October 4, 2008
9th Circuit Rules on Effect of Completion of Chapter 13 Plan on Unpaid Student Loans
Espinosa v. United Student Aid Funds (In re Espinosa), ---- F. 3d ----, 2008 WL 4426634 (9th Cir. October 2008)
Issue: When a confirmed chapter 13 plan is completed and the discharge injunction is entered, is the unpaid portion of the student loan discharged when the lender received actual notice of its treatment in the plan and did not object?
Holding: Yes, the discharge injunction may be set aside only pursuant to FRCP60(b) and then based on a lack of sufficient notice.
Judge Alex Kozinski
The debtor’s chapter 13 plan
“provided for repayment of $13,250 in student loans to United Student Aid Funds, Inc. (Funds). Funds was notified and filed a proof of claim in the amount of $17,832.15. The bankruptcy court eventually confirmed the plan, and the Chapter 13 Trustee mailed Funds a notice advising it that ‘[t]he amount of the claim filed differs from the amount listed for payment in the plan. Your claim will be paid as listed in the plan.’ The notice also contained the following warning: If an interested party wishes to dispute the above stated treatment of the claim, it is the responsibility of the party to address the dispute. The claim will be treated as indicated above unless the Trustee receives within 30 days from this mailing, a written request for different treatment. The request should set forth the specific grounds for alternative treatment and should be filed with the Clerk of the Court, with a copy mailed to the Trustee. Funds did not object and Espinosa successfully completed the plan.”
The discharge was then entered. Three years later Funds began collection efforts. The bankruptcy court ruled for the debtor and ordered Funds to cease collection efforts. The District Court reversed. Funds defended arguing that an adversary proceeding was required with a finding that there was a hardship. Kozinski writes, “Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee), 193 F.3d 1083, 1086 (9th Cir. 1999), which is on all fours with our case, forecloses this argument.” “In essence, Pardee held that a discharge is a final judgment and cannot be set aside or ignored because a party suddenly claims, years later, that the trial court committed an error.” “Regardless, when the creditor is served with notice of the proposed plan, it has a full and fair opportunity to insist on the special procedures available to student loan creditors by objecting to the plan on the ground that there has been no undue hardship finding.” “A discharge injunction does not operate by way of res judicata; it is, rather, an equitable remedy precluding the creditor, on pain of contempt, from taking any actions to enforce the discharged debt.” “Had the creditor wanted to insist on an adversary, it could have objected to the Chapter 13 plan on the ground that there was no judicial finding of undue hardship. Had Funds so objected, the bankruptcy court would have been required to disapprove the plan and Espinosa would have been put to the hard choice of commencing an adversary or abandoning Chapter 13. But Funds didn’t object to the plan and didn’t appeal the order confirming the plan, as it well could have. See Lawrence Tractor Co. v. Gregory (In re Gregory), 705 F.2d 1118 (9th Cir. 1983). Instead, it accepted the payments made by the debtor during the plan’s life and then acted as if the whole thing never happened.”
“It makes a mockery of the English language and common sense to say that Funds wasn’t given notice, or was somehow ambushed or taken advantage of.”
The lender must go through FRCP 60(b)(4) or (6) to vacate the judgment. That comes down to whether or not it received sufficient notice. “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.”
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