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In Re: August K. Ristow, Jr. and Victoria Rei Ristow v. August K. Ristow


March 26, 2012


Appeal from the United States Bankruptcy Court for the District of Arizona Honorable Eileen W. Hollowell, Bankruptcy Judge, Presiding Bk. No. 10-06491-EWH Adv. No. 10-01141-EWH




Argued and Submitted on February 24, 2012 at Phoenix, Arizona

Filed - March 26, 2012

Before: DUNN, JURY and PAPPAS, Bankruptcy Judges.

Victoria and August Ristow (collectively, the "Ristows") sought discharge of the student loan debt owed to Educational Credit Management Corporation ("ECMC") as an undue hardship under § 523(a)(8).*fn2 The bankruptcy court granted partial discharge of the student loan debt. ECMC appeals, contending that the bankruptcy court erred in finding that the Ristows met all three prongs of the test for undue hardship set forth in Brunner v. N.Y. State Higher Educ. Srvcs. (In re Brunner), 46 B.R. 752 (S.D.N.Y. 1985), aff'd, 831 F.2d 395 (2d Cir. 1987). We REVERSE.


A. The Ristows' employment circumstances The Ristows are in their early sixties with no dependents. August is an interim Lutheran minister who works with parishes that are "in between" more permanent ministers. His pay varies by the size of the parish he serves; he earns less at smaller parishes. August currently works at a large parish in Las Vegas, Nevada, where he expects to work until mid to late 2012. He stays in Las Vegas whenever he works at the parish; the parish provides his housing and pays certain expenses.

Several years ago, August worked as a furniture repairman and restorer, but he stopped such work due to back problems. Aside from his work at the parish, he has no other source of income.

Victoria has a master's degree in education and an MBA. However, she is unemployed. For thirty years, she worked as a disability case manager in state-funded vocational rehabilitation programs, providing re-employment assistance to people with disabilities or work-related injuries. She also worked as an 4 international business development consultant.

Because of cutbacks in funding for state vocational 6 rehabilitation programs, Victoria decided to obtain an MBA from 7 the Thunderbird School of Global Management ("Thunderbird") in 8 hopes of developing another career with higher income. She 9 believed that her experience in international business 10 development, as well as Thunderbird's prestigious reputation, 11 would help her transition into a career in international 12 business. Victoria further reasoned that she could use her MBA 13 in other endeavors if she was unable to obtain employment in 14 international business.

15 Victoria attended Thunderbird from 2006 to 2008, completing 16 the MBA program with a 3.4 GPA. She funded her education with 17 student loans from various lenders. Victoria also continued to 18 work as a disability case manager while attending Thunderbird.

19 However, she was laid off shortly before graduating from 20 Thunderbird.

21 After graduation, for nearly three years, she tried to find 22 employment in business development, business management and case 23 management. As part of her job-hunting efforts, she joined 24 networking groups, used a private career placement service, and 25 conducted online and phone searches. She managed to obtain a few 26 interviews, but no job offers. Subsequently, she continued to 27 search for employment, though not with the "same intensity," believing that her MBA had lost some of its value over time.*fn3 While searching for jobs, Victoria found short-term employment as a consultant in capital investment; for a contingent finder's fee, she introduced venture capitalists to small start-up companies. She was unable to develop this endeavor into permanent employment due to the poor economy.

Victoria also managed to find some employment as an independent contractor in case management, which supplied her one to four cases a year. She supplemented the family income with unemployment benefits.

Like August, Victoria has health problems. Because of a car accident, she needs double-knee replacement surgery, left foot metatarsal fusion surgery and thumb surgery. She has not undergone the double-knee replacement surgery, because she needs to lose weight before doing so. Victoria also has no funds with which to pay for the surgeries. Due to her health, she believes that she only may work jobs that are sedentary or involve light exertion and do not involve high levels of stress or long hours. B. The Ristows' chapter 7 bankruptcy filing The Ristows filed their chapter 7 bankruptcy petition on March 10, 2010. At the time of the bankruptcy filing, the Ristows had $4,675 in monthly net income and $7,011 in monthly expenses.*fn4 Their monthly net income decreased to $3,614, however, when Victoria's unemployment benefits expired sometime post-petition.*fn5 Their monthly expenses also decreased to $3,704, after the Ristows surrendered timeshares and a recreational vehicle post-petition and lowered the monthly mortgage payments on their home through a loan modification.

Among their expenses, the Ristows pay approximately $1,210 per month for their home mortgage and $415 per month for utilities. They also pay $50 per month for laundry, $120 per month for medical expenses and $140 per month for miscellaneous expenses.*fn6

The Ristows also make monthly payments of $516 on a 2007 Honda Civic Hybrid and $392 on a 2005 Honda Element. They report $300 per month in transportation expenses and $96 per month for car insurance.

As of the bankruptcy petition date, the Honda Civic had 53,618 miles on it and the Honda Element had 74,313 miles on it. The Ristows reaffirmed the debts on the Honda Civic and the Honda Element. Under the reaffirmation agreement for the Honda Civic, they agreed to pay $516.06 per month for 55 months, beginning April 13, 2010. Under the reaffirmation agreement for the Honda Element, the Ristows agreed to pay $390.65 per month for 20 months, beginning May 30, 2010.

C. The Ristow's § 523(a)(8) complaint

The Ristows filed a complaint to discharge student loan debts totaling $204,764 under § 523(a)(8). They asked that the student loans be discharged because repayment of the student loans would impose an undue hardship on them. Although the Ristows named several lenders as defendants, only ECMC answered the complaint.*fn7 The Ristows later obtained a default judgment against the other lenders.

Victoria owed ECMC $88,966.30 in student loan debt as of July 29, 2010. ECMC contended that the entire amount of the student loan debt was excepted from discharge.

At the March 29, 2011 trial, Victoria testified that she made nominal monthly payments of $150 to $160 on her student loan debt for a few months after the loan repayment deferment period ended.*fn8 She admitted that she had been advised of her student loan repayment options, which were the William D. Ford Income- Based repayment plan ("Income Based Plan") and the William D. Ford Income Contingent repayment plan ("Income Contingent Plan")(collectively, "Repayment Plans"). Under the Income Based Plan, Victoria's monthly payment would be $268.91. Under the Income Contingent Plan, her monthly payment would be $479.97.

Victoria explained that she decided not to make payments 2 under either the Income Based Plan or the Income Contingent Plan 3 because: (1) she did not want August to be liable for any 4 payments; (2) she and August did not have any extra disposable 5 income to make even the minimum payments; and (3) she would have 6 to make payments until she was 85 or 90 years old, given the 25 7 to 30-year repayment term.

8 Victoria testified that "the dual income that [they] . .. 9 had at one time when both of [them were] working and getting the 10 kind of professional incomes [they] should be getting, [was] 11 about [$]150 to $180,000." Tr. of March 29, 2011 trial, 49:9-12.

She did not anticipate that she and August would return to their 13 former level of income, however, based on her experiences over 14 the last three years. Victoria testified that, after one 15 interview with a company, she was informed that she did not 16 advance past the first interview because she "was too old and 17 [she] wouldn't make it with the technology." Tr. of March 29, 18 2011 trial, 59:8-10. Moreover, she pointed out, their additional 19 sources of income (namely, August's furniture repair and 20 restoration work) were no longer viable due to the economy and 21 their health.

Victoria explained that, with their current income and 23 expenses, she and August either "broke even" or had approximately 24 $100 in disposable income left over. Tr. of March 29, 2011 25 trial, 74:16-19. She explained that, based on their current 26 financial circumstances, she did not see how she and August could 27 cut their expenses; they were "just, you know, scraping by as it 28 [was], so." Tr. of March 29, 2011 trial, 57:12-13.

Victoria testified that she initially sought jobs with 2 salaries between $101,000 to $150,000, though "she didn't 3 stipulate to that criteria." Tr. of March 29, 2011 trial, 4 81:11-15. She admitted that, in her search for employment, a 5 $90,000 salary was the minimum salary she would consider.

6 Victoria explained that she had been told that "six figures and 7 above [salary was] what MBA people [got]." Tr. of March 29, 2011 8 trial, 42:24-25.

9 Victoria further testified that she believed that she would 10 repay the student loans either with the income she earned through 11 employment with her MBA or by consolidating the student loans 12 and/or using the equity in the Ristows' home. She asserted that 13 before she applied to Thunderbird, she had been told that she 14 would very likely get a job within six months of graduation.

15 At the end of the trial, the bankruptcy court concluded 16 that, based on the evidence the Ristows presented, the Income 17 Based Plan and the Income Contingent Plan "would be a stretch 18 because [Victoria] was unemployed and the economy [was] very 19 difficult right now." Tr. of March 29, 2011 trial, 89:1-3. It 20 acknowledged, however, that because the Ristows would be paying 21 off the Honda Element in December 2011, they might have some 22 excess income with which to pay off some of the student loan 23 debt. The bankruptcy court pointed out that neither the Ristows 24 nor ECMC addressed the issue of a partial discharge of the 25 student loan debt. The bankruptcy court then gave the Ristows 26 and ECMC the opportunity to present post-trial briefs on the 27 issue.

The bankruptcy court issued a memorandum decision 8 1 ("Memorandum Decision") after the parties submitted their post- 2 trial briefs. It applied the three-prong test established in 3 Brunner, which was adopted by the Ninth Circuit in United Student 4 Aid Funds, Inc. v. Pena (In re Pena), 155 F.3d 1108, 1112 (9th 5 Cir. 1998), to determine undue hardship under § 523(a)(8).

The bankruptcy court found that the Ristows met all of the 7 elements of the Brunner test. Although it determined that the 8 Ristows satisfied the Brunner test, the bankruptcy court refused 9 to discharge all of Victoria's student loan debt.

10 The bankruptcy court recognized that the Ristows would never 11 have sufficient income with which to pay the student loan debt in 12 full. It found, however, that once they paid off the Honda 13 Element in December 2011, the Ristows would have some surplus 14 income with which to pay off some of the student loan debt. It 15 figured that the Ristows would have approximately $100 per month 16 surplus income, after taking $300 in transportation expenses into 17 account under the chapter 13 trustee guidelines. 18 The bankruptcy court determined that, as there was no 19 statute of limitations on student loan debt, the repayment period 20 should be 25 years. It determined that the interest rate should 21 be 8%, as applied to federal consolidated loans. The bankruptcy 22 court calculated that the total amount of the student loan debt 23 excepted from discharge was $13,000, based on a payment of 24 $100.34 per month over 25 years at 8% interest. 25 On July 7, 2011, the bankruptcy court entered a judgment 26 consistent with its rulings. ECMC timely appealed.


28 The bankruptcy court had jurisdiction under 28 U.S.C. 9 1 §§ 1334 and 157(b)(1) and (b)(2)(I). We have jurisdiction under 2 28 U.S.C. § 158.


Did the bankruptcy court err in granting the Ristows a 5 partial discharge of the student loan debt?


7 We review the bankruptcy court's factual findings for clear 8 error and its interpretation of the Bankruptcy Code de novo.

9 ECMC v. Mason (In re Mason), 464 F.3d 878, 881 (9th Cir. 2006), 10 quoting Miller v. Cardinale (In re DeVille), 361 F.3d 539, 547 11 (9th Cir. 2004). We review mixed questions of law and fact de 12 novo. Murray v. Bammer (In re Bammer), 131 F.3d 788, 792 (9th 13 Cir. 1997). A mixed question of law and fact exists when the 14 facts are established, the law is undisputed, and the issue is 15 whether the facts satisfy the legal standard. Id. Such mixed 16 questions require consideration of legal concepts and the 17 exercise of judgment regarding the values that animate legal 18 principles. Id.

19 The question as to whether student loan debt imposes an 20 undue hardship on a bankrupt debtor is such a mixed question, 21 reviewed de novo. Rifino v. United States (In re Rifino), 22 245 F.3d 1083, 1086-87 (9th Cir. 2001); Pa. Higher Educ. 23 Assistance Agency v. Birrane (In re Birrane), 287 B.R. 490, 493 24 (9th Cir. BAP 2002).


In this appeal, we must deal with the consequences of 27 several arguably poor decisions: It was imprudent of Victoria to 28 incur student loan debt exceeding $150,000 to pursue her MBA at her advanced age, and it was imprudent of her lenders to lend it to her. As acknowledged by ECMC in its opening brief, "In 2006, Victoria Ristow decided to finance an MBA with student loans despite several factors suggesting she'd never be able to fully repay them." Appellant's Opening Brief at 2 (emphasis added). Now, the Ristows are in bankruptcy, and we consider whether the bankruptcy court erred in partially discharging Victoria's approximately $90,000 obligation to ECMC, leaving a balance owing of $13,000 payable at 8% interest.

Under the Bankruptcy Code, student loan debt generally is presumed excepted from discharge under § 523(a)(8)*fn9 unless the debtor establishes that requiring repayment would impose an undue hardship. The Bankruptcy Code does not define "undue hardship."

ECMC v. Nys (In re Nys), 446 F.3d 938, 944 (9th Cir. 2006). But using the adjective, "undue," indicates that Congress viewed garden-variety hardship as an insufficient justification for discharging student loan debt. In re Pena, 155 F.3d at 1111.

What separates a "garden-variety debtor" from a debtor who can show "undue hardship" is the realistic possibility that a "garden-variety debtor" could improve her financial situation in the future. With increased financial stability, a debtor can make payments on her student loans and maintain a minimal standard of living. In comparison, forcing debtors who cannot reasonably be expected to increase their future income to make payments on their student loans when it causes them to fall below a minimal standard of living constitutes an "undue hardship."

In re Nys, 446 F.3d at 944.

To meet the "undue hardship" test of § 523(a)(8), the debtor 6 must demonstrate that: (1) she cannot maintain, based on current 7 income and expenses, a minimum standard of living for herself if 8 forced to repay her student loans; (2) additional circumstances 9 exist indicating that this state of affairs is likely to persist 10 for a significant portion of the student loan repayment period; 11 and (3) she has made a good faith effort to repay the student 12 loans. In re Pena, 155 F.3d at 1111-12, adopting the test 13 ("Brunner test") from Brunner, 46 B.R. at 753. The debtor bears 14 the burden of proof to establish all three elements of the 15 Brunner test. Rifino v. U.S. (In re Rifino), 245 F.3d 1083, 16 1087-88 (9th Cir. 2001). If the debtor fails to meet her burden 17 as to any one of these elements, the inquiry ends with a finding 18 that the student loan debt is not excepted from discharge. Id. at 1088. Accordingly, the path to a discharge of student loan 20 debt is not easy.

On appeal, ECMC argues that the Ristows failed to meet their 22 burden as to all three of the Brunner test elements. We agree 23 with ECMC as to one element, the "good faith" effort to repay, 24 but that conclusion is enough to require reversal of the 25 bankruptcy court's decision.

26 The third element of the Brunner test requires that the 27 debtor establish that she made a good faith effort to repay the 28 subject student loan(s). See In re Pena, 155 F.3d at 1114.

"Good faith is measured by the debtor's efforts to obtain 2 employment, maximize income, and minimize expenses." In re 3 Mason, 464 F.3d at 884, quoting In re Birrane, 287 B.R. at 499.

4 In addition, courts will consider the debtor's record of making 5 payments on the student loan debt and the debtor's efforts, if 6 any, to negotiate a repayment plan. Id. However, the debtor's 7 history of making or not making student loan payments is not 8 dispositive. Id. at 499-500.

In considering the good faith effort element, the bankruptcy 10 court noted that Victoria "timely sought forbearance and made 11 some minimal payments from her unemployment benefits" on the ECMC 12 loans. Memorandum Decision at 11. As noted above, Victoria 13 testified that she made a total of $600 to $800 in payments on 14 her student loan debt.

15 ECMC focuses on two portions of the evidentiary record that 16 we agree are critical in light of Ninth Circuit authorities.

17 First, Victoria's testimony indicates that following her receipt 18 of her MBA, during the intensive period of her job search, she 19 focused on jobs with compensation ranging from $101,000 to 20 $150,000, and the minimum compensation she would consider was 21 $90,000 with incentive bonuses. Her career placement firm 22 advised her that in any given week, only about 0.05% of the 23 available employment positions provided compensation in her 24 preferred range. She never sought employment in lower paying 25 positions.

The bankruptcy court noted that Victoria's testimony "did 27 not indicate that she was unwilling to work for less than six 28 figures" (Memorandum Decision at 8), but that determination does not meet the Ristows' burden to establish that they sufficiently exerted themselves to maximize their income. As ECMC emphasizes, there is nothing in the record to indicate that Victoria attempted to secure any "minimum-wage part-time jobs" to pay her student loan debts. In fact, as ECMC further notes, "If [Victoria] worked at a [Lowe's] customer service desk like the debtor in [ECMC v. Blackbird (In re Blackbird), 2008 WL 8444793 (9th Cir. BAP July 11, 2008)]-or in any other 'light sedentary' job-for minimum wage, ten hours a week, she'd be able to make her loan payments."*fn10 Appellant's Reply Brief at 8-9.

We do not share ECMC's blithe assumptions about the increased net income that may result for the Ristows from part- time, minimum wage jobs once the expenses associated with such employment are considered. See B. Ehrenreich, Nickel and Dimed:

On (Not) Getting By in America (2001). However, we recognize that the lack of any evidence that Victoria considered employment for compensation at any amount less than $90,000 is telling in this context.

Second, Victoria testified that she was aware of the Income Based Plan and Income Contingent Plan for payment of her student loan debts and would not apply for them. Under the Income Based Plan, her initial monthly payment would be $268.91, and after a term of twenty-five years, any unpaid balance would be forgiven.

Where income contingent repayment programs are available, a failure to pursue such options is considered in determiningwhether a debtor has met her burden to establish a good faith effort to repay student loan debt. See, e.g., In re Mason, 464 F.3d at 884 (the debtor failed to pursue an income contingent repayment plan option with diligence); In re Birrane, 287 B.R. at 500 (concluding lack of good faith where debtor made some effort to renegotiate payment of student loan debt but failed to pursue an income contingent repayment plan option when it became available).

11 As the bankruptcy court noted, Victoria testified that she 12 rejected applying for either of the Repayment Plans because: 13 1) she did not want her husband to become obligated for the 14 payments, 2) the Ristows could not afford the Income Based Plan 15 payments currently, and 3) the twenty-five year payment term 16 meant that the Ristows would be obligated to make payments under 17 the Income Based Plan through their mid-eighties. The bankruptcy 18 court concluded that the Ristows' reasons for not pursuing the 19 Repayment Plans did not demonstrate good faith, and we agree.

20 However, the bankruptcy court's remedy for the Ristows' 21 deficiency in evidencing a good faith effort to repay was to 22 grant a partial discharge, discharging approximately $77,000 of 23 Victoria's student loan debt to ECMC, on top of the $100,000 of 24 student loan debt already discharged by default in the Ristows' 25 adversary proceeding. As noted above, Ninth Circuit authorities 26 are clear that if the debtor does not meet the burden of proof on 27 any element of the Brunner test to discharge student loan debt, the debt is not discharged.


For the foregoing reasons, we conclude that the Ristows did not meet their burden of proof under the Brunner test to establish that they are entitled to a discharge of their student loan debt to ECMC as an undue hardship.

Accordingly, we REVERSE.

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