ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA. (D.C. Civil No. 93-00038).
Before: Stapleton, Cowen, and Alito, Circuit Judges.
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 service 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 nondischarge would be "unconscionable." The bankruptcy and district courts concluded that it would be "unconscionable" not to discharge one-half of Dr. Matthews' current obligation, but we hold that the standard of unconscionability was not met. We therefore reverse.
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 obligation of two years). 42 U.S.C. §§ 254l (f)-(g). This service must be performed "in a health professional shortage 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) (emphasis added). Each scholarship recipient must also agree in writing that, if he or she breaches this commitment, he or she will be liable for liquidated damages of three times the amount of scholarship support received, as well as interest.*fn1 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).
Dr. Matthews received NHSC scholarships, totaling $46,726.00, to attend Hahnemann Medical College in 1979, 1980, and 1981. In return, she signed an agreement 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 obligation so that she could complete a family practice residency. 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 Saegertown and work at the Conneaut Valley Health Center.
As a result of Dr. Matthews' refusal to fulfil her service 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 discharge of various student loan obligations, including the obligation stemming from her NHSC scholarship. After both sides in this adversary proceeding moved for summary 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:
Considering all of the facts and circumstances of this case, we find the matter unconscionable in two respects -- first, it is shockingly 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 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 ...