Supreme Court Affirms Espinosa on Procedural Grounds Without Endorsing Discharge by Declaration

Consistent with several prior rulings, a unanimous Supreme Court held that a creditor could not use a Motion under Rule 60(b)(4) to attempt to set aside a chapter 13 confirmation order which included a controversial "discharge by declaration" provision." United Student Aid Funds, Inc. vs. Espinosa, No. 08-1134 (U.S. 3/23/10).

Background

Espinosa involved a chapter 13 debtor who included a single student loan debt in his chapter 13 plan and provided that upon payment of the principal amount, the debt would be discharged. The plan violated 11 U.S.C. Sec. 523(a)(8) because it sought to discharge a student loan debt without a finding of undue hardship. However, the creditor did not object to the plan, the plan was confirmed and the debtor received a discharge after completing his payments. Several years after discharge, the student loan creditor began collection efforts. The debtor asked the bankruptcy court to enforce the discharge order, while the creditor asked the court to declare the order to be void under Rule 60(b)(4). The Bankruptcy Court and the Court of Appeals ruled that the orders were not void and could not be challenged at such a late date.

I have previously written about Espinosa here, here and here.

All About Voidness

Justice Thomas, writing for a unanimous Supreme Court, authored an opinion affirming the Ninth Circuit on finality grounds, while pointing out that inappropriate orders could be policed through other methods than declaring them void.

Justice Thomas explained that in order to set aside a judgment as void, there must be a jurisdictional defect or failure to afford due process.

“A judgment is not void,” for example, “simply because it is or may have been erroneous.” (citation omitted). Similarly, a motion under Rule 60(b)(4) is not a substitute for a timely appeal. (citation omitted). Instead, Rule 60(b)(4) applies only in the rare instance where a judgment is premised either on a certain type of jurisdictional error or on a violation of due process that deprives a party of notice or the opportunity to be heard. (citation omitted). The error United alleges falls in neither category.

Opinion, pp. 8-9.

Voiding a judgment for lack of jurisdiction is "reserved . . . only for the exceptional case in which the court that rendered judgment lacked even an 'arguable basis' for jurisdiction." Opinion, at 9. Section 523(a)(8)'s requirement that a court find undue hardship to discharge a student loan debt is a precondition for discharge, but is not a limitation on the court's jurisdiction. Similarly, the procedural requirement of an adversary proceeding and a summons is not jurisdictional.

Justice Thomas also found that failure to initiate an adversary proceeding did not deprive the student loan creditor of due process.

Espinosa’s failure to serve United with a summons and complaint deprived United of a right granted by a procedural rule. (citation omitted). United could have timely objected to this deprivation and appealed from an adverse ruling on its objection. But this deprivation did not amount to a violation of United’s constitutional right to due process. Due process requires notice “reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” (citation omitted). (“[D]ue process does not require actual notice . . .”). Here, United received actual notice of the filing and contents of Espinosa’s plan. This more than satisfied United’s due process rights. Accordingly, on these facts, Espinosa’s failure to serve a summons and complaint does not entitle United to relief under Rule 60(b)(4).

Opinion, p. 10.

No Expansion of Voidness Concept

The Supreme Court also rejected an attempt to expand the concept of voidness to embrace statutory defects.

Unable to demonstrate a jurisdictional error or a due process violation, United and the Government, as amicus , urge us to expand the universe of judgment defects that support Rule 60(b)(4) relief. Specifically, they contend that the Bankruptcy Court’s confirmation order is void because the court lacked statutory authority to confirm Espinosa’s plan absent a finding of undue hardship. In support of this contention, they cite the text of §523(a)(8), which provides that student loan debts guaranteed by governmental units are not dischargeable “ unless ” a court finds undue hardship. 11 U. S. C. §523(a)(8) (emphasis added). They argue that this language imposes a “ ‘self-executing’ limitation on the effect of a discharge order” that renders the order legally unenforceable, and thus void, if it is not satisfied. (citation omitted). In addition, United cites §1325(a)(1), which instructs bankruptcy courts to confirm only those plans that comply with “the … applicable provisions” of the Code. Reading these provisions in tandem, United argues that an order confirming a plan that purports to discharge a student loan debt without an undue hardship finding is “doubly beyond the court’s authority and therefore void.” (citation omitted).

We are not persuaded that a failure to find undue hardship in accordance with §523(a)(8) is on par with the jurisdictional and notice failings that define void judgments that qualify for relief under Rule 60(b)(4). As noted, §523(a)(8) does not limit the bankruptcy court’s jurisdiction over student loan debts. (citation omitted). Nor does the provision impose requirements that, if violated, would result in a denial of due process. Instead, §523(a)(8) requires a court to make a certain finding before confirming the discharge of a student loan debt. It is true, as we explained in Hood , that this requirement is “ ‘self-executing.’ ” (citation omitted). But that means only that the bankruptcy court must make an undue hardship finding even if the creditor does not request one; it does not mean that a bankruptcy court’s failure to make the finding renders its subsequent confirmation order void for purposes of Rule 60(b)(4).

Given the Code’s clear and self-executing requirement for an undue hardship determination, the Bankruptcy Court’s failure to find undue hardship before confirming Espinosa’s plan was a legal error. . . . But the order remains enforceable and binding on United because United had notice of the error and failed to object or timely appeal.

United’s response—that it had no obligation to object to Espinosa’s plan until Espinosa served it with the summons and complaint the Bankruptcy Rules require, . . .is unavailing. Rule 60(b)(4) does not provide a license for litigants to sleep on their rights. United had actual notice of the filing of Espinosa’s plan, its contents, and the Bankruptcy Court’s subsequent confirmation of the plan. In addition, United filed a proof of claim regarding Espinosa’s student loan debt, thereby submitting itself to the Bankruptcy Court’s jurisdiction with respect to that claim. (citation omitted) . United therefore forfeited its arguments regarding the validity of service or the adequacy of the Bankruptcy Court’s procedures by failing to raise a timely objection in that court.

Rule 60(b)(4) strikes a balance between the need for finality of judgments and the importance of ensuring that litigants have a full and fair opportunity to litigate a dispute. Where, as here, a party is notified of a plan’s contents and fails to object to confirmation of the plan before the time for appeal expires, that party has been afforded a full and fair opportunity to litigate, and the party’s failure to avail itself of that opportunity will not justify Rule 60(b)(4) relief. We thus agree with the Court of Appeals that the Bankruptcy Court’s confirmation order is not void.

Opinion, pp. 11-14.

The Court's Independent Duty

However, the Supreme Court did chastise the Ninth Circuit for finding that Bankruptcy Courts were under an obligation to confirm plans containing improper "discharge by declaration" language absent objection.

As Espinosa concedes. . . a Chapter 13 plan that proposes to discharge a student loan debt without a determination of undue hardship violates §§1328(a)(2) and 523(a)(8). Failure to comply with this self-executing requirement should prevent confirmation of the plan even if the creditor fails to object, or to appear in the proceeding at all. (citation omitted). That is because §1325(a) instructs a bankruptcy court to confirm a plan only if the court finds, inter alia , that the plan complies with the “applicable provisions” of the Code. (citation omitted). Thus, contrary to the Court of Appeals’ assertion, the Code makes plain that bankruptcy courts have the authority—indeed, the obligation—to direct a debtor to conform his plan to the requirements of §§1328(a)(2) and 523(a)(8).

Opinion, pp. 14-15.

Deterring Bad Behavior

Finally, the Supreme Court reinforced its holding in Taylor v. Freeland & Kronz that deterring bad behavior is not a sufficient reason to allow untimely objections.

United argues that our failure to declare the Bankruptcy Court’s order void will encourage unscrupulous debtors to abuse the Chapter 13 process by filing plans proposing to dispense with the undue hardship requirement in the hopes the bankruptcy court will overlook the proposal and the creditor will not object. In the event the objectionable provision is discovered, United claims, the debtor can withdraw the plan and file another without penalty.

We acknowledge the potential for bad-faith litigation tactics. But expanding the availability of relief under Rule 60(b)(4) is not an appropriate prophylaxis. As we stated in Taylor v. Freeland & Kronz , 503 U. S. 638 (1992) , “[d]ebtors and their attorneys face penalties under various provisions for engaging in improper conduct in bankruptcy proceedings,” (citation omitted). The specter of such penalties should deter bad-faith attempts to discharge student loan debt without the undue hardship finding Congress required. And to the extent existing sanctions prove inadequate to this task, Congress may enact additional provisions to address the difficulties United predicts will follow our decision.

Opinion, pp. 16-17.

Summing It Up

This opinion is consistent with both Taylor v. Freeland & Kronz and last summer's opinion in Travelers Indemnity Co. v. Bailey, 557 U.S. ____ (2009) that deadlines have meaning and that untimely attacks on orders will not be allowed merely because the orders were unwise or unwarranted. At the same time, the Supreme Court stressed the obligation of the Bankruptcy Court to perform its own independent review to determine that only proper orders are entered and to use Rule 9011 to police parties who openly flaunt the rules in the hopes that they won't get caught. The Supreme Court's approach emphasizes the necessity for all parties to follow the rules but to do so in a timely fashion. The debtor's attorney has an obligation to include only arguable plan provisions; the court has an obligation to independently review the plan before approving it; and the creditor has an obligation to make a timely objection or else lose its complaint.

Kudos to Bankruptcy Judge Keith Lundin who correctly predicted this result at the State Bar of Texas Bankruptcy Bench-Bar Conference in June 2009.