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Palmer v. Laying

United States District Court, D. Colorado

November 15, 2016

RICHARD WILLIAM PALMER, DAR MAE PALMER, Appellants,
v.
PATRICK S. LAYING, as U.S. Trustee, Appellee.

          OPINION AND ORDER

          RAYMOND P. MOORE, UNITED STATES DISTRICT JUDGE

         On the last day of 2015, appellants Richard William Palmer (“Mr. Palmer”) and Dar Mae Palmer (collectively, “appellants”) appealed the decision of the U.S. Bankruptcy Court for the District of Colorado (“the Bankruptcy Court”), granting appellee the U.S. Trustee's (“the UST” or “appellee”) Motion to Dismiss Debtors' Case Under 11 U.S.C. § 707(b)(1) and § 707(b)(2) or, in the Alternative, Under 11 U.S.C. § 707(b)(3) (“the motion to dismiss”). (ECF No. 1.) In their Opening Brief, appellants raised the following issue for judicial review: whether the Bankruptcy Court erred in finding that Mr. Palmer's student loan debt was a consumer debt. (ECF No. 15 at 5.)[1]Appellee has filed a Response Brief (ECF No. 17), and appellants have filed a Revised Reply Brief (ECF No. 20-1).

         With this matter now being fully briefed, and for the reasons discussed herein, this Court REVERSES the decision of the Bankruptcy Court, and DENIES the motion to dismiss.

         I. Background

         On August 27, 2014, appellants filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code. (ECF No. 11-1 at 6-8.) In the Schedules attached to appellants' chapter 7 petition, they listed a debt of $91, 312.00 in student loans (“the student loan debt”). (Id. at 35.) That debt has become the source of the parties' conflict in this case. This is due to the operation of 11 U.S.C. § 707(b)(1) (“707(b)(1)”), which provides that a court may dismiss a chapter 7 case if the debts of the debtor are “primarily consumer debts” and the granting of relief to the debtor would be an abuse of chapter 7. 11 U.S.C. § 707(b)(1).

         With that provision in mind, the UST, on October 31, 2014, filed the motion to dismiss, asserting that (1) appellants' debts were primarily consumer debts, including the student loan debt, and (2) a presumption of abuse arose under § 707(b)(2). (ECF No. 11-1 at 82-86.) On October 5, 2015, an evidentiary hearing was held on the motion to dismiss, at which Mr. Palmer testified. (ECF No. 11-2 at 3-62.) Prior to the evidentiary hearing, the parties limited the scope of their dispute to the singular issue of whether the student loan debt was a consumer debt under 11 U.S.C. § 101(8) (“§ 101(8)”). (ECF No. 11-1 at 115.) The parties agreed that, if the student loan debt was a consumer debt, then the motion to dismiss should be granted, but, if the converse was true, the motion to dismiss should be denied. (Id.)

         After the evidentiary hearing, on December 15, 2015, the Bankruptcy Court entered an Order granting the motion to dismiss. (Id. at 147-158.) Addressing the singular issue before it, the Bankruptcy Court first explained that the Bankruptcy Code defines a consumer debt as a debt incurred “primarily for a personal, family, or household purpose.” (Id. at 150 (internal quotation marks omitted)). The Bankruptcy Court then summarized and discussed the varying, and differing, approaches taken by courts in deciding whether a student loan constitutes a consumer debt for bankruptcy purposes. (Id. at 151-153.) Importantly, the Bankruptcy Court noted that the Tenth Circuit Court of Appeals has spoken, to an extent, on this issue. Specifically, the Bankruptcy Court discussed the Tenth Circuit's decision in Stewart v. U.S. Trustee, 175 F.3d 796 (10th Cir. 1999) (“Stewart III”). In Stewart III, the Tenth Circuit stated that “[c]onsumer debt is further distinguished from non-consumer debt as a debt incurred with a ‘profit motive.'” 175 F.3d at 806 (quotations omitted).

         The Bankruptcy Court then stated that the following four concepts were important to its determination of whether a student loan is a consumer debt: (1) the Tenth Circuit's reference to “profit motive” in Stewart III should be interpreted narrowly because this was in keeping with the intent of the changes made to the Bankruptcy Code in 2005; (2) trying to determine whether a debt is a business or personal investment will be problematic without a narrow, objective standard; (3) without a narrow interpretation of “profit motive, ” it could be applied to virtually all student loans, and thus, would become an exception that swallows the rule; and (4) “[a] narrow standard, tied to an existing business, or to some requirement for advancement in a current job or organization, is necessary to avoid a student's aspirational goal, or a wished-for ‘hope and dream' being the focus, as opposed to the advancement of a tangible opportunity.” (ECF No. 11-1 at 155-156.)

         These four concepts led the Bankruptcy Could to conclude that, for a student loan to be incurred with a profit motive, “the debtor must demonstrate a tangible benefit to an existing business, or show some requirement for advancement or greater compensation in a current job or organization.” (Id. at 156.) With that test for reference, the Bankruptcy Court found that the student loan debt was a consumer debt because Mr. Palmer did not incur the debt “with the objective of profiting” his employer, Essential Insurance Services (“EIS”), and EIS did not require Mr. Palmer to pursue the education resulting in the student loan debt. (Id. at 156-157.)

         II. Legal Standards

         The Bankruptcy Court's legal conclusions are reviewed de novo, while its findings of fact are reviewed for clear error. In re Stewart, 215 B.R. 456, 459 (B.A.P. 10th Cir. 1997) (“Stewart II”). The determination that a debt is primarily a consumer debt is reviewed de novo. Stewart III, 175 F.3d at 803.

         The burden of proof is on the movant to support a motion to dismiss under § 707(b)(1) by a preponderance of the evidence. (ECF No. 11-1 at 150 (citing In re Cherrett, 523 B.R. 660, 668 (B.A.P. 9th Cir. 2014))). As before the Bankruptcy Court, the only issue before this Court is whether the student loan debt constitutes a consumer debt under the Bankruptcy Code. Section 101(8) defines “consumer debt” as “debt incurred by an individual primarily for a personal, family, or household purpose.” 11 U.S.C. § 101(8). Thus, the only issue here is whether the student loan debt was a debt incurred “primarily for a personal, family, or household purpose.” See id.

         III. Discussion

         Because of its importance, the Court begins with the “profit motive” test, and the Bankruptcy Court's formulation of the same. In Stewart III, the Tenth Circuit explained that consumer debt, apart from being of a personal, family, or household nature, is further distinguished from non-consumer debt by being incurred with a “profit motive.” Stewart III, 175 F.3d at 806. In applying that concept to the student loans in Stewart III, though, the Tenth Circuit only definitively addressed those loans that were used to pay for the debtor's family expenses. The Tenth Circuit explained that those loans (that were used for family expenses) could “fairly” be characterized as consumer debt. Id. at 807. As for the student loans used for other expenses of the debtor, the Tenth Circuit observed that those expenses included books, tuition, and room and board. The Tenth Circuit stated that “little or no binding or persuasive authority exists to help us determine the characterization of educational expenses such as books, tuition, and room and board as either consumer or business debt.” Id. The Circuit did not further address how to characterize these “educational expenses, ” in light of its finding ...


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