In re: GuBrath, et al
Filing
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ORDER AFFIRMING BANKRUPTCY COURT'S ORDER DISCHARGING STUDENT LOAN DEBT. By Judge William J. Martinez on 12/10/2014. (alowe)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge William J. Martínez
Civil Case No. 14-cv-0707-WJM
In re: CHAD DAVID GUBRATH and
NICOLE DIANN GUBRATH,
Debtors.
COLLEGE ASSIST, and
MRU STUDENT LOAN TRUST, 2007-A,
Appellants,
v.
CHAD DAVID GUBRATH and
NICOLE DIANN GUBRATH,
Appellees.
ORDER AFFIRMING BANKRUPTCY COURT’S ORDER DISCHARGING
STUDENT LOAN DEBT
College Assist and MRU Student Loan Trust, 2007-A (“Appellants”) appeal from
the Bankruptcy Court’s March 10, 2014 Order discharging the student loan debts of
debtors Chad and Nicole GuBrath (“the GuBraths” or “Debtors”). For the reasons set
forth below, the Bankruptcy Court’s Order is AFFIRMED.
I. BACKGROUND
In 2005-06, Debtor Chad GuBrath executed promissory notes in favor of
Appellant MRU Student Loan Trust 2007-A in a total sum of $64,184.85. (ECF Nos.1
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References to the Record on Appeal, as filed with this Court, are cited as (ECF No.
__.). References to filings on the Bankruptcy Court’s Docket are cited as (Bankr. Docket No.
__.).
16-11 & 16-12.) Nicole GuBrath was a co-borrower on at least one of these loans.
(ECF No. 16-12.) Chad GuBrath also executed two promissory notes in favor of
Appellant College Assist, which have a value of $64,162.95. (ECF Nos. 16-25 & 16-27.)
Nicole GuBrath executed a promissory note in favor of College Assist for $8,446.09.
(ECF No. 16-28.) In addition to these loans, the GuBraths obtained over $150,000 in
additional student loans from other lenders.
After these loans went into repayment, Appellants allowed the GuBraths to make
payments under income-based repayment plans, such that the GuBraths’ monthly
payments on these loans was between $0 and $30 per month. (ECF Nos. 16-15 & 17.)
Before seeking discharge of their student loan debt, Debtors made only five payments
totaling $153 on the loans to Appellants. (ECF No. 17 at 82.) Other loans taken out by
the GuBraths were not subject to income-based repayment plans and required
payments of at least $377 per month, and these loans were in collection at the time of
the proceedings before the Bankruptcy Court. (ECF No. 17 at 129-130.)
On May 4, 2012, the Debtors filed for Chapter 7 bankruptcy, and listed a total of
$340,297.85 in unsecured debt, with $282,421.25 in student loans. (ECF Nos. 16-5 &
16-6.) On February 14, 2013, Debtors brought an adversary proceeding, seeking
discharge of their student loan debt. (Bankr. Docket No. 1.) A number of loan holders,
including Sallie Mae, National Collegiate Trust, and the Education Resources Institute,
did not respond to this adversarial proceeding, and default was entered against them.
(Bankr. Docket Nos. 29-31.) The only note holders who contested the adversarial
proceeding were Appellants. (See generally Bankr. Docket.)
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Bankruptcy Judge Bruce Campbell presided over a one-day bench trial. (Bankr.
Docket No. 92.) At trial, Chad and Nicole GuBrath testified about their financial
situation, earning opportunities, and lifestyle. (ECF No. 17.) Their testimony shows that
the GuBraths have one dependent, a 12-year-old son who suffers from anxiety reaction,
epilepsy, intermittent explosive disorder, autism, and constipation. (Id. at 38-42, 14245; ECF No. 16-4.) He is non-verbal, requires a special diet, and attends a specialized
school program. (Id.) It is not anticipated that his condition is likely to significantly
improve; rather, he will need intensive care for the rest of his life. (ECF No. 17 at 48-49,
146-47.)
With regard to income, Nicole GuBrath testified that, due to the need to care for
her child, she has been unable to obtain paid employment. (ECF No. 17 at 48, 145-46.)
She has pursued part-time work, but has been unsuccessful in finding a position that
can accommodate her schedule. (Id.) Chad GuBrath works full-time as an investigator
for the State of Colorado, where he nets $3,181.05 per month. (ECF No. 16-2.)
Because he sometimes has to work weekends and evenings, he is unable to get a
second job. (ECF No. 17 at 50.) Mr. GuBrath has received a number of raises this
year, but does not anticipate this trend continuing. (Id. at 86-87.)
The Debtors also testified extensively about their monthly spending habits. They
cancelled their cable and landline telephone, do their own home and auto repairs, and
use coupons when possible. (ECF No. 17 at 64-65.) They do not vacation, get books
and movies from the library, and minimize gift giving. (Id. at 65-66.) They have no
credit cards, no savings, and receive no help from outside sources. (Id. at 51, 63-64.)
However, the Debtors spend $130 per month on life insurance, have internet service in
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their home, and have cell phones. (Id. at 88.) The Debtors spend about $1,000 a
month on groceries, which far exceeds the guidelines put out by the United States
Department of Agriculture for a family of three. (Id. at 88-93.) Debtors also spend
about $150 a month eating out and $100 a month on liquor. (ECF Nos. 16-42 & 16-43.)
On February 21, 2014, the Bankruptcy Court made its oral findings of fact and
conclusions of law. (Bankr. Docket No. 129.) Judge Campbell found that Debtors had
met their burden of showing that the Debtors’ student loans constituted an undue
hardship under 11 U.S.C. § 523(a)(8). (Id. at 5.) Based on this finding, the Bankruptcy
Court ordered that the Debtors’ student loans be discharged. (Id. at 17.) A subsequent
order confirming the ruling was entered on March 10, 2014. (Bankr. Docket No. 104.)
Appellants then filed the instant appeal. (ECF No. 2.) The opening brief was
filed on May 27, 2014. (ECF No. 15.) The Debtors filed their response brief on June 5,
2014 (ECF No. 19), and Appellants filed their reply on June 24, 2014 (ECF No. 22).
The case is ripe for review.
II. LEGAL STANDARD
In reviewing a bankruptcy court’s decision, the district court functions as an
appellate court and is authorized to affirm, reverse, modify, or remand the bankruptcy
court’s ruling. 28 U.S.C. § 158(a); Fed. R. Bankr. P. 8013. A bankruptcy court’s legal
conclusions are reviewed de novo, and factual findings are reviewed for clear error. In
re Warren, 512 F.3d 1241, 1248 (10th Cir. 2008). In this case, the parties agree that
the Court reviews the bankruptcy court’s factual findings regarding Appellee’s financial
situation for clear error, and that the Court reviews de novo whether those findings
constitute undue hardship pursuant to 11 U.S.C. § 523(a)(8). See Alderete v. Educ.
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Credit Mgmt. Corp., 412 F.3d 1200, 1204 (10th Cir. 2005).
III. ANALYSIS
Section 523(a)(8) of the Bankruptcy Code states that a Chapter 7 discharge does
not discharge an individual debtor from any debt “for an educational . . . loan made,
insured or guaranteed by a governmental unit . . . unless excepting such debt from
discharge under this paragraph will impose an undue hardship on the debtor and the
debtor’s dependants[.]” To determine what constitutes an “undue hardship”, the Tenth
Circuit has adopted the three-part test set forth in Brunner v. New York State of Higher
Education Services, 831 F.2d 395 (2d Cir. 1987):
(1) that the debtor cannot maintain, based on current income
and expenses, a “minimal” standard of living for herself and
her dependants if forced to repay the loans; (2) that
additional circumstances exist indicating 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.
Educational Credit Mgmt. Corp. v. Polleys, 356 F.3d 1302, 1305-06 (10th Cir. 2004).
The Tenth Circuit explicitly eschewed formulaic application of this standard, instead
imploring courts to “advance the Bankruptcy Code’s ‘fresh start’ policy” and apply the
Brunner test in a manner “such that debtors who truly cannot afford to repay their loans
may have their loans discharged.” Id. at 1309.
The Bankruptcy Court discharged all of the Debtors’ student loan debts based on
its finding that the failure to discharge the student loan debts would impose an undue
hardship on Debtors. (R. 272.) Appellants contend that a number of the factual findings
underlying this conclusion were erroneous. The Court will discuss Appellants’
arguments in turn below.
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A.
Total Debt Owed by Debtors
In its oral findings of fact and conclusions of law, the Bankruptcy Court noted that
the GuBraths had incurred higher education debt in the amount of $295,392.83, which
is accruing interest at a rate of approximately $15,000 per year. (Bankr. Docket No. 129
at 7.) It is undisputed that the amounts owed to Appellants are the only loans that were
contested at trial, and that these loans totaled $137,284.85. (ECF No. 15 at 12.)
Appellants contend that the Bankruptcy Court erred by referring to and relying on the
uncontested loan amounts in making its Brunner findings. (Id. at 11-12.)
Having reviewed the record, the Court concludes that the Bankruptcy Court did
not err in discussing the full amount of the GuBraths’ student loan debt. “A factual
finding is ‘clearly erroneous’ when ‘it is without factual support in the record, or if the
appellate court, after reviewing all the evidence, is left with the definite and firm
conviction that a mistake has been made.’” In re Lemke, 423 B.R. 917, 919-20 (10th
Cir. B.A.P. 2010) (quoting Las Vegas Ice & Cold Storage Co. v. Far W. Bank, 893 F.2d
1182, 1185 (10th Cir. 1990)). The Bankruptcy Court’s statement regarding the total
amount of debt owed by the GuBraths was factually accurate; it is undisputed that the
GuBraths incurred $295,392.83 in student loan debt. At the time of the trial and the
Court’s ruling, even the uncontested loan amounts had not yet been discharged, which
means that the GuBraths were still under their full debt burden.
Moreover, after stating that the GuBraths had incurred $295,392.83 in debt that
was accruing interest at a rate of approximately $15,000 per year, the Bankruptcy Court
explicitly stated that defaults had been entered against Sallie Mae and National
Collegiate Trust, and that only the Appellants were contesting discharge of their loans.
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(Bankr. Docket No. 129 at 7.) Thus, the Bankruptcy Court was plainly aware of the
status of all of the loans at the time it made its Brunner findings.
As such, the Court finds that the Bankruptcy Court did not commit clear error in
its findings regarding the amount of student loan debt owed by the GuBraths.
B.
Brunner Factors
Appellants take issue with a number of the factual findings made by the
Bankruptcy Court with regard to the Brunner factors. (ECF No. 15 at 13-21.) The Court
will address each factor below.
1.
Ability to Maintain Minimal Standard of Living
Under the first prong, the Court must “evaluate the debtor’s current financial
situation” and “take into consideration whether the debtor has demonstrated any reason
why he or she is unable to earn sufficient income to maintain him/herself and
dependants while repaying the student loan debt.” In re Alderete, 308 B.R. at 503. “A
minimal standard of living includes what is minimally necessary to see that the needs of
the debtor and [his] dependents are met for care, including food, shelter, clothing, and
medical treatment.” In re Innes, 284 F.R. 496, 504 (D. Kan. 2002). With regard to this
inquiry, the Bankruptcy Court found as follows:
[G]iven the health and disability challenges facing the
GuBrath family, and given the enormity of the debtors’
student loan debt combined with the Court’s finding that the
GuBraths are, under the circumstances, earning what they
are able by working hard to support themselves without
frivolous or luxury spending, the Court concludes that these
debtors cannot maintain a minimal standard of living while at
the same time repaying their student loan debt.
(Bankr. Docket No. 129 at 16.)
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Appellants contend that this finding was erroneous and point to the fact that the
GuBraths spend money each month on liquor and at restaurants. (ECF No. 15 at 1415.) Appellants also take issue with the monthly amount allocated to groceries by the
GuBraths. (Id. at 15-16.) Finally, Appellants point to decisions of other courts who have
found that the debtors failed to satisfy the first prong when they had similar spending
habits. (Id. at 17.)
The Court acknowledges that there is support in the record for each of
Appellants’ arguments. Were the Court considering this issue for the first time, it may
have been inclined to side with Appellants and hold that the GuBraths had not shown
that making payments on their student loans would make them unable to maintain a
minimal standard of living. However, this Court reviews the Bankruptcy Court’s findings
under the very deferential standard of clear error. In re Lemke, 423 B.R. at 919-20. So
long as there is support in the record for the Bankruptcy Court’s finding, and the Court is
not firmly convinced that a mistake has been made, the finding must be affirmed.
The Court concludes that there is sufficient support in the record for the
Bankruptcy Court’s finding that the GuBraths would not be able to maintain a minimal
standard of living if forced to pay off their educational debt. The GuBraths explained
how their money was allocated each month, testified about attempts to minimize their
expenses, and put forth evidence showing that they were doing their best to live within
their means. (ECF No. 12-1 at 238-42.) The GuBraths testified about their son’s
medical needs, including a special diet, and how these expenses cause them to spend
more on groceries than a typical family their size. (Id.; ECF No. 17 at 131-32.) The
record shows that there was no extra money at the end of each month, and that having
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to make payments towards student loans of this size would interfere with their ability to
maintain their standard of living. (Id.)
Appellants’ argument regarding the monies spent by the GuBraths on “nonessential” commodities like restaurants and alcohol ignores the reality that, even putting
these amounts aside, the record shows that Debtors could not come close to making
the payments on the debt that had incurred. “The Brunner test ought not be turned in
that fashion into a game of ‘gotcha’ based on viewing certain expenditures in isolation,
wearing blinders that disregard the debtor’s needs in a global fashion.” In re Zook, 2009
WL 512436, at *9 (Bankr. D.D.C. Feb. 27, 2009). Moreover, “[e]ven under the minimal
standard of living test, people must have the ability to pay for some small diversion or
source of recreation, even if it is just watching television or keeping a pet.” In re
McLaney, 375 B.R. 666, 674 (M.D. Ala. 2007).
The Court is also not persuaded by Appellants’ citation to other courts that have
held contrary to the Bankruptcy Court’s findings here. Other judges’ findings that a
debtor could still make payments on educational debt and maintain a minimal standard
of living under similar conditions does not mean that the Bankruptcy Court’s contrary
findings in this case were clearly erroneous. Anderson v. City of Bessemer City, 470
U.S. 564, 574 (1985) (“Where there are two permissible views of the evidence, the
factfinder's choice between them cannot be clearly erroneous.”).
As there is sufficient factual support in the record for the Bankruptcy Court’s
finding, the Court finds that Appellants have failed to show clear error as to the first
prong of the Brunner test.
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2.
Persistence of Financial Condition
The second prong of the Brunner test looks at whether “additional circumstances
exist indicating that this state of affairs is likely to persist for a significant portion of the
repayment period of the student loans.” Id., 831 F.2d at 396. As described by one
court, this prong of the test “imputes to the meaning of ‘undue hardship’ a requirement
that the debtor show his dire financial condition is likely to exist for a significant portion
of the repayment period.” In re Roberson, 999 F.2d 1132, 1135 (7th Cir. 1993).
With regard to this prong, the Bankruptcy Court found that “the health and
disability challenges facing these debtors and their son are severe and profound and
the evidence establishes that this condition will likely persist for a significant portion of
the repayment period of the debtors’ student loans.” (Bankr. Docket No. 129 at 16.)
Appellants contend that this finding was error because Chad GuBrath received a
number of raises in the last year, and because Nicole GuBrath testified that she would
like to return to work someday. (ECF No. 15 at 19.) Although these arguments are
supported by the record, the Bankruptcy Court’s findings also have significant support,
and are therefore not clearly erroneous.
Chad GuBrath testified that he has received a number of raises in the past year,
but that he does not anticipate receiving anything other than cost of living adjustments
in the future. Additionally, after one of these raises, his income increased to the point
that the family is now disqualified from receiving a disability payment from the Social
Security Administration for their son. While Ms. GuBrath testified that she would like to
return to work one day, she also discussed how difficult it would be for her to
substantially contribute to the family’s income given the intensive needs of her child.
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The record shows that the GuBrath’s son’s medical condition is not likely to improve,
and that he will need substantial care for the rest of his life. Given these facts, the Court
concludes that the Bankruptcy Court did not err in finding that the Debtors had satisfied
the second prong of the Brunner test.
3.
Good Faith Effort to Pay Loans
The third prong of the Brunner test requires that trial courts consider whether the
debtor has made a “good faith effort to repay” a student loan. In re Alderete, 308 B.R.
at 504. The Bankruptcy Court found that borrowing nearly $300,000 for student loan
“may have reflected bad judgment. However, bad judgment is not bad faith.” (Bankr.
Docket No. 129 at 16-17.) The Bankruptcy Court noted that the GuBraths had made
some minimal payments on their loans, and found that they had made a good faith effort
at repayment. (Id. at 17.)
Appellants contend that this finding was error because the GuBraths acted in bad
faith by filing for discharge of their student loans shortly after their repayment period
commenced. (Id.) Appellants also argue that the payments made by the GuBraths
were so minimal that they cannot be considered to constitute good faith. (Id. at 20-21.)
Finally, Appellants contend that the Bankruptcy Court’s alleged failure to consider their
payment plans violates public policy. (Id.) at 21-22.)
The Court concludes that the Bankruptcy Court properly considered the
repayment plans offered by Appellants. The Court found that Appellants have been
“sympathetic, cooperative and flexible in offering [the GuBraths] income-based payment
plans” but that these were only a “short-term answer” and, because such payment plans
did not even come close to covering the interest on the loans, “the debt load simply
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grows more burdensome as time passes.” (Bankr. Docket No. 129 at 7.) This complies
with the law in this circuit, which emphasizes that the focus is not on whether the loan
companies have acted in good faith, but on whether the debtors have made good faith
efforts to repay. See Polleys, 356 F.3d at 1309 (“[T]he good faith portion of the Brunner
test should consider whether the debtor is acting in good faith in seeking the discharge,
or whether he is intentionally creating his hardship.”).
After reviewing the record, the Court finds significant support for the Bankruptcy
Court’s finding that the GuBraths made good faith efforts to repay the loans. Chad
GuBrath testified that he completed the necessary paperwork to obtain income-based
repayment for the loans held by Appellants, and made periodic payments in accordance
with these plans. However, he also testified that a number of his other loans were not
eligible for such payment plans, and that he was getting calls from collectors on these
other loans. (ECF No. 17 at 129.) When he learned this news, he realized that making
payments on all of his loans would be impossible, and sought discharge of all of his
student loan debt. (Id. at 129-30.) The Court concludes that this record evidence is
sufficient to sustain the Bankruptcy Court’s finding that the GuBraths made good faith
efforts to repay their loans.
In sum, the Court concludes that the Bankruptcy Court’s findings with respect to
the three prongs of the Brunner test were not clearly erroneous. Moreover, considering
de novo whether these findings were sufficient to constitute “undue hardship” for
purposes of Section 523(a)(8), the Court concludes that the Bankruptcy Court correctly
discharged the GuBrath’s student loans. Given the Tenth Circuit’s emphasis on
discharging the student loans of those “debtors who truly cannot afford to repay their
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loans,” and the evidence submitted showing the GuBraths’ long-term medical situation,
personal care needs, and financial situation, the Court concludes that discharging their
student loans advances the Bankruptcy Code’s “fresh start” policy. Polleys, 356 F.3d at
1309.
IV. CONCLUSION
For the reasons set forth above, the Bankruptcy Court’s March 10, 2014 Order
discharging the student loan debts of Debtors Chad and Nicole GuBrath is AFFIRMED.
Dated this 10th day of December, 2014.
BY THE COURT:
William J. Martínez
United States District Judge
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