How Bankrupt is 'Bankrupt'?

Posted: May 25, 2006 12:00 AM

Hard cases, they say, make bad law. The case of Laura Susan Reynolds, just brought to the Supreme Court on a money-lender's petition for appeal, is about as hard a case as you're likely to find.

Judge John R. Gibson spelled out the facts last October in his opinion for the 8th Circuit. Much condensed, the story begins when Mrs. Reynolds began suffering from depressive symptoms in junior high school. The symptoms worsened during her college years. She dropped out of a foreign study program, but kept struggling toward a degree. Despite persistent depression and panic attacks, she was able to graduate cum laude from Claremont McKenna College in California.

She pushed on to law school in Michigan. Serious physical and mental problems continued, but she nevertheless was graduated in 1995 in the middle of her class. After passing her bar exams, she tried doggedly to find employment as a lawyer. Nothing worked. At last, five years ago, she settled into a permanent job as secretary-receptionist for a roofing contractor in Minnesota. There she now earns about $30,000 a year. Her husband earns $29,000 driving a school bus. They have no children.

At the time she left law school, Mrs. Reynolds had piled up more than $140,000 in unpaid student loans. For a few months she made token payments. At last these stopped. In June 2000 she filed a petition for bankruptcy. She volunteered to pay $100 a month toward her debts. The bankruptcy court held that she reasonably could be ordered to pay much more, but eventually the court discharged her entire debt.

Some of her creditors dropped out, but the Educational Credit Management Corp., her principal creditor, refused to go along. Under the Bankruptcy Code, student loans must be repaid unless repayment "will impose an undue hardship on the debtor and the debtor's dependents." How undue is "undue"? A three-judge panel, voting 2-1, found her hardship sufficiently undue, and the 8th Circuit, voting en banc, denied rehearing 6-5. Now the parties wait to learn if the high court will take the case.

In his petition to the Supreme Court, attorney Curtis P. Zahn of St. Paul, Minn., argues persuasively that what is known as the "Brunner test" of 1987 requires her to make at least some regular payments unless she can prove "a persistent inability to maintain a minimal standard of living." Nine of the 10 federal circuits that have passed on such cases have applied the Brunner test. The 8th Circuit, in contrast, since 2003 has applied a test predicated instead upon the "totality of debtor circumstances."

Joined by Judge Myron H. Bright, Judge Gibson accepted the medical conclusion reached in the bankruptcy court, i.e., "there is no prospect that Reynolds' condition would improve to such an extent that she could practice law or even work as a paralegal." Her best hope is to remain in the type of job she has now, "if indeed she is able to perform that job without lapsing into depression or engaging in behavioral incidents connected with her personality disorder, which would be likely to cause her to lose her job or quit."

To apply the creditors' interpretation of bankruptcy law, said Judge Gibson, "we would have to ignore the possibility -- and in many cases reality -- that a debtor's health and financial position are inextricably intertwined. ... We will not adopt an interpretation of 'undue hardship' that causes the courts to shut their eyes to factors that may lead to disaster, both personal and financial, for a suffering debtor."

udge William F. Riley dissented. He sympathized with the petitioner, but "to view a serious illness other than through its effect on income and expenses borders on illogical circularity. The majority opinion makes this very mistake. It concludes that having unpaid debt contributes to Reynolds' mental illness, and mental illness contributes to the inability to repay the debt (which inability, of course, worsens the mental illness, and so on). Such an analysis grants double treatment to a debtor's illness, which is at odds with the 'fairness and equity' required by the totality of circumstances test."

It would require a heart of stone not to have sympathy for the debtor in this case. Solid testimony in the bankruptcy court supported her plea for relief from the debt she acknowledges. All the same, the Constitution calls for "uniform laws on the subject of bankruptcies," which surely implies uniform rules in court. Why should there be one law for litigants in the 8th Circuit and a different law for everyone else?