Rifino v. United States (In re Rifino)

Citation: 260 F.3d 1083Docket: No. 99-35378

Court: Court of Appeals for the Ninth Circuit; April 13, 2001; Federal Appellate Court

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The case involves Rosemary Rifino's attempt to discharge her student loan obligations under the undue hardship provision of 11 U.S.C. § 523(a)(8) after filing an adversary proceeding. The bankruptcy court initially ruled in her favor, declaring her loans dischargeable due to undue hardship. However, the defendants, holders of her loans, appealed to the district court, which reversed the bankruptcy court's decision and reinstated the loans. The appellate court, having jurisdiction under 28 U.S.C. § 158(d), affirmed the district court's ruling that Rifino did not qualify for discharge under the undue hardship standard.

At the time of the proceedings, Rifino, a 41-year-old single mother, held a Bachelor of Science degree and a Master of Social Work degree, financing her education with approximately $69,000 in federally insured student loans. At the time of the adversary proceeding, she was employed as a social worker with a gross annual salary of $27,591.36 and monthly expenses totaling around $1,897, which included discretionary spending on items such as tanning, cable, and her son's private school tuition, among other costs. Rifino's Chapter 7 bankruptcy petition was filed in June 1996 and granted in September 1996, followed by her adversary proceeding seeking discharge of her student loans. The bankruptcy court ruled in her favor, but the defendants appealed to the district court, which ultimately found against her. A stipulation led to the dismissal of appeals from two defendants, the University of Oregon and the Oregon State Scholarship Commission.

The district court reversed the bankruptcy court's discharge order, reinstating Rifino's student loan debt, determining that the bankruptcy court misapplied the law regarding the "undue hardship" provision under 11 U.S.C. § 523(a)(8). The district court found that Rifino's situation did not present exceptional circumstances indicating long-term hardship. It noted that Rifino had not made any payments or efforts to repay her loans, and her decision to file for bankruptcy under Chapter 7 instead of Chapter 13, along with her refusal to consolidate her loans, demonstrated a lack of good faith. Rifino is now appealing this decision.

The court emphasized that it would independently review the bankruptcy court's findings, adhering to a clearly erroneous standard for factual determinations and a de novo standard for legal standards concerning dischargeability. Rifino argued that the district court improperly substituted its judgment, but the court found her claims unconvincing. Student loans are generally presumed nondischargeable under the Bankruptcy Code unless the debtor demonstrates "undue hardship," which is not explicitly defined but has been interpreted as requiring more than mere hardship.

The Ninth Circuit adopts the three-part Brunner test to assess undue hardship, which mandates that the debtor prove: 1) an inability to maintain a minimal standard of living based on current income and expenses while repaying the loans; 2) the existence of additional circumstances indicating that this inability will likely continue for a significant portion of the repayment period; and 3) that the debtor has made good faith efforts to repay the loans. The burden rests with the debtor to satisfy all three criteria; failure to meet any one of them results in a finding of nondischargeability.

The Brunner test's first prong requires the debtor to demonstrate an inability to maintain a minimal standard of living while repaying student loans, necessitating evidence beyond mere financial strain. The bankruptcy court found that Rifino was barely meeting minimal living standards and had no excess funds for loan repayment. While the court acknowledged potential budgetary adjustments, it deemed any such reductions minimal and inconsequential. Appellees, including NELA, Sallie Mae, and the University of Washington, argued that the bankruptcy court erred by overlooking "unnecessary" budget items like tanning and cable television, which they claimed disqualified her from a minimal standard of living. Previous cases have denied discharges under similar circumstances, but the court maintained that its decision regarding Rifino was not clearly erroneous as there were differing interpretations of her financial situation.

The second prong of the Brunner test requires showing that current financial difficulties are likely to persist throughout the loan repayment period. This prong aims to align with Congress's intent to make student loan discharges more challenging than other debts. The bankruptcy court found that if Rifino remained in her current job, her financial situation was unlikely to improve. However, this conclusion was deemed unsupported by the record and, therefore, clearly erroneous.

Dr. John Longris, Associate Dean at the University of Washington School of Social Work, testified regarding the earning potential of social workers. He noted that while starting salaries may be low, they typically increase significantly after five years, especially for those with MSW degrees who may advance to administrative roles earning between $47,000 to $65,000 or enter private practice with salaries up to $75,000. At the time of the adversary proceeding, Rifino, a social worker at Ryther Child Center, earned $27,591.36 and had received two raises in her three years of employment. The court found that it was a clear error for the bankruptcy court to assume Rifino’s financial situation would persist, concluding that her student loans were not dischargeable under 11 U.S.C. § 523(a)(8) due to failure to establish undue hardship. The district court dismissed the University of Washington from the proceedings based on sovereign immunity, but instructed to vacate this dismissal since the University withdrew its claim on appeal. The court clarified that while it must accept the bankruptcy court's factual findings, it could assess the legal implications of those findings. The current version of § 523(a)(8), effective October 7, 1998, allows for discharge of student loans only on the grounds of undue hardship, which Rifino failed to demonstrate according to the Brunner test. The court did not consider the third prong of the Brunner test regarding good faith repayment efforts and rejected Rifino's request for attorney's fees as moot following the affirmation of the lower court’s ruling. The issue of attorney's fees remains open for future cases.