Bankruptcy Plan Litigation

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Bankruptcy Plan Litigation

• Joni Anderson - United Student Aid Funds, Inc.
• Madeleine Wanslee - Gust Rosenfeld, P.L.C.
• Dan Fisher - Educational Credit Mgmt. Corp.

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Bankruptcy Litigation-Chapter 13 Plan Language

• The root of the problem In re Andersen, 179
  F.3d 1253 (10th Cir. 1999) Just because a Plan
  provision is contrary to the Code doesnt mean it
  is unenforceable. The confirmation of the Plan
  makes the provision res judicata. The focus is
  the need for finality.
• The assertion of an undue hardship in a Plan
  becomes the establishment of undue hardship as a
  matter of law. Creditors cannot rely on the Code
  or the Rules for protection.

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Bankruptcy Litigation-Chapter 13 Plan Language

• In re Pardee, 193 F.3d 1083 (9th Cir. 1999). The
  9th Circuit adopted the holding of Andersen and
  states that confirmation orders are final orders.
  It did not matter to the Court that the
  provision in question was a direct violation of
  the law.
• Oh, by the way, we know that weve just
  opened a can of worms regarding presumptively
  non-dischargeable child support obligations or
  alimony. But thats a problem for another day.
  

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Bankruptcy Litigation-Chapter 13 Plan Language

• Chipping away at Andersen
• In re Banks, 299 F.3d 296 (4th Cir. 2002) (this
  is a lack of due process)
• In re Whelton, 432 F. 3d 150 (2d Cir. 2005) (this
  is contrary to the statutory language of the
  Code)
• In re Ruehle, 412 F. 3d 679 (6th Cir 2005) (Due
  process is not to be sliced, diced and disguised
  with sauce due process must be served whole,
  without garnish.)
• In re Poland, 382 F.3d 1185 (10th Cir. 2004)
  (Andersen was wrongly decided and should be
  reconsidered.)

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Bankruptcy Litigation-Chapter 13 Plan Language

• Finally, the issue appeared to be resolved
• In re Mersmann, 505 F. 3d 1033 (10th Cir. 2007)
  The panel hearing the case sua sponte referred
  the case to the court for an initial en banc
  review. The court held that the statutory
  framework cannot support discharging a student
  loan in a Plan. Further, res judicata should not
  apply where there is inadequate notice as
  required by the Rules.

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• Until Now. . .

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Espinosa The Ninth Circuit Rejects Banks,
Hanson, Ruehle, Whelton Mersmann
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• Espinosa Facts
• In 1992, Espinosa filed a Chapter 13 bankruptcy
  petition listing his student loans as his only
  debts.
• The plan provided for payment of only the
  principal amount of his loans, and declared that
  any amounts or claims for student loans unpaid
  by this Plan shall be discharged.
• The plan did not allege that Espinosa would
  suffer undue hardship if the accrued and
  accruing interest on his debt was not discharged
  - - It simply declared a discharge.

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• Notice of the case and the plan was given to USA
  Funds by mail at the post office box address used
  to receive loan payments.
• USA Funds did not object to the plan and it was
  confirmed. The confirmation order made no
  express mention of Espinosas student loan debt
  and did not assert that repayment would cause an
  undue hardship.
• Espinosa completed the payments under the plan,
  and a standard discharge order was entered in
  1997. That order excepted from discharge any
  debt for a student loan as specified in 11
  U.S.C. 523(a)(8).

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• Espinosa Post-Confirmation History
• The loans were subrogated to the U.S. Department
  of Education, and it commenced collection efforts
  to intercept Espinosas income tax refunds.
• In 2003, Espinosa filed a motion alleging
  violation of the discharge injunction. USA Funds
  moved under Fed.R.Civ.P. 60(b)(4) for relief from
  the confirmation order as void.
• The bankruptcy court found Pardee controlling,
  granted Espinosa relief, and ordered that
  collection efforts cease. However, the court
  declined to grant the sanctions Espinosa
  requested.

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• USA Funds appealed to the district court, which
  reversed, ruling that the confirmation order is
  void for lack of due process and therefore had no
  res judicata effect.
• Espinosa appealed to the Ninth Circuit. That
  court remanded to the bankruptcy court for a
  determination whether exclusion of Espinosas
  student loan debt from the discharge order was a
  clerical error. The bankruptcy court ruled that
  it was. Espinosa I, 530 F.3d 895.

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• The court of appeals then reversed the district
  court. Chief Judge Kozinski wrote that a debtor
  may discharge student loan debt by merely
  including it in a Chapter 13 plan, without
  proving undue hardship in an adversary
  proceeding. If the creditor fails to object to
  the plan, the orders confirming the plan and
  discharging the debt are valid and final.
  Espinosa II, 545 F.3d 1113.
• USA Funds requested that the Court grant a
  rehearing of the matter. The Court denied that
  request and amended the decision. Espinosa III,
  553 F.3d 1193.

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Are Student Loan Creditors Living In A Fairy
Tale?

• "The creditors in such cases are huge
  enterprises whose business it is to administer
  the very kinds of debts here in question. If this
  kind of notice to sophisticated parties who have
  ample resources to protect their rights is
  inadequate for purposes of res judicata, then the
  concept of notice has no meaning and res judicata
  is a fairy tale."  Espinosa III.
• "We reject the idea that a creditor who is in
  the business of administering student loans has a
  constitutional right to ignore a properly served
  notice that clearly specifies that its debt will
  be discharged on successful completion of the
  plan. Espinosa III.

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Courts Should M.Y.O.B.

• We find it highly unlikely that a creditor whose
  business it is to administer student loans will
  be misled by the customary bankruptcy procedures
  or somehow be bamboozled into giving up its
  rights by crafty student debtors. If the creditor
  is notified and fails to object, it is doubtless
  the result of a careful calculation that this
  course is the one most likely to yield repayment
  of at least a portion of the debt. In such
  circumstances, bankruptcy courts have no business
  standing in the way. Cases such as In re Webber
  and In re Patton are, to that extent, overruled.
  Espinosa III.

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• Ruehle stated that in the end, . . . due
  process is not to be sliced, diced and disguised
  with sauce. Due process must be served whole,
  without garnish.

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• Anything less is winking at due process, which
  is the cornerstone of justice. Id.

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• What Due Process looks like in the 9th Circuit

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• Whats the next step?

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The Supreme Court

• Given the Ninth Circuits refusal in this case
  to overturn Pardee, as the Tenth Circuit did
  Andersen, there is no point in waiting any longer
  for the Ninth Circuit to eliminate the conflict
  with its sister circuits.

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The Top 3 Reasons the Supreme Court Should Accept
This Appeal

• Reason No. 3 Espinosa conflicts with
  principles expressly recognized in Hood
• Section 523(a)(8) is self-executing. Unless
  the debtor affirmatively secures a hardship
  determination, the discharge order will not
  include a student loan debt.
• . . . .
• Creditors generally are not entitled to personal
  service before a bankruptcy court may discharge a
  debt. Because student loan debts are not
  automatically dischargeable, however, the Federal
  Rules of Bankruptcy Procedure provide creditors
  greater procedural protection. The current
  Bankruptcy Rules require the debtor to file an
  adversary proceeding against the State in order
  to discharge his student loan debt. . . . As
  prescribed by the Rules, an adversary
  proceeding requires the service of a summons and
  a complaint.
• Tennessee Student Assistance Corp. v. Hood, 541
  U.S. 440, 449-452 (2004) (internal citations
  omitted).

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• Reason No. 2 Circuit Split The Ninth
  Circuit on Pardee our position in Pardee is in
  the minority indeed, among the circuits we now
  stand alone. In re Espinosa I

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• The No. 1 Reason Why the Supreme Court Should
  Accept this Appeal

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• The 9th Circuit Is Wrong
• Discharge-by-Declaration violates the Bankruptcy
  Code and Rules and is therefore void. Sections
  523(a)(8) 1328 Rule 7001(6)
• Discharge-by-Declaration is void for lack of
  the prescribed notice to the creditor. Rules
  7001 7004
• An order confirming a plan providing for
  discharge of student loan debt without proof of
  undue hardship in an adversary proceeding, and
  the subsequent discharge order, are not res
  judicata.

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What Can You Do ?
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What Can You Do ?
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• Become a Friend of the Court
• All Amicus Curiae Briefs are Due
• Thursday, April 9, 2009