Amicus Curiae Brief — United Student Aid Funds, Inc. v. Espinosa

a "Supreme Coon, US

APR 10 2009

No. 08-1134 OFFICE OF THE CLERK

In the

Supreme Court of the United States

UNITED STUDENT AID FUNDS, INC.,

Petitioner,

FRANCISCO J. ESPINOZA,

Respondent.

On Petition for A Writ of Certiorari to the

United States Court of Appeals for the Ninth Circuit

BRIEF IN SUPPORT OF PETITIONER

FOR AMICUS CURIAE EDUCATIONAL

CREDIT MANAGEMENT CORPORATION

Julie K. Swedback

Counsel of Record

EDUCATIONAL CREDIT

MANAGEMENT CORPORATION

1 Imation Place, Building 2

Oakdale, MN 55128

(651) 325-3088

Counsel for Amicus Curiae

Educational Credit

Management Corporation

2009 — Bachmao Legal Printing @ (612) 339-9518 @ 1-400-715-5582 @ Fas (612) 357-8055

TABLE OF CONTENTS

STATEMENT OF INTEREST OF AMICUS

REASONS FOR GRANTING THE WRIT................

I. Espinosa Created a Decisive Split: Five

Circuits Have Banned Discharge-by-

Declaration of Student Loan Debt through

a Chapter 13 Plan, But the Ninth Circuit

RE SES YR CR Ne Ceo Rc Pe a

A. The Fourth, Sixth, and Seventh Circuits

Maintain that Discharge by Declaration

Violates Creditors’ Due Process ...................

1. This Court has specifically delineated

SEND PIE TIE BE inc saccctnccnceccncnescecccsses

bo

The Ninth Circuit’s conclusion that

notice under Fed. R. Bankr. P. 2002

satisfies a creditor’s due process is

contrary to this Court’s decisions in

BE NT inc cncodecscacccvevcasce

B. The Ninth Circuit Explicitly Rejects

the Second and Tenth Circuits Holding

that Chapter 13 Confirmation Orders

Containing Discharge-by-Declaration

Provisions Are Not Entitled to

I a ici vc sepemincoptvanney

1. Declaration-by-discharge provisions

violate statutory principles ....................: 15

2. Aconfirmation order is not res

judicata to issues that were not

ii ccincsananscicnnsennscdénectesions 17

Il. The Ninth Circuit's Decision Paves the

Path for Debtors to Discharge Child

Support, Maintenance, Tax Debt, and

Wrongful Death Judgments Through

CRE Bib PI oc cccescccccccsecscsessessccess 20

Ill. The Ninth Circuit's Decision Makes a

Mockery of Bankruptcy Process and

Encourages Unethical Conduct ........................ 21

NIT Dirtascsicseserissiciniiciinatimnuiiiad sdioniineniaunibaniiiiass 24

fT

TABLE OF AUTHORITIES

CASES: Page

Allen v. McCurry, 449 U.S. 90, 94 (1989)...........0..... 17

Andersen v. UNIPAC-NEBHELP

(In re Andersen), 179 F.3d 1253

et a enanibeaiansineianons 15, 16

Banks v. Sallie Mae Servicing Corp.

(In re Banks), 299 F.3d 296 (4th Cir. 2002).......... 5, 11

City of New York v. New York, New Haven

& Hartford R.R. Co., 344 U.S. 293 (1953)................ 10

Cohen v. De La Cruz, 523 U.S. 213 (1998) ............... 20

Educ. Credit Mgmt. Corp. v. Mersmann

(In re Mersmann), 505 F.3d 1033

SIE TINIE oc caiainedaumipadmaieanveneniebesdnessents passim

Educ. Credit Mgmt. Corp. v. Whelton

(In re Whelton), 299 B.R. 306 (Bankr. Vt. 2003) ...... 18

Espinosa v. United Student Aid Funds, Inc.,

SES F.Se LEDS Cotas Car. BOSD occ cccccccccccccsseccsesss passim

Great Lakes Higher Educ. Corp. v. Pardee

(In re Pardee), 193 F.3d 1083 (9th Cir. 1999)...........14

Grogan v. Garner, 498 U.S. 279 (1991) .................... 21

Hanson v. Educ. Credit Mgmt. Corp.

(In re Hanson), 397 F.3d 482, 487

I a adacnduuveabecesbousscouukouisiukiaiienglana tee

TT

Mullane v. Central Hanover Bank &

Trust Co., 339 U.S. 306 (1960).....................0000. passim

Norwest Bank Worthington v. Ahlers,

Se Ee es SI CI oo ceenscesicice secs scscsscsccessascuss 19

Repp v. Educ. Credit Mgmt. Corp.

(In re Repp), 307 B.R. 144

sd eccinebaenndscenins 11,13

Ruehle v. Educ. Credit Mgmt. Corp.

(In re Ruehle), 412 F.3d 679 (6th Cir. 2005)......... 6, 11

Tenn. Student Assistance Corp. v. Hood,

Se Me ons cocsisncncnsseneededncsnnscsoseusesses passim

Whelton v. Educ. Credit Mgmt. Corp..,

GER Fe BBD Ce Cae. Bcc cccecccccccccsccvsccccscces passim

Statutes:

EERE ONO RD octet nr 8, 13, 14

ud wuensndineuaeeusones 8, 9, 14, 20

so easahabis nacineioreenelll 16, 17

is cad ceiecavuediones 15, 16, 17, 18

Oh i I nic cacassaccncssecdeseosacceness 16, 18, 20

ee SE a amon 6

Rules:

a ee eae 10, 11, 12

Si Us sulle agente g

nM oe os eda peadunnsuaseubasnenn 11

Fed. R. Bankr. P. 7004............... peas ial, Bete 9,11, 12, 18

2 sacuasteeekeies sicamcanolaaell 9g

A a Oa suis ioald whaseenbeueeen 21

Educational Credit Management Corporation,

as amicus curiae, respectfully files this brief in support

of Petitioner United Student Aid Fund’s Petition for a

Writ of Certiorari.!

STATEMENT OF INTEREST OF AMICUS CURIAE

Amicus curiae Educational Credit Management

Corporation (ECMC) is a private, nonprofit corporation

and guaranty agency in the Federal Family Education

Loan (FFEL) Program, one of two federally-backed

student loan programs.? As of September 30, 2007, the

total financial interest at stake in the two federal

student loan programs approached $500 billion.

ECMC guarantees or services approximately

65% of the total FFEL Program loan volume currently

in bankruptcy. In the Ninth Circuit alone, ECMC

manages the accounts of approximately 5,800 Chapter

13 bankruptcy debtors who have FFEL student loans,

' Pursuant to Sup. Ct. R. 37.6, amicus curiae states that no

counsel for a party authored this brief in whole or in part, and no

person other than amicus has made a monetary contribution to

the preparation or submission of this brief. All parties have

consented to the filing of this brief by amicus curiae, and their

consent letters are on file with the Clerk’s Office. Counsel of

record for all parties received notice at least ten days prior to the

due date of the amicus curiae’s intention to file this brief.

2 The Federal Government operates two student loan programs:

The Federal Family Education Loan (FFEL) Program and the

Wiliam D. Ford Federal] Direct Loan (DL) Program. Both

programs are regulated by the United States Department of

Education (ED) and are federally-insured.

3 There is approximately $363 billion of student loans in the

FFEL Program and $107.2 billion in the DL Program.

totaling over $135 million. ECMC also manages an

additional 50,200 Chapter 13 bankruptcy cases

involving FFEL Program loans, representing more

than $1 billion in outstanding balances across the rest

of the United States.4

The federal fisc at stake here is paramount.

Since its inception in 1965, the FFEL Program has

provided $735 billion in loans to postsecondary

students and their parents. In the 2007-08 academic

year, the FFEL Program served 6.5 million students

and their parents, lending them approximately $54.7

billion. Between 1965 and 2004, the percentage of

adults holding bachelor degrees more than tripled.

To ensure the integrity of the federal student

loan program, Congress specifically excepted student

loan debt from bankruptcy discharge absent proof by

the debtor of undue hardship of the debtor and

debtor's dependents. Over the last five decades,

Congress has increasingly tightened the standard that

debtors must prove to be relieved from repaying their

student loans. Thus, as a federal guaranty agency,

ECMC plays a vital, integral role in the student loan

program and has an obligation to comply with

Congress’s mandate to maintain the viability of the

federal student loan program.

‘ These figures do not include any student loan accounts serviced

and monitored by the United States Department of Education.

“~

-_

SUMMARY OF ARGUMENT

The circuit courts of appeal are sharply divided

on whether debtors may discharge their student loan

debt through the Chapter 13 bankruptcy plan

confirmation process. Because’ entrenched

disagreement in the courts of appeal has caused

confusion and disuniformity of rulings in cases based

on identical facts, certiorari is warranted to provide

guidance for lower courts.

The Fourth, Sixth, and Seventh Circuits have

held that confirmed plans with discharge-by-

declaration provisions have no preclusive effect

because they violate creditors’ due process rights.

The Second and Tenth Circuits prohibit debtors from

discharging student loan debt through their Chapter

13. pians because this practice violates’ the

bankruptcy code, and, therefore, the confirmation

orders have no preclusive effect. The Ninth Circuit’s

Espinosa® decision outright rejected both of these

analyses.

The Ninth Circuit’s Espinosa decision is a legal

charade. It stands against the universe of this

Court's precedent, other circuits’ decisions, and

congressional mandate for the shocking proposition

that debtors may discharge their nondischargeable

student loan debt simply by hiding magic language in

their Chapter 13 bankruptcy plans. Espinosa

unjustifiably sets a trap for unwary courts, trustees,

and creditors. Moreover, it reduces the bankruptcy

process to gamesmanship and condones’ and

5 Espinosa v. United Student Atd Funds, Inc., 553 F.3d 1193

(9th Cir. 2008)

3

encourages unethical, sanctionable practices’ by

debtors’ attorneys.

Allowing Espinosa to be the law-——in the Ninth

Circuit alone—-has significant financial and practical

consequences for the federal government, states

government, student loan industry, and the processes

of bankruptcy courts. It also sanctions a dangerous

path for debtors to discharge other nondischargeable

debts like child support, maintenance, tax, personal

injury, and wrongful death through their Chapter 13

plans.

Only this Court can clarify its due process

precedent, resolve the clear conflict between circuits,

ensure the uniform application of the Bankruptcy

Code, and protect the federal fisc and other socially-

based, specially-excepted nondischargeable debt.

Accordingly, ECMC urges this Court to grant USA

Funds’ Petition for a Writ of Certiorari.

REASONS FOR GRANTING THE WRIT

Two early cases from the Tenth and Ninth

Circuits initiated a decade of gamesmanship among

debtors’ counsel, bankruptcy courts, Chapter 13

trustees, and creditors’ counsel. Four other circuits

have specifically disavowed these opinions as a

fundamental violation of due process, the statutory

requirements of the Bankruptcy Code, and the

requirements of res judicata.

In 2007, the Tenth Circuit repudiated what

had been the initial decision in this line of cases,

realizing it could no longer defend this practice.

Although Espinosa squarely presented the Ninth

4

Circuit with the opportunity to right its earlier

wrongs, the Ninth Circuit instead reasserted the

requirement that bankruptcy courts engage in the

procedural nonsense that allows debtors to include in

a bankruptcy plan whatever they can get away with.

When given a chance to review its opinion en banc,

the court declined and thereby punted the issue

directly to this Court.

I. Espinosa Created a Decisive Split: Five

Circuits Have Banned Discharge-by-

Declaration of Student Loan Debt

through a Chapter 13 Plan, But the Ninth

Circuit Permits It.

A. The Fourth, Sixth, and Seventh

Circuits Maintain That Discharge-by-

Declaration Violates Creditors’ Due

Process.

Three Circuit Courts of Appeal have held that

discharge-by-declaration violates student loan

creditors’ due process rights. First, the Fourth

Circuit held that “[w]here the Bankruptcy Code and

Bankruptcy Rules specify the notice required prior to

entry of an order, due process generally entitles a

party to receive the notice specified before an order

binding the party will be afforded preclusive effect.”

Banks v. Sallie Mae Serv. Corp. (In re Banks), 299

F.3d 296, 302 (4th Cir. 2002).

Following the Fourth Circuit’s lead, the

Seventh Circuit also held that discharge-by-

declaration provisions are not entitled to preclusive

effect because they violate a student loan creditor's

due process rights. Hanson v. Educ. Credit Mgmt.

5

Corp. (In re Hanson), 397 F.3d 482, 487 (7th Cir.

2005) (“[Djue process entitles creditors to the

heightened notice provided for by the Bankruptcy

Code and Rules, and the dictates of due process

trump policy arguments about finality.”) (citing

Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S.

306, 314 (1950)).

Next, the Sixth Circuit joined the “evolving

majority view that a purported ‘discharge by

declaration’ of student loan debt is not only invalid

but void” because it violates a student loan creditor’s

due process rights. Ruehle v. Educ. Credit Mgmt

Corp. (In re Ruehle), 412 F.3d 679, 684 (6th Cir.

2005). The Sixth Circuit considered, and explicitly

rejected, the finality rationale used by the Ninth

Circuit, stating that this approach “ignores the clear

intent of Congress and the Judicial Conference” to

“require an adversary proceeding” and “it enriches

and emboldens those who take what is not theirs and

legitimizes it with court sanction.” Jd. (quoting and

adopting the bankruptcy court’s “astute analysis in

this case”).

On indistinguishable facts, only the Ninth

Circuit disagrees. Certiorari is mecessary so this

Court may resolve this circuit split and provide

guidance regarding its due process precedent and the

intersection of the Federal Rules of Bankruptcy

Procedure and the Bankruptcy Code.

1. This Court has specifically delineated

the process that is due.

Pursuant to 28 U.S.C. § 2075, this Court is

mandated “to prescribe by general rules, the forms of

6

process, writs, pleadings, and motions, and the

practice and procedure in cases under title 11.” In

promulgating the Federal Rules of Bankruptcy

Procedure, this Court specifically delineated the

process that is due to student loan creditors before

student loan debt may be discharged. It is this

specific process—established by this Court—that the

Ninth Circuit ignores, without legal or factual

justification.

a. Mullane establishes the process that

is due.

More than five decades ago, this Court held

that due process requires that “deprivation of life,

liberty or property by adjudication be preceded by

notice and opportunity for hearing appropriate to

the nature of the case.” Mullane v. Cent. Hanover

Bank & Trust Co., 339 U.S. 306, 313 (1950)

(emphasis added). Critically, the Ninth Circuit

misses or improperly dismisses this key phrase:

“appropriate to the nature of the case.” To accord

finality to the confirmation order in the bankruptcy

case below, Mullane requires that the notice be

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.

But when notice is a person’s due, process

which is a mere gesture is not due process.

The means employed must be such as one

desirous of actually informing the absentee

might reasonably adopt to accomplish it.

Id. at 315.

Significantly, Congress expressly incorporated

the Mullane standard in the Bankruptcy Code:

In this title—

(1) “after notice and a hearing”, or a

similar phrase—

(A) means after such notice as is

appropriate in the particular

circumstances, and such

opportunity for a hearing as is

appropriate in the particular

circumstances;

11 U.S.C. § 102 (1). This provision, read together

with 11 U.S.C. § 523(a)(8), leaves little doubt that the

process due in student loan discharge matters is

“heightened” to afford “greater procedural

protections’ to student loan creditors. See Tenn.

Student Assistance Corp. v. Hood, 541 U.S. 440, 451

(2004) (Rehnquist, C.J.) (“Because student loan debts

are not automatically dischargeable...the Federal

Rules of Bankruptcy Procedure provide creditors

greater procedural protection.”)

b. Hood prescribes precisely which

bankruptcy rules must be

followed to satisfy Mullane’s due

process requirements in_ the

student loan discharge context.

In Tenn. Student Assistance Corp. v. Hood,

Chief Justice Rehnquist unequivocally stated that,

“unless the debtor affirmatively secures a hardship

determination, the discharge order will not include a

student loan debt.” Hood, 541 U.S. at 449 (emphasis

added) (Rehnquist, C.J.) (citing 11 U.S.C. § 523(a)(8)).

As Chief Justice Rehnquist explained, § 523(a)(8) is

“self-executing,” requiring the debtor—not_ the

creditor—to seek the dischargeability determination

through an adversary proceeding as required by Fed.

R. Bankr. P. 7001(6). Hood, 541 U.S. at 450.

Further, Chief Justice Rehnquist noted that,

absent Rule 7001(6), debtors could affirmatively

seek discharge of their student loan debt by motion

under Rule 9014 without raising constitutional

concerns. Hood, 541 U.S. at 453; but see Fed. R.

Bankr. P. 9014(b) (requiring that Rule 9014 motion

“shall be served in the manner provided for service of

a summons and complaint under Rule 7004’). Under

7001(6), debtors must initiate an adversary, file a

complaint, and serve a summons on the student loan

creditor pursuant to Fed. R. Bankr. P. 7004. Hood,

541 U.S. at 450-51.

The notice provided by Espinosa to USA Funds

was not “appropriate” given the unique “nature of the

{bankruptcy] case” in student loan discharge matters.

Burying illegal discharge language in a Chapter 13

plan and sending general notice of the plan to a

9

payment lockbox address cannot be construed—at

any level—as notice “appropriate to the nature of the

case.”

2. The Ninth Circuit’s conclusion that

notice under Fed. R. Bankr. P. 2002

satisfies a crediter’s due process is

contrary to this Court’s decisions in

Mullane and Hood.

Long ago, this Court recognized that “[e]ven

creditors who have knowledge of a reorganization

have a right to assume that the statutory ‘reasonable

notice’ will be given them before their claims are

forever barred.” City of New York v. New York, New

Haven & Hartford R.R. Co., 344 U.S. 293, 297 (1953).

Hood specifically outlined what rules debtors must

follow to satisfy the “greater procedural protection”

student loan creditors enjoy in bankruptcy settings.

Hood, 541 U.S. at 550-52. There is no dispute that

the only notice Espinosa provided was under Fed. R.

Bankr. P. 2002.

The Fourth Circuit explained the rationale

behind the “heightened notice” requirement in

student loan discharge cases:

Fed. R. Bankr. P. 2002(b) does not require

specific notice of plan provisions affecting a

particular creditor, nor does it require the

notice to be served in any particular

manner or upon any particular person.

“(T]here are many aspects to and actions

that may be taken in bankruptcy cases

which affect the generai administration of

10

the case and all creditors generally, but

none specifically.” Generally, such matters

require “notice,” but not service of process.

When the rights of specific parties become

an issue, however, service of the initiating

motion or objection on the affected party is

required. Fed. R. Bankr. P. 7003, 7004.

Mailing the proposed plans, the hearing

notice, and the confirmation order satisfies

the “notice” requirement under. Rule 2002,

but not the service and summons

requirements of Rule 7004.

Banks, 299 F.3d at 301 (internal citation omitted); see

also Ruehle, 412 F.3d at 684; Hanson, 397 F.3d at

486-87; Repp v. Educ. Credit Mgmt. Corp. (In re

Repp), 307 B.R. 144, 152-56 (B.A.P. 9th Cir. 2004)

(holding that “notice less than that which results

from compliance with Rule 7004’s requirement for

serving a complaint on a corporate defendant flunks

due process’).

Espinosa’s assertion that the plan itself, which

was mailed by the court to a general post office box,

or the Trustee’s general warning letter was sufficient

notice falls wide off the Mullane mark. See Espinosa,

553 F.3d at 1200, n.4. That Espinosa did not hide the

language in a footnote or put it in small print is not

the relevant consideration under Mullane. That USA

Funds received general notice or that “nobody-in-

particular’ at USA Funds may have received notice is

also not the specific, appropriate notice this Court,

the Bankruptcy Code, or the Bankruptcy Rules

require.

1]

Here, the process chosen by Espinosa was

substantially less likely to “bring home notice” than

the “feasible,” “customary,” and legally required

alternative: summons, complaint, and delivery to a

registered agent. See Repp, 307 B.R. at 149 (“The

nub of the problem... is that the method chosen for

notice was calculated to minimize the chance that it

would come to the attention of persons in the position

to make litigation decisions for the creditor.”).

If Espinosa had actually destred to notify USA

Funds of his intent to discharge his student loan, he

could easily have served the corporate officer or

registered agent of the student loan creditors with a

summons and complaint as required by the

Bankruptcy Rules. Instead, he simply mailed the

Plan to USA Funds, addressed to nobody in

particular at a post office box address. This practice

places the student loan creditor in an unfair “Catch

aa:

It is black-letter law that [student loan

creditors] are not required to respond per

Rule 7012 until they have been "duly

served" in accordance with Rule 7004 and

need not fear a default judgment if they

have not been “duly served.” Yet—Catch-

22—if they do not respond to notice of a

plan mailed in accordance with Rule 2002

to nobody-in-particular at a payment

lockbox, they stand to lose their rights by

default to an “illegal” plan provision that

they—double Catch-22—are entitled to

expect the court, in the exercise of its

independent duty, to reject in the first

12

—

place.

Repp, 307 B.R. at 153.

The form of notice Espinosa used was not

“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.” Mullane, 339 U.S. at 314. In this

case, Espinosa never issued a summons or complaint

and the issue of undue hardship was never litigated .®

While not every procedural rule violation

offends due process, Hood’s explicit recitation of

procedural requirements in student loan discharge

matters is not mere dicta as Espinosa argued below.

Rather, Hood’s discussion about the procedural rules

at issue here is fundamental to all of the Bankruptcy

Code, whether the issue is sovereign immunity or

student loan discharge.? 11 U.S.C. § 102 embodies

6 Significantly, Espinosa did not attempt to plead or prove in his

plan that payment of the full amount of his student loan debt

would constitute an “undue hardship.”

7 Indeed, both Judge Kozinski and Judge Lundin appear to

misread Hood by suggesting that, in the student loan context,

Hood narrowly stands for the proposition that “an adversary

proceeding initiated by complaint and summons is not a

statutory or constitutional prerequisite to an adjudication of

student loan discharge.” Espinosa, 553 F.3d at 1202. Actually,

Hood's point is broader and simpler and certainly does not

“undermine[] Fund’s argument.” In Jiood, Tennessee Student

Assistance Corporation (TSAC), a state-based guaranty agency,

invoked sovereign immunity from the student loan discharge

action. This Court disagreed that the discharge action was an

affront to TSAC’s sovereignty on the ground that the discharge

action was an in rem action and the court’s jurisdiction was

premised on the res not the person or the State. Thus, the

13

the Mullane standard for notice. Hood reaffirms the

specific notice “appropriate” in student loan discharge

matters as required by § 102 and the Bankruptcy

Rules. Under Hood, the appropriate notice is a

“heightened notice,” to afford a “greater procedural

protection” to effect Congress’s explicit intent to

prevent discharge of student loan debt, except upon

proof of undue hardship under § 523(a)(8). Hood, 541

U.S. at 451.

Given the circuits’ conflicting and

irreconcilable interpretations of this Court’s due

process precedent, certiorari is necessary to clarify

whether a blatant violation of the Bankruptcy Code

and Federal Rules of Bankruptcy Procedure violates

a student loan creditor’s due process rights.

B. The Ninth Circuit Explicitly Rejects

the Second and Tenth Circuits

Holding that Chapter 13 Confirmation

Orders Containing Discharge-by-

Declaration Provisions Have No

Preclusive Effect.

In its wholesale rejection of this Court's

precedent and the creditor’s due process concerns, the

lower court relied primarily on its earlier plan

language decision, Great Lakes Higher Educ. Corp. v.

Pardee (In re Pardee), 193 F.3d 1083 (9th Cir. !999).

“form” of pleading by which the sovereign was brought into the

proceeding, i.e., a Summons and Complaint, did not change the

fact that the bankruptcy proceeding was an in rem proceeding,

and, therefore, the “undue hardship determination .. . is nota

suit against a State for purposes of the Eleventh Amendment.”

Hood, 541 US. at 451 & n5.

14

Although Andersen,® the early case that Pardee relied

on had been reversed by the Tenth Circuit, the Ninth

Circuit, refusing to sit en banc, determined that

Pardee and the overruled Andersen were still the

right approach. The Ninth Circuit concluded it had

not “strayed off course” and reaffirmed its Pardee

decision, holding that

Pardee and Andersen stand soundly for the

better-reasoned principle that notice of how

the Chapter 13 plan affects creditors’ rights

is all that the Constitution, the Bankrutpcy

Code and the Bankruptcy Rules require to

bind creditors to the provisions of a

confirmed plan under § 1327(a).

Espinosa, 553 F.3d at 1202. The Ninth Circuit's

decision directly contradicts precedent in the Second

and Tenth Circuits.

1. Declaration-by-discharge provisions

violate statutory principles.

Both the Second and the Tenth Circuits have

expressly rejected the Ninth Circuit’s reliance on the

preclusive effect of 11 U.S.C. § 1327(a). Educ. Credit

Mgmt Corp. v. Mersmann (In re Mersmann), 505 F.3d

1033 (10 Cir. 2007) (en banc); Whelton v. Educ.

Credit Mgmt. Corp., 432 F.3d 150, 155-56 (2d Cir.

2005). While acknowledging that 11 U.S.C. § 1327(a)

generally binds a non-objecting party, the Second and

® See Andersen v. UNIPAC-NEBHELP (In re Andersen), 179 F.3d

253 (10th Cir. 1999), overruled by Educ. Credit Mgmt Corp. v.

Mersmann (In re Mersmann), 505 F.3d 1033 (10th Cir. 2007) (en

banc).

1S

Tenth Circuits held that it cannot have preclusive

effect in orders entered in violation of the rest of the

Bankruptcy Code. See Mersmann, 505 F.3d at 1047

(“Discharge-by-declaration [in the context of student

loans] deserves no preclusive effect under § 1327(a)

because it fails to comport with the provisions of the

Bankruptcy Code and Rules governing discharge.”);

Whelton, 432 F.3d at 154-55 (“[T]he Bankruptcy

Court lacked the authority to grant a discharge of

[the debtor's] student loan debt through the ordinary

confirmation process.”).

In a footnote, the Ninth Circuit dismisses the

import of the Tenth Circuit’s “statutory” ground

because “it proves something that is both obvious and

beside the point.” Espinosa, 553 F.3d at 1199, n.3.

While Mersmann’s holding is obvious, it is also the

“point” the Ninth Circuit missed.

Tn concluding discharge-by-declaration

provisions are not entitled to preclusive effect, the

Tenth Circuit relied, in part, on the inherent

statutory conflict between 11 U.S.C. § 1327(a) and 11

U.S.C. § 1328(a)(2). In overruling its earlier

Andersen case, the Tenth Circuit noted that “[g]iving

preclusive effect to the [general] discharge-by-

declaration through § 1327(a) renders [the specific

exception] of § 1328(a)(2) nugatory.” Mersmann, 505

F.3d at 1048. Statutory construction principles

require that, when general and specific statutory

provisions contradict, the “specific pronouncement [of

§ 1328(a)(2)] must be read as limiting § 1327(a) broad

res judicata effect.” Jd. In other words, the specific

language of the § 1328 discharge order that

specifically excepts student loan debt from

16

bankruptcy discharge limits the broader reach of the

confirmation order that binds creditors who fail to

object to illegal plan language.

The Tenth Circuit also noted that discharge-

by-declaration language violates 11 U.S.C. § 1325's

requirement that Chapter 13 plans comply with the

Bankruptcy Code. Therefore, allowing a plan with

illegal language to be confirmed “violates the general

maxim that the Bankruptcy Code and Rules ‘be

construed so that their provisions are harmonious

with each other.” Jd. The Tenth Circuit further

explained that “[t]lo give preclusive effect to a

confirmation order based solely on § 1327(a) deprives

the Bankruptcy Code and Rules of a coherent

reading, fails to give full effect to all of their

provision, and undermines the clear will of

Congress.” Id.

2. A confirmation order is not res

judicata to issues that were not

actually litigated.

The Second and Tenth Circuits also rely on a

res judicata analysis to conclude that a confirmation

order has no preclusive effect on an issue that could

not or should not have been litigated at the

confirmation hearing. As a general matter, this

Court has stated that res judicata will be invoked

when there is (1) an adjudication on the merits, (2)

the parties are identical or in privity, and (3) the

claims were or could have been raised in that action.

Allen v. McCurry, 449 U.S. 90, 94 (1989); see also

Mersmann, 505 F.3d at 1049: Whelton, 432 F.3d at

154-55.

17

Discharge-by-declaration provisions fail res

judicata elements for at least two reasons: First,

failure to provide specific notice under Fed. R. Bankr.

P. 7004 effectively denies the student loan creditor a

full and fair opportunity to litigate the claim.

Mersmann, 505 F.3d at 1049. Second, plan

confirmation is a narrow forum, limited to confirming

those plans specified in 11 U.S.C. § 1325(a)(1) (“court

shall confirm a plan if the plan complies with the

provisions of this chapter’).

Student loan debt is specifically excepted from

the discharge under 11 U.S.C. § 1328(c) unless the

debtor makes “a specific factual showing” of undue

hardship. Whelton, 432 F.3d at 155. Inserting illegal

language into a Chapter 13 plan violates these

provisions because undue hardship cannot and is not

proved through the Chapter 13 plan itself. Moreover,

in the plan confirmation process, the court never

actually adjudicates the issue of undue hardship on

the merits. Mersmann, 505 F.3d at 1050; Whelton,

432 F.3d at 155. Under the bankruptcy code, the

dischargeability of student loan debt cannot be

litigated at the plan confirmation stage; plan

provisions purporting to discharge by declaration are

“mere trespassers” and cannot and do not enjoy the

statutory res judicata effect of § 1327. Educ. Credit

Mgmt. Corp. v. Whelton, (In re Whelton), 299 B.R.

306, 315 (Bankr. Vt. 2003) (“The Confirmation Order

enforces only those provisions of the Plan that are

required or permitted to be there by the Bankruptcy

Code and cannot be usurped to validate or enforce

provisions that were never properly lodged in the

Plan.”)

18

The Ninth Circuit, however, considered and

rejected this res judicata analysis, stating that the

Mersmann and Whelton decisions do not offer any

persuasive reasons why the discharge-by-declaration

provisions should not be given full preclusive effect.

Espinosa, 553 F.3d at 1200. Foremost, the Ninth

Circuit rejected the application of res judicata

principles because a “discharge injunction does not

operate by way of res judicata,” but is “an equitable

remedy.” Id.

Even following the Ninth Circuit's fractured

analysis to its conclusion, however, violates this

Court’s precedent. That is, even if res judicata

principles do not apply because a_ discharge

injunction is an equitable remedy, that equitable

remedy is still confined to the Bankruptcy Code. As

this Court stated in Norwest Bank Worthington uv.

Ahlers, “[w]hatever equitable powers remain in the

Bankruptcy Courts must and can only be exercised

within the confines of the Bankruptcy Code. Norwest

Bank Worthington v. Ahlers, 485 U.S. 197, 206-07

(1988). Thus, a discharge injunction cannot be

exercised in contravention of another section of the

Code. Id.

Espinosa erred by continuing to follow the

Pardee rationale, a case that has become an outlier.

Pardee cannot stand on res judicata grounds because

the issue of undue hardship—or even the broader

issue of the dischargeability of student loan debt of

any sort—cannot, should not, and was not litigated at

the confirmation hearing. This irreconcilable circuit

split is hased primarily on disagreeing

interpretations of the Bankruptey Code and Rules

19

and this Court’s precedent, resulting in_ the

inconsistent application of bankruptcy law. Without

resolution by this Court, lower courts will continue to

disagree over whether’ discharge-by-declaration

provisions are entitled to preclusive effect. As such,

this Court should grant certiorari.

II. The Ninth Circuit’s Decision Paves the

Path for Debtors to Discharge Child

Support, Maintenance, Tax Debt, and

Wrongful Death Judgments Through

Chapter 13 Bankruptcies.

The disagreement in the Circuits over whether

the creditor of a presumptively nondischargeable debt

is entitled to the level of process prescribed in the

Federal Bankruptcy Rules of Procedure prior to

discharge is particularly significant because it could

easily extend beyond the context of student loan

“undue hardship” cases into other presumptively

nondischargeable debts. The danger of allowing

Espinosa to stand is immeasurable. Under the lower

court’s rationale, debts such as child support,

maintenance, tax debt, court-ordered restitution,

criminal fines and penalties, and others would all be

susceptible to discharge via plan language in the

Ninth Circuit. See generally 11 U.S.C. §§ 523(a);

1328(a).

This result directly contravenes the important

public policy choices Congress made in declaring

these debts presumptively nondischargeable. See

Cohen v. De La Cruz, 523 U.S. 213, 222 (1998) (“The

various exceptions to discharge in § 523(a) reflect a

conclusion on the part of Congress ‘that the creditors

20

interest in recovering full payment of debts in these

categories outweigh[s] the debtors’ interest in a

complete fresh start.”) (citing Grogan v. Garner, 498

U.S. 279, 287 (1991)). Espinosa allows debtors in the

Ninth Circuit to circumvent rules promulgated by

this Court pertaining to notice and service in

initiating dischargeability proceedings for other types

of nondischargeable debt. It also undermines the

stability that these rules are meant to provide,

Congress's intent that these debts be

nondischargeable in bankruptcy proceedings, and the

uniform application of bankruptcy laws.

Ill. The Ninth Circuit’s Decision Makes a

Mockery of Bankruptcy Process and

Encourages Unethical Conduct.

Even as limited to the student loan context,

the decision below will have an enormous impact on

the uniform application of the Bankruptcy Code, the

student loan industry, the federal fisc, and the

efficiency of bankruptcy courts’ process. In giving

preclusive effect to discharge-by-declaration plan

language, Espinosa encourages every student loan

debtor in the Ninth Circuit to attempt it. Indeed, it

would cost nothing for the debtor to insert an

additional paragraph in a Chapter 13 plan purporting

to discharge student loans. Debtors and their counsel

would not even be subject to sanctions if they

modified their plans within 21 days of the sanction

motion, even though, as the Ninth Circuit

acknowledges, the provision is undoubtedly illegal.

Fed. R. Bankr. 9011; see also Espinosa, 553 F.3d at

1202. Bankruptcy attorneys would face an ethical

conundrum between zealous advocacy on behalf of

21

their clients and ensuring that their clients meet the

elements of an “undue hardship” in good faith. See

Mersmann, 505 F.3d at 1050 (“Bankruptcy attorneys

may be caught on the horns of a dilemma between

aggressively pursuing a discharge-by-declaration on

behalf of clients and ensuring that their clients meet

the elements of an ‘undue hardship’ in good faith.”).

In contrast, student loan creditors would be

required to hire local counsel to file objections to

every Chapter 13 plan in which a student loan is

involved. The attorney fees and costs incurred by

creditors would be extraordinary. The system would

be clogged with plan objections, withdrawals of

motions to modify, and sanctions requests. Yet the

bankruptcy system would enjoy no benefit or gain

from this meaningless procedure.

This futile process will only inundate the

bankruptcy courts with pointless objections that

would always be successful because there is no

question that student loan creditors are entitled

under the Bankruptcy Code and Rules to an

adversary proceeding to determine undue hardship,

as the lower court acknowledged. See Espinosa, 553

F.3d at 1202 (stating that if the creditor were to

object, the bankruptcy court would be required to

force the debtor to initiate an adversary proceeding

and amend his plan).

Espinosa will cause bankruptcy courts and

creditors to be overly burdened in a futile exercise of

entertaining and granting countless objections to

confirmation. Even within the Ninth Circuit, some

loans will be discharged by use of plan language.

Some loans will not. Some attempts will be caught by

99

——

the trustee. Some will be caught by the court. Some

will be held to their statutory burden of proof of

establishing undue hardship. Some will not have to

prove anything. The better outcome would be to

prohibit this practice rather than rewarding it.

Without a definitive resolution, the

Bankruptcy Code and Rules, designed to promote

uniform treatment of like situations, will instead

spawn inconsistent results. This Court’s review is

warranted to prevent such disparity.

CONCLUSION

Only this Court can say whether the Ninth

Circuit is wrong to stand against the universe of this

Court’s precedent, congressional mandate, and a

decade worth of contrary circuit-level caselaw.

Unless this Court resolves the matter, the certain

consequences will be the rise of gamesmanship, the

mockery of bankruptcy process, and harm to the

federal fisc. To countenance the practice of

discharge-by-declaration, at any level, erodes the

fundamental processes that embody this Court's

jurisprudence. This Court should grant USA Funds’

Petition for a Writ of Certiorari to restore certainty

and consistency to the bankruptcy process and

uniformity in the application of the Bankruptcy Code.

Respectfully submitted,

Julie K. Swedback

Counsel of Record

EDUCATIONAL CREDIT

MANAGEMENT CORPORATION

1 Imation Place, Building 2

Oakdale, MN 55128

(651) 325-3088

Counsel for Amicus Curiae

Educational Credit Management

Corporation tn Support of

Petitioner