Hedlund v. Educational Resources Inst.

When reviewing the third prong of the test from Brunner v. New York Higher Education Services Corp. to determine whether a debtor has shown undue hardship, a finding of good faith is to be reviewed for clear error.

Michael Hedlund graduated from law school with student loans exceeding $85,000 owed to Pennsylvania Higher Education Assistance Agency (“PHEAA”) and exceeding $17,000 owed to The Education Resources Institute (“TERI”). Hedlund subsequently failed the bar exam twice and missed the third exam. In 2003, Hedlund filed for bankruptcy and sought discharge of his student loans under 11 U.S.C. § 523(a)(8). Prior to filing bankruptcy, both credit agencies had begun garnishing his paychecks and bank account. Prior to the trial, Hedlund settled with TERI by agreeing to pay down the amount owed at $50 per month. PHEAA offered three payment plans “if the loans [were] determined not to be dischargeable,” but Hedlund did not pursue the options. Although student loan debt is presumptively nondischargeable absent a showing of undue hardship, the bankruptcy court, using the three-prong test set forth in Brunner v. New York Higher Education Services Corp., granted a partial discharge of all but $30,000 of the loans owed to PHEAA. The Bankruptcy Appellate Panel (“BAP”) reversed and reinstated the debt. Hedlund appealed to the Ninth Circuit, which remanded the case to the bankruptcy court. On remand, the court again partially discharged the student loan debt. PHEAA appealed, and the district court reviewed the bankruptcy court’s finding of good faith de novo and reversed the partial discharge. On this appeal, the Ninth Circuit held that the good faith prong of the Brunner test has consistently been reviewed for clear error, and the district court erred when it reviewed de novo. Further, the panel held that the bankruptcy court’s finding of good faith was not clearly erroneous and remanded to the district court with orders to reinstate the partial discharge of student loan debt. REVERSED and REMANDED with directions.