Last month, U.S. Bankruptcy Chief Judge Cecelia Morris of the Southern District of New York entered a decision granting summary judgment to pro se debtor, Kevin Jared Rosenberg, finding that Rosenberg had satisfied the "undue hardship" standard set forth in Section 523(a)(8) of the Bankruptcy Code, and ordering the discharge of Rosenberg's student loan debt of more than $220,000 in Rosenberg v. New York State Higher Education Services (In re Rosenberg),  Case No. 18-35379 (Bankr. S.D.N.Y. Jan. 7, 2020).

The 'Brunner' Test

The notion that student loans are generally nondischargeable in bankruptcy is, perhaps, one of the more familiar principles of bankruptcy law, even to nonlawyers. This concept has evolved from the case of Brunner v. New York State Higher Education Services (In re Brunner), 831 F.2d 395 (2d. Cir. 1987), which established a relatively straightforward three-pronged test:

• That the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for himself and his dependents if forced to repay the loans;
• 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
• That the debtor has made good faith efforts to repay the loans.

Background

Before filing his Chapter 7 bankruptcy petition in March 2018, Rosenberg earned an undergraduate degree from the University of Arizona and a Juris Doctor degree from Yeshiva University's Benjamin N. Cardozo School of Law in 2004. He consolidated $116,464.75 of his student loan debt in 2005. By 2018, Rosenberg's student loan indebtedness had ballooned to $221,385.49. Three months after filing his bankruptcy petition, Rosenberg commenced an adversary proceeding seeking judgment declaring his student loan debt discharged under Section 523(a)(8) of the Bankruptcy Code.

Educational Credit Management Corp. (ECMC) obtained authority from the bankruptcy court to intervene in the adversary proceeding as the guarantor and holder of Rosenberg's consolidated student loan debt. As there were very few facts in dispute, the parties filed cross-motions for summary judgment on the issue of dischargeability, and agreed that the three-part Brunner test was the proper standard for the bankruptcy court to apply in deciding the motions.

The 'Rosenberg' Court's Analysis

Section 523(a)(8) of the Bankruptcy Code excepts student loan debt from discharge "unless excepting such debt from discharge … would impose an undue hardship on the debtor and the debtor's dependents." The Bankruptcy Code does not define the term "undue hardship."

The bankruptcy court began its analysis of Section 523(a)(8) and the Brunner standard by highlighting the strong criticism that general application of the standard has received over the years. Interestingly, the court recognized the "harsh results" that have often prevailed from judicial application of the cases interpreting Brunner, rather than by applying Brunner itself, noting that "over the past 32 years, many cases have pinned on Brunner punitive standards that are not contained therein."

The court noted that the "infamous and oft-cited term 'certainty of hopelessness'" in connection with a debtor's ability to repay student loan debt did not originate with the Brunner case, but instead with a 1981 bankruptcy court case decided six years before Brunner (quoting Briscoe v. Bank of New York (In re Briscoe), 16 B.R. 128, 131-32 (Bankr. S.D.N.Y. 1981) (employing a "mechanical (checklist) test" to determine the debtor's future financial prospects and balancing the debtor's lack of financial prospects against the debtor's own influence in his financial misfortune and bona fide efforts to repay his student loans)).

The court observed that the "certainty of hopelessness" standard discussed in Briscoe had been incorporated by another bankruptcy court as a requirement under the second prong of the Brunner test in Jean-Baptiste v. ECMC (In re Jean-Baptiste), 584 B.R. 574, 588 (Bankr. E.D.N.Y. 2018), and that such "retributive dicta" have been "applied and reapplied so frequently in the context of Brunner" that it has "subsumed the actual language of the Brunner test," and "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."

The court noted that the requirement under the third prong of the Brunner test had also become warped over time, such that "some courts have even called it 'bad faith' when someone struggling with repaying a student loan attempts to discharge that debt in bankruptcy court."

The Court's Application of the 'Brunner' Test

After providing her insight into the evolution of Brunner, Morris determined to break the chain of decisions that she felt had distorted the Brunner standard, and to "apply the Brunner test as it was originally intended."

Under the first prong of the test, the court reviewed Rosenberg's means test and schedules, which it noted had been filed under penalty of perjury, and accepted Rosenberg's negative income figures as undisputed. The court further found that, as Rosenberg's consolidated student loan was in default, the full $219,000 balance had been accelerated and was currently due and payable in full. Based on these findings, the court determined that Rosenberg had satisfied the first prong in demonstrating that he had no money available to satisfy his student loan debt in full and maintain a "minimal" standard of living. 

Under the second prong of Brunner, the court noted that Brunner simply required it to consider whether Rosenberg's current state of affairs was likely to persist for a significant portion of the repayment period under Rosenberg's student loan contract. The court determined that, as the loan had been accelerated, the repayment period for the loan had ended. Consequently, Rosenberg easily satisfied the second prong in showing that "his circumstances will certainly exist for the remainder of the repayment period."

Under the third and final prong of the test, the bankruptcy court noted that Brunner required it only to consider Rosenberg's prepetition efforts to repay his student loan debt. The court reviewed Rosenberg's student loan history and found that, during the 26 months that the consolidated student loan was not in deferment or forbearance, Rosenberg had made 10 payments in varying amounts, roughly equating to 40% of the payments he had been required to make. Based on these facts, the court concluded that Rosenberg had made a good faith effort to repay his student loans, thereby satisfying the third prong of the Brunner test.

Having found that all necessary elements of Brunner had been met, the court granted summary judgment in Rosenberg's favor on the issue of dischargeability. ECMC has since sought and obtained leave to appeal the interlocutory portion of the order denying its summary judgment motion. In its notice of appeal, ECMC has indicated its election to have the U.S. District Court, rather than the Bankruptcy Appellate Panel, hear the appeal.

Adoption of the SLM Program

Concomitant in time with the entry of the Rosenberg decision, on Jan. 27, 2020, Morris issued General Order M-536, adopting the "Student Loan Mediation Before Litigation Program Procedures" (SLM program), a "uniform, comprehensive, court-supervised student loan mediation program" intended to "facilitate consensual resolutions of student loan issues for the benefit of debtors and lenders."

While the SLM program is not mandatory, and neither debtors nor lenders can be compelled to participate, the adoption of this new resource suggests that relief for struggling student loan borrowers may become less of an "impossibility."

Clearly, Morris' decision in Rosenberg is not just of import to bankruptcy practitioners, but it is highly impactful to the 45 million borrowers in the United States who collectively owe over $1.5 trillion in student loan debt. Interested practitioners should follow the appellate path of Rosenberg, as this case has the potential to drastically change the course of treatment of student loan debt in bankruptcy.

Rudolph J. Di Massa Jr., is a partner at Duane Morris. He is a member of the business reorganization and financial restructuring practice group and concentrates his practice in the areas of commercial litigation and creditors' rights.

Keri L. Wintle, an associate at Duane Morris, practices in the area of business reorganization and financial restructuring with a focus on bankruptcy and creditors' rights. Wintle represents trustees, corporate debtors, creditors and creditor committees in Chapter 7 and 11 cases.