Opposition Brief — Educational Credit Management Corporation v. Reynolds (No. 05-1361)

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FILED

(A JUL 28 208

No. 05-1361 SEE Cog

In the Supreme Court of the United States

EDUCATIONAL CREDIT MANAGEMENT CORPORATION,

PETITIONER

LAURA SUSAN REYNOLDS, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

BRIEF FOR THE FEDERAL RESPONDENT

IN OPPOSITION

PAUL D. CLEMENT

Solicitor General

Counsel of Record

PETER D. KEISLER

Assistant Attorney General

ROBERT M. LOEB

EDWARD HIMMELFARB

Attorneys

Department of Justice

Washington, D.C. 20530-0001

(202) 514-2217

QUESTION PRESENTED

Whether a student-loan debtor’s emotional stress at

having to repay her student loans may constitute “undue

hardship” permitting her a discharge under 11 U.S.C.

523(a)(8).

(1)

TABLE OF CONTENTS

Page

REECE, Pe OEE LTE POE ONE TS ee FE Pe 1

Le Sc ghee khads BOA AE WR Se 1

SS a a eg) bi sake Rae Ree EE Roa Dene 2

NE 8 Sis a aks VK Sa ee keee 9

CINE oe igk 5 Soak Oe a8 ta Pe ee eo 13

TABLE OF AUTHORITIES

Cases:

Andrews, In re, 661 F.2d 702 (8th Cir. 1981) ........... 7

Brightful, In re, 267 F.3d 324 (3d Cir. 2001) ........... 10

Brunner v. New York State Higher Educ. Servs.

Corp., 831 F.2d 395 (2d Cir. 1987) ............. 2, 3, 10

Cox, In re, 338 F.3d 1238 (11th Cir. 2003), cert.

Gees, GET Rice. See Lee Nas bee od w eke eee 10

Douglass, In re, 237 B.R. 652 (Bankr. N.D. Ohio 1999) ... 2

Educational Credit Mgmt. Corp. v. Polleys, 356 F.3d

RAR CU Ta BS os Sa eae ea eee Ee 10

Ekenasi, In re, 325 F.3d 541 (4th Cir. 2003) ........... 10

Gerhardt, In re, 348 F.3d 89 (5th Cir. 2003) ........... 10

Long, In re, 322 F.3d 549 (8th Cir. 2003) ...... 3, 4, 6, 7, 10

Oyler, In re, 397 F.3d 382 (6th Cir. 2005) ............. 10

Rifino, In re, 245 F.3d 1083 (9th Cir. 2001) ............ 10

Roberson, In re, 999 F.2d 1132 (7th Cir. 1993) ......... 10

(IIT)

Statutes: Page

Bankruptcy Reform Act of 1978, 11 U.S.C. 101 et seq.:

RE Ape OE 8h WSF SSS AN we Ss aks gee 2

BD UAC. GRONONA) CIODS) ook ie ok recnecess 2

Education Amendments of 1976, Pub. L. No. 94-482,

Ser ee is I se se ba see CS os Hana ens 2

Federal Debt Collection Procedures Act of 1990, Pub.

L. No. 101-647, § 3621(2), 104 Stat. 4965 ............. 2

Higher Education Act of 1965, 20 U.S.C. 1001 et seg. ....2

Higher Education Amendments of 1998, Pub. L. No.

PUG NR, STA, TAR TOO os ins oe si ee 2

In the Supreme Court of the Gnited States

No. 05-1361

EDUCATIONAL CREDIT MANAGEMENT CORPORATION,

PETITIONER

vU.

LAURA SUSAN REYNOLDS, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

BRIEF FOR THE FEDERAL RESPONDENT

: IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. la-27a)

is reported at 425 F.3d 526. The opinion of the district

court (Pet. App. 28a-40a) is unreported. The opinion of

the bankruptcy court (Pet. aed 41a-78a) is reported at

303 B.R. 823.

JURISDICTION

The judgment of the court of appeals was entered on

October 10, 2005. A petition for rehearing was denied on

January 26, 2006. Pet. App. 79a-80a. The petition for a

writ of certiorari was filed on April 24, 2006. The juris-

diction of this Court is invoked under 28 U.S.C. 1254(1).

(1)

STATEMENT

1. Section 523(a)(8) of the Bankruptcy Code pro-

vides that a student-loan debt is not dischargeable “un-

less excepting such debt from discharge under this para-

graph will impose an undue hardship on the debtor and

the debtor’s dependents.” 11 U.S.C. 523(a)(8). Although

the Bankruptcy Code does not define the term “undue

hardship,” Congress has repeatedly limited the ability

of debtors to discharge their student-loan debt. In 1976,

Congress added a provision to the Higher Education Act

of 1965, 20 U.S.C. 1001 et seq., that barred the discharge

of certain educational loans unless either (a) they had

been in repayment for over five years or, if not, (b) pay-

ment would impose an undue hardship on the debtor or

his dependents. Education Amendments of 1976, Pub.

L. No. 94-482, § 127(a), 90 Stat. 2141. Since then, “Con-

gress has intentionally and progressively made it more

difficult for student loan obligations to be discharged in

bankruptcy cases.” Jn re Douglass, 237 B.R. 652, 653

(Bankr. N.D. Ohio 1999). In 1990, Congress extended

the five-year requirement to seven years. Federal Debt

Collection Procedures Act of 1990, Pub. L. No. 101-647,

§ 3621(2), 104 Stat. 4965; 11 U.S.C. 523(a)(8)(A) (1994).

Subsequently, the statutory provision allowing dis-

charge for loans that had been in repayment for more

than seven years was eliminated in the Higher Educa-

tion Amendments of 1998, Pub. L. No. 105-244, § 971,

112 Stat. 1837, for bankruptcies filed after October 7,

1998.

All of the circuits that have addressed the issue of

“undue hardship”—with the exception of the Eighth

Circuit—have adopted the so-called “Brunner” test.

See Brunner v. New York State Higher Educ. Servs.

Corp., 831 F.2d 395 (2d Cir. 1987) (per curiam). Under

the Brunner test, a debtor claiming “undue hardship”

must show:

(1) that the debtor cannot maintain, based on current

income and expenses, a “minimal” standard of living

for herself and her dependents if forced to repay the

loans; (2) that additional circumstances exist indi-

cating that this state of affairs is likely to persist for

a significant portion of the repayment period of the

student loans; and (3) that the debtor has made good

faith efforts to repay the loans.

Brunner, 831 F.2d at 396.

Three years ago, the Eighth Circuit rejected the

Brunner test in favor of a totality-of-circumstances test.

In re Long, 322 F.3d 549, 554 (2003). The court stated:

In evaluating the totality-of-the-circumstances, our

bankruptcy reviewing courts should consider: (1) the

debtor’s past, present, and reasonably reliable future

financial resources; (2) a calculation of the debtor’s

and her dependent’s reasonable necessary living

expenses; and (3) any other relevant facts and

circumstances surrounding each particular bank-

ruptcy case.

Ibid. In the same paragraph, immediately after an-

nouncing this test, the court summarized it as an

economic test rooted in ability to repay the debt:

Simply put, if the debtor’s reasonable future

financial resources will sufficiently cover payment

of the student loan debt—while still allowing for a

minimal standard of living—then the debt should

not be discharged. Certainly, this determination will

require a special consideration of the debtor’s

present employment and financial situation—

including assets, expenses, and earnings—along with

the prospect of future changes—positive or

adverse—in the debtor’s financial position.

Id. at 554-55 (emphasis added).

2. a. The debtor, Laura Susan Reynolds, is a

graduate of Claremont McKenna College and the

University of Michigan Law School. She was admitted

to practice law in Colorado, but eventually settled in

Minnesota, where she took temporary jobs as a

secretary and then held a variety of non-legal jobs. Pet. -

App. 3a-4a. At the time of the bankruptcy proceedings,

she was a secretary-receptionist making about $30,000

a year. At the same time, the debtor’s husband was a

bus driver earning about $29,000, paid over the nine

months of the school year. /d. at 4a, 49a.

b. The debtor filed a Chapter 7 petition and brought

an adversary proceeding to discharge her educational

debt under the “undue hardship” exception to non-

dischargeability. Pet. App. 43a. On January 2, 2004, the

bankruptcy court issued an order granting her a

discharge. The bankruptcy court found that the debtor

had been diagnosed with “major depression, panic and

anxiety disorder, borderline personality disorder, or all

three” by “a half-dozen different mental health pro-

fessionals.” /d. at 49a. The bankruptcy court found that

the debtor had no prospect of gaining admission to the

Minnesota bar in the foreseeable future and was unable

to be employed as a practicing attorney. /d. at 53a-54a.

The court determined that the debtor, though unable

to become an attorney, had $2600 a month in household

expenses and $3300 in net household income, resulting

in $700 a month in available income. Pet. App. 58a; see

id. at 55a-58a. The debtor’s educational loan indebted-

ness was approximately $142,000. Paying those loans

over 20 years would cost her $1021.55 a month.’ She

made payments on the loans for about six months and

then stopped. /d. at 59a-60a.

Based on those findings of fact, the bankruptcy court

recognized that the debtor “did not establish, as a

matter of fact, that she lacked all means to pay down all

of the component loans in her educational debt

structure.” Pet. App. 63a. Nevertheless, the court held

that, under Jn re Long’s totality-of-circumstances test,

a court must be allowed to consider the “non-pecuniary

effects of a debtor’s very substantial loan burden.” Jd.

at 64a. The court explained that, in evaluating “undue

hardship,” it could and perhaps must give those non-

pecuniary effects more weight than ability to pay—at

least when “an educational-loan balance is very

substantial in relation to a debtor’s net worth and annual

gross income, where the standard and restructured

amortizations would extend over a very long period, and

where the presence and awareness of that great and

ongoing liability have a demonstrated, detrimental

impact on the debtor’s physica] or mental health.” Jd. at

65a. Although the debtor’s expert did not testify that

relieving the debtor of the loan burden would

significantly reduce her stress, the court found an

“utterly clear” inference that discharge of the loan

“would take a very significant stressor out of the

Debtor’s life and consciousness.” /d. at 66a. Thus, the

bankruptcy court concluded that under the totality of

circumstances, the debtor’s hardship, absent discharge,

' Two lenders have not appealed to the court of appeals, and the

debtor is no longer responsible for those debts. Pet. App. 10a. The

remaining debt can be paid off under various scenarios with monthly

payments of less than $700. /d. at 59a-60a.

would be undue: “Her fairly tenuous grasp on these

reduced expectations [in her life] could fail, were the

stressor of continuing liability on her educational loan

burden, or even a portion of it, to continue. This danger

is what makes the hardship of a continuing exception

from discharge ‘undue.’” /d. at 67a.

ce. The district court, believing there was an

“ambiguity in Long about how non-pecuniary factors

interact with pecuniary concerns,” affirmed the decision

of the bankruptcy court. Pet. App. 37a-38a. It con-

cluded that “subjugating Reynolds’s severe mental ill-

ness to purely financial considerations undermines

Long’s adherence to a ‘less restrictive approach to the

“undue hardship” inquiry’ as conipared to the more rigid

Brunner test.” Id. at 38a.

3. a. The United States Department of Education,

Educational Credit Management Corporation, and

Pennsylvania Higher Education Assistance Agency

appealed to the Eighth Circuit, which affirmed in a split

decision. Pet. App. la-27a. The three lenders argued

that the totality-of-circumstances test prohibited

discharge once the bankruptcy court found that the

debtor could in fact repay a portion of her student-loan

debt. See Jn re Long, 322 F.3d at 554-555 (emphasis

added) (“Simply put, if the debtor’s reasonable future

financial resources will sufficiently cover payment of the

student loan debt—while still allowing for a minimal

standard of living—then the debt should not be

discharged.”). But according to the panel majority, “the

creditors read this language too narrowly,” because of

“the possibility-——and in many cases reality—that a debt-

or’s health and financial position are inextricably

intertwined.” Pet. App. 13a.

The Eighth Circuit had previously held that a

debtor’s medical condition was relevant to “undue

hardship” only to the extent it affected the ability to

repay. In re Andrews, 661 F.2d 702 (8th Cir. 1981). The

panel majority read Jn re Andrews to support the propo-

sition that discharge may be appropriate even if the

debtor can repay a portion of the student-loan debt, if

the existence of the debt could cause stress affecting the

debtor’s mental health:

As recognized in Andrews, illness often affects both

a debtor’s ability to earn and her expenses; in such

cases, factors affecting the debtor’s health also have

a financial significance. Where the evidence shows

that financial obligations are likely to undermine a

debtor’s health, which in turn will affect the debtor’s

financial outlook, we think it entirely consistent

with Andrews and Long to take such facts and

circumstances into account. We will not adopt an

interpretation of “undue hardship” that causes the

courts to shut their eyes to factors that may lead to

disaster, both personal and financial, for a suffering

debtor.

Pet. App. 14a (emphasis added). The majority em-

phasized the bankruptcy court’s finding that continuing

liability for the debt could possibly affect Reynolds’s

mental condition, ibid., and it quoted Jn re Long for its

“consideration of ‘reasonably reliable future financial

resources ... and any other relevant facts and circum-

stances surrounding each .. . case,’” including “the

prospect of future changes—positive or adverse—in

debtor’s financial position.” /d. at 15a (quoting Jn re

Long, 322 F.3d at 554-555). Because Reynolds’s condi-

tion had been diagnosed as “recurrent,” ibid., the

majority concluded that the stress of repaying the debt

could possibly affect her mental condition, which in turn

could affect her ability to repay in the future. /bid. The

majority concluded that “excepting the student loans

from discharge would cause an undue hardship to

Reynolds because of the effect of the debt on Reynolds’s

mental health.” /d. at 16a.

b. Judge Riley, in dissent, explained that the

majority had misunderstood the relevance of a debtor’s

medical condition to the totality of circumstances. Pet.

App. 20a-24a. Her mental illness might make simply

being in debt stressful, but under the Bankruptcy Code,

this would not constitute “undue hardship.” Alter-

natively, her mental illness might reduce her future

financial resources and possibly increase her expenses,

resulting in “undue hardship.” But, Judge Riley ex-

plained, such a possibility was foreclosed in this case by

the bankruptcy court’s findings of fact. Jd. at 20a-21a.

Judge Riley stated that the majority had engaged in

analysis that “borders on illogical circularity” by first

looking to the effect of the debt on the debtor’s mental

condition and then looking to the effect of the thus-

affected mental condition on the debtor’s ability to repay

the debt. Pet. App. 22a (“The majority opinion makes

this very mistake: it concludes having an unpaid debt

contributes to Reynolds’s mental illness, and mental

illness contributes to the inability to repay the debt

(which inability, of course, worsens the mental illness,

and so on).”). He characterized the majority’s holding

as “grant{ing] double treatment to a debtor’s illness”

and as “chang[ing] this circuit’s law.” /bid.

Judge Riley also pointed out that the majority had

ignored the bankruptcy court record, which showed that

Reynolds could maintain an administrative job despite

her mental illness—a job that paid her enough, along

with her husband’s income, to repay her debt to the

three remaining creditors. Pet. App. 22a-23a.

ec. Petitioner and the United States Department of

Education filed petitions for rehearing and rehearing en

bane, which the court of appeals denied over five

dissenting votes. Pet. App. 79a-80a.

ARGUMENT

The decision of the court of appeals is incorrect to

the extent it permits discharge, on the ground of undue

hardship, when the debtor has not demonstrated an

inability to repay the debt. In the context of a bank-

ruptcy proceeding, the statutory requirement of “undue

hardship” necessarily entails an economic determina-

tion, and a debtor’s medical condition may be relevant to

undue hardship only insofar as it affects the ability to

pay.

In this case, however, the decision of the court of

appeals was predicated in large part on a mistaken

reading of the factual record set forth in the bankruptcy

court’s decision. The panel majority appeared to accept

the bankruptcy court’s conclusion that the stress that

the debtor might suffer from having to repay her

student loans could be “undue hardship” because it

might affect her medical condition. But the majority

went beyond that conclusion to suggest, contrary to the

factual record, that the debtor’s worsened medical

condition was likely to affect her ability to repay the

debt.

Because the decision of the court of appeals thus

turns upon the factual record below, this case is not a

good vehicle for resolving the important legal question

otherwise presented here.

1. Three years ago, in Jn re Long, the Eighth

Circuit adopted a totality-of-circumstances test for

undue hardship and expressly declined to adopt the

Brunner test adopted by all other circuits that had

announced a test.” However, like those other circuits,

the Eighth Circuit made clear that its test was a purely

economic test:

Simply put, if the debtor’s reasonable future

financial resources will sufficiently cover payment of

the student loan debt-—while still allowing for a

minimal standard of living—then the debt should not

be discharged. Certainly, this determination will re-

quire a special consideration of the debtor’s present

employment and financial situation—including

assets, expenses, and earnings—along with the pros-

pect of future changes—positive or adverse—in the

debtor’s financial position.

In re Long, 322 F.3d at 554-555. It was in this economic

context that the Eighth Circuit’s totality-of-circum-

stances test invoked flexibility by allowing a court to

consider “any other relevant facts and circumstances

surrounding each particular bankruptcy case.” /d. at

554.

Given the economic focus of the totality-of-circum-

stances test, it was unclear after Jn re Long was decided

whether the test differed in a legally significant way

* Currently, nine other circuits have adopted the Brunner test. See

Brunnerv. New York State Higher Educ. Servs. Corp., supra (2d Cir.);

In re Brightful, 267 F.3d 324 (3d Cir. 2001); /n re Ekenasi, 325 F.3d 541

(4th Cir. 2003); Jn re Gerhardt, 348 F.3d 89 (5th Cir. 2003); Zn re Oyler,

397 F.3d 382 (6th Cir. 2005); Zu re Roberson, 999 F.2d 1132 (7th Cir.

1993); Jn ve Riftno, 245 F.3d 1088 (9th Cir. 2001); Educational Credit

Mam. Corp. v. Polleys, 356 F.3d 1302 (0th Cir. 2004); Zn re Cox, 338

F.3d 1238 (11th Cir. 2003), cert. denied, 541 U.S. 991 (2004).

from the Brunner test, which also had a purely economic

focus.

2. Inthe bankruptcy court decision below, however,

the totality test of Jn re Long was interpreted to permit

consideration of non-economic factors that did not relate

to the debtor’s ability to repay. Although the

bankruptcy court expressly held that the debtor “did not

establish, as a matter of fact, that she lacked all means

to pay down all of the component loans in her

educational debt structure,” it also announced that

courts should consider the “non-pecuniary effects of a

debtor’s very substantial loan burden.” Pet. App. 64a-

65a. In particular, the bankruptcy court found an

“utterly clear” inference that discharge of the loan

“would take a very significant stressor out of the

Debtor’s life and consciousness,” despite the failure of

the debtor’s expert to testify to that effect. /d. at 66a;

see id. at 67a (“Her fairly tenuous grasp on these

reduced expectations [in her life] could fail, were the

stressor of continuing liability on her educational loan

burden, or even a portion of it, to continue.”) (emphasis

added).

As the case reached the court of appeals, the record

included a finding of fact that the debtor had not shown

an inability to repay all of the component loans of her

student debt, Pet. App. 63a, and a finding of fact that the

debtor could maintain her non-lawyer employment at

comparable compensation levels “for the indefinite

future,” id. at 55a. The case also presented the bank-

ruptey court’s legal conclusion that the mere stress of

having to repay student loan debt could justify a dis-

charge of all of that debt, notwithstanding the debtor’s

ability to repay a portion of it. The bankruptcy court’s

reasoning was thus irreconcilable with the Brunner test,

which compels rejections of an “undue hardship” claim

when the debtor has the ability to repay some or all of

the debt.

The court of appeals affirmed, but it did so in a

manner that makes it difficult to determine whether,

and to what extent, its holding conflicts with the

approach followed by the circuits that adhere to the

Brunner test. In its conclusion to the “undue hardship”

analysis, the court of appeals stated that it was

affirming the bankruptcy court’s conclusion that

“excepting the student loans from the discharge would

cause an undue hardship * * * becazse of the effect of the

debt on [respondent’s] mental health.” Pet App. 16a

(emphasis added). At other points in its discussion,

however, the court of appeals appeared to rest its

decision on its view that in this case the debtor’s stress

was likely to affect her financial condition. 7d. at 14a

(“Where the evidence shows that financial obligations

are likely to undermine a debtor’s health, which in turn

will affect the debtor’s financial outlook, we think it

entirely consistent with Andrews and Long to take such

facts and circumstances into account.”) (emphasis

added).

The decision of the court of appeals therefore can be

read to stand for the limited proposition that a debtor

may obtain a discharge if he or she proves that the

stress of repayment “will affect the debtor’s financial

outlook.” Pet. App. 14a. Read in that fashion, the

decision would still require a debtor to show that his or

her financial outlook makes repayment an undue

hardship. Although it is unclear that the decision will be

limited to that category of cases in the future, the

ambiguity in the court of appeals’ holding makes the

case an unappealing candidate for resolving a circuit

split that may not actually lead to a materially different

result in concrete cases. It would therefore be appro-

priate to await a future case in which the rule of law

applied by the Eighth Circuit can be clarified and the

existence, or lack thereof, of a meaningful circuit conflict

can be ascertained.

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.