Hurley v. United States (In re Hurley)

601 B.R. 529

IN RE: Paul HURLEY, Debtor.

Paul Hurley, Appellant,

v.United States of America; Accesslex Institute dba Access Group, Appellees.

BAP No. WW-18-1259-BKuF

Bk. No. 2:16-bk-13155-TWD

Adv. No. 2:17-ap-01025-TWD

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Submitted Without Oral Argument on May 23, 2019

Filed June 26, 2019

Appellant Paul Hurley pro se on brief;

Annette L. Hayes and Pooja Faldu Davé on brief for Appellee the United States of America;

Joseph Ward McIntosh of McCarthy & Holthus, LLP on brief for Appellee Accesslex Institute dba Access Group.

Before: BRAND, KURTZ and FARIS, Bankruptcy Judges.

BRAND, Bankruptcy Judge:

INTRODUCTION

Appellant Paul Hurley appeals a summary judgment order in favor of the United States and Accesslex Institute, dba Access Group (together, "Defendants"). The bankruptcy court determined that, given Hurley's legal background and the nature of his criminal conduct, he was unable to establish good faith under Brunner¹ and therefore was not entitled to a hardship discharge of his student loans under § 523(a)(8).² We AFFIRM.

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

A. Prepetition events

Hurley received his law degree in 2004 and his L.L.M. in tax in 2006. He received federal and private student loans to fund his legal education and bar examination costs. Hurley was admitted to practice law in the state of Washington in November 2006 but changed his license to inactive status in January 2010.

Hurley has made payments on both his federal and private student loans. He consolidated his federal student loans in 2010 and entered into an Income Based Repayment Plan. He has also been diligent in his efforts to obtain deferments and forbearances. Hurley was not in default on his student loans at the time he filed for bankruptcy.

In June 2009, Hurley was hired as a revenue agent for the Internal Revenue Service. Hurley conducted audits of taxpayers' federal tax returns.

In July 2015, Hurley began auditing the 2013 and 2014 tax returns for Have a Heart Compassion Care, Inc., a medical marijuana dispensary.³ Hurley met with Ryan Kunkle, the representative for Have a Heart, on several occasions to discuss the tax returns. After the men had completed the audit process and signed the necessary forms, they went outside to have a discussion "off the record." As part of that discussion, Hurley told Kunkle that he had saved Have a Heart over $1 million in taxes. Hurley then solicited a bribe of $20,000 from Kunkle, which Hurley stated he needed to help pay his student loan debt. Fearing that Hurley would not present the signed audit documents to his superiors to complete the matter, Kunkle agreed to make the payment. Kunkle immediately reported the incident to law enforcement, who arrested Hurley after Hurley was recorded accepting two cash payments of $5,000 and $15,000 from Kunkle. Subsequently, Hurley resigned from the IRS, and he was indicted for federal offenses in connection with this conduct.

On May 13, 2016, Hurley was convicted for the crimes of Receiving a Bribe by a Public Official and Receiving an Illegal Gratuity by a Public Official, both felonies. He was sentenced to thirty months' imprisonment and three years' supervised release. Following his conviction, Hurley was disbarred from the practice of law by order of the Washington Supreme Court. Hurley was released from prison in June 2018 and is living in a halfway house in Seattle.

B. Postpetition events

Hurley filed a chapter 7 bankruptcy case one month after his conviction. His debts consist almost entirely of his student loan debt. Hurley represented that, as of the petition date, his student loan debt totaled approximately $256,000. Hurley was granted a discharge on September 14, 2016.

1. Hurley's § 523(a)(8) complaint

In February 2017 and while incarcerated, Hurley filed a complaint against Defendants,⁴ seeking to discharge his entire student loan debt under § 523(a)(8). In support of his undue hardship claim, Hurley noted his conviction, incarceration, disbarment from the practice of law, and resulting financial circumstances. Hurley stated that due to his disbarment and felony record, he would be unable to return to his former profession or be employed at the same income level, even if he could find any substantive employment following his release. Therefore, requiring him to pay his student loan debt would impose an undue hardship on him and his dependents. At the time Hurley sought his hardship discharge, he was 45 years old and had a 3-year-old son. Hurley did not note any medical or other condition that prevented him from working in the future.

2. Defendants' motion for summary judgment

Defendants moved for summary judgment on Hurley's complaint ("MSJ"). Specifically, Defendants argued that Hurley was unable to satisfy the third prong of the Brunner test: that the debtor has made good faith efforts to repay the loans. Defendants argued that, despite Hurley's prior efforts to pay and stay current on his student loan debt, his present financial misfortune was self-imposed: Hurley willfully engaged in criminal activity that directly resulted in his current financial circumstances. Defendants argued that Hurley's intentional, egregious conduct outweighed his prior repayment efforts and prevented him from establishing good faith under Brunner .

In opposition, Hurley argued that one past bad act should not be dispositive of good faith under Brunner as Defendants contended. Instead, the court should consider present-tense factors which indicate whether or not a debtor has reasonable control over his or her current situation that now imposes the undue hardship. Hurley contended that he has no control over his criminal record, that he has no law license, that he has little prospect for good employment, and that he has no savings. His present circumstances were a result of societal factors preventing a felon from ever gaining employment at an income similar to his or her previous employment. Hurley said he had submitted more than 40 job applications since his release, which resulted in only one physical interview and no job offers.

3. The bankruptcy court's ruling on the MSJ

At the MSJ hearing, Hurley's counsel agreed with the court that there were no material facts in dispute; the issue was whose interpretation of the good-faith prong in Brunner was the correct one and whether it could be met on the facts for summary judgment purposes.

After hearing argument from the parties, the bankruptcy court announced its oral ruling granting the MSJ, finding that the facts relevant to the good-faith prong of the Brunner test were not in dispute and that no reasonable trier of fact could find for Hurley on good faith. Recognizing that there is no per se rule that past criminal conduct defeats good faith, the court found that the criminal conduct in this case was "very significant" and "outweigh[ed]" Hurley's earlier, good-faith efforts to repay his student loans. Precisely, the court noted that:

As a lawyer, the Debtor had to know that, if he committed the crime that he did, he would lose his ability to practice law. As such, the Debtor suffers from both a failure to maximize his income and having willfully or negligently caused his financial condition.

The Debtor's financial condition is a direct result of factors that were within his reasonable control. His financial condition was self-inflicted by his decision to commit a crime that would significantly impact his financial situation in a very negative way. The Debtor's situation is far more egregious than in some other cases within the Ninth Circuit where the debtor was found not to meet the good-faith prong for failing to maximize income or to take other action within the debtor's reasonable control.

Hr'g Tr. (Sept. 7, 2018) 20:1-15. Hurley timely appealed the bankruptcy court's later written order.

II. JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158(b).⁵

III. ISSUE

Did the bankruptcy court err in determining that Hurley could not establish good faith under Brunner ?

IV. STANDARD OF REVIEW

We review de novo the bankruptcy court's summary judgment ruling. Salven v. Galli (In re Pass) , 553 B.R. 749, 756 (9th Cir. BAP 2016).

We review de novo the bankruptcy court's application of the legal standard in determining whether a student loan debt is dischargeable as an undue hardship. Rifino v. United States (In re Rifino) , 245 F.3d 1083, 1087 (9th Cir. 2001). Whether the debtor has satisfied each of the three prongs of the Brunner test, including the good-faith prong, is a mixed question of law and fact requiring de novo review. Roth v. Educ. Credit Mgmt. Corp. (In re Roth) , 490 B.R. 908, 916 (9th Cir. BAP 2013). We review the factual underpinnings of the bankruptcy court's good faith determination for clear error, but we review de novo the bankruptcy court's ultimate good faith conclusion. Id.

V. DISCUSSION

A. Summary judgment standards

Summary judgment should be granted when there are no genuine issues of material fact and when the movant is entitled to prevail as a matter of law. Civil Rule 56(a) (made applicable in adversary proceedings by Rule 7056). In resolving a summary judgment motion, the court does not weigh evidence, but rather determines only whether a material factual dispute remains for trial. Covey v. Hollydale Mobilehome Estates , 116 F.3d 830, 834 (9th Cir. 1997). A material fact is one that, "under the governing substantive law ... could affect the outcome of the case." Caneva v. Sun Cmtys. Operating Ltd. P'ship (In re Caneva) , 550 F.3d 755, 760 (9th Cir. 2008). "A genuine issue of material fact exists when ‘the evidence is such that a reasonable jury could return a verdict for the nonmoving party.’ " Id. at 761 (quoting Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) ).

At the hearing on the MSJ, Hurley's counsel conceded that there were no...