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In re Schatz

United States Bankruptcy Appellate Panel of the First Circuit

July 26, 2019

ACCESS GROUP, INC., and MASSACHUSETTS EDUCATIONAL FINANCING AUTHORITY, Defendants-Appellees. AUDREY EVE SCHATZ, Plaintiff-Appellant, Adversary Proceeding No. 15-03001-EDK

          Appeal from the United States Bankruptcy Court for the District of Massachusetts (Hon. Elizabeth D. Katz, U.S. Bankruptcy Judge)

          Francis C. Morrissey, Esq., on brief for Plaintiff-Appellant.

          Martin A. Mooney, Esq., on brief for Defendant-Appellee, Access Group, Inc.

          Melissa C. Donohoe, Esq., and Philip X. Murray, Esq., on brief for Defendant-Appellee, Massachusetts Educational Financing Authority.

          Mark Polebaum, Esq., and Michael Sugar, Esq., on brief of Amicus Curiae, Commonwealth of Massachusetts.

          Before Godoy, Lamoutte, and Finkle, United States Bankruptcy Appellate Panel Judges.

          Finkle, U.S. Bankruptcy Appellate Panel Judge.

         The debtor Audrey Eve Schatz (hereinafter "Schatz" or the "Debtor") appeals from the bankruptcy court's May 2, 2018 Memorandum of Decision and Judgment (collectively, the "Order") excepting her student loan obligations from discharge under § 523(a)(8).[1] The bankruptcy court determined that repayment of approximately $106, 000.00 in student loans would not result in an undue hardship for Schatz, finding as a dispositive factor that the exempt equity in her home was sufficient to pay the loans in full. As discussed below, we VACATE the Order and REMAND to the bankruptcy court for further proceedings consistent with this opinion.


         I. Background

         Schatz, a single mother now in her mid-60s, resides alone in the home she owns at 4 Pleasant Court, Great Barrington, Massachusetts (the "Property"). She purchased the Property in 1998 for $94, 000.00. The parties stipulated that on April 1, 2014, Schatz recorded a declaration of exemption in the Property under the Massachusetts homestead exemption statute, Mass. Gen. Laws ch. 188, §§ 1, et seq. (the "Homestead Law").

         Schatz has one child, who is a college student. Schatz earned an undergraduate degree in psychology from the University of Massachusetts in 1977, and received a law degree from Western New England College School of Law (now known as Western New England University School of Law) in 2009. She has been a licensed and practicing attorney in Massachusetts since 2010.

         II. Bankruptcy Filing

         Schatz filed a voluntary petition for chapter 7 relief, pro se, on August 29, 2014. On Schedule A-Real Property filed with her petition, she listed the value of the Property at $165, 000.00 and disclosed that it was subject to a mortgage lien in the approximate amount of $59, 000.00. Other than the Property, Schatz's assets as reflected on her Schedule B-Personal Property included a checking account with $2, 000.00, a savings account with $8, 710.00, and an Individual Retirement Account with approximately $1, 800.00. By the time of trial in 2017, the savings account balance was substantially reduced. On her Amended Schedule C-Exemptions, Schatz claimed a homestead exemption in the Property under Mass. Gen. Laws ch. 188, § 1 in the amount of its listed value. Schatz's Amended Schedule F-Creditors Holding Unsecured Claims reflected that in addition to her student loan obligations, [2] she had two unsecured debts: a credit card debt of $1, 700.00 and a $23, 000.00 obligation owed to her child's former school for unpaid tuition.[3] Schatz's schedules disclosed monthly income of $2, 490.33 and monthly expenditures of $2, 911.17. Schatz updated these schedules nearly three years later to reflect monthly income of $1, 483.02, and monthly expenses of $1, 559.13, resulting in a $76.11 deficit per month.

         III. The Complaint for Discharge of Student Loans

         Schatz received a chapter 7 discharge in December 2014. The following month, she filed a two-count complaint against ACS Loan Servicing Group, Inc., Access Group, Inc., the U.S. Department of Education (the "DOE"), and Massachusetts Educational Financing Authority ("MEFA"), seeking a discharge of her student loans. At the time of trial Schatz waived the second count of the complaint, which alleged that the loans did not fall under the definition of educational loans under section 221(d)(1) of the Internal Revenue Code. Accordingly, the trial only involved the first count-the allegation that repayment of those loans would result in an "undue hardship" and render her "unable to maintain a minimal standard of living . . . and provide for her retirement."[4] She further alleged that she suffered from several medical conditions, including lasting ill effects from a brain injury, chronic kidney disease, shingles, cellulitis, Hashimoto's disease, alopecia, psoriasis, and low blood pressure, all of which "interfere[d] with [her] ability to work." In her complaint, Schatz also described an austere lifestyle, identifying aspects of her personal health and home maintenance she had deferred due to lack of funds, and stated that she relied, or had relied upon, "public assistance" in the form of fuel assistance, MassHealth (Massachusetts Medicaid), reduced school lunch, and reduced utilities.

         In her prayer for relief, Schatz requested the entry of a judgment in her favor under § 523(a)(8), discharging the student loans in their entirety on the basis of "undue hardship."

         IV. Pretrial Stipulations

         The defendants, Access Group, Inc. ("Access Group") and MEFA, filed answers to the complaint, asserting affirmative defenses to Schatz's claims. Shortly thereafter, Schatz obtained legal representation in the adversary proceeding and entered into stipulations with ACS Loan Servicing, Inc. ("ACS") and the DOE, agreeing to the voluntary dismissal of the complaint against those defendants. The stipulation with the DOE provided that Schatz would enter into an income-based repayment plan for a period of five years, at the end of which her debt to the DOE would be deemed discharged. The bankruptcy court approved the stipulations.

         The parties identified the following questions of law for trial: (1) whether all or a portion of Schatz's student loan debt is dischargeable under § 523(a)(8); and (2) what is the proper legal standard for the bankruptcy court to apply in determining whether an undue hardship exists under § 523(a)(8).

         V. The Trial

         The trial took place over the course of three days, in October and November 2017. Schatz was the only witness to testify. By that time, she owed Access Group and MEFA approximately $82, 000.00 and $28, 000.00, respectively. We summarize her testimony from the trial transcripts.

         A. Schatz's Direct Examination

         From 1977 to 2006, Schatz was employed in a variety of jobs, none of which earned her more than $35, 000.00 annually. In 1993, she relocated from Florida to Great Barrington, Massachusetts. Proceeds from the sale of her Florida home enabled her to purchase the Property in Great Barrington. In 1999, Schatz adopted her child, who she raised single-handedly. In an effort to increase her earnings Schatz decided to attend law school. In 2005 she began law school at Western New England School of Law. At the time she entered law school, she suffered from several medical ailments, including Hashimoto's disease (a fatigue-inducing thyroid condition), and ongoing symptoms caused by an alleged brain injury she sustained in a car accident while in high school. This injury caused her to occasionally experience "brain fog," which necessitated law school test-taking accommodations. While in law school, she became ill with pneumonia and bronchitis and developed eczema and psoriasis. Nonetheless, she was able to complete her legal education without requiring any other accommodations.

         Schatz financed nearly her entire law school education through student loans. She graduated in 2009, passed the state bar exam after three tries, and was admitted to the Massachusetts bar. Within the first year after law school, at the age of 56 or 57, Schatz submitted 75 job applications "in different fields." These applications yielded only a single interview, and no job offers. The following year she applied for 25 more jobs in the public and private sectors, with salaries ranging from $12.00 per hour to $90, 000.00 per year. Her efforts included identifying job openings online, attending a Boston networking event, working with her law school's career office, and networking with people she knew in other states, all to no avail.

         During the first two years following her law school graduation she made ends meet by performing housecleaning services, painting, and gardening. She also served as the director for an organization she founded while in law school-the Berkshire Center for Justice ("Berkshire Center")-which offered free legal clinics and reduced fee services for low income clients. Additionally, she provided pro bono legal services and reduced fee services to clients of the Berkshire Center. About three years after her law school graduation Schatz realized she "wasn't going to get a job." She discontinued her job search and focused on establishing a private practice. Her few paying clients include friends who need assistance with will preparation or real estate closings. She continues to work for the Berkshire Center as its executive director, but only receives a salary of $50.00 per hour when its budget permits. She is also paid at the hourly rate of $100.00 for her legal services to paying clients of the Berkshire Center. Schatz testified that she is unable to work more hours to increase her income because of her "medical issues."

         For the years 2011 through 2014, Schatz's tax returns list the following approximate annual income: $10, 800.00 in net business income in 2011; $14, 500.00 from self-employment in 2012; $61.00 in net rental income and $10, 200.00 in net business income for 2013; and $14, 800.00 from self-employment in 2014.

         From 2012 to 2013, she continued to experience a number of medical issues which contributed to the reduction in her income during that period, although she stated she had limited recall of those years because of her health conditions. She stressed that in July 2013, she fell down the stairs in her home and the injuries she sustained causes her to have ongoing memory issues, cognitive difficulties, fatigue, a torn rotator cuff, ocular migraines, tinnitus, reading difficulties, and weakness. For these symptoms she received care from her primary care physician and a physical therapist although she has not fully recovered. As proof of her physical impediments, Schatz introduced into evidence a letter from nurse practitioner Kathy Korte ("Nurse Korte"), dated January 19, 2015, which referenced her several "medical issues causing an inability for her to work under pressured circumstances or full-time," and "limit[ing] her current and future inability to work." The letter also noted that Schatz "has other medical conditions that while they may not directly affect her ability to work, doctor appointments, diagnostic testing, treatment and recovery are time-consuming and take away from the time she is available for work."

         To supplement her income, in 2013 or 2014, Schatz began renting a room in her house through Airbnb (a short-term rental website) which produced annual income of approximately $1, 000.00. Beginning in 2014, Schatz received referrals for performing real estate refinance closings from a Boston law firm which pays her $75.00 to $100.00 per closing. At the time of trial in October 2017, Schatz had performed only one closing for that year. In summary, Schatz testified that she has four sources of income: the Berkshire Center; her private practice; room rentals; and referral fees from real estate closings.

         Turning to her student loans, Schatz maintained that she made payments on these loans using savings from the sale proceeds of her Florida home. By living frugally she was able to save some money, remain current on her financial obligations, and contribute $4, 000.00 toward her child's college housing expense. As evidence of her austere lifestyle and sacrifices she endures, she has foregone some medical and dental procedures and needed repairs to her house, household appliances, and her late-model, high-mileage vehicle, and maintains her home heat at fifty degrees. She had unsuccessfully sought financing for the home repairs. Additionally, she had applied for loans to assist with her child's tuition, but her loan applications were denied.

         B. Schatz's Cross-Examination

         Upon cross-examination by Access Group, Schatz testified that when she embarked upon her law school education, she did not apprehend the risk that she might not find a high-paying job. She further testified that despite financial challenges resulting in limited payment to her, the Berkshire Center was current on its rent payments and other bills, and she was current on her mortgage payments, real estate taxes, and homeowner's insurance. During cross-examination by MEFA, Schatz testified that the assessed value of the Property in 2015 was $204, 000.00 and that reflected a market value of $228, 000.00. However, on the Free Application for Federal Aid form submitted in 2016 for her child's student loan applications, Schatz listed the Property's value at $125, 000.00. She explained that this figure actually may have been her estimate of the equity in the Property.

         Turning to her testimony about her asserted medical conditions and their alleged impact on her earning capacity, Schatz revealed in her cross-examination that she had edited the letter from Nurse Korte before it was signed. Schatz submitted her edited version of the letter to Nurse Korte stating that "[t]he Court requires more of a report than a letter. I expanded your letter to give more details. Feel free to sign this letter or call me to discuss it."

         In response to additional questioning by MEFA's attorney, Schatz testified further regarding her various health conditions and certain medical reports which indicated few, if any, abnormal findings. MEFA also questioned Schatz about a diagnostic MRI report of her brain that found her brain stem and cerebellum were normal and there was no evidence of "intracranial hemorrhage." Schatz challenged these findings, asserting: "[J]ust because this [MRI] came back normal doesn't mean there was no brain injury." As for some of the afflictions Schatz alleged she suffered from, there were no medical reports from her doctors substantiating her testimony and, aside from Nurse Korte's general letter edited by Schatz, the record discloses no medical reports from her physicians corroborating her claim that her various medical conditions significantly impaired her ability to increase her income.

         C. The Court's Ruling

         After taking the matter under advisement, the bankruptcy court issued its ruling denying Schatz's request to discharge her student loans. Schatz v. U.S. Dep't of Educ. (In re Schatz), 584 B.R. 1 (Bankr. D. Mass. 2018). The bankruptcy court acknowledged that there is a division among courts on the applicable test to determine whether a debtor has established the requisite hardship for excepting student loan debt from discharge under § 523(a)(8), and the U.S. Court of Appeals for the First Circuit ("First Circuit") has not yet adopted a specific test.[5] Here the bankruptcy court employed the "totality of the circumstances" test for its analysis. This test, the bankruptcy court noted, has been applied by most "former and currently-sitting bankruptcy judges in Massachusetts, as well as the U.S. Bankruptcy Appellate Panel for the First Circuit (the 'BAP') . . . ." Id. at 6. As with other courts that have adopted this test, the bankruptcy court rejected the Brunner test, concluding that it "imposes requirements of proof that are not supported by the statutory text . . . ." Id.

         The bankruptcy court, applying the totality of the circumstances test, found that the Debtor "is an intelligent, well-educated woman who, regardless of whether she is able to substantially increase her income, has reached a level of consistency in her current employment endeavors." Id. at 7. The court further found that Schatz "suffers from several medical conditions" but that she is "receiving care to successfully alleviate, improve, or regulate those conditions." Id. Additionally, based on Schatz's testimony and the expenses listed on her amended Schedule J, the court found that Schatz "lives a rather spartan lifestyle not susceptible to further reduction of necessary expenses." Id. at 5. The court did not assess Schatz's capacity to increase her income in the foreseeable future to enable her to pay her student loans, concluding, instead, that "the outcome in this case turns ...

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