Rosario v. United States Department of Education, 592 US 69 (2020)

68. Rosario v. United States Department of Education, 592 U.S. 69 (2020)

Kagan, J., delivered the opinion of this Court, joined by Justices Ginsburg, Sotomayor, and Breyer 

            Section 523(a) of the United States Bankruptcy Code exempts from discharge a variety of debts that may linger and latch onto the debtor after they have received their discharge. Most prevalent among them is Section 523(a)(8), debt for educational benefit. As of this writing, approximately 45 million Americans have bankrolled their education in part or in full via funds received as an educational benefit, cumulatively accounting for $1.6 trillion in outstanding student debt.

The Bankruptcy Code was enacted in 1978, and the 1970 Commission on Bankruptcy Laws first proposed that government loans be deemed nondischargeable for five years, based upon the perception that a great number of soon-to-be-wealthy graduates of medical and law schools would abuse the system. First the compromise was made to allow for it after five years, or if undue hardship existed. Later, it was after seven years. Later, it was never. That came in the 2005 BAPCPA amendments. This case challenges one of those provisions, yet not on constitutional grounds. Rather, it challenges the common test of the “undue hardship” standard. 

The debtor seeks to prove that he is existing in a state of undue hardship, and the government has appealed, arguing that his circumstances are far from dire. A key issue of the litigation at hand involved an affidavit that the debtor signed, attesting to his circumstances, which the government failed to challenge, or request discovery upon, or examination of the debtor himself in court. The bankruptcy court did not grant a full discharge. The bankruptcy court would, eventually, allow for approximately $100,000 to be discharged, yet the debtor would be required to maintain his income-driven repayments as required for two more years.  The bankruptcy court effectively modified the debt, and short-circuited the government-mandated 20 years of repayment forgiveness provision down to approximately 12 years. The Northern District of Illinois and the 7th Circuit affirmed those judgments. The government appeals and repeats its argument that the bankruptcy court abused its discretion by making this modification, and that, even if such a modification would be allowed, and even if the debtor is taken at his word, undue hardship does not exist in this case. We affirm that such a modification is allowed and agree that the modification made by the bankruptcy court was appropriate under the totality of circumstances. 

Circuits have split on the contours of the “undue hardship” standard, which has come to be known as the Brunner test:

1.      That the debtor cannot maintain a minimal standard of living, based on current income and expenses, if forced to repay the loans;

2.      That additional circumstances exist that make this state of affairs likely to persist for a significant portion of the loan repayment period;

3.      That the debtor has made good faith efforts to repay the loans.

      Brunner v. New York State Higher Education Service Corp., 831 F.2d 395 (2d. Cir. 1987)

  In Thomas v. U.S. Dept. of Education, 18-11091 (2019), the 5th Circuit upheld the “strict reading” of the Brunner test. That court found the debtor, who had been incapacitated by diabetic neuropathy, had not adequately shown that her condition precluded her from any other kind of gainful employment in the future, thus failing the second prong. The court noted that unsympathetic debtors and sympathetic debtors such as herself could not be distinguished absent congressional action. Undue hardship, as defined by Thomas, is the state of being faced with “intolerable difficulties.”

Conversely, in Rosenberg v. New York State Higher Education Service Corp., 18-09023 (S.D.N.Y. 2020) Judge Morris noted that Brunner had applied “punitive standards that are not contained therein” and that “retributive dicta” had subsumed the actual language of the test. “They have become a quasi-standard of mythic proportions so much so that most people (bankruptcy professionals as well as lay individuals) believe it impossible to discharge student loans.”  

            Yet in each case, the debtor met the standards for the first prong of the Brunner test because their expenses exceeded their monthly net income. Clearly, the debtor in this case has not satisfied the first prong, according to that criteria, but today we hold that a debtor need not show negative monthly income to prove undue hardship, but that it should be determined on a case-by-case basis. We agree that the Brunner test has been interpreted more strictly than the spirit of the Bankruptcy Code requires. Accordingly, in assessing the first prong, the bankruptcy court should take into account other factors, such as amount repaid, amount of interest accumulated, standard of living, relative prospects of the debtor, and likelihood of full repayment prior to sunset period forgiveness. 

            While we note this gloss upon the first prong of the test, it could just as well be used as a gloss for the second, which Judge Morris specifically cited as the one that often does the most injustice. In Thomas, for example, the court found that the debtor, then engaged in a string of minimum-wage jobs, worked while physically disabled, had not adequately shown that she couldn’t turn it around, so to speak. 

The onus is on the debtor to prove their circumstances, and the onus of cross-examining the debtor is the creditor’s. In this case, there was an utter failure to do so, and accordingly the ruling must stand. We do believe that the appeal raises important issues of substantive law, and we agree that further guidance on this issue is appropriate under the circumstances. Certainly, anything can happen, but taking a relentlessly optimistic view that the future will hold greater prosperity is somewhat unrealistic according to the debtor’s standard of living. To the extent these two prongs have played into one another, they should be simplified and combined, leaving only this determination, and the easier assessment of a debtor’s good faith efforts to repay the loan. We also hold that maintaining minimum monthly income-driven-plan repayments is sufficient to establish good faith, though we hasten to add that the length and amount of repayment should be taken as a significant factor. We do not think it is appropriate to discharge loans within the first five, or seven years, as previous iterations of the Code required, but we do believe 10 years is a sufficient period of time to establish good faith efforts and relative prospects of future earnings. Effectively this should allow debtors with a negative net worth and other compelling circumstances to apply for a modification on the remaining balance and terms of the loan. All of these considerations should be made in the decision to deny, permit, or modify the discharge. 

In this case the debtor has made payments for 10 years, and the bankruptcy court has ordered him to pay for 2 more years, at which time a full discharge will be granted. A creditor, however, may object to discharge where sufficient assets to satisfy the debt are present. As such, an appropriate balance should be struck so that, if a debtor has not been able to make a dent in their loans after 10 years, and has not accrued sufficient assets to satisfy the debt, they may file and substantially reduce their liabilities. This may put certain debtors into a scenario where they are faced with a sort of Hobson’s Choice--continue paying the loans for 10 more years and wait for forgiveness, or apply for discharge modification, with the understanding that all assets will be disgorged up to the exemption limits. 

We recognize that states differ, sometimes dramatically, in what exemptions they will allow, and so we are wary of bankruptcy planning and forum-shopping. Generally debtors may select between state-specific or federal exemptions, and will choose the option better suited to their individual circumstances. Certain states, such as Illinois (where the debtor resides) only provide a state-specific option. While it is not the province of this Court to supersede the legislature, the spirit of the Code dictates a result that balances the rights of the debtor and the creditor.  Perhaps this is an oversimplification but, outside of the Chapter 11 context, debtors are living, breathing, individual human beings, and creditors are conglomerates of individuals that do not rely on the debtor alone for their continuing viability. Here, the debtor represents less than a drop in the bucket of the going concern that is the Department of Education student loan program. Were the creditor a philanthropic older relative suddenly fallen on hard times, a more creditor-friendly result should follow. Courts and commentators often clutch their pearls, theorizing hysterically about absurd and unjust results, formulating axioms, epigrams and proverbs like “bad cases make bad law.” Cases studied by law students in the areas of contracts, trusts & estates, and property, to name but a few, rely upon the concept of perfected intent. The makers of instruments know exactly what they want and exactly how they will get it. Students, on other hand, while they may be over 18 and presumptively capable of entering into enforceable contracts, do not have equal bargaining power with a government lender. Federal loans are often seen as “safer” than private loans, yet they may have higher interest rates. Students cannot guarantee a result anticipated prior to entering into a classroom of their peers, each focused on grabbing brass rings, because there may not be enough rings, so to speak, to go around. The debtor in this case admitted that he wanted to drop out of school after his first year, but he had accrued over $20,000 in debt and felt the year and amount of debt added up to a “sunk cost.” While this Court is not prepared to say that the debtor made the wrong decision in completing his legal studies and passing the bar exam, where unjustly harsh results follow from flawed or misguided decision-making, our system aspires to protect the most vulnerable amongst us; individuals need not deserve a financial life sentence for the crime of trying to make their way through this world. Accordingly, the decision of the 7th Circuit is affirmed. 

Roberts, C.J. concurring.

I write separately from my brethren in the majority to comment that while I agree with the result reached, the reasoning provided is rather flawed and dangerous. The majority toes the line of rendering an Advisory opinion, and the dissenting justices call them out for crossing it; they want to “cancel” each other, it appears. They are no longer serving as umpires in the game, as we should aspire, but as players on opposing teams, in derogation of our jurisprudential ethos.  

Statutory interpretation is the province of the courts, and it is appropriate for the Court to resolve a dispute, but this Court did not take this case to resolve the procedural dispute in this case. It was a naked attempt to comment on a political issue which has recently arisen in the form of campaign promises during Presidential campaigns. Justice Kagan’s grandstanding is inappropriate. However, it does not comport that the creditor should get two bites at the apple. There is no abuse of discretion in the ruling and it should be affirmed. 

However, the Court needlessly proceeds onto the substance of the issue, as if the creditor had not failed to object, and had been ruled against regardless. Certainly the bankruptcy judge might very well have reached a different decision if presented with a deeper examination of the debtor’s standard of living. But that did not actually happen, and we need not pretend it did. 

In short, it is not inappropriate for the Court to interpret statutes, or to reject case law and establish precedent, but it was inappropriate to do so in this case. 

Alito, J. dissenting, joined by Justices Thomas, Gorsuch and Kavanaugh.                        

            Today, the Supreme Court of the United States reaches a new low. Not since the earliest days of the Republic has such childishness and foolishness reigned in the well of the Court at oral argument, or in judicial conference.  This entire case, from beginning to end, has been a farce, and the Court has indulged the litigants, allowing them to make a political statement in the guise of a precedential ruling. This is both unethical and dangerous. 

            The majority strains to find support for their position where none exists. The circuits have not split in recognizing that relief of this magnitude is only appropriate in cases of truly unusual difficulties and suffering. The Thomas court recognized that all but one circuit has followed this same standard. It is not accurate to refer to the divide between 11-1 as a “split.” The majority instead cites one recent District Court opinion (which again, provides no persuasive authority) to justify its reasoning. It is not surprising, and it is almost as if Justice Kagan has felt enabled by Judge Morris and Judge Scudder to engage in such naked judicial activism. 

Even if we are to believe that an actual dispute still exists in this case, as the 7th Circuit had it, the debtor clearly does not satisfy any part of the Brunner test. For one, his expenses do not exceed his income. This is no problem for the majority, as it feels empowered to craft wholesale legislation onto the Bankruptcy Code, and assert that individuals with no other real and compelling need to file bankruptcy should be allowed to do that for their loans alone, as the debtor has in this case. It has never been the province of the Courts to serve as a super-legislature. In fact, it is absolutely prohibited. Courts may strike down legislation, but they are simply not allowed to create new legislation. We have all merely taken an oath to defend the Constitution, and to determine where legislation has run afoul of it. We also may determine whether lower courts erred. That is it.

We have, on occasion, been known to create certain “tests” to determine whether a set of facts comes into the ambit of prior case law. Casey v. Planned Parenthood transmogrified Roe v. Wade. The Court essentially dictated that abortions within the first trimester fell within the ambit of constitutionally-protected rights. It then did away with the trimester framework in favor of a viability framework, and an “undue burden” standard, rather than strict scrutiny, to legislation that impeded women’s access to abortions.

            Today, the majority has pulled a Casey on the Brunner test, and it has essentially held that people who otherwise do not need to file bankruptcy may do so to discharge their loans alone. At least, that part of the Brunner test has essentially been eviscerated. The definition of bankruptcy is when liabilities exceed assets. And while we recognize that the debtor's total debt exceeds their total assets, apart from that, this looks like a duck, walks like a duck, and quacks like a duck. It’s probably a duck. It’s probably a bad faith filing.

            The Trustee has not yet had the opportunity to even investigate the debtor’s finances. This entire time, we have been talking about the U.S. Department of Education and their failure, as the creditor in an adversary proceeding, to subject the debtor to adequate scrutiny. And while their performance is not to be lauded, it is the province of the Trustee to investigate the debtor, to marshall property of the estate, and distribute that property--subject to exemptions--to creditors according to priority of the claim. Student debt is unique in that it is an unsecured debt, but enjoys very high priority in the hierarchy of creditors. It has been stamped within the ironclad protections of Section 523(a) specifically out of concern for this type of abuse. Now, students may borrow astronomical sums, perhaps $100,000, perhaps $200,0000--there really is no limit--and all they need to do is wait ten years and wipe it out. Income-based-repayment plan forgiveness is now essentially the same time as public service forgiveness. The only difference is imputing the discharge as income for tax purposes. That, and some slippery mumbo-jumbo about the totality of the circumstances of the debtor’s financial situation.

While this is not a bad faith filing per se, the majority has run a zamboni down an already slippery slope. Of course, these cases are not dismissed for bad faith; these motions are simply denied. After this, the debtor will return to the process and have his Section 341 meeting and the Trustee will be prevented from satisfying the creditor out of available assets. This is effectively widening the wild-card exemption, potentially to an unlimited extent (certainly, those extreme cases of spousal-combined student loan debts over $500,000 will all end up in bankruptcy court, expecting relief) and a perversion of the bankruptcy framework and philosophy. There is a growing sense in the nation that, for some reason, people should be entitled to have their student debt forgiven or cancelled. Several Democratic Presidential candidates formed utopian campaign promises around this celebration of financial irresponsibility. People latched onto it. The majority consists of five of those people. 

As judges, we are asked to follow the letter of the law. And while the majority has done that today, it has not followed the laws of the United States; nay, it has followed the laws of Fantasyland. 

It is so ordered.