Bankruptcy Judge Christopher M. Klein decried the “widespread belief that student loans are virtually impossible to discharge in bankruptcy.”

In his April 5 opinion, Judge Klein said, only the most compelling cases seem to be able to qualify for discharge as “undue hardship” on a standard of proof that is preponderance of evidence.

It is now time, Judge Klein said, to demythologize unwarranted and fallacious dogmas and propaganda that have encrusted, ossified, neutralized, and transmogrified § 523(a)(8) analysis into a misconception that student loan debt is virtually impossible to discharge, even though the “undue hardship” standard of proof is preponderance of evidence and the standard of appellate review is “clear error.”

As the “solution” for trial and appellate courts to reach the proper resolution in student loan cases, Judge Klein cited U.S. Bank Nat’l Ass’n v. Village at Lakeridge, 138 S. Ct. 960 (2018). Courts, he said, should follow “the Supreme Court’s explication of the proper roles of trial and appellate courts facing ‘mixed questions’ of law and fact and proper standard of review.”

Applying Lakeridge, Judge Klein said:

Student loan “undue hardship” questions depend intensely on the facts of each case. As such, they are mixed questions of law and fact in which factual questions predominate over legal analysis that must . . . be reviewed on appeal under the deferential “clear error” standard . . . . [T]he “clear error” standard . . . does not permit appellate courts to substitute judgment for that of the trial court. Lakeridge, 138 S. Ct. at 966-67.

Judge Klein, who sits in Sacramento, Calif., “is known for being a master of statutory analysis and this opinion doesn’t disappoint,” said Prof. Nancy B. Rapoport.  She said that he “points out that the question of undue hardship is a mixed question of law and fact, subject to review only for clear error.”

In commentary provided to the National Association of Chapter Thirteen Trustees, Prof. Rapoport described the case before Judge Klein as involving “the prototypical honest but (extremely) unfortunate debtor who tried her best to improve her position in life, but a rubbish heap of a university and a former abusive husband made it impossible for her to dig out of the hole of student debt.” Prof. Rapoport is a UNLV Distinguished Professor and the Garman Turner Gordon Professor of Law at the Univ. of Nevada at Las Vegas William S. Boyd School of Law.

The Brunner and Pena Tests

The opinion by Judge Klein is the definitive explication of the so-called Brunner test, taken from Brunner v. New York State Higher Educ. Serv. (In re Brunner), 831 F.2d 395 (2d Cir. 1987), as adopted by the Ninth Circuit in United Student Aid Funds, Inc. v. Pena, 155 F.3d 1108 (9th Cir. 1998).

Applying the same standard, the courts in Brunner and Pena reached opposite conclusions. Pena discharged the debt, but Brunner didn’t. “The facts make all the difference,” Judge Klein said.

With regard to the first Brunner test — inability to maintain a minimal standard of living — the debtor’s income in Pena was $41 short of covering expenses. When income and expenses fluctuate, the Ninth Circuit allowed the bankruptcy court to average the figures without being bound to accept the circumstances at the time of trial.

On the second Brunner test — “additional circumstances” indicating that the inability to maintain a minimal standard of living will persist — the Ninth Circuit in Pena did not require expert corroboration of the debtor’s medical problems. The appeals court found no clear error in the bankruptcy court’s finding that the debtor satisfied the second Brunner test.

On the third Brunner test — a “good faith” effort to repay the loan — the appeals court in Pena saw no clear error in finding good faith, because the debtor had made several payments.

Critique of Ninth Circuit Precedent

Judge Klein examined Ninth Circuit student loan cases in light of Lakeridge. Many appeals, he said, involved mixed questions of fact and law on the issue of “undue hardship.” Some courts, he said, paid “lip-service to ‘clear error’ but then [used] the ‘mixed question’ label as license to nit-pick the trial court all the way to reversal in a manner that is the antithesis of ‘clear error’ review.”

Judge Klein parsed Lakeridge to discern how appellate courts should treat mixed questions of fact and law regarding “undue hardship.” In the unanimous Lakeridge opinion, he said that the Supreme Court gave a “master class” in assessing the standard of review when there are mixed questions of law and fact. Lakeridge teaches us how to choose between de novo and clear error.

Judge Klein quoted Lakeridge for saying that “the standard of review for a mixed question all depends . . . on whether answering it entails primarily legal or factual work.” Lakeridge, supra, 138 S. Ct. at 967.

Applying Lakeridge to student loan cases, Judge Klein said that the mixed question about undue hardship “immerses the court in case-specific factual issues. The controlling law — the Brunner test — is well known and needs little explication.”

Because the undue hardship question is “primarily factual,” Judge Klein said “it follows” that an appellate court should apply the “deferential ‘clear error’” standard of review.

Judge Klein identified two pre-Lakeridge decisions from the Ninth Circuit as being inconsistent with the “clear error” rule announced by the Supreme Court. See Rifino v. U.S. (In re Rifino), 245 F.3d 1083 (9th Cir. 2001); and Educ. Credit Mgmt. Corp. v. Mason (In re Mason), 464 F.3d 878 (9th Cir. 2006). He said they were both “garden-variety decisions in which a bankruptcy court found ‘undue hardship,’” but the appellate courts had reversed.

On the other hand, Judge Klein lauded Hedlund v. Educ. Res. Inst. Inc., 718 F.3d 848, 854 (9th Cir. 2013), where he described the Ninth Circuit as having held that it was “error for an appellate court to substitute its judgment for that of the trial court on the question of Brunner ‘good faith.’” He cited the Seventh Circuit for reaching the same conclusion from the same reasoning.

Applying the Law to the Facts

After explicating the law on undue hardship, Judge Klein applied the law to the facts of the case before him. Prof. Rapoport aptly summarized the debtor’s economic circumstances above. The debtor had attended a now-defunct for-profit university to obtain a certificate that qualified her for nothing. She had an abusive husband who was convicted and jailed for beating her up. The expenses for herself and her two minor children exceeded her after-tax income. The judge saw no likelihood of an increase in the debtor’s income.

There being no requirement to exhaust administrative remedies, Judge Klein dismissed the government’s contention that the debtor should apply for relief under the Biden administration’s attempts to provide relief for student loan debtors without amending the statute. He said there was only the “mere possibility” of administrative relief.

By a “preponderance of the evidence,” Judge Klein found that the debtor satisfied all three Brunner tests, entitling her to discharge all of her student loans under the Section 523(a)(8) undue hardship standard.

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