hedlund 2011 ruling

7/16/2019 Hedlund 2011 Ruling

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1 UNITED STATES BANKRUPTCY COURT

2 DISTRICT OF OREGON

3 _______________________________________________________

4 In re: )

)

5 MICHAEL ERIC HEDLUND and ) No. 03-63788

STEPHANIE RAE HEDLUND, )

6 )

Debtors. )

7 ______________________________)

)

8 MICHAEL ERIC HEDLUND, )

)9 Plaintiff, )

)

10 vs. ) No. 03-06231

)

11 THE EDUCATION RESOURCES )

INSTITUTE INC., et al., )

12 )

Defendants. )

13 _______________________________________________________

14 TRANSCRIPT OF THE DIGITALLY-RECORDED PROCEEDINGS

15 BEFORE THE HONORABLE PHILIP H. BRANDT

16 MAY 19, 2011

_______________________________________________________

17

18

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20

21

22

23 Reported by: Robyn Oleson Fiedler

CSR #1931

24

25

Case 03-06231-tmr Doc 68 Filed 06/10/11



1 A P P E A R A N C E S

2

3 For the Plaintiff:

(telephonically)

4

MR. KEITH Y. BOYD

5 Attorney at Law

MUHLHEIM BOYD

6 88 E. Broadway

Eugene, OR 97401

7 Phone: 541-868-8005

[email protected]

8

9 For PHEAA:

(telephonically)10

MR. MILES D. MONSON

11 Attorney at Law

10700 S.W. Bvtn-Hlsdl Highway, #460

12 Beaverton, OR 97005

Phone: 503-646-9230

13 [email protected]

14

15

16

17

18

19

20

21

22

23

24

25

2




1 DIGITALLY RECORDED IN TACOMA, WASHINGTON

2 MAY 19, 2011

3 --ooOoo--

4

5 THE COURT: This is Judge Brandt. Thank you

6 both for calling in. And this is the time we set for

7 my ruling after the argument on the record, and I don't

8 remember precisely what date that was, I think about

9 the 25th of April.

10 I'm going to begin by letting you know that

11 this is going to be a tentative ruling. Given the

12 somewhat extended history of this adversary proceeding

13 and the possibility that there might be another round

14 of appeals, I think I want to make really sure that

15 we've addressed thoroughly, at the trial court level,

16 all of the issues. So if there's something that comes

17 out in this ruling that either of you or your clients

18 feel is not appropriate, based on the record and the

19 authorities, we'll set up a time for you to file

20 memoranda to that effect, and then we'll set a further

21 hearing, if necessary, or otherwise enter a judgment

22 after the time passes, if there are no such memoranda

23 filed.

24 So that said, I think I'll just start out.

25 The matter is before the Court, and I'm sitting as a

3




1 bankruptcy judge for the District of Oregon, although

2 I'm a Western Washington judge in recall status. And

3 it's before the Court on remand from the Ninth Circuit

4 via the Ninth Circuit Bankruptcy Appellate Panel.

5 MR. MONSON: Your Honor, Miles Monson. Sorry

6 to interrupt. The sound is fading in and out. I'm

7 having a hard time hearing you.

8 THE COURT: Okay. Is this better?

9 MR. MONSON: That is better. Thank you.

10 THE COURT: I'm try to remember to be as

11 close to this microphone as possible.

12 So starting with the history of the case,

13 plaintiff Michael Hedlund filed a joint Chapter 7

14 petition in May of 2003 with his wife Stephanie. And

15 he received his discharge in September of that year.

16 On June 16th of that year, he filed this

17 adversary proceeding against two student lenders, one

18 of them, The Educational Resources Institute, known as

19 TERI, or T-E-R-I, was owed about $17,700; the other,

20 Pennsylvania Higher Education Assistance Agency, which

21 is typically referred to in pleadings as PHEAA -- all

22 caps, P-H-E-A-A, and I'll probably refer to it mostly

23 that way today. PHEAA was owed over $85,000.

24 Mr. Hedlund settled with TERI shortly before

25 trial, and ultimately, there was an agreed judgment

4




1 docketed in October of 2004 as docket No. 38. And the

2 import of that judgment is that a state court judgment

3 is nondischargeable. It doesn't set forth precise

4 terms, but we have some evidence of that in the record

5 of the trial.

6 The trial between Mr. Hedlund and PHEAA took

7 place in December of 2003. At that time he argued for

8 a partial discharge of any amount in excess of $28,000.

9 On December 15th, the Court -- Judge

10 Radcliffe announced his findings of fact and

11 conclusions of law and reached a conclusion that all

12 but $30,000 of the student loan debt should be --

13 student loan debt to PHEAA should be discharged. And

14 judgment to that effect was entered on January 14th of

15 2004.

16 PHEAA appealed to the Bankruptcy Appellate

17 Panel, which reversed in an unpublished opinion in

18 August of 2004. Mr. Hedlund then appealed to the Ninth

19 Circuit, which in a memorandum, again unpublished,

20 entered March 2nd, 2010, vacated the BAP decision and

21 ordered remand to this court. And that's found at 368

22 Fed Appx 819, or 2010 WL 737641.

23 The BAP remanded to this court at my

24 instigation, when I noticed it hadn't happened, with an

25 order that was filed in the adversary file on the 27th

5




1 of April of this year, docket No. 66.

2 The Circuit's decision left to this Court's

3 discretion whether or not to reopen the record for

4 further evidence. My recollection from the papers is

5 that Mr. Hedlund objected to reopening the record, and

6 in any event, Judge Radcliffe declined to do so. After

7 briefing and argument, Judge Radcliffe took the matter

8 under advisement, but then he died, unfortunately,

9 before entering his ruling.

10 In response to a request from the chief

11 bankruptcy judge of Oregon, the Ninth Circuit assigned

12 me to carry out -- to finish the process. Under

13 Federal Rule of Civil Procedure 63, which applies in

14 bankruptcy -- or at least adversary proceedings and

15 contested matters, via Federal Rule of Bankruptcy

16 Procedure 9028, if a judge conducting a hearing or

17 trial is unable to proceed, any other judge may proceed

18 upon certifying familiarity with the record and

19 determining that the case may be completed without

20 prejudice to the parties. And then it goes on from

21 that.

22 With respect to a hearing or non-jury trial,

23 which is what we have here, the successor judge may

24 recall witnesses with material testimony who are

25 available to testify without undue burden, and may also

6




1 recall other witnesses.

2 Rule 63 applies where a successor judge steps

3 into the shoes of the original judge in order to finish

4 something the other judge started. And the substitute

5 judge may make a finding of fact in a bench trial,

6 based on evidence heard by a different judge -- and

7 that comes from Patelco Credit Union v. Sahni, 262 F.3d

8 897, a Ninth Circuit case from 2001.

9 Here the parties have stipulated that there

10 are no issues of credibility and have consented to my

11 determining the remand issues on the record, and did so

12 at the 2 March 2011 status conference after I was

13 assigned.

14 In accordance with the rule, I certify that I

15 have examined the complete record of these proceedings,

16 including the pleadings, the stipulation of facts, the

17 trial transcript, the admitted exhibits, and the

18 transcripts of the other arguments in other proceedings

19 after remand held by Judge Radcliffe. And upon that

20 review, and in light of the parties' stipulation, I

21 find that the case may be completed without prejudice

22 to the parties.

23 In a student loan case, an adversary about

24 discharge of a student loan, 11 USC Section 528(a)(8)

25 provides that a student loan is discharged while in

7




1 bankruptcy only if excepting such debt from discharge

2 would impose an undue hardship on the debtor and the

3 debtor's dependents. In In re Pena, 155 F.3d 1108, a

4 Ninth Circuit case from 1998, the Ninth Circuit adopted

5 the three-prong test set out in In re Brunner, a Second

6 Circuit case, 831 F.2d 395, from 1987.

7 Under the Brunner standard, first the debtor

8 must establish that he cannot maintain, based on

9 current income and expenses, a minimal standard of

10 living for himself and his dependents if forced to

11 repay the loans; second, that additional circumstances

12 exist indicating this state of affairs is likely to

13 persist for a significant portion of the repayment

14 period of the loans; and third, the debtor must also

15 show good faith efforts to repay the loans.

16 The debtor's burden of proof is by a

17 preponderance of evidence on all three prongs, and

18 partial discharges are permitted. And that's from

19 In re Saxman, S-a-x-m-a-n, 325 F.3d 1168, a Ninth

20 Circuit case from 2003.

21 When a partial discharge is sought, the

22 debtor has to show the Brunner elements with respect to

23 the portion of the debt he wishes to discharge. The

24 time for this determination is as of the time of trial,

25 as we discussed at the status conference.

8




1 The Circuit's remand was that this Court

2 reconsider the evidence in light of the Brunner test

3 and make findings on each of the three factors, so as

4 to facilitate appellate review. To do this, I've

5 carefully examined the trial transcript of the exhibits

6 and so on, as mentioned before, and considered the

7 plaintiff's arguments, both oral and written, made at

8 the trial as well as after the remand. In other words,

9 I've looked at the briefs that were filed post remand,

10 as well as the ones that were filed while Judge

11 Radcliffe was hearing the matters.

12 So I'm going to go through the facts now.

13 And keeping in mind that the trial was, what, going on

14 more than seven years ago, I may -- I'll probably use

15 the present tense. But I'm addressing this situation

16 as of the time of the trial. And at that point,

17 Mr. Hedlund was 33 years old.

18 His father practiced law in Klamath Falls,

19 Oregon, and one of his brothers was also practicing

20 law. He grew up in that town, attended Oregon State

21 University, Oregon Institute of Technology, and

22 ultimately graduated from the University of Oregon in

23 1992 with a bachelor of science in business

24 administration.

25 He had some trouble finding appropriate

9




1 employment and decided, after considering his family's

2 line of work, that he would practice law. So he was

3 accepted at Willamette University School of Law and

4 graduated in 1997, ranking in the middle of his class.

5 After graduating from law school, he enrolled

6 in a bar exam preparatory course, and he took and then

7 failed the Oregon bar exam. Nevertheless, he was able

8 to work in the Klamath County District Attorney's

9 Office and hoped to continue working for a few years

10 and then ultimately practice law with his father.

11 While he was at the District Attorney's

12 Office, he took time off to study and then take the

13 bar, the Oregon bar, in February of 1998, again with

14 unfortunate results. He did not pass.

15 The following summer he took time off to try

16 for a third time, approximately two months. He had a

17 misfortune en route to taking the bar exam, stopped for

18 coffee, locked his keys in his car, and did not make it

19 to the site in time to take the bar.

20 Without the bar -- without being admitted to

21 the bar, it's not clear to me whether he had any choice

22 but to leave the District Attorney's Office, but in any

23 event, he did leave the District Attorney's Office and

24 started with his current employment as a juvenile

25 counselor with the Klamath County Juvenile Department,

10




1 in which capacity he reviews police records, meets with

2 accused juveniles and their parents, recommends whether

3 or not they need to be on probation, appears in court,

4 at least in preliminary matters in juvenile cases, and

5 supervises juveniles to ensure compliance with any

6 probation order.

7 In 2000 he married Stephanie Hedlund, his

8 co-petitioner. She's a high school graduate with some

9 college education, but no degree. At the time of trial

10 she was 25, working part-time, one day per week in a

11 flower shop, earning $8.50 an hour.

12 In mid 2001, they had a daughter. And at the

13 time of trial, they lived in a two-bedroom duplex in

14 Klamath Falls owned by Mr. Hedlund's parents. They

15 paid rent below the market rate at $375 a month. That

16 was -- the testimony was that that was $75 a month

17 below the market rate.

18 At the time of trial, Mr. Hedlund and his

19 family were in good health with no obvious health

20 problems. They owned a 1990 Chevrolet Blazer that had

21 150,000 miles on it, and had leased a 2002 Honda Accord

22 for $354 a month. They had no other assets of

23 significance.

24 Mr. Hedlund had financed his law school

25 education primarily with student loans, including the

11




1 six Stafford loans guaranteed by PHEAA, which are the

2 subject of this adversary proceeding -- or the

3 remaining subject of this adversary proceeding. The

4 aggregate monthly payment on those loans was in excess

5 of $800.

6 When he took the loans and was in law school,

7 Mr. Hedlund expected to repay by practicing law. The

8 loans were scheduled to go into repayment six months

9 after he finished law school. But since he had failed

10 the bar exam and didn't have sufficient resources,

11 Mr. Hedlund requested and got two additional six month

12 hardship forbearances. Thus, the loans went into

13 repayment status in January of 1999.

14 At that time, Mr. Hedlund asked to

15 consolidate his loans to lower the payments. This was

16 very close to the deadline, and PHEAA or its employees

17 or agents, advised him not to worry if he got notices

18 that his payments were late while his application was

19 being processed.

20 Some months later, after receiving several of

21 these late payment notices, Mr. Hedlund checked on the

22 status and was told that the application had never been

23 received. He then asked if he could reapply, was told

24 he couldn't because he wasn't current in the originally

25 scheduled payments.

12




1 He made no payments on the loans until

2 September of 1999 when, after he received an

3 inheritance from his grandmother, he paid $954.72

4 toward those loans. The other roughly $4,000 he used

5 to pay other creditors.

6 Still unable to make the full monthly

7 payment, Mr. Hedlund tried again to negotiate a reduced

8 payment. PHEAA gave him the option of paying $10,000

9 and then $1,300 a month for 10 months, after which his

10 regular payments would be lowered. He was unable to do

11 so. He did offer a good faith payment of $5,000, which

12 he would borrow from his parents, in exchange for more

13 lenient terms and a waiver of some of the fees that had

14 been assessed. The offer was rejected.

15 Thereafter, from January of 2002 until May of

16 2003, PHEAA garnished Mr. Hedlund's wages, collecting,

17 I think it was at the rate of $258 a month, $4,272.52.

18 In the spring of 2003, TERI also took up

19 garnishment and garnished more than $1,000 from

20 Mr. Hedlund's bank account on the student loan owed to

21 it. Those were the funds that were left over after

22 garnishment by PHEAA, and were what Mr. Hedlund and his

23 family were expecting to live on.

24 Unable to deal with both garnishments,

25 Mr. and Ms. Hedlund filed the Chapter 7.

13




1 The total owed PHEAA as of the date of trial

2 was $85,245.87, and it bore interest at 4.22 percent

3 per year. The maximum repayment period on the loans

4 was 20 years, and five of those years had already

5 elapsed.

6 After the adversary had been filed, but

7 before trial, PHEAA offered three repayment plans, I

8 think a choice of three -- simultaneously offered them

9 to Mr. Hedlund, but each would have required monthly

10 payments on a 30-year amortization, and each had

11 payments that stepped up after an initial lower

12 payment.

13 Actually, that's not true. The first option,

14 I think, was roughly $417 a month for the whole period,

15 with a slightly shorter last payment. The other two

16 started at -- the other two started at $307 a month,

17 and the first variation of that had two steps, and the

18 second one had three steps. But each totaled 30 years

19 and would cover the whole amount of the loan.

20 It's to this set of facts that the Brunner

21 test is to be applied. The first prong requires that

22 the debtor establish that he could not maintain, based

23 on current income and expenses, a minimal standard of

24 living for himself and his family if forced to repay

25 the loans. More than simply tight finances must be

14




1 shown, and more than a temporary financial adversity.

2 But utter hopelessness is not required; that's from In

3 re Rifino, 245 F.3d 1083, a Ninth Circuit case from

4 2001.

5 A minimal standard of living is above the

6 federal poverty level but below a middle class standard

7 of living, according to In re Howe, 319 B.R. 886, a

8 Ninth Circuit BAP case from 2005. And that case also

9 teaches that the minimal standards are to be determined

10 in light of the particular facts of each case. And the

11 test articulated is whether it would be unconscionable

12 to require the debtor to take steps to earn more or

13 reduce expenses further to make the payments under a

14 given schedule. And that is from In re Carnduff.

15 That's 367 B.R. 120, a BAP case from 2007.

16 In its remand, the Ninth Circuit noted as to

17 prong one that the Court had not considered whether

18 Mr. Hedlund could increase his income either by taking

19 on a part-time job or by his wife working part-time,

20 and that it did not sufficiently consider whether

21 Hedlund could reduce his expenses to meet a greater

22 portion of the loan payments.

23 That seems to me a somewhat constrained

24 reading of Judge Radcliffe's decision, because he did

25 in fact consider whether Ms. Hedlund -- and in fact,

15




1 factored in Ms. Hedlund working three days a week

2 instead of one, and did in fact consider and direct

3 that some of the expenses be reduced or at least not

4 considered in setting the payment. But be that as it

5 may, that's where we are.

6 I've re-examined the evidence in light of the

7 remand and conclude that Mr. Hedlund had maximized his

8 income. As the date of trial he was working full-time

9 as a juvenile counselor earning $19.17 per hour,

10 grossing approximately $3,200 a month and netting,

11 after taxes and deductions, about $2,317 a month. He

12 had benefits which included health, dental and life

13 insurance, vacation and sick time, and a pension plan

14 with mandatory contributions and a significant, roughly

15 6 percent match from the County.

16 The evidence was that Plaintiff Hedlund was

17 doing as well as he could financially, given his

18 skills, and the then recessionary economic conditions.

19 Paula Pence, the occupational expert called on his

20 behalf, testified that he was well-placed for his

21 skills, that his wages and benefits were excellent for

22 the Klamath Falls area, there were no higher paying

23 jobs available to him, and that the area's employment

24 situation was unlikely to change in the near future.

25 That testimony was uncontroverted.

16




1 After taking his job with the County,

2 Mr. Hedlund continued to look for work in the area,

3 applying for but not getting two higher paying jobs.

4 He also looked out for similar juvenile counselor

5 positions in Oregon and Washington and was willing to

6 relocate if there was a net economic benefit. On this

7 point, Ms. Pence testified that although there might be

8 higher wages or salaries for similar positions in other

9 areas outside of Klamath Falls, the increased earnings

10 would be offset by the increased expenses, Klamath

11 Falls being a relatively low cost area, and of course,

12 the Hedlunds having quite a low cost situation with

13 their concessionary rent.

14 PHEAA's argued that Mr. Hedlund could earn

15 more as a licensed attorney. And there was evidence

16 that statewide Oregon attorney's earnings on average

17 exceeded his. But there was no available evidence as

18 to the average earnings of lawyers in Klamath County,

19 and it's not clear that higher wages elsewhere would

20 net him higher take-home pay, given higher living

21 expenses elsewhere.

22 In addition, besides just the raw dollars,

23 Mr. Hedlund had significant benefits in connection with

24 his employment, as mentioned before. It's not at all

25 clear that his then current wages or income, including

17




1 the value of the benefits, were in fact lower than an

2 attorney with like years experience practicing law.

3 Further, it's not -- I have to say I don't

4 regard Mr. Hedlund's failure to pass the bar exam as

5 being within his control. He tried twice, was going to

6 try a third time, had a misfortune, but he's now, as of

7 the time of trial, in a position where he could not

8 afford to lose a couple months' wages or take the bar

9 prep to retake the exam. And it's not at all clear --

10 I don't believe there was evidence on the point one way

11 or the other whether his employer would let him take

12 sufficient time off to do that. So that simply does

13 not -- is not available to him.

14 PHEAA also suggested that he should work more

15 than full-time, take an additional part-time job. But

16 I would find that unconscionable. The cases that dealt

17 with underemployment have typically focused on either

18 being employed at a job -- not the best job or not the

19 best paying job that was then available to the party,

20 or someone not working full-time and not trying to work

21 -- not looking for full-time work. And I have in mind

22 in that connection Mason. And that cite is 464 F.3d

23 878, a Ninth Circuit case from 2006.

24 On the other hand, as Judge Radcliffe stated

25 in his initial original findings and conclusions, it

18




1 would be reasonable and not unconscionable to require

2 Ms. Hedlund to work three days rather than one day per

3 week, particularly in light of the availability of free

4 child care from grandparents. That would add

5 approximately $320 gross monthly income and around $265

6 net to their household income, which would then yield

7 an aggregate net income of $2,715 per month. That's

8 $2,450 from Schedule I plus the $265.

9 The Court can also adjust expenses in the

10 prong one analysis to those reasonably necessary to

11 maintain a minimal standard of living. And we find

12 that in Craig v. ECMC, 579 F.3d 1040, Ninth Circuit

13 2009. And as indicated in Mason, those expenses are

14 within the discretion of the bankruptcy court.

15 Judge Radcliffe followed Sequeira, 278 B.R.

16 861, a 2001 case from Oregon, and held that the

17 disposable income test from Chapter 13 was an

18 appropriate measure for what's permissible to maintain

19 a minimal standard of living.

20 Arguably, that standard is less strict than

21 unconscionability. But the BAP in Carnduff's Footnote

22 5 expressed no view on whether the disposable income

23 test of Chapter 13 was either permissible or required

24 as a method of assessing undue hardship under Section

25 523(a)(8).

19




1 The BAP also referenced a Montana case, In re

2 Fulbright, 319 B.R. 650, from 2005, which has a

3 somewhat different view. So it's clear that there's no

4 single formula for determining reasonably necessary

5 expenses. They're to be determined on a case-by-case

6 basis, using concepts such as the Chapter 13 disposable

7 income analysis, Chapter 7 abuse allowances, and expert

8 testimony, of which we had none in this case on this

9 point.

10 I do find that the Chapter 13 standard is

11 helpful. And by and large, I'm inclined to use that as

12 a method of considering expenses, keeping in mind that

13 the Chapter 13 is looking at a situation that will last

14 three to five years in most cases, and student loans

15 cases have a much longer tail, 15 years in this

16 instance, maybe in other instances, 20 or more.

17 PHEAA argues that the Hedlunds should give up

18 the leased Accord, which would free $350 some a month,

19 in favor of relying only on the 1990 Blazer. I find

20 that that would be unconscionable. The uncontroverted

21 evidence about the Blazer is that it's not sufficiently

22 reliable for out-of-town trips, and given that the

23 family included at the time of trial a two-year-old

24 child, I don't think that one could reasonably require

25 a family not to have one non-luxury vehicle for

20




1 reliable transportation.

2 Although the lease term would end -- since it

3 is a lease and the car goes away unless lease payments

4 are made, they will either have to renew the lease and

5 continue with similar payments or find something else

6 in the same general price range, very likely. Perhaps

7 even higher.

8 PHEAA also challenges some expenses:

9 Clothing, cable TV and internet, cell phones,

10 charitable contributions, gym membership, laundry and

11 dry cleaning, recreation, child care and haircuts, as

12 excessive. And I agree that some of those are not

13 reasonably necessary for a minimal standard of living

14 and note that plaintiff conceded in closing argument

15 that $125 a month for clothing was too generous and

16 thought that $75 a month would be more appropriate.

17 I'll certainly adopt that recommendation. And I will

18 find that the recreation expenses can appropriately be

19 trimmed, but I think PHEAA's suggestion of only $25 a

20 month is unduly restrictive.

21 So what I will find is that $100 a month for

22 recreation, viewed as including the cable TV and

23 internet, is appropriate, and that from the child care

24 budget or miscellaneous category that includes child

25 care and haircuts and so on, given the availability of

21




1 free child care, I'll cut that to $30 a month.

2 The rest of the entries on Mr. Hedlund's

3 Schedule J, and the slightly updated figures set out in

4 his responses to the interrogatories in the adversary,

5 are reasonably necessary for a minimal standard of

6 living.

7 I think the cell phone, in particular, at $75

8 a month is reasonably necessary. This allows each

9 parent a cell phone. And Mr. Hedlund is out of town on

10 work at various times and can't use the County's phone

11 for personal calls. Parents of young children do need

12 the ability to communicate.

13 Finally, Mr. Hedlund testified that the

14 payment on the TERI settlement is $50 a month, and

15 that's also nondischargeable. So these changes,

16 rounded off, equal roughly $200 a month.

17 If Mr. Hedlund and his wife's net income, as

18 adjusted, is $2,715 a month, and the current expenses

19 with these adjustments are $2,250, that leaves $465 a

20 month as surplus as of the time of trial.

21 Plaintiff has established by a preponderance

22 of the evidence that he doesn't have the current

23 ability to make the full $800 plus per month payments

24 required under the PHEAA loans without undue hardship,

25 but he could make partial payments.

22




1 On to prong two, in which the debtor must

2 show additional circumstances exist that indicate his

3 present inability to pay is likely to persist for a

4 significant portion of the repayment period.

5 While this case was on appeal, the Circuit

6 clarified that, while a debtor must demonstrate that

7 the additional circumstances are likely to persist for

8 a significant portion of the repayment period, they

9 need to be exceptional only in the sense that they

10 demonstrate insurmountable barriers to his financial

11 recovery and ability to pay. And that's from In re

12 Nys, 446 F.3d 938, a Ninth Circuit case from 2006.

13 The Court clarified that the additional or

14 exceptional circumstances mean only that the debtor

15 must present something more than her current financial

16 situation. She must present the Court with

17 circumstances she cannot reasonably change. To prove

18 undue hardship, circumstances must indicate that the

19 debtor cannot reasonably be expected to increase her

20 income and make payments for a substantial portion of

21 the repayment period. And that's found in note 7 at

22 page 946 of that case.

23 Do we still have both counsel?

24 MR. MONSON: Yes, Miles Monson is here.

25 MR. HOYT: Yes, Your Honor, Keith Hoyt.

23




1 THE COURT: Thank you. We just heard a bleep

2 that suggested maybe somebody lost the call.

3 Under Nys, courts are to presume that a

4 debtor's income will rise to the point at which

5 payments can be made on the student loan obligation

6 while maintaining a minimal standard of living, but a

7 debtor may rebut that presumption.

8 Just as an aside, I'll observe that this

9 presumption may not any longer reflect reality.

10 There's considerable recent economic literature that

11 suggests that lower and middle income American families

12 are essentially losing ground, or certainly not gaining

13 ground, such as was the trend in earlier years, earlier

14 decades. But at this point, that's what the law is in

15 this Circuit.

16 The Court in that case set out a long

17 inexhaustive list of additional circumstances on page

18 947, which I won't reread now, but I will reference as

19 I go through the ones that seem to me pertinent.

20 Fundamentally, the question is whether

21 debtors -- the debtor plaintiff's current financial

22 situation will persist for a significant portion of the

23 15-year period.

24 As to factor No. 2, which is the debtor's

25 obligation to care for dependents, even with

24




1 Ms. Hedlund working for three days a week, he's going

2 to bear the bulk of the responsibility for supporting

3 the family. And that burden will increase if in fact

4 they have an additional child.

5 As to factors 5 and 6, the lack of usable or

6 marketable job skills or underemployment, which apply

7 here, arguably, through the lack of admission to the

8 bar, and the uncertainty and cost of perhaps gaining

9 that certification or that admission, those suggest

10 that the circumstances will continue indefinitely.

11 As to 7, 9 and 12, which are whether he's

12 maximized his income potential, whether age or other

13 factors prevent retraining or relocation, and whether

14 potentially increasing expenses outweigh any potential

15 appreciation in assets or income -- excuse me, I meant

16 to say 12, not 11. 12 is the lack of better financial

17 options elsewhere. I think that those also point the

18 same way.

19 There are no better jobs available in Klamath

20 County to the plaintiff. There's some possible

21 promotions and some modest step increases. Possible

22 promotions are well off into the future when current

23 incumbents and folks higher up in his department

24 retire. And those are certainly not sure things.

25 While there might be some cost of living

25




1 adjustments, they're not likely to outpace inflation.

2 Of the possible promotions, there are only

3 three possible positions in the department, and the

4 earliest that one of those would be expected to be

5 available was eight years out. Thus, Mr. Hedlund had

6 no significant opportunity for advancement for well

7 over half of the repayment period.

8 Cost of relocating would likely -- and the

9 increase in living expenses suggests that that would

10 not improve his position. And although Ms. Hedlund can

11 contribute some more to the family income, we've

12 discussed that already, and that doesn't really add

13 very much to suggest that the situation will change and

14 that Mr. Hedlund would be able to repay the entire

15 loan.

16 As to Factor 10, the current assets are

17 minimal, and there's no evidence that he might be

18 getting an inheritance or any other large asset that

19 would help in retiring the student loan debt.

20 As to Factor 11, the plaintiff's testimony

21 was that his housing expenses would soon increase,

22 moving from essentially a below market rate two bedroom

23 duplex into something slightly larger to accommodate a

24 larger family, which would cost on the order of $600 a

25 month, a $225 increase from their present housing

26




1 budget. That seems to me a reasonably necessary

2 expense.

3 With respect to the Accord, as I mentioned

4 earlier, although the $354 a month lease payment would

5 run out in October of 2004, something similar would

6 have to be obtained, and the price is likely to be

7 somewhat similar.

8 In all, it doesn't look like Mr. Hedlund's

9 prospects of net economic change for the better was in

10 the offing or to be expected during the repayment

11 period on the loans. So I will find that Mr. Hedlund

12 rebutted the presumption that his income will increase

13 or his expenses decrease to a point where he could

14 make, without undue hardship, the full payment on the

15 PHEAA debt.

16 But as I indicated before, he could make

17 partial payments without undue hardship. Once the

18 additional rental expense is factored in, there is left

19 available a $240 a month surplus for payments to PHEAA.

20 On to prong three. The debtor, to establish

21 prong three, must have established -- must show that

22 he's made good faith efforts to repay the loan. Good

23 faith was measured by his efforts to obtain employment,

24 maximize income, minimize expenses. And that's, again,

25 from Mason at page 884. Also, a relevant consideration

27




1 is whether or not he's attempted to negotiate a

2 repayment plan, although that's not dispositive;

3 likewise, payments that the debtors made and the timing

4 of his attempt to have the loan discharged.

5 Mr. Hedlund's efforts to find employment,

6 maximize his income and minimize his expenses I've

7 already discussed. While I find that Ms. Hedlund could

8 be expected to work three days a week instead of one,

9 it's hard to ascribe her past failure to do so as

10 indicating a lack of good faith, particularly on

11 Mr. Hedlund's part. Even assuming she -- since she's

12 not an obligor on the loan and arrived after the loans

13 were already in force or already taken out, and I think

14 actually in repayment, the idea that she has an

15 independent duty to maximize her income to help pay for

16 them seems inappropriate. And in addition, she's got a

17 young child to take care of, and that would override

18 any duty to assist in the payment of the loans, at

19 least as far as good faith is concerned.

20 Although I've indicated that I'm prepared to

21 rule that some of the expenses could be trimmed and

22 that, obviously, the Hedlunds haven't done that before

23 trial, in light of all the circumstances, I don't think

24 that tips the balance away from a good faith finding.

25 And part of the reason I've reached that conclusion is

28




1 that those expenses co-existed with the garnishment,

2 about which I'll say a little bit more later.

3 Although the expenses that I've indicated

4 could be cut and dedicated to student loan repayment,

5 Mr. Hedlund and his family have always lived frugally,

6 and their budget for non-necessities has been modest.

7 Regarding efforts to repay, at no time from

8 -- since the loans went into repayment status did

9 Mr. Hedlund have the ability to make full payments in

10 excess of $800 a month. But he didn't immediately go

11 off and file bankruptcy. During the roughly four years

12 that followed, he made a voluntary payment of $950 some

13 dollars. He endured 16 and a half months of

14 garnishments, in his words, "because PHEAA was entitled

15 to the money."

16 He did not challenge those garnishments, nor

17 did PHEAA take any action indicating that that state of

18 affairs, payments at the rate of $258 a month, was

19 unsatisfactory. It was only after TERI garnished the

20 bank account, obtaining what was left after the PHEAA

21 garnishment and kicking the supports out from the

22 family's financial situation, that they filed

23 bankruptcy.

24 That brings us to alternative repayment

25 plans. As Mason indicates, efforts to obtain and

29




1 participation in an alternative repayment plan is

2 relevant, but it's not dispositive on the issue of good

3 faith. Mr. Hedlund did attempt to negotiate

4 consolidation and lower payments, but was first stymied

5 by a lost application. Later he made an offer of

6 $5,000, which was rejected. And he did turn down the

7 various 30-year options PHEAA presented shortly before

8 trial.

9 Here, even the minimum repayment offered by

10 PHEAA was over $300, which is more than Hedlund could

11 afford without undue hardship. And accepting any of

12 those offers would have had him paying on his student

13 loans into his mid 60's. His refusal to obligate

14 himself long past when his child or children would

15 hopefully have had a chance to go to college themselves

16 does not seem to me to obviate good faith.

17 Since remand, PHEAA has argued that his

18 failure to apply for the income contingent repayment

19 plan evidences a lack of good faith. Mr. Hedlund

20 testified he had investigated ICRP online, but

21 concluded he was not eligible because he was already in

22 default.

23 PHEAA indicated that he may have been

24 qualified, may be qualified, but there's no evidence so

25 indicating. But even at the original trial, in

30




1 closing, PHEAA conceded that the payments under the

2 ICRP would be more per month than the options PHEAA had

3 had offered. And so it seems to me that the same

4 considerations apply. They simply were not feasible.

5 But I also have to say one further thing

6 about ICRP. I simply don't find the ICRP argument very

7 convincing. In circumstances such as the plaintiff's

8 and probably at least a significant number of the folks

9 who are in bankruptcy and seeking to discharge student

10 loans, the ICRP simply is going to substitute a

11 nondischargeable tax debt based on loan forgiveness for

12 the student loan debt. And that tax debt is going to

13 hit as much as 25 years further out, even when young

14 debtors are likely to be dealing with their own

15 children needing help with college or as they're

16 getting ready for retirement or hoping to get ready for

17 retirement or potentially both.

18 An excellent discussion of how this works is

19 fund in In re Booth, a bankruptcy case from the Eastern

20 District of Washington, 2009, and the cite is 410 B.R.

21 672. I don't see declining to get into a trade, for

22 all practical purposes, of nondischargeable debt, and

23 given what we know about Mr. Hedlund's position and

24 circumstances, there's no reason to expect that his

25 situation would improve sufficiently for him to pay any

31




1 very large portion of the debt, thus, there's a

2 considerable forgiveness at the end and considerable

3 nondischargeable tax liability -- it just doesn't seem

4 to me that that -- that his failure to apply or failure

5 to obtain an ICRP payment schedule evidence is a lack

6 of good faith.

7 Finally, I'm to consider whether or not this

8 is self-inflicted harm. Did this arise through the

9 debtor's irresponsibility or negligence? I don't see

10 any. He's remained employed at the best job he could

11 find, given the circumstances. He's not got addictions

12 to drugs, gambling, alcohol or anything else that

13 diverts a significant portion of his income, or even

14 any, according to the evidence. He lives modestly. He

15 and his family live modestly. They've forgone

16 luxuries.

17 His hope was to practice law. He made a

18 valiant effort towards doing that, even beyond the

19 effort that law school requires. His attempts,

20 repeated attempts to pass the bar, indicate a good

21 faith in trying to maximize the value of his education.

22 Sometimes one simply can't accomplish what one sets out

23 to do, and it's prudent to put the past behind and make

24 the best of the circumstances. I think that's what

25 Mr. Hedlund has done here.

32




1 So I will find that a partial discharge is

2 appropriate in this case and that Mr. Hedlund can pay,

3 without undue hardship, $240 a month in the remaining

4 15-year repayment period. Again, we're speaking as of

5 the end of trial in December of 2003.

6 Using the Sequeira methodology, the present

7 value of that stream of payments at a 4.22 percent

8 discount rate is $32,080. That amount will be excepted

9 from discharge and will bear interest at the rate of

10 4.22 percent from January 14th, 2004, the date of the

11 original judgment. And Mr. Hedlund shall make monthly

12 payment of $240 due on the 10th of each month with

13 credit for any payments he's made since that trial.

14 Repayment of any amount in excess of that

15 would impose an undue hardship on Mr. Hedlund and his

16 dependents and, therefore, will be discharged. I will

17 enter a separate judgment.

18 As I indicated at the beginning of this

19 ruling, these are my tentative findings of fact and

20 conclusions of law. If either party believes there's a

21 flaw in the analysis, I want that party to file a

22 memorandum pointing out what it is, referencing the

23 pertinent authority and precisely where in the record

24 the basis is for that contention. And to do so, I'm

25 going to pick a date, and then we can talk about it.

33




1 But my pick of a date would be -- we're now

2 at this 13th -- the 3rd of June. And I will say that

3 I'm going to order out a transcript directly, and I'm

4 going to edit the transcript because I realize that

5 this is of importance to the parties. I assume that

6 will take a few days. But that should enable the

7 parties to file -- to analyze the transcript and file

8 what you wish by the 3rd of June.

9 One sort of minor footnote to that, Mr. Boyd,

10 if the 10th of the month is not the best date to set

11 the payment date, that doesn't require anything other

12 than, you know, just telling me what's a better day and

13 maybe briefly why. But that's not significant, whether

14 it's the 10th or the 5th or so on.

15 So if there are such memoranda filed, we'll

16 set up a hearing to consider. I think it would make

17 sense to wait until then till we know what schedules

18 are like into June. And if there are no such

19 memoranda, the Court will prepare a judgment and enter

20 it.

21 Any further questions? Well, let me start

22 with, is the 3rd of June feasible? Or do either of you

23 have major trials or vacations with tickets already

24 paid for and things like that that would interfere with

25 that?

34




1 MR. MONSON: Your Honor, Miles Monson. We

2 would like that to be extended just a little bit,

3 because we don't know how much time it's going to take

4 to get the transcript.

5 THE COURT: Okay. So one more week, do you

6 think?

7 MR. MONSON: Yes, please.

8 MR. BOYD: I agree, Your Honor. I think one

9 more week. I do have a friend who has surgery on that

10 day up at OHSU, and I do plan to attend that. So I

11 would appreciate that, also.

12 THE COURT: Okay. Well, we'll say the 10th

13 of June, then. My experience with getting transcripts

14 -- and we'll order it from here because it's in our

15 recording system. My experience is we can typically

16 get those within a few days, but it may take a couple

17 of days to review it and do the editing and make sure

18 we get the cites correctly and so on. But we'll have a

19 transcript that gets filed, I would hope, within a week

20 and a half or two.

21 And then once we get there, and if there are

22 further proceedings to be had, we'll sort out when they

23 might be, ideally later in June, although I'm committed

24 to do some work in Sacramento, I think it's the

25 following week. I'm not sure -- in the middle part of

35




1 June. So we'll have to work around that. Or maybe

2 we'll do a telephone hearing from Sacramento, if it

3 turns out that that works best.

4 MR. MONSON: Your Honor, if I could suggest

5 more than a week. The 24th might be a better date. By

6 the time we get the transcript, have our chance to

7 review it, have the client look at it, we're probably

8 up against close to that June 10th deadline.

9 THE COURT: So do you think the 24th rather

10 than the 17th?

11 MR. MONSON: Please.

12 THE COURT: Okay. Let me tell you that I

13 don't have July in front of me. I don't know that

14 there are significant -- parts of July may be

15 difficult. We've got a wedding in the family in the

16 middle of -- no, that's in August. Never mind. Yes,

17 we'll figure out something in July, I should think,

18 then. So the 27th of June --

19 MR. MONSON: The 24th?

20 THE COURT: Excuse me, the 24th.

21 MR. MONSON: Works for us. Thank you.

22 MR. BOYD: Very good.

23 THE COURT: Thank you both.

24 MR. BOYD: Thank you, Your Honor.

25 MR. MONSON: Thank you.

36




1 CERTIFICATE

2

3 ROBYN OLESON FIEDLER certifies that:

4

5 The foregoing pages represent an accurate and

6 complete transcript of the entire record of the

7 digitally-recorded proceedings before the HONORABLE

8 PHILIP H. BRANDT presiding, in the matter of HEDLUND;

9 and

10

11 These pages constitute the original or a true

12 copy of the original transcript of the proceedings.

13

14 Signed and dated this 3rd day of June, 2011.

15

16

17

18

19 by |s| Robyn Oleson Fiedler

ROBYN OLESON FIEDLER,

20 Certified Court Reporter.

21

22

23

24

25

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hedlund 2011 ruling

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