1 at 3; ECF No. 1-2 at 3.) Mindful that Plaintiff proceeds pro

20 se, the Court construes Plaintiff’s claim of “extreme financial hardship,” (ECF No. 1 at

21 3), as a claim of “undue hardship” pursuant to 11 U.S.C. § 523(a)(8).

22 Student loans are excepted from discharge in a bankruptcy proceeding “unless

23 excepting such debt from discharge . . . would impose an undue hardship on the debtor

24 and the debtor’s dependents.” 11 U.S.C. § 523(a)(8). Thus, to obtain relief from student

25 loans, the debtor must seek a hardship determination through an adversary proceeding.

26 United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 263–64 (2010) (“The Federal

27 Rules of Bankruptcy Procedure require bankruptcy courts to make this undue hardship

28 determination in an adversary proceeding”); Tenn. Student Assistance Corp. v. Hood, 541

1 U.S. 440, 450 (2004) (“Unless the debtor affirmatively secures a hardship determination,

2 the discharge order will not include a student loan debt.”).

3 A plaintiff may request a hearing on the dischargeablity by filing a complaint in

4 federal court. See Fed. R. Bankr. P. 4007(a), 7001(6). Moreover, because these

5 complaints are not among the dischargeability complaints referenced in 11 U.S.C.

6 § 523(c), such complaints “may be filed at any time.” Fed. R. Bankr. P. 4007(b); see

7 Zygarewicz v. Educ. Credit Mgmt. Corp. (In re Zygarewicz), 423 B.R. 909, 913 n.2

8 (Bankr. E.D. Cal. January 15, 2010) (“The dischargeability of a student loan may be

9 determined at any time and in any court.”).

10 When reviewing such a complaint, the Court must assess if the plaintiff alleges a

11 claim upon which relief can be granted, i.e., that the plaintiff’s debt creates an undue

12 hardship within the meaning of 11 U.S.C. § 523(a)(8). “To determine if excepting student

13 loans from discharge will create an undue hardship on a debtor, the Ninth Circuit has

14 adopted the three-part test established by the Second Circuit in Brunner.” Rifino v. United

15 States (In re Rifino), 245 F.3d 1083, 1087 (9th Cir. 2001); see United Student Aid Funds

16 v. Pena (In re Pena), 155 F.3d 1108, 1111-12 (9th Cir. 1998). The debtor must prove “(1)

17 that the debtor cannot maintain, based on current income and expenses, a ‘minimal’

18 standard of living for herself and her dependents if forced to repay the loans; (2) that

19 additional circumstances exist indicating that this state of affairs is likely to persist for a

20 significant portion of the repayment period of the student loans; and (3) that the debtor

21 has made good faith efforts to repay the loans.” In re Rifino, 245 F.3d at 1087 (quoting

22 Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987)).

23 C. Plaintiff’s Complaint Sufficiently Alleges a Claim of Undue Hardship.

24 The first prong of the Rifino test requires the debtor to prove her current income is

25 insufficient to maintain a minimal standard of living. In re Rifino, 245 F.3d at 1087. To

26 meet this requirement the court requires more than temporary financial adversity but

27 stops short of requiring utter hopelessness. Id. at 1088. “The proper inquiry is whether it

28 would be ‘unconscionable’ to require the Debtor to take steps to earn more income or

1 reduce her expenses.” In re Nascimento, 241 B.R. 440, 445 (B.A.P. 9th Cir. 1999).

2 Here, Plaintiff’s monthly income is insufficient to meet her current expenses. (ECF

3 No. 2.) Plaintiff’s expenses, moreover, include little beyond food, shelter, and healthcare.

4 (ECF No. 2.) Consequently, requiring Plaintiff to pay her loans would deprive her of the

5 ability to meet her basic needs and could be understood as unconscionable. Therefore,

6 plaintiff’s complaint, if true, would satisfy the first prong of the Rifino test.

7 The second Rifino prong requires “that additional circumstances exist indicating

8 that this state of affairs is likely to persist for a significant portion of the repayment

9 period of the student loans.” In re Rifino, 245 F.3d at 1087. Plaintiff cannot rely merely

10 on her “current financial situation,” and must point to additional circumstances indicating

11 that her inability to pay “cannot reasonably change.” In re Nys, 446 F.3d 938, 946 n.7

12 (9th Cir. 2006).

13 Here, Plaintiff’s allegations suggest that her financial difficulty is likely to persist.

14 (Dkt. Nos. 1-2 at 2.) Plaintiff is 66 years old and has suffered from “ill health” since the

15 “early 1990’s.” (Id.) Plaintiff has also been indigent since 1994 and is currently

16 unemployed. (Id.) In addition, Plaintiff has had to relocate at least four times – in 1998,

17 199, 2001, and 2008 – due to her ballooning debt, and has incurred additional moving

18 and legal costs in the process. (Id.) Plaintiff thus alleges various additional circumstances

19 – her advanced age, deteriorating health, long-term indigence, and compulsory relocation

20 and legal costs – which together satisfy the second prong of the Rifino test.

21 The third prong of the Rifino test requires “that the debtor has made good faith

22 efforts to repay the loans.” In re Rifino, 245 F.3d at 1087. This prong was implemented as

23 a response to students utilizing the bankruptcy process to avoid repayment of student

24 loans and was thus intended to “forestall students . . . from abusing the bankruptcy

25 system.” In re Pena, 155 F.3d at 1111 (quoting In re Brunner, 46 B.R. 752, 755

26 (S.D.N.Y. 1985), aff’d sub nom., Brunner, 831 F.2d at 395).

27 Here, Plaintiff’s allegations, if true, do not indicate that she is “abusing the

28 bankruptcy system.” In re Pena, 155 F.3d at 1111. Indeed, Plaintiff affirms that she

1 maintained contact with her creditors and attempted to implement their

2 recommendations, including an unsuccessful effort to consolidate her loans at the behest

3 of the U.S. Department of Education. (ECF No. 1 at 2.) Plaintiff alleges that she tried to

4 discharge her debt in 2008, and again in 2013, and that she even hired a law firm in

5 Mission Valley, CA to assist her in seeking relief despite her financial limitations, which

6 have since worsened. (Id.) In addition, Plaintiff spoke to three separate people at the

7 Department of Education’s Ombudsmen, and ultimately filed the instant action to comply

8 with a letter she received from Federal Student Aid Commission. (Id.) Therefore,

9 Plaintiff’s allegations, if true, would seem to satisfy the third prong of the Rifino test.

10 Having asserted facts to support all three prongs of the Brunner test Plaintiff has

11 presented a claim on which relief can be granted. Plaintiff also seeks an order for the

12 reimbursement of $7,056.15 that was involuntarily deducted from Plaintiff’s Social

13 Security Disability benefits between 2005 and 2017 to pay her student loans. (ECF No. 1

14 at 3.) Plaintiff, however, has not offered any claims or causes of action that would permit

15 the Court to grant the requested relief of reimbursement independent of her claim for

16 undue hardship. Consequently, the Court interprets Plaintiff’s request for reimbursement

17 as a part of Plaintiff’s prayer for relief in her undue hardship claim.

18 Thus, in sum, Plaintiff’s complaint survives initial screening as required in 28

19 U.S.C. § 1915(e)(2) in that it adequately pleads a claim for a hardship determination

20 pursuant to 11 U.S.C. § 523(a)(8). Plaintiff’s motion for IFP is GRANTED.

21 IV. Appointment of Counsel

22 Plaintiff requests appointment of counsel to assist in prosecuting this civil action.

23 (ECF No. 3.) District courts have discretion under 28 U.S.C. § 1915(e)(1) to appoint

24 counsel to represent “any person unable to afford counsel.” 28 U.S.C. § 1915(e)(1). The

25 appointment of counsel requires a finding of “exceptional circumstances.” Terrell v.

26 Brewer, 935 F.2d 1015, 1017 (9th Cir. 1991) (quoting Wilborn v. Escalderon, 789 F.2d

27 1328, 1331 (9th Cir. 1986)). To determine if “exceptional circumstances” exist a court

28 must evaluate the petitioners (1) likelihood of success on the merits and (2) ability to

1 || articulate her claims pro se. Id. “Neither of these issues is dispositive and both must be

2 || viewed before reaching a decision.” /d. Also, a civil plaintiff must make a reasonably

3 || diligent effort to obtain counsel before a court may exercise its discretion under 28

4 ||U.S.C. § 1915(e)(C1). Bailey v. Lawford, 835 F. Supp. 550, 552 (S.D. Cal. 1993).

5 Although Plaintiff has established her indigence by successfully obtaining IFP

6 || status, and she has made a reasonably diligently effort to pursue counsel, she has failed to

7 || meet the rigorous standards of exceptional circumstances. The Court is required to assess

8 || Plaintiff’s likelihood of success on the merits and Plaintiff’s ability to articulate her

9 ||claims pro se. While the court recognizes Plaintiff’s cognizable claim for a hardship

10 || determination, her claim stems from a 25-year-old debt whose total lifetime may present

11 |] an obstacle to her success. (ECF No. | at 2.) Furthermore, there is no information before

12 || the Court to indicate Plaintiffs inability to articulate her claim other than her decision to

13 || proceed pro se. Therefore, it is inappropriate for the Court to appoint counsel at this time.

14 For the foregoing reasons, Plaintiffs motion for appointment of counsel is

15 || DENIED without prejudice.

16 Conclusion

17 The Court finds Plaintiff has demonstrated her inability to pay and may proceed

18 || IFP. Plaintiff has raised a cognizable legal claim that she is entitled to an adversarial

19 || hearing in which she may argue for the discharge of her student loan debt pursuant to a

20 || hardship determination which may be raised at any time and in any court. The Court

21 ||interprets her request for reimbursement from her garnished Social Security Disability

22 || Benefits as part of her prayer for relief on her undue hardship claim. Additionally,

23 || Plaintiff fails to meet the high standard for appointment of counsel.

24 IT IS SO ORDERED.

25 Dated: December 16, 2019 <=

7 United States District Judge

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