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

-

(3) FILED

No. 08-1134 APR 1 3 2009

OFFICE OF THE C

SUPREME COURT US

In the Supreme Court

of the United States

UNITED STUDENT AID FUNDS, INC.,

Petitioner,

Vv.

FRANCISCO J. ESPINOSA,

Respondent.

On Petition for Writ of Certiorari to the

United States Court of Appeals for the Ninth

Circuit

Brief of the States of Oregon, Alaska, Hawaii,

Michigan, Missouri, Nevada, Ohio, Tennessee,

Utah, Washington and Wyoming

JOHN R. KROGER

Attorney General of Oregon

MARY H. WILLIAMS

Deputy Attorney General

* JEROME LIDZ

Solicitor General

CAROLYN G. WADE

Assistant Attorney General

400 Justice Building

Salem, Oregon 97301-4096

Phone: (503) 378-4402

Counsel for State of

Oregon

*C ounsel of Record

A

WiL.SON-EPES PRINTINGCO INC — (202) 789-0096 -— WASHINGTON.DC 20001

QUESTIONS PRESENTED

Section 523(a)(8) of the Bankruptcy Code provides

that student loans are nondischargeable unless there

is an affirmative showing by the debtor that repay-

ment of the loan would impose an undue hardship. In

turn, Rule 7001(6) of the Federal Rules of Bankruptcy

Procedure (“Bankruptcy Rule”) provides that an ac-

tion to determine the dischargeability of a debt must

be brought by way of an adversary proceeding (a

separate proceeding within a bankruptcy case that is

litigated directly between the debtor and the other

party). Finally, Bankruptcy Rule 7004 provides that

an adversary proceeding is to be initiated by the ser-

vice of a summons and complaint on the defendant

party. The questions presented are:

1. Where a debtor ignores the requirements of

Bankruptcy Rules 7001(6) and 7004 and purports to

discharge a student debt by inclusion of language in a

Chapter 13 plan, has the debtor satisfied the re-

quirements of Mullane v. Cent. Hanover Bank &

Trust Co.,, 339 U.S. 306 (1950) — that due process re-

quires that a party must provide “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 objec-

tions?”

2. If the debtor has failed to satisfy those due

process requirements by failing to initiate an adver-

sary proceeding and to serve the student loan creditor

with a summons and complaint, is the plan confirma-

tion order void in that respect, is the order void, or

may the bankruptcy court nevertheless presume that

the party agrees with the proposed action such that it

can be bound by res judicata to an order approving

that action?

3. Does the bankruptcy court have authority to

approve a plan that provides for actions that the

Bankruptcy Rules state must be taken by adversary

action?

TABLE OF CONTENTS

Page

he GB. | ne i

STATEMENT OF AMICI INTEREST................00........ l

I sn ss cacslbieemsnniesctinnnaecannisonanieis 3

RSE ES ER AEA OD So er eo 5

I. Bankruptcy’s unique nature demands a

consistent application of the rules...................... 6

II. The decision below conflicts with holdings of this

Couart G50 Gtiner CIPCUIES. ..............000..eeccceescsccese00- 12

III. The Ninth Circuit erred in its ruling on the

REALE BERR ke Ne ln een ee eo NER RR Ok 16

A. Where the Bankruptcy Code and Rules

prescribe the procedure for discharge of a

student loan, the bankruptcy court cannot

approve a plan that ignores the procedure. .... 17

B. Where the Bankruptcy Code or Rules

prescribe a particular form of notice, denial of

that notice violates due process......................... 18

nT ivitcisncnasp-coocosnawnsuiallinsntiassuesnenantveibaiinisedecoibiiin ae

itl

TABLE OF AUTHORITIES

Page

Cases Cited

Andersen v. UNIPAC-NEBHELP (In re Anderson),

ee Be Ee ls ID scsesiccscevenccccscecesesesces 14

Banks v. Sallie Mae Servicing Corp.,

299 F.3d 296 (4th Cir. 2002) .................c.cceceeeee 17, 20

Black v. Educational Credit Mgmt. Corp.,

GED Fe Fe CF Oee CP, BOG) occ ccccsccccccccscccsscessosscsceses 3

Bruning v. United States,

Nee acne sila nadindnememaniiniinens 11

Cen-Pen Corp. v. Hanson,

ee ee SN A BD issn vcscsccsccscnsccscoensessses 15,18

City of New York v. New York,

New Haven & Hartford R.R.,

is in ccd cnliondsiinsaaredabeasascanenh 20

Educ. Credit. Mgmt. Corp. v. Mersmann (In re

Mersmann),

EE CIID Bo conccsecccncononsovecdnnnccconson 14, 17, 20

In re Bateman,

Se ee 0 ED Gal, BED cv cvcccccccccencccccccccsccosties 15

In re Brawders,

Fe ee Cn Ge BED ncccccecsccccccncsescccscscscsoees 15

In re Enewally,

ee ee ee I FE, ID ons cc ciicccccccccscaccceccccscacces 15

In re Espinosa,

553 F.3d 1193 (9th Cir. 2008).......... 4. 33. 33. 38, 38

In re Foster,

BAD Fe SHS Geis Cie. BOGS) occcccccevcccsoccscsscccsecccccess 11

In re Hanson,

SOT FBG SSB C7 tha Cir. BOOB) ...cccccccccccevsescocccccccvevess 13

In re Jones,

SSO F.3S 1304 (10s Cir. BOOS) .......cecccccscsccccscesscons 18

In re Mansaray-Ruffin,

GOO Fe Be GTS Cae. BB) ci cccccccccnccecsessccscnccccecccs 15

In re Metzger,

346 B.R. 806 (Bankr. N.D. Cal. 2006) ...........0.0..... 20

In re Repp,

307 B.R. 144 (Othe Cir. BAP BODGE).......ccccccccccccccscses 13

In re Ruehle,

412 F.3d 679 (6th Cir. 2004)...........0.0000000000000.. 19, 20

Mullane v. Cent. Hanover Bank &

Trust Co.,

Me I vic ccsicecnachssininiaiieabiimenies i, 5, 13, 19, 22

Shaw v. Aurgroup Financial Credit Union,

fe £ og 1s | Ere en nos 18

Tennessee Student Assistance Corp. v. Hood,

gk BR | eee re 12, 13, 17, 24

Whelton v. Educ. Credit Mgmt. Corp.,

GBS Fe TD Ce Coa. Be in vnc scdccccdecncccctcccoceoccses 17

Constitutional and Statutory Provisions

af Ge FF RS OF RS eer ae 16

UR UBS. FB ID oes ccesinecesnsichscesustsnaneuiicnsanianaaeea 23

Nee a. ces nscnscsmescounesionnniees 19

a cana cnncnennsscccecsvsecnessasestes 1

ss raaninisisasnmeonooneses i, 12

aici sscosascsenessacsessiensessess 17

Nees csssvensnaceeansasecsssindeacnses 17

os ansncssiiansnbeusibenssodenes 18

ao cs cacsnsasnneseuioncosonens 17

ss ssiuibuekvasbatosenssonaes 11

a ssapseeotodeuvecees 1

il son ssccnsnsnceanescsecodcusscconsoceness 13

I Se MIE vcs nctvncscnscosessssasesecsssscnenscence 19

I ss nasensnccccoonensecsoeses 2,14

I ccc ccccnncncscccecscecescees i, 5, 13

Ne. . scunwncdsecussdcaccnevcesenes i, 5

Et) 4

I on sc ncosncesasnusicesucseesecscsceseces 4

es eunsucesenivsnccosssios 1

Teen cs emeesnneseconenenens 15

ss sccencvoswencscasessecesscocnccecses 4

Other Authorities

Prot. Scott F. Norberg,

Chapter 13 Project: Little Paid to Unsecureds,

26 Amer. Bank. Inst. J. 1 (March 2007) ......0..0..000.0..... 0... 10

vi

STATEMENT OF AMICI INTEREST

The Amici states are parties that appear as se-

cured and unsecured creditors in bankruptcy cases.

They may enforce student loans and, as such, are di-

rectly affected by the Ninth Circuit’s holding. The

logic of the analysis below, though, extends far be-

yond student’ loans to any discharge exception in

Chapter 13 which, since the 2005 amendments to the

Bankruptcy Code, now include, inter alia, those aris-

ing from late or non-filed tax returns, from taxes a

debtor sought to fraudulently evade, from debts that

the debtor failed to timely schedule, from domestic

support obligations, from drunk driving judgments,

and from criminal sentences.

Those debts are excepted from discharge under

Sections 523 and 1328(a) without need for action by

the creditor. Taken together, the Bankruptcy Code

and Rules provide that the determination of whether

a particular debt falls into those exceptions must be

made by a separate proceeding, directed at and nam-

ing a specific creditor, in a complaint with allegations

sufficient to satisfy Bankruptcy Rule 9011, and

served by means of a summons. That is a distinctive

method of proceeding from that used to confirm a

plan and provides notice with far greater force and

clarity to creditors that the debtor is seeking to dis-

charge their debt.

The Ninth’s Circuit’s analysis, though, which

countenances debtors’ actions that flout those provi-

sions of the Bankruptcy Code and the Rules, creates a

chaotic process in Chapter 13 that lays traps for the

unwary, requires prudent parties to incur unneces-

2

sary costs, and burdens courts with the need to re-

view plans multiple times. This process — often re-

ferred to as “discharge by declaration” or “discharge

by ambush” — is antithetical to a debtor’s obligation to

deal equitably with its creditors when it seeks the

enormous equitable benefit of a discharge.

Similarly, to the extent that the Amici states ap-

pear as secured creditors, they are also concerned

with attempts by debtors to use Chapter 13 plans to

invalidate security interests, even though Bank-

ruptcy Rule 7001(2) provides that actions to “deter-

mine the extent, priority, and validity” of liens must

also be brought by adversary proceedings. The Ninth

Circuit’s analysis would equally allow such plans to

trump the provisions of the Code and the Rules. The

Amici states have an interest in this case to ensure

that their liens — for taxes, for costs of environmental

cleanups, and for a myriad of other purposes — are not

lost when debtors ignore the rules.

Under the decision here, creditors must assume

debtors will include unlawful provisions in their plan

and fail to provide legally-required notice thereof, so

that they must devote their efforts to ferreting out

those provisions and forcing debtors to rewrite their

plans. At best, the decision places substantial unnec-

essary costs and burdens on ail parties in the case as

well as the courts. At worst, those who do not antici-

pate the debtor’s violations will lose rights Congress

intended them to retain. Moreover, since the costs of

administering the student loan system are not per-

sonally apportioned but, rather, are imposed equally

3

on all student debtors,' those added costs will be

spread onto borrowers who do play by the rules. The

costs for protecting other debts and secured interests

from frivolous plan provisions will similarly fall

squarely on taxpayers of the Amici states.

Those costs will be increased even further by vir-

tue of the Ninth Circuit’s final ruling in the case —

namely, that bankruptcy courts may not act sua

sponte to bar confirmation of abusive plans and to po-

lice the actions of debtors and their counsel. The out-

break of “discharge by ambush” cases a decade ago

was contained not only by the heightened diligence of

creditors, but also by stern warnings by bankruptcy

courts that inclusion of such provisions was improper

and sanctionable. The Ninth Circuit’s holdings,

though, if left standing, will engender a new explo-

sion of these cases, recreating the burden, costs, and

uncertainty that occurred before. That is particularly

true in light of the broad venue provisions of the Code

which allow debtors to obtain favorable rulings

merely by changing their residence. In an era of un-

precedented budget shortfalls, the Amici states are

deeply concerned that they not be forced to shoulder

unnecessary costs to protect themselves from debtors

who refuse to abide by the Code and Bankruptcy

Rules.

STATEMENT OF CASE

In 1988-89, Mr. Espinosa obtained various gov-

—

' See Black v. Educational Credit Mgmt. Corp., 459

F.3d 796, 800-01 (7th Cir. 2006) (upholding imposition of

collection costs as uniform percentage of debt owed).

4

ernment guaranteed student loans. In 1992, he filed a

Chapter 13 case that listed his student loans as his

only debts, proposed to pay only the principal, and

stated any unpaid amounts (i.e., the prepetition and

postpetition interest) would be discharged. He did not

file an adversary proceeding to seek discharge of his

debts, and his plan did not assert that payment of the

interest would be an “undue hardship.” Instead of

serving an officer, managing or general agent, or

other agent authorized to receive service of process

with a summons and complaint as required by Bank-

ruptcy Rule 7004(a) and (b)(3), Mr. Espinosa mailed a

copy of his plan to a post office box used to receive

payments on his loans.

The lender filed a proof of claim that was not ob-

jected to. It was later notified that the plan amount

differed from its claim. It did not object to payment of

that different amount. The standard discharge order

was entered in 1997, providing that any debt for a

student loan was excepted from discharge. In 2000,

the Education Department began collection efforts

and caused his income tax refunds to be intercepted.

Three years later, in 2003, Espinosa filed a motion

alleging that those actions violated the discharge in-

junction. The lender recalled the loans from the Edu-

cation Department and moved, under Fed. R. Civ. P.

60(b)(4), for relief from the confirmation order. The

bankruptcy court ruled for Espinosa, but the district

court reversed, holding that the confirmation order

was void for lack of due process. On further appeal,

the Ninth Circuit remanded to the bankruptcy court

to indicate if its original discharge order (which con-

tradicted the plan terms) had been a clerical error,

5

and, upon being informed that the order was in error,

the Ninth Circuit reversed the District Court and, en-

tered the order at issue here. In re Espinosa, 553

F.3d 1193 (Sth Cir. 2008)

ARGUMENT

The Ninth Circuit's analysis reduces to a few

propositions. First, despite Bankruptcy Rule 7001(6),

which requires an adversary proceeding and a show-

ing of undue hardship to discharge a student loan

debt, a debtor’s plan may provide that the debt will be

discharged and no such proof will be required. Sec-

ond, despite the requirement in Bankruptcy Rule

7004 that an adversary proceeding must be brought

by means of a complaint and summons served upon

specified parties at a specified address, the debtor

may mail a copy of the plan to a different address and

without naming those specific parties. Third, the

creditor has no right to assume that legal require-

ments for notice will be complied with so as to limit

its involvement in the case in accordance with those

requirements. And fourth, violation of the Rules has

no relevance to the question of whether due process

has been accorded to litigants such that Mullane has

been satisfied. Instead, the Ninth Circuit assumes

that Mullane prescribes some generic degree of notice

that is adequate, even if that form of notice violates a

rule or statute. Thus, under its view, if that general

level of notice is provided, it is irrelevant that the

creditor would have expected something better and

could have been misled by its absence.

That analysis, the Amici states submit, violates

the basic holding of Mullane that due process must be

6

decided after an analysis of all of the circumstances.

Those circumstances surely include the fact that

creditors have been told what notice they are to re-

ceive and are entitled to rely thereon. That fact is

true in any civil proceeding; it is critical in the unique

scenario posed by bankruptcy proceedings.

I. Bankruptcy’s unique nature demands a con-

sistent application of the rules.

Bankruptcy is quantitatively — and, in turn, qualli-

tatively — different from any other form of litigation

in federal court. Bankruptcy filings are far greater

than all other federal cases combined — and the ratio

has increased dramatically during the twenty years

since Mr. Espinosa received his loans. In 1988, when

he took out the loans, there were 549,612 nonbusi-

ness bankruptcies. By 1992, when he filed his peti-

tion, that number had soared to 900,874, and by

1997, when he received a discharge, the number had

grown by another 50 percent to 1,350,118. From 1998

to 2004, the number varied between a low of

1,217,972 in 2000 and a high of 1,625,208 in 2003.

After Congress amended the Code in April 2005,

620,000 petitions were filed in October 2005 alone to

avoid the effective date of the new act, resulting in an

* All filing rates taken from charts maintained by

American Bankruptcy Institute:

http://www.abiworld.org/AM/AM'Template.cfm’?Section=Ho

me&TEMPLATE=/CM/Content Dis-

play. cfm&CONTEN'TID=56822. All websites cited herein

were viewed on April 7, 2009.

7

annual total or more than 2 million cases.* After

dropping dramatically the following year (to just un-

der 600,000 cases), the numbers have grown each

succeeding year — to more than 800,000 in 2007, over

1 million in 2008, and a projected total of perhaps as

many as 1.4 to 1.6 million in 2009.4

By contrast, in 1992, there were 66,875 federal

criminal and 229,850 federal civil cases for a total of

296,725 filings,° less than a third of the 900,000 plus

bankruptcy filings. By 1997, other federal filings had

risen only to 322,390, compared to 1.35 million bank-

ruptcy filings — a 4.1 to 1 ratio. Those other filings

varied little in succeeding years, averaging abeut

340,000 cases a year from 2004 to 2008. Even with an

initial slowing after the 2005 amendments. bank-

ruptcy cases during that period averaged about 1.2

million or about three and half times the rest of fed-

eral cases. As filings soar again this year, the ratio

should move back above the 4 to 1 mark. Chapter 13

* See ht*p://www. abiworld. org/ AM/Template. cfm Sec-

TENTID= 42631.

* See Appendix 1 for 2006- 08 statistics. See

http://www.creditslips.

entry. html#more for predictions by Professor Robert Law-

less for 2009 filings.

° See http://www.ojp.usdoj.gov/bjs/pub/pdf/cfjs92_. pdf p.

12 (criminal filings) and

http://www.ilectlaw.com/fles/jud09 htm (civil filings).

(Criminal statistics are for calendar year 1992; the civil

statistics are for FY 93, beginning October 1992).

8

cases typically have comprised about 30 percent of all

consumer cases.® Thus, except for the exceptional

year of 2006, Chapter 13 cases alone have equaled (or

substantially exceeded) the total of the rest of the

federal civil system during this entire period.

The reality is that bankruptcy, at least on the con-

sumer debtor side, is a high volume, highly standard-

ized practice that uses software packages, form plead-

ings, standard plans, “no look” fee approvals, and the

like to handle the wholesale business of processing

hundreds of thousands of petitions each year. In that

regard, while the federal courts obviously handle

many complex, multi-party cases, most civil litigation

still involves only two-party disputes raising a finite

number of related issues. Bankruptcy cases, by con-

trast, inevitably involve unrelated claims by many

different parties against the debtor. The debtor (or

trustee), in turn, must analyze a wide variety of state

law and Code-created claims against creditors and

third parties, contest liens of those parties, and de-

fend challenges to the claimed exemptions. Further,

in filings under Chapters 11, 12, and 13, debtors have

broad leeway to propose plan terms and creditors

may vote on and/or object to those proposed plans.

And, finally, the debtor and his creditors may litigate

his right to a general discharge, or whether specific

debts may be discharged. That multitude of proceed-

ings, moreover, takes place on a highly compressed

" See http://www _ abiworld.org/AM/AMTemplate.

ctm?Section=Home& TEMPLATK=/CM/ContentDisplay.cf

m.

9

schedule compared to normal federal litigation.’

This cacophony of actions could result in chaos in

the absence of the carefully-orchestrated provisions of

the Code and the Rules which set procedural mecha-

nisms for different types of actions, with snecific no-

tice, timing, and objection provisions for each. Those

clearly spelled out rules give all parties the informa-

tion they need to navigate the complex waters of

bankruptcy litigation without running aground. If

those provisions can be ignored, however, creditors

wil] be left unsure as to what they must do to retain

their rights and be forced to incur added costs to liti-

gate issues the Code and Rules have already settled.

Creditors, though, should have a right to reccive

the notice due to them under the Rules and to gauge

their actions accordingly. That truism undoubtedly

applies even when a defendant is involved in only one

case with a single other party, but the need for rules

to be followed increases geometrically where a single

defendant, such as the student loan creditors — or a

tax authority of the Amici states — may be faced with

literally thousands or tens of thousands of cases in a

‘ Plans must be filed no later than 15 days after the

petition date. Bankruptcy Rule 3015(a). The confirmation

hearing currently must be at least 20 days after the Sec-

tion 341 meeting of creditors, which in turn, under Bank-

r ptey Rule 2003(a) is to be held between 20 and 50 days

after the case is filed. Section 1324(b). Thus, if the plan is

filed on the L5th day, the plan confirmation hearing could

be as early as the 40th day of the case. Before 2005, there

was no minimum period set between the petition date and

the confirmation hearing.

10

single year.® To cope with those filings in an economi-

cally realistic fashion, creditors must set up auto-

mated systems to handle their cases, delegate much

of the work to paralegals, and train secretarial staff

as to which matters must be brought to counsel’s at-

tention and which do not require further action. In

making those case-handling judgments, creditors

have a right to gauge their actions in accordance with

the clear terms of the Code and the Rules.

That is particularly true when a third salient real-

ity of Chapter 13 cases is considered, namely, the fact

that, despite the array of potential litigation relative

to any given filing, these are usually low-dollar cases.

In FY 2007, for instance, the payments made through

Chapter 13 cases totaled some $2.8 billion for secured

claims, $390 million for debtors’ counsel, $300 million

for priority debt, and $257 million for the trustees, for

a total of about $3.75 billion - leaving only $1.35 bil-

lion for all unsecured creditors.’ Divided by the

—

* As noted by the defendant, the federal student loan

programs service more than $500 biliion of loans. The de-

fendant here received notice of 24,411 bankruptcies in

2008 alone. U.S. DEPT. OF EDUC., FINANCIAL AND

PERFORMANCE QUARTERLY UPDATE, Issue 2008-2,

at 7 (Sept. 30, 2008).

® See

http://www.usdoj.gov/ust/eo/private trustee/library/chapte

r13/docs/ch13ar07-AARpt.xls; FY-2007 Chapter 13 Trustee

Audited Annual Reports. The total was even less before

the 2005 amendments — see Prof. Scott F. Norberg, Chap-

ter 13 Project: Little Patd to Unsecureds, 26 Amer. Bank.

Inst. J. 1 (March 2007) (ess than 20% of receipts went to

11

roughly 300,000 Chapter 13 cases filed in 2007, that

resulted in an average payout to unsecured creditors

of little more than $4,500 per case. When potential

recoveries are so small, unsecured creditors like the

student lenders here must judge carefully how much

to spend on reviewing and litigating plan terms,

knowing that their real hope of payment comes from

collecting nondischargeable debts after the plan is

finished and competing obligations are discharged.

Finally, it is important to consider how Chapter

13 plans will be structured if a debtor knows that it

must comply with the law. The Chapter 13 discharge

in Section 1328 excepts certain debts (including stu-

dent loans) from discharge. Further, it is well settled

that interest accruing on non-dischargeable debts

(such as was the case here) is also excepted from the

discharge. Bruning v. United States, 376 U.S. 358,

360 (1964); In re Foster, 319 F.3d 495, 497-98 (9th

Cir. 2003). If a debtor knows it cannot discharge such

debts through plan provisions, it not only has no in-

centive to discriminate against those debts, it has a

positive incentive to give them preferential treatment.

Courts differ on whether such treatment is allowed;

the point is simply that, if the debtor knows he can

discharge the debt only by filing an adversary com-

plaint, he has every reason to pay as much as possible

on such debts under its plan, since each dollar not

paid on a nondischargeable debt is a one that he must

pay later. Accordingly, a creditor that does not want

to waste money in Chapter 13 cases or run up costs

unsecured creditors).

12

for those who are paying their debts, can rely on

those built-in incentives to ensure that it will receive

as much under the plan as it is legally entitled to. It

can, then, direct its limited resources to higher-

priority issues, such as defending actual undue hard-

ship adversary actions.

On the other hand, if debtors are free to ignore

both the substantive and procedural requirements of

the Code and the Rules, then they have every reason

to underpay disfavored creditors or seek to discharge

debts improperly through plan provisions. Thus, until

creditors are alerted by decisions such as the one be-

low, debtors can obtain substantial and unwarranted

benefits from those who make the mistake of relying

on the rule they have read. And, while creditors with

many cases presumably will learn to adapt to a new

regimen based on this altered version of the Rules

(albeit at substantial, unnecessary cost and burden to

all parties), occasional creditors may not learn until

too late that they were foolish to have assumed that

the Rules applied to debtors too. That is not a state of

affairs that this Court should tolerate; the Amici

states urge the Court to take certiorari on this case in

order to reverse the decision below.

Il. The decision below conflicts with holdings of

this Court and other circuits.

In Tennessee Student Assistance Corp. v. Hood,

541 U.S. 440, 449-452 (2004), this Court described the

student loan discharge provisions, noting that Section

523(a)(8) is “self-executing;” that the debtor must “af-

firmatively secure[{] a hardship determination” to dis-

charge a student loan debt; that creditors are given

13

“greater procedural protection” before such debts can

be discharged even though creditors are not generaliy

entitled to personal service prior to the entry of the

discharge; and that an adversary proceeding must be

filed to discharge the debt. This Court did, to be sure,

state that “absent Rule 7001(6), a debtor could pro-

ceed by motion, . . . which would raise no constitu-

tional concern,” 541 U.S. at 453 (emphasis added),

but that does not mean, as the Ninth Circuit stated

that it would be “wrong and dangerous” to allow Con-

gress to define what is required for due process if it

chooses to do so. Espinosa, 553 F.3d at 1204. The re-

ality is that Rule 7001(6) does exist and it does im-

pose positive obligations on a debtor — obligations

that cannot be disregarded in evaluating the rights of

the creditor. The suggestion that Hood allows courts

to disregard the effect of Rule 7001(6) was rightfully

rejected out of hand by Jn re Hanson, 397 F.3d 482,

487 (7th Cir. 2005). Correcting the Ninth Circuit’s

misreading of Hood is itself sufficient reason to grant

certiorari.

Even absent the conflict with Hood, the Ninth

Circuit’s ruling puts it squarely in conflict with five

other Circuits, as well as this Court’s holding in Mul-

lane. The Ninth Circuit openly conceded that it had

placed itself on the opposite side of all of its sister cir-

cuits, as well as the District Court in this case, and

the Ninth Circuit Bankruptcy Appellate Panel in Jn

re Repp, 307 B.R. 144 (9th Cir. BAP 2004), reversed

by Espinosa, 553 F.3d at 1204, n. 6. Its decision to

give debtors who live in — or move to'® — the largest

' [Inder the venue provisions of 28 U.S.C. § 1408, a

14

circuit in the country a preferable position vis-a-vis

discharging their student loans compared to those in

those other circuits, creates the sort of split that calls

for resolution by this Court.

The cases in the other circuits involved the same

fact pattern as here — a Chapter 13 debtor who used

plan language to discharge a debt, ignoring the Rule

stating that he must bring an adversary action to de-

termine undue hardship. In each case, the creditor

did not object to the plan or appeal from confirmation,

but sought to collect the debt after the plan ended

and was met by the contention that the confirmed

plan was res judicata of the issue. In each case, the

Circuit Court held, contrary to the Ninth Circuit’s

ruling here, the orders were void due to the debtor’s

violation of due process. Indeed, although the Tenth

Circuit had initia.:y relied on res judicata principles

to uphold “discharge by declaration” in Andersen v.

UNIPAC-NEBHELP (In re Anderson), 179 F.3d 1253

(10th Cir. 1999), it eventually overruled Andersen in

its en banc decision in Educ. Credit. Mgmt. Corp. v.

Mersmann (In re Mersmann), 505 F.3d 1033 (2007),

when it considered the due process issues the Ninth

Circuit rejected in this case.

Further, the same issue has also arisen with re-

spect to whether liens can be invalidated through

plan provisions, rather than adversary proceedings as

required by Bankruptcy Rule 7001(2). See In re Man-

case may be brought wherever a debtor is currently dom!-

ciled, regardless of where the debt was incurred or the

lender located.

15

saray-Ruffin, 530 F.3d 230, 35-36 (3rd Cir. 2008); In

re Bateman, 331 F.3d 821, 830-833 (llth Cir. 2003);

Cen-Pen Corp. v. Hanson, 58 F.3d 89 (4th Cir. 1995),

all holding that liens cannot be invalidated through

plan provisions. Indeed, see In re Brawders, 503 F.3d

856, 859-870 (9th Cir. 2007) (affirming decision by

Bankruptcy Appellate Panel) and Jn re Enewally, 368

F.3d 165, 1173 (9th Cir. 2004), both of which appear

to endorse the same concept. Thus, the Ninth Circuit

is in conflict with itself on these issues, and its stu-

dent loan analysis sets up conflicts with this line of

decisions as well.

In short, the Ninth Circuit has created uncer-

tainty where the Bankruptcy Rules prescribe a

bright-line requirement, leaving parties to grapple

with an amorphous balancing process despite the fact

that Congress has prescribed the proper process with

complete clarity. Under the Rules, the result is sim-

ple — either a summons and cumplaint are properly

served on a proper party, or they are not. But under

the Ninth Circuit’s approach, courts must decide

whether some other, lesser form of notice is adequate

under the circumstances of each particular case. In-

deed, if its approach is correct, why would it not

equally allow parties to disregard the provisions of

Fed. R. Civ. Proc. 4 when they commence an ordinary

civil action? If one can ignore the duty to serve a

complaint and summons yet still bind a party to a de-

fault judgment in bankruptcy by mailing some docu-

ment to the other party, why should that same result

not obtain in other litigation? The suggestion would

be absurd outside of bankruptcy; it is no less so in

bankruptcy.

16

If anything, it is more necessary in light of the

complex, multi-faceted bankruptcy process. The

Ninth Circuit’s opinion imposes added costs and bur-

dens with no countervailing benefits. Indeed, by gra-

tuitously reviving an abuse that was largely elimi-

nated through the vigilance of creditors and courts,

the Ninth Circuit has made handling of bankruptcy

matters more difficult than necessary. Those difficul-

ties will increase in light of the new discharge excep-

tions in Chapter 13 discharge, giving debtors greater

incentives te evade the Rules. It is critical that certio-

rari is granted here so that the Court may bring the

law in the Ninth Circuit back into conformity with

that of the other Circuit Courts and restore the con-

stitutionally mandated “uniform” law of bankruptcy.

U.S. Const. art. I, § 8, cl. 4.

Ill. The Ninth Circuit erred in its ruling on the

merits.

It is also important for this Court to grant certio-

rari because of the Ninth Circuit's plain error in its

rulings on the merits. The discussion below merely

touches on the problems with the Ninth Circuit’s ru]

ing that must be corrected. Specifically, the decision

below erred in not finding that the confirmation order

was void for lack of due process in two separate, but

related aspects. The Ninth Circuit’s rejection of these

arguments further illustrates the split among the

Circuit Courts on these issues.

17

A. Where the Bankruptcy Code and Rules

prescribe the procedure for discharge of a

student loan, the bankruptcy court can-

not approve a plan that ignores the pro-

cedure.

The Bankruptcy Rules state that an adversary

proceeding is the exclusive procedure for determining

the dischargeability of a debt in bankruptcy court.

Bankruptcy Rule 7001(6). Hood, 541 U.S. at 449-452.

Under Section 1322(b)(11), a Chapter 13 plan may

contain any provision “not inconsistent with this ti-

tle.” Similarly, Section 1325(a)(1) provides that the

court “shall confirm a plan if — (1) the plan complies

with the provisions of this chapter and with the other

applicable provisions of this title; . . . fand] (3) the

plan has been proposed in good faith and not by any

means forbidden by law.” Thus, Congress has thrice

stated that plans must only contain lawful provisions

and that courts may only confirm lawful plans.

Based on those provisions, and as set out in more

detail in Petitioner’s brief, other Circuits have held

that the Bankruptcy Court lacks the authority to

grant a discharge of student loan debt through the

plan process. See Whelton v. Educ. Credit Mgmt.

Corp., 432 F.3d 150, 154-55, 156, n.2 (2nd Cir. 2005)

(using plan process makes discharge provision “void

ab initio”), Banks v. Sallie Mae Servicing Corp., 299

F.3d 296, 300 (4th Cir. 2002). Section 1325 does not

issue mere hortatory admonishments to the debtor;

rather, it imposes requirements the plan must satisfy

to be confirmed. Mersmann, 505 F.3d at 1048, 1049

(Ҥ 1325(aX1)... permits the confirmation of a plan

18

only if it is consistent with the rest of the Code;”

“bankruptcy court lacks authority to confirm” plan

that does not use adversary proceeding); Hanson, 397

F.3d at 487 (“Failure to comply with the Code has

been said to render the plan and any confirming or-

der ‘nugatory.”). See also Shaw v. Aurgroup Finan-

cial Credit Union, 552 F.3d 447, 455-58 (6th Cir.

2009); In re Jones, 530 F.3d 1284, 1289-90 (10th Cir.

2008), both holding requirements of Section 1325(a)

are mandatory. Even if this position is in dispute,

that simply creates further conflicts that this Court

should resolve. That is particularly true where the

Ninth Circuit ended its discussion with the conclu-

sion that bankruptcy courts not only could confirm

plans that violated the Code — but they were barred

from refusing to do so. Espinosa, 533 F.3d at 1205

(reversing prior decisions denying confirmation of

such pians). Such a clear conflict cries out to be re-

solved by this Court.

B. Where the Bankruptcy Code or Rules pre-

scribe a particular form of notice, denial

of that notice violates due process.

An adversary proceeding is commenced by filing a

complaint that must, under Bankruptcy Rule 7008

show “that the [debtor]! is entitled to relief” and the

specific relief sought. Thus, unlike a debtor’s bare

demand in a plan for a discharge, a complaint must

show the alleged hardship, name the lender, set out

the desired relief, and be served by summons on a

high-level official or person designated to receive ser-

vice. Those measures bring home to the creditor in a

clear and direct fashion that its specific interests are

19

being challenged and that it must look to those inter-

ests or suffer a default. By comparison, the debtor

need not even serve a full Chapter 13 plan on credi-

tors, only a summary thereof. Bankruptcy Rule

3015(d). Indeed, Section 521(e)(3) now states that a

plan is provided to a creditor only if it requests the

plan and pays for the copy it receives.

In short, the notice requirements for an adversary

proceeding are far more exacting than the notice re-

quired for confirmation of a Chapter 13 plan. Never-

theless, because USA Funds received some “notice”

that a plan was filed, and could have inquired into

the effect of the proposed plan on its claim, the Ninth

Circuit held that it had received all the notice that it

was due on the discharge issue. That conclusion is in-

correct both practically and legally. As a practical

matter, large creditors, like USA Funds, receive “tidal

waves of mail... . The quantity ‘of notice’ that is is-

sued by the bankruptcy system is so overwhelming

that it is necessary to have clear rules in order for

creditors to know what notices to notice as opposed to

the notices that are deafening legal background noise.

The Code and the Rules set forth those clear stan-

dards and it is up to the courts to ensure that the

lines are not blurred.” Jn re Ruehle, 412 F.3d 679,

682-83 (6th Cir. 2004).

As a legal matter, this Court has stated that due

process requires “notice reasonably calculated, under

all the circumstances, to apprise interested parties of

the pendency of the action and afford them an oppor-

tunity to present their objections.” Mullane v. Central

Hanover Bank & Trust, 339 U.S. 306, 314 (1950)

20

(emphasis added). The other Circuits have concluded

that, at a minimum, that means that parties must

receive the notice they have been promised. See, e.g.,

Banks, 299 F.3d at 303 (“due process generally enti-

tles a party to receive the notice specified before an

order binding the party will be afforded preclusive

effect”); Ruehle, 412 F.3d at 684-85 (parties are “enti-

tled to the prescribed level of notice for the process to

be due”); Mersmann, 503 F.3d at 1049 (“creditor has 2

right to assume that he will receive all of the notices

required by statute before his claim is forever

barred.”).

That principle was stated by this Court in City of

New York v. New York, New Haven & Hartford R.R.,

344 U.S. 293 (1953) where it considered whether a

party could be bound by a confirmation order where it

knew of the case but had not been mailed notice of

the hearing on the plan as required under -he statute

and the rules. This Court rejected the argument that

knowledge of the case would put a party on inquiry

notice so that it would be obligated to take steps to

learn of the hearing, stating that “even creditors who

have knowledge of a reorganization have a right to

assume that the statutory ‘reasonable notice’ will be

viven them before their claims are forever barred.”

(Emphasis added). Courts continue to apply that rule

in Chapter 11 cases, even where they also find that

the different circumstances in Chapter 7 and 13 cases

can bind parties to mere inquiry notice. See In re

Metzger, 346 B.R. 806, 817-19 (Bankr. N.D. Cal.

2006), explaining the differences and noting the effect

of varying statutory provisions in the different chap-

ters. Thus, it is clear that there is no one single size

21

notice that satisfies all constitutional duties.

The same is true here — the creditors have been

told that they will receive a particular form of “rea-

sonable notice,” but the debtor provided a different,

lesser form of notice that it argues was “good

enough.” The Ninth Circuit decided that, because the

alternative service might have been adequate, in the

absence of any specified provisions in the statute or

Rule, that it was immaterial that it was not the ser-

vice that was required. That conclusion, though, ig-

nores the critical distinction between being given no

information and being given misleading information.

If nothing had been said about how undue hardship

would be decided, the creditor would have no alterna-

tive but to examine each paper it received with care

to determine if a discharge action was lurking within.

But, where a specific form of notice is specified, credi-

tors have a right to rely thereon and limit their moni-

toring efforts accordingly.

Put another way, if the Rules had said, “no action

can be taken to affect the discharge of any debt

unless the notice is sent in a blue envelope,” a credi-

tor could not be faulted for not reviewing documents

sent in white envelopes to determine if attempts were

being made to affect their debts. The result is no dif-

ferent here — the creditor is told explicitly what to ex-

pect, but the debtor used a different mode entirely.

The Ninth Circuit held that the lender was sophisti-

cated and it was “highly unlikely” that it was misled

by “customary bankruptcy procedure,” Espinosa, 553

F.3d at 1205 — a statement true only if is “customary”

for debtors to ignore the Code and the Rules.

9

eee

The Ninth Circuit’s basic error is its failure to ap-

ply Mullane’s requirement that due process requires

consideration of all the circumstances. In Mullane, a

trustee sought to settle its accounts where thousands

of parties were involved and it could not ascertain

names and addresses for many of them. The trustee

relied on state law that allowed publication notice for

all parties, but this Court held that such notice could

be used only for unknown creditors. Known creditors

were entitled to actual service even where there was

no reason to believe the trustee had done anything

wrong or that any party would sue. Moreover, this

was the only action involving the beneficiaries, not

one of thousands to which they must respond. Never-

theless, this Court made clear that due process was

not a mere gesture, but must be calculated by what a

person would do who truly wanted to communicate to

another.

Here, by contrast, the debtor is violating the

Rules, the plan takes away the creditor’s rights, the

debtor typically has a manageable number of credi-

tors to notify and knows their contact information,

while the creditor is dealing with a huge case load

that must be carefully managed. Under those circum-

stances, the debtor knows that creditors will justifia-

bly rely on the Rules to determine the efforts they

must make. Allowing debtors to exploit that reliance

dues not satisfy Mullane; it is the antithesis of Mul-

lane. Nor can it simply be assumed, as the Ninth Cir-

cuit held, that creditors actually agree that their

claims should be discharged so that it would be im-

proper for bankruptcy courts to challenge such provi-

sions sua sponte, despite their broad policing powers

23

under Section 105(a). By doing so, the Ninth Circuit

has reinvigorated the concept of discharge by am-

bush, while removing a powerful tool to alleviate the

problem. Under all of these circumstances, this is

plainly a decision that demands reversal.

CONCLUSION

For the foregoing reasons, the petition for writ of

certiorari should be granted.

Respectfully submitted,

JOHN R. KROGER

Attorney General of Oregon

MARY H. WILLIAMS

Deputy Attorney Genera!

JEROME LIDZ

Solicitor General

CAROLYN G. WADE

Assistant Attorney General

Counsel for Amicus Curiae

State of Oregon

April 13, 2009

24

APPENDIX A

LIST OF THE AMICI CURIAE

State of Alaska

Wayne Anthony Ross

Attorney General of Alaska

P. O. Box 110300

Juneau, Alaska 99811

State of Hawaii

Mark J. Bennett

Attorney General of Hawaii

425 Queen Street

Honolulu, Hawaii 96813

State of Michigan

Mike Cox

Attorney General of Michigan

P. O. Box 30212

525 W. Ottawa Street

Lansing, Michigan 48909-0212

State of Missouri

Chris Koster

Attorney General of Missouri

Supreme Ct. Bldg.

207 W. High Street

Jefferson City, Missouri 65101

25

State of Nevada

Catherine Cortez-Masto

Attorney General of Nevada

Old Supreme Court Bldg.

100 N. Carson Street

Carson City, Nevada 89701

State of Ohio

Richard Cordray

Attorney General of Ohio

30 East Broad Street, 17" Floor

Columbus, Ohio 43266-0410

State of Tennessee

Robert E. Cooper, Jr.

Attorney General and Reporter of Tennessee

P.O. Box 20207

Nashville, Tennessee 37202-0207

State of Utah

Mark L. Shurtleff

Attorney General of Utah

Utah State Capitol Suite #230

P.O. Box 142320

Salt Lake City, Utah 84114-2320

State of Washington

Rob McKenna

Attorney General of Washington

1125 Washington Street SE

P. O. Box 40100

Olympia, Washington 98504-0100

26

State of Wyoming

Bruce A. Salzburg

Attorney General of Wyoming

State Capitol Building

Cheyenne, Wyoming 82002