Title Matthews v. Pineo
Date 1994
By Alito
Subject Misc
Contents
Page 1
LEXSEE 19 F3D 121
MARY SUSAN MATTHEWS v. WILLIAM PINEO, ESQ.; UNITED STATES OF AMERICA; NATIONAL HEALTH SERVICE CORPS; FIRST EASTERN BANK; HAHNEMANN UNIVERSITY; PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY United States of America and the National Health Service Corps, Appellants
No. 93-3401
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
19 F.3d 121; 1994 U.S. App. LEXIS 4534; Bankr. L. Rep. (CCH) P75,762
January 13, 1994, Argued
March 15, 1994, Filed
SUBSEQUENT HISTORY: Certiorari Denied October
3, 1994, Reported at: 1994 U.S. LEXIS 5590.
PRIOR HISTORY: **1 ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA. (D.C. Civil No. 93-00038).
CASE SUMMARY:
PROCEDURAL POSTURE: Appellants, government and service corps, sought review of an order of the United States District Court for the Western District of Pennsylvania, which affirmed a bankruptcy court's or- der partially discharging the amount that appellee doctor owed to appellants for breaching her agreement to provide medical service in exchange for a scholarship to attend medical school.
OVERVIEW: After appellee doctor failed to fulfill her obligation to provide medical service in certain regions in return of her receipt of a scholarship to attend medical school, appellants, government and service corps, ob- tained a judgment for damages against her. A bankruptcy court entered an order partially discharging the amount that appellee owed to appellants for breaching the agree- ment. The district court affirmed the bankruptcy court's or- der. However, on appeal, the court reversed and remanded the district court's order. The court held that the district court had improperly determined that the denial of the dis- charge of appellee's debt would have been unconscionable to appellee under 42 U.S.C.S. § 254o(d)(3)(A). The court further held that the nondischarge of the debt would only have temporarily inconvenienced appellee and her family by requiring them to move because she had the oppor- tunity to still fulfill her obligation under the agreement. Finally, the court held that it would also not have been
unconscionable for appellee to have altered her lifestyle in order to repay the debt.
OUTCOME: The court reversed and remanded an order of the district court, which affirmed a bankruptcy court's order partially discharging the amount that appellee doc- tor owed to appellants, government and service corps, for breaching her agreement to provide medical service in exchange for a scholarship to attend medical school. To have allowed the entire debt would not have been uncon- scionable to appellee.
LexisNexis(R) Headnotes
Bankruptcy Law > Discharge
HN1 Under 42 U.S.C.S. § 254o(d)(3)(A), an obligation stemming from a National Health Service Corps scholar- ship is dischargeable in bankruptcy only if the bankruptcy court finds that nondischarge of the obligation would be unconscionable. In ordinary usage, the term uncon- scionable means excessive, exorbitant, lying outside the limits of what is reasonable or acceptable, shockingly unfair, harsh, or unjust, or outrageous.
Civil Procedure > Appeals > Standards of Review > Standards Generally
HN2 The meaning of the term unconscionable is a ques- tion of law over which the appellate court exercises ple- nary review.
COUNSEL: GARY V. SKIBA, ESQ. (Argued), Yochim, Skiba, Moore & Nash, 345 West 6th Street, Erie, Pennsylvania 16507, Attorneys for Appellee.
FRANK W. HUNGER, Assistant Attorney General, FREDERICK W. THIEMAN, United States Attorney, MARK B. STERN, JENNIFER H. ZACKS (Argued), Attorneys, Appellate Staff, United States Department of
19 F.3d 121, *; 1994 U.S. App. LEXIS 4534, **1; Bankr. L. Rep. (CCH) P75,762
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Justice, Civil Division, 10th and Pennsylvania Avenue, N.W. Washington, D.C. 20530-0001, Attorneys for Appellants.
JUDGES: Before: STAPLETON, COWEN, and ALITO, Circuit Judges.
OPINIONBY: ALITO
OPINION: *122 OPINION OF THE COURT
ALITO, Circuit Judge:
The United States of America and the National Health Service Corps ("NHSC") have appealed from a district court order that affirmed a bankruptcy court order partially discharging the amount that Dr. M. Susan Matthews owes to the NHSC for breaching her agreement to provide ser- vice in the NHSC in exchange for a scholarship to attend medical school. Under 42 U.S.C. § 254o(d)(3)(A), such an obligation is dischargeable in bankruptcy only if nondis- charge would be "unconscionable." The bankruptcy **2 and district courts concluded that it would be "uncon- scionable" not to discharge one-half of Dr. Matthews' current obligation, but we hold that the standard of un- conscionability was not met. We therefore reverse.
I.
The National Health Service Corps Scholarship
Program, see 42 U.S.C. §§ 254d-254t, was enacted in
1976 to remedy the problem of maldistribution of health care professionals in the United States. See H.R. Rep. No. 266, 94th Cong., 2d Sess., pt. 1, 22 (1976), reprinted in 1976 U.S.C.C.A.N. 4947, 4964. Under this program, students of medicine and related professions are granted scholarships but must enter into written agreements to provide one year of "obligated service" for each year of educational support (with a minimum service obliga- tion of two years). 42 U.S.C. §§ 254l(f)-(g). This ser- vice must be performed "in a health professional short- age area (designated under 42 U.S.C. § 254e ) to which
the scholar is assigned by the Secretary of Health and Human Services ." 42 U.S.C. § 254l(f)(1)(B)(iv) (empha- sis **3 added). Each scholarship recipient must also agree in writing that, if he or she breaches this commit- ment, he or she will be liable for liquidated damages of three times the amount of scholarship support received, as well as interest. n1 42 U.S.C. § 254o(b)(1)(A).
n1 If the scholarship recipient partially fulfills his or her obligation, the amount of damages is reduced. See 42 U.S.C. § 254o(b)(1)(A).
Congress has severely limited the conditions under
which an NHSC scholarship obligation may be discharged in bankruptcy. Pursuant to a 1987 amendment, such an obligation may be discharged only after the passage of five years and "only if the bankruptcy court finds that nondischarge of the obligation would be unconscionable."
42 U.S.C. 254o(d)(3)(A).
*123 Dr. Matthews received NHSC scholar- ships, totaling $46,726.00, to attend Hahnemann Medical College in 1979, 1980, and 1981. In return, she signed an agreement **4 to practice for three years in a suitable location selected by the Secretary of HHS. Dr. Matthews also agreed that if she violated this agreement she would be liable for the liquidated damages specified by statute. After graduation from medical school, Dr. Matthews was given a three-year deferment of her service obliga- tion so that she could complete a family practice resi- dency. In July 1984, she was given the opportunity to arrange for the performance of her service obligation at any site designated on the NHSC's Health Manpower Shortage Area Placement Opportunity List as having a vacancy for a physician with her specialty. The Conneaut Valley Health Center in Crawford County, Pennsylvania, was designated on this list as needing an internist, not a physician specializing in family practice. Nevertheless, Dr. Matthews requested placement at the Conneaut Valley Health Center. The NHSC did not grant this request, but
instead assigned her to South Dakota.
Dr. Matthews made no effort to locate a placement in South Dakota. Instead, she established a practice in the location of her choice, Crawford County, Pennsylvania. She currently divides her time between a private family practice in **5 Saegertown and work at the Conneaut Valley Health Center.
As a result of Dr. Matthews' refusal to fulfil her ser- vice obligation, the NHSC brought suit against her in the United States District Court for the Western District of Pennsylvania to recover the damages provided by statute. In February 1990, the district court granted summary judgment for the NHSC in the amount of $140,178 plus prejudgment interest.
Instead of paying this judgment, Dr. Matthews filed for bankruptcy under Chapter 7 of the Bankruptcy Code and commenced an adversary proceeding to obtain dis- charge of various student loan obligations, including the obligation stemming from her NHSC scholarship. After both sides in this adversary proceeding moved for sum- mary judgment, the bankruptcy court held that one-half of Dr. Matthews' NHSC obligation, which by then had risen to nearly $400,000, was dischargeable. The court wrote:
19 F.3d 121, *123; 1994 U.S. App. LEXIS 4534, **5; Bankr. L. Rep. (CCH) P75,762
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Considering all of the facts and circum- stances of this case, we find the matter uncon- scionable in two respects -- first, it is shock- ingly unfair for the Debtor to receive all the benefits from the NHSC and then refuse to perform her service obligation. Second, it is outside the limits of **6 what is reasonable to hold the Debtor in a virtual receivership by requiring the repayment of nearly $400,000, which even with the Debtor's income is a near impossibility. The fresh start provisions of the Bankruptcy Code do not contemplate perpetual indebtedness beyond a reasonable repayment period.
Matthews v. United States (In re Matthews), 150 Bankr.
11, 14
(Bankr. W.D. Pa. 1992), aff'd No. 93-00038E (W.D. Pa. June
14, 1993).
The NHSC moved for reconsideration and argued that Dr. Matthews could still avoid having to pay liquidated damages if she would simply fulfill her service obligation. The bankruptcy court denied this motion, observing that
"to require the Debtor to now close her practice, leave her home and the building in which she practices, pos- sibly separate herself from her husband, and uproot her children's lives for temporary relocation to a NHSC high priority area is outside the limits of what is reasonable." Matthews v. United States (In re Matthews), Ch. 7 Case No. 90-00765E, Adv. No. 90-0133, op. at 2-3 (Bankr. W.D. Pa. Jan. 19, 1993).
The NHSC appealed to the district court, but that court affirmed the bankruptcy **7 court's order without opinion. This appeal followed.
II.
HN1 Under Section 254o(d)(3)(A), an obligation stemming from a NHSC scholarship is dischargeable in bankruptcy only "if the bankruptcy court finds that nondis- charge of the obligation would be unconscionable." n2
*124 In ordinary usage, the term "unconscionable" means "excessive, exorbitant," "lying outside the limits of what is reasonable or acceptable," "shockingly un- fair, harsh, or unjust," or "outrageous." Webster's Third New International Dictionary 2486 (1977). In the ab- sence of contrary indications, we presume that Congress, in employing the term "unconscionable" in Section
254o(d)(3)(A), meant to adopt this definition. Smith v. United States, 124 L. Ed. 2d 138, 113 S. Ct. 2050, 2054
(1993); Perrin v. United States, 444 U.S. 37, 42, 62 L. Ed. 2d 199, 100 S. Ct. 311 (1979). We note that other bankruptcy courts -- and, indeed, the bankruptcy court in this case -- have adopted essentially the same definition. See, e.g., In re Green, 82 Bankr. 955, 959 (Bankr. N.D. Ill. 1988); In re Quinn, 102 Bankr. 865, 867 (Bankr. M.D. Fla. 1989). **8
n2 HN2 The meaning of the term "uncon- scionable" is a question of law over which we ex- ercise plenary review. The parties disagree as to whether the bankruptcy court's application of this concept to the facts of this case should be reviewed under the plenary or abuse of discretion standard. We need not decide this question, however, since the bankruptcy court's decision cannot be sustained under either standard.
Applying this definition, we hold that nondischarge of Dr. Matthews's entire debt would not be "uncon- scionable." First, we find it significant that the NHSC has presented Dr. Matthews with the option of fulfilling her service obligation even at this late date. n3 As noted, the bankruptcy court felt that it would be "outside the limits of what is reasonable" to require Dr. Matthews to "close her practice, leave her home and the building in which she practices, possibly separate herself from her husband, and uproot her children's lives for temporary relocation to a NHSC high priority area." Matthews, Ch. 7 Case **9 No. 90-00765E, Adv. No. 90-0133, op. at 2-3. This rea- soning, however, appears to misapprehend the extremely limited scope of the concept of unconscionability. An op- tion is not "unconscionable" simply because it may be disruptive, unpleasant, undesirable, or painful. Instead, to be "unconscionable" an option must be "shockingly un- fair, harsh, or unjust" or "outrageous," and the facts cited by the bankruptcy court and by Dr. Matthews do not show that a temporary relocation to satisfy her service obliga- tion would rise to this level. These facts show little more than that Dr. Matthews and her family would experience some of the ordinary difficulties of relocation, and we do not believe that the ordinary difficulties of relocation can be regarded as "unconscionable." Each year many Americans must uproot their families and move because they are transferred by their employers or because they cannot find satisfactory work where they currently live.
n3 The NHSC states that it has a general policy of extending this option to scholarship recipients such as Dr. Matthews.
**10
Second, even if Dr. Matthews did not have the option
19 F.3d 121, *124; 1994 U.S. App. LEXIS 4534, **10; Bankr. L. Rep. (CCH) P75,762
Page 4
of avoiding the payment of liquidated damages by ful- filling her service commitment, she failed to demonstrate that nondischarge of the full amount she owes would be
"unconscionable." The bankruptcy court reasoned, based on Dr. Matthews' current income of $85,000 per year, that it would be nearly impossible for Dr. Matthews to pay off her NHSC obligation. Elaborating on this reasoning, Dr. Matthews claims that the annual payments needed to pay off her NHSC obligation and the accumulating interest on this obligation would exceed the difference between her current annual income and her current annual expenses. This argument is flawed, however, because it assumes that, in determining whether nondischarge would be "un- conscionable," both Dr. Matthews' current income and her current expenses should be regarded as unalterable. Instead, the proper inquiry is whether it would be "uncon- scionable" to require Dr. Matthews to take any available steps to earn more income or to reduce her expenses.
Dr. Matthews bore the burden of proving uncon- scionability, and she failed to discharge that burden. She did not point to facts in the summary judgment **11 record establishing that she could not earn more by chang-
ing her practice or relocating to a higher paying area, or that requiring her to undergo such changes would be
"shockingly unfair, harsh, or unjust." Similarly, she did not point to facts in the summary judgment *125 record showing that it would be "outrageous" to require her to reduce her expenses. The test for unconscionability is not whether repayment of an NHSC obligation would pre- vent the debtor from maintaining the standard of living of the average physician or the standard of living to which the debtor is accustomed. Average taxpayers subsidize the medical education of NHSC scholarship recipients. Requiring such recipients who flout their service com- mitments to live like average taxpayers is not "uncon- scionable."
III.
In sum, we hold that the nondischarge of Dr. Matthews' entire NHSC obligation is not "uncon- scionable." We will therefore reverse the order of the district court and remand for the entry of an order hold- ing that Dr. Matthews' entire NHSC obligation is nondis- chargeable.
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