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Ninth Circuit Leans Toward Student Debtors
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Ninth Circuit Leans Toward Student Debtors

Hedlund v. The Educational Resources Institute, Inc., et al (9th Cir.)

In an important case decided last week, the Ninth Circuit Court of Appeals upheld a bankruptcy judge’s decision allowing a debtor to discharge part of his student loan debt.

A few years after law school, Michael Hedllund found himself in a financially precarious position. He filed a bankruptcy petition and sought permission to discharge his student loan debt under 11 U.S.C. Sec. 523(a)(8). Following a hearing, the bankruptcy judge found Hedlund acted in good faith and allowed a partial discharge of the student loans.

The general rule is that student loan debt not dischargeable in bankruptcy absent a showing that the debtor will suffer undue hardship if discharge is denied. The Ninth Circuit follows the three-prong Brunner test for student loan dischargeability, which requires a debtor to show:

(1) The debtor cannot maintain, based on current income and expenses, a minimal standard of living for himself and his dependents if forced to pay off student loans;

(2) That additional circumstances exist indicating his financial situation is likely to persist for a significant portion of the repayment period; and

(3) The debtor has made good faith efforts to repay the loans.

On appeal, Educational Resources argued Hedlund failed to satisfy the third prong, i.e., that Hedlund failed to demonstrate good faith efforts to repay the loans. The district court reversed, finding Hedlund failed to act in good faith.

Hedlund appealed to the Ninth Circuit, arguing that the bankruptcy judge’s decision was supported by sufficient evidence. The Ninth Circuit agreed with Hedlund, citing a number of factors related to the debtor’s finances, including:

  • The debtor maximized his income
  • The debtor’s spending was only marginally excessive compared to his income
  • The debtor waited four years after repayment obligations began to file for bankruptcy
  • The debtor made a small voluntary payment along the way
  • The debtor made efforts to research alternatives to discharging his obligations
  • The debtor underwent several months of wage garnishments before filing his petition

It is important to note the importance of the standard of review in this case. Appeals are won and lost depending on the facts adduced at trial and the standard of review. It is critical to know which standard of review applies in an appeal.

In cases where the issue on
appeal is related to the sufficiency of the evidence, the standard of review is abuse of discretion. An abuse of discretion review considers whether any facts existed before the trial court to support the trial court’s decision. In other words, the appellate only has authority to review whether the trial court’s decision was clearly erroneous. In this case, Educational Resources argued Hedlund failed to present sufficient evidence of good faith, so the abuse of discretion standard of review applied to the appeal.

Abuse of discretion is contrasted with the de novo standard of review. In cases where the appellant alleges the trial court applied an incorrect rule of law, the appellate court conducts a de novo review. For instance, if Educational Resources argued on appeal that the Brunner test was not applicable, the appellate court would have considered the case from a de novo perspective.

The problem with the district court’s decision in this case was that the reversal was based on an assessment of the facts. The district court essentially reweighed the facts, invading the trial court’s territory.

The Ninth Circuit reversed the district court’s decision and pointed out pertinent facts adduced at trial from which the trial court could have reasonably concluded Hedlund acted in good faith. Whether or not the Ninth Circuit agreed with the trial court’s assessment of the facts, the Ninth Circuit followed the correct standard of review in holding the trial court’s decision was not clearly erroneous.

The most important lesson to take away from this case is a lender must conduct every trial with an eye toward an eventual appeal. A lender’s chances of success on appeal may hinge on whether all available evidence was presented at the trial level to contradict a debtor’s claims.

If you are a lender facing a question as to the dischargeability of student loan debt, seek the advice of experienced legal counsel. Glass & Goldberg provides high quality and cost-effective legal services and advice for clients in all aspects of business litigation, creditors’ rights and transactional law.  Call us at (818) 888-2220, email us at info@glassgoldberg.com, or visit us on the web at www.glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

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