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

| m4 (2) Con ere Fn. "eS a

No. 08-1134 Hine.

on T SEP 4= 2009

In The bo: oe

Supreme Court of the Anited States

+

UNITED STUDENT AID FUNDS, INC.,

Petitioner,

V.

FRANCISCO J. ESPINOSA,

Respondent.

.

On Writ Of Certiorari To The

United States Court Of Appeals

For The Ninth Circuit

+

BRIEF OF AMICUS CURIAE EDUCATIONAL

CREDIT MANAGEMENT CORPORATION

IN SUPPORT OF PETITIONER

° —

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

COCKLE LAW BRIEF PRINTING CO (800) 225-6964

OR CALL COLLECT (402) 342-283)

buyer SPOLI5LC ow

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ...................ceeeeeeeeeeees ili

STATEMENT OF IDENTITY AND INTEREST

CF FU CU TREIRD cccsscsescccsscsecscccosccecssessceseses 1

SUMMARY OF ARGUMENT ............ cee cceeeeeeeeeeeees 5

TTT iniccciniceesininishlonteamanuneinenteeienatdemnenenets 8

I. Orders Discharging Student Loan Debt

IT.

Through the Plan Confirmation Process

Violate Creditors’ Right to Due Process and

TD sich iclnssncaierninndiinesicanniiniamaniianncciaiiaieadhliinguies

A. This Court has specifically delineated

the process that is due ..........................

1. Mullane establishes the process

SRR Rene eee Pee ee

2. Hood prescribes precisely which

bankruptcy rules must be followed

to satisfy Mutiane’s due process

requirements in the student loan

Re iris cnrcsvnrcstsdncennsesesnee

B. 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

SI I I ccs nsocicnnssciininimlnininess

Confirmation Orders Containing

Discharge-by-Declaration Provisions Have

FO BO BG sien evincnsipcsdcctincsncstoasccciess

10

12

il

TABLE OF CONTENTS — Continued

Page

A. When two statutory provisions conflict,

the specific statutory provision will

prevail over the general statutory

SII siibuectcnnebsemmniedinsnbieetionenieininseniese 18

B. Travelers vu. Indemnity Co. is

immaterial to this caseé...................:0.c0e 20

1. Travelers is inapposite ..................+5 20

2. At best, Travelers merely offsets the

conflicting final orders ..................... 21

3. The corrected 2008 discharge order

was void because the court altered

the parties’ substantive rights......... 24

C. A plan confirmation order is not res

judicata to issues that were not

I I i inntctienseisicistinassnnonsiensint 29

III. The Ninth Circuit’s Decision Paves the Path

for Debtors to Discharge Child Support,

Spousal Maintenance, Tax Debt, and

Wrongful Death Judgments Through

Chapter 13 Bankruptcies ............................ 32

IV. The Ninth Circuit’s Decision Makes a

Mockery of Bankruptcy Process’ and

Encourages Unethical Conduct................... 33

NIE eitisinadsnincestonsccciesovsbassesinnuviunllacnimassnts 35

ill

TABLE OF AUTHORITIES

Page

CASES

Allen v. McCurry, 449 U.S. 90 (1989) ......... eee 29

Am. Trucking Ass’ns v. Frisco Transp. Co., 358

Oe a icele aca iaidinaniieinpanadeiinnnineionadens 27

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

179 F.3d 1253 (10th Cir. 1999) ................... 18, 19, 23

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

299 F.3d 296 (4th Cir. 2002) 0.0.0... eee ceeeeeee neers 13

City of New York v. New York, New Haven &

Hartford R.R. Co., 344 U.S. 293 (1953)........0...0..... 12

Cohen v. De La Cruz, 523 U.S. 213 (1998).....0..0........ 32

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

Coleman), 560 F.3d 1000 (9th Cir. 2009)................ 28

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

Mersmann), 505 F.3d 1033 (10th Cir. 2007).... passim

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

Whelton), 299 B.R. 306 (Bankr. Vt. 2003).............. 30

Espinosa v. United Student Aid Funds, Inc.,

530 F.3d 895 (9th Cir. 2008) ....0.00.0.0000000000. 22, 23, 24

Espinosa v. United Student Aid Funds, Inc.,

553 F.3d 1193 (9th Cir. 2008)......0.0.0000 passim

Gagnon v. United States, 193 U.S. 451 (1904) .......... 27

Great Lakes Higher Educ. Corp. v. Pardee

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

_ PE esc teeiaddatnaiaeanetaastin 17, 18, 21, 28, 31

Grogan v. Garner, 498 U.S. 279 (1991).............0..0006. 32

iv

TABLE OF AUTHORITIES — Continued

Page

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

Hanson), 397 F.3d 482 (7th Cir. 2005) ...........00000... 13

In re Johns-Manville Corp., 517 F.3d 52 (2d

I is dalle a dian iaaiialatis ined tied nitsinisieaeinnibenenatinnasanes 26

In re Jones, 352 B.R. 813 (Bankr. S.D. Tex.

Si iciakaislossehaumaaadsbesibesileianbiadeaninibinesiiasnapnnntiiiineeniaeed 28

Mullane v. Cen. Hanover Bank & Trust Co.,

Be SE iiicsnasta<casccnicsovensnsnsianscsaseians passim

Mullins v. Nickel Plate Mining Co., Inc., 691

Bee Pe GE NONE MIs vencosecsenaccicoresccnnsntansascsencess 24

Norwest Bank Worthington v. Ahlers, 485 U.S.

RESIS EEE SN ee cn a 31

Repp v. Educ. Credit Mgmt. Corp. (In re Repp),

307 B.R. 144 (B.A.P. 9th Cir. 2004) ............ 13, 14, 15

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

Ruehle), 412 F.3d 679 (6th Cir. 2005)..........00000.00... 13

Tenn. Student Assistance Corp. v. Hood, 541

chasse sc ssnicaonsathanienscniaiheninisieutenian passim

Travelers Indemnity Co. v. Bailey, 129 S.Ct

TT cisaiccielieniess sacationdinieniecinienstnetaieiiiinenseibeedd passim

United States v. Stuart, 392 F.2d 60 (3d Cir.

I a 24

Warner, Ill v. City of Bay St. Louis, 526 F.2d

RIS ae ene one POE 26

Whelton v. Educ. Credit Mgmt. Corp., 432 F.3d

I acini arernensanecninmatsadihenetd 19, 29, 30

Windsor v. McVeigh, 93 U.S. 274 (1876) .................... 27

v

TABLE OF AUTHORITIES ~— Continued

Page

CONSTITUTIONAL AND STATUTORY PROVISIONS

te Ge BS aren 8

§ f * ci 2; | RRR EeEen en Em I Ni Nn 10, 16

BB DEAD. FG on cccrcccccccccccnssscmnens 10, 11, 16, 21, 32

Be ils OF Be iicesswcrssccncassesassinnniiennstiiumeeamenanaaa 19, 30

BE WARE. © BIG vecccnccsesnsoccssansnnecsens 18, 19, 20, 28, 30

Ll U.S.C. § ISBAAND)..........000...200.00000 18, 19, 21, 30, 32

OE ie Oe Ski vse siincsnnnnsnonissiininsinnsiinsiacenapamiipmasaniiesamame 28

Be St OF ID wiccensnencrenitncicinniitissmiinepmiauliameeeia nama 8

RULES

i § OS 0 RRP ENEE ERM eee seers 12,14

Ps ks SIE, TE PUI i dcccccsnsscsccssuseconedsmininicieennnii 11

Ee pamnneno 11, 12, 13, 14, 29

Bs Bite MINIS te CII terns: msicinnssseniniccidibeiieiingmicanaemiaainal 33

8g 8 4 rR or ne. 11

OTHER AUTHORITIES

Keith M. Lundin, Chapter 13 Bankruptcy

§ 229.1 (3d ed. 2000 & Supp. 2004)............0..0.00..... 16

AMICUS CURIAE BRIEF OF EDUCATIONAL

CREDIT MANAGEMENT CORPORATION

IN SUPPORT OF PETITIONER

Educational Credit Management Corporation

submits this amicus curiae brief in support of

Petitioner United Student Aid Funds, Inc.’

,

vv

STATEMENT OF IDENTITY AND

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-insured student loan programs.’ The federal

' Pursuant to Sup. Ct. R. 37.3(a), counsel of record states

that 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. 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.

* The Federal Government operates two student loan

programs: The Federal Family Education Loan (FFEL) Program

and the William D. Ford Federal Direct Loan (DL) Program.

Both programs are regulated by the United States Department

of Education (ED) and are federally-insured.

2

financial interest at stake in the federal student loan

program is paramount, totaling $525 billion.’

ECMC is also a specialized guarantor designated

by the United States Department of Education (ED)

to receive assignment of chapter 13 accounts when a

borrower has filed bankruptcy. Twenty-six of the 35

FFEL Program guaranty agencies as well as ED

assign their chapter 13 bankruptcies to ECMC for

servicing during the bankruptcy. 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

6,600 chapter 13 bankruptcy debtors who have FFEL

student loans, totaling over $148 million and an

additional 53,000 chapter 13 bankruptcy cases

nationwide, representing almost $1.1 billion.

* The most current dollar amount publicly available

indicates that, as of September 2008, there is approximately

$415 billion of student loans in the FFEL Program and $109.9

billion in the DL Program. See http://www.ed.gov/about/reports/

annual/2008report/report.pdf, at 32, 144. The actual current

total dollar amount is likely much higher. FY2009 loan volume

has in fact, exceeded the FY2010 budget projections: “Overall

federal education loan volume increased by $7 3 billion to a total

of $28.0 billion in the first six months of FY2009 as compared

with the first six months of FY2008, a 35% year-over-year

increase. This compares with the 13.6% increase assumed by the

president’s FY2010 budget.” See http://www-finaid.org/loans/

fy2009v2008loanvolume txt.

3

To survive, the FFEL Program relies on loan

repayments to fund new student loans. Because

collecting student loans assures the program will

continue, Congress has repeatedly passed legislation

to minimize the loss of federal funds due to student

loan defaults, collection failures, and especially

discharge in bankruptcy. In addition to increasingly

stricter bankruptcy legislation, this Court has

promulgated specific bankruptcy processes to effect

congressional intent and to create uniform

bankruptcy practices.

The federally-mandated regulatory claims process

and the sheer volume of bankruptcy claims has the

potential of effectively limiting a guaranty agency’s

meaningful participation in chapter 13 cases, at least

in the plan confirmation process. For example, when

a borrower files a chapter 13 bankruptcy, the lender

receives general notice of filing from the bankruptcy

clerk; the lender then files a claim for the student

loan with the guaranty agency, who then, in the

majority of cases, assigns the account to ECMC for

handling. It is not uncommon for these transfers to

exceed the time set by the rules to object to

confirmation of the plan.

As the primary chapter 13 bankruptcy processer,

servicing $1.25 billion, ECMC receives 18,537

bankruptcy documents monthly by U.S. mail. Of this

monthly number, nearly 20% or 3,587 alone are

chapter 13 plans. In many cases, by the time the

bankruptcy claim is processed, the chapter 13 plan

4

may already have been confirmed before the guaranty

agency has received actual notice or had a realistic

opportunity to respond. Through legislation, Congress

has addressed these pragmatic and administrative

burdens facing student loan creditors by requiring

debtors to provide heightened notice to the loan

holders when seeking to discharge student loan debt.

Only the Ninth Circuit stands at odds with

Congress, this Court, and five circuit courts that have

affirmed the very specific rules and process debtors

must follow to discharge their student loan debt.

Because ECMC plays an integrai role in the federal

student loan program, it brings a_ practical

perspective that may assist the Court in its decision.

e

5

SUMMARY OF ARGUMENT

The Ninth Circuit’s Espinosa* decision is an

aberration that defies Congress’s pragmatic student

loan discharge process. This decision, which validates

the deliberately illegal practice of discharging student

loans by declaration in a chapter 13 plan, invites

debtors and their counsel! to lay a trap for their

student loan creditor. If the debtor slips a single

sentence into his chapter 13 plan and if the student

loan creditor does not carefully police every plan and

catch this single sentence, then the debtor has

craftily avoided his burden to file an adversary

proceeding and prove undue hardship as expressly

required by Congress and this Court. The debtor has

dodged repaying his federally-insured debt with the

stroke of a pen, and, by sneaking a single sentence

into an administrative document, thousands of which

are mailed to creditors every day, the debtor has

avoided every obligation placed on him by statute.

This is simply not the law as set forth by Congress in

the Bankruptcy Code or the process prescribed by

this Court.

In weighing a debtor’s right to a fresh start

against future students’ right to student loans,

Congress chose to protect the federal student loan

program. It did so by making the debtor act, not the

creditor. This dichotomy, which this Court has

* Espinosa v. United Student Aid Funds, Inc., 553 F.3d 1193

(9th Cir. 2008).

6

affirmed, is set forth in the Bankruptcy Code and

Federal Rules of Bankruptcy Procedure:

Debtors’ Obligations:

¢ Debtors alone have the burden to prove.

entitlement to a discharge of their

student loan debt.

¢ Debtors’ burden is heavy because

student loans are presumptively

nondischargeable.

¢ Debtors can only satisfy this burden by

filing an adversary proceeding, which is

a federal court action separate from the

main bankruptcy case, and proving

undue hardship.

¢ Filing an adversary proceeding requires

a summons and complaint and service of

process, i.e., notice above mailing to a

post office box.

* Absent debtors taking all of these

required steps and satisfying the legal

standard for undue hardship, the

bankruptcy court’s discharge order will

not include a discharge of the student

loan debt.

7

Student Loan Creditors’ Rights:

¢ Creditors’ status as holder of a

nondischargeable debt is established by

statute.

¢ Creditors do not need to take any steps

to “obtain” nondischargeable status

because nondischargeability status is

“self-executing.”

e Creditors can expect to receive notice

through service of a summons and

complaint of an adversary proceeding

if the nondischargeability status of the

debt is contested.

¢ Nothing in the Bankruptcy Code or

Rules leads creditors to believe their

nondischargeable debt can be eliminated

by illegal language stuck in a plan.

* Creditors expect that, absent action by

debtor, the student loan debt will not be

included in the standard discharge

order.

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

450-53 (2004). This practical, procedural process is

what Congress intended, what this Court has

affirmed is due, and what the student loan creditors

have a right to expect.

Adopting Espinosa’s approach has significant

financial and practical consequences for the federal

government, the student loan industry, and the legal

processes governing bankruptcy courts. It also

8

sanctions a dangerous path for debtors to discharge

other nondischargeable debts like child support,

spousal maintenance, tax debt, and personal injury

and wrongful death judgments through their chapter

13 plans. Espinosa reduces the bankruptcy process

to gamesmanship and condones and encourages

unethical, sanctionable practices by debtors’

attorneys. ECMC urges this Court to reverse the

Ninth Circuit’s Espinosa decision.

+

ARGUMENT

I. Orders Discharging Student Loan Debt

Through the Plan Confirmation Process

Violate Creditors’ Right to Due Process

and Are Void.

A. This Court has specifically delineated

the process that is due.

The Constitution vests Congress with plenary

power to legislate “uniform laws on the subject of

Bankruptcies.” U.S. Const. art. I, § 8, cl. 4. In turn,

pursuant to 28 U.S.C. § 2075, Congress imbued this

Court with the mandate “to prescribe by general

rules, the forms of 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 —

9

that the Ninth Circuit ignores, without legal or

factual justification.

1. 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. Cen. 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 a bankruptcy court’s plan

confirmation order, 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.

10

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 Hood, 541

U.S. at 451 (Rehnquist, C.J.) (“Because student loan

debts are not automatically dischargeable ... the

Federal Rules of Bankruptcy Procedure provide

creditors greater procedural protection.”).

2. Hood prescribes precisely which

bankruptcy rules must be followed

to satisfy Mullane’s due process

requirements in the student loan

discharge context.

This Court stated that, “uniess the debtor

affirmatively secures a hardship determination, the

discharge order will not include a student loan debt.”

Hood, 541 U.S. at 449 (Rehnquist, C.J.) (citing 11

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).

Id. 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 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.

In this case, the bankruptcy court clerk mailed

the general notice of the bankruptcy filing to USA

Funds. Given the unique “nature of the [bankruptcy]

case” in student loan discharge matters, sending

general notice to a post office box address, addressed

to no particular person cannot be construed — at any

level — as notice “appropriate to the nature of the

case.

12

B. 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

Mullane and Hood.

Long ago, this Court recognized that “le}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.

Curiously, Espinosa himself never served any

type of notice, let alone service of process, on USA

Funds, and there is no dispute that the only notice

provided to USA Funds was mailed to a post office

box pursuant to Fed. R. Bankr. P. 2002 by the

bankruptcy court clerk. The Fourth Circuit explained

the difference between Rule 2002 notice and Rule

7004 notice in bankruptcy:

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

general administration of the case and all

13

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

F.3d 296, 301 (4th Cir. 2002) (internal citation

omitted); see also Ruehle v. Educ. Credit Mgmt. Corp.

(In re Ruehle), 412 F.3d 679, 684 (6th Cir. 2005):

Hanson v. Educ. Credit Mgmt. Corp. (In re Hanson),

397 F.3d 482, 486-87 (7th Vir. 2005); 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”).

The Ninth Circuit's assertion that the plan itself

or the Trustee’s general warning letter, both which

were mailed by the court’s clerk to a general post

office box, were sufficient notice falls wide off the

Mullane mark. See Espinosa, 553 F.3d at 1200, n.4.

That USA Funds received general notice or that

“nobody-in-particular” at USA Funds may have

received actual notice is also not the _ specific,

14

appropriate notice this Court, the Bankruptcy Code,

or the Bankruptcy Rules require.

Here, the process -— or lack thereof — chosen by

Espinosa was substantially less likely to “bring home

notice” than the “feasible,” “customary,” and legally

required alternative: summons and _ complaint,

delivered to a registered agent or corporate officer.

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 desired 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 served no notice at all

of his intent to discharge his student loan debt by less

than payment in full but rather relied on the court

clerk to mail general notice under Rule 2002. This

practice places the student loan creditor in an unfair

position:

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

15

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

place.

Repp, 307 B.R. at 153.

The form of notice served on USA Funds 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

* Indeed, 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.

16

discharge.” 11 U.S.C. § 102 embodies 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.

The bankruptcy rules do not invoke or create a

constitutional due process notice standard, but they

do require a certain specific process, just like service

of process rules in the Federal Rules of Civil

Procedure. And it is reasonable for any bankruptcy

* The Ninth Circuit wrongly suggests 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 (citing Keith

M. Lundin, Chapter 13 Bankruptcy § 229.1 (3d ed. 2000 & Supp.

2004)). Actually, Hood’s point is broader and simpler and does

not “undermine{] Fund’s argument.” In Hood, 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 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 not a suit against a State for purposes of the Eleventh

Amendment.” Hood, 541 US. at 451 & n.5.

17

litigant to rely on and expect that all of the rules will

be followed. Even the Ninth Circuit agrees that

Congress intended for there to be a heightened notice

standard to discharge student loan debt but only

when a debtor files an adversary proceeding.

Circularly, the Ninth Circuit reasons that, because

Espinosa never filed an adversary proceeding, the

creditor was not entitled to heightened notice.

Espinosa, 553 F.3d at 1204. The Ninth Circuit did not

and cannot relieve a debtor from following specific

bankruptcy procedural rules that plainly require a

debtor to file an adversary proceeding to discharge

student loan debt.

Reversing Espinosa does not require drawing

a constitutional due process bright line for student

loan cases. Reversing Espinosa ensures that the

simple notice standard and_ well-functioning

procedural processes in the Bankruptcy Code and

Rules are enforced. Reversing Espinosa ends the

gamesmanship and forces debtors to follow the same

rules as all litigants must do.

Il. 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

Ninth Circuit relied primarily on its earlier plan

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

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

18

Although Andersen,’ the early case that Pardee relied

on had been reversed by the Tenth Circuit, the Ninth

Circuit 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.

A. When two statutory provisions

conflict, the specific statutory

provision will prevail over the general

statutory provision.

In 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). Educ. Credit Mgmt. Corp. v. Mersmann

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

’ See Andersen v. UNIPAC-NEBHELP (In re Andersen), 179

F.3d 1253 (10th Cir. 1999), overruled by Educ. Credit Mgmt.

Corp. v. Mersmann (In re Mersmann), 505 F.3d 1033 (10th Cir.

2007) (en banc).

19

banc). In overruling its earlier Andersen case, the

Tenth Circuit noted “[gliving 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.

Under statutory construction principles, 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.”

Id. In other words, the specific language of the § 1328

discharge order that specifically excepts student loan

debt from bankruptcy discharge limits the broader

reach of the plan confirmation order that binds

creditors who fail to object to illegal plan language.

Id.; see also Whelton v. Educ. Credit Mgmt. Corp., 432

F.3d 150, 155-56 (2d Cir. 2005) (expressly rejecting

the Ninth Circuit's reliance on the general preclusive

effect of 11 U.S.C. § 1327(a)).

In a footnote, the Ninth Circuit dismissed 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. Section 1327 and its

general binding effect cannot control or dictate the

specific exception for student loan debt contained in

the general discharge provision of § 1328.

Moreover, the Tenth Circuit also noted that

discharge-by-declaration language violates 11 U.S.C.

§ 1325’s requirement that chapter 13 plans comply

20

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. Thus, giving “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 provisions, and undermines the clear will of

Congress.” Jd. Section 1327 is not controlling in this

instance; it simply has no preclusive effect on the

student loan creditor who fails to object to an illegal

plan confirmation order.

B. Travelers v. Indemnity Co. is

immaterial to this case.

1. Travelers is inapposite.

While this Court’s recent Travelers’ decision

discusses the finality of orders in bankruptcy cases, it

is inapposite to the issue before this Court. See

Travelers Indemnity Co. v. Bailey, 129 S. Ct. 2195

(2009). Travelers does not support Espinosa’s position

for two reasons: First, Travelers did not address the

tension between the finality of orders and orders

entered in violation of a party’s due process rights. In

fact, this Court left Respondent Chubb’s due process

challenge to the bankruptcy court’s 1986 Orders to

the Second Circuit on remand because the Second

Circuit had not previously considered it. Travelers,

129 S.Ct. at 2207; see also Espinosa, 553 F.3d at

21

1203-04 (noting that Pardee did not address due

process and now rejecting three other circuit courts’

due process holdings, finding the analysis “novel” and

“unpersuasive”). Irrespective of Travelers’ finality

rule, Espinosa can and_ should be _ reversed

independently on due process grounds. And, unlike

Travelers, that issue is squarely before this Court and

is ripe for decision.

2. At best, Travelers merely offsets the

conflicting final orders.

Second, Travelers as much supports the finality

of the plan confirmation order against USA Funds as

it does the finality of the discharge order against

Espinosa. Espinosa received his general discharge in

1997. The discharge order provided:

Pursuant to 11 USC §1328(a), the

debtor(s) are discharged from all debts

provided for by the plan or disallowed under

11 USC § 502, except any debt

(c) for a student loan or

educational benefit overpayment as

specified in 11 U.S.C. § 523(a\(8).

Jt. App. at 46. This order clearly excepted from

discharge “any amounts remaining” on Espinosa’s

student loan debt. It is undisputed that Espinosa

never challenged this discharge order or appealed the

fact that the discharge order did not discharge “any

amounts remaining” on his student loan debt as

22

proclaimed in his chapter 13 plan. Under this Court’s

Travelers decision, the bankruptcy court’s 1997

discharge order was res judicata against Espinosa.

See Travelers, 129 S.Ct. at 2205. Even the Ninth

Circuit found that

(c]uriously, the discharge order provided that

Espinosa was “discharged from all debts

provided for by the plan ... except any debt

... for a student loan,” which contradicted

the terms of the plan and pretty much

rendered the whole exercise pointless from

Espinosa’s point of view. Curiouser’ still,

Espinosa did not seek reconsideration of the

discharge order, nor did he appeal.

Espinosa v. United Student Aid Funds, Inc., 530 F.3d

895, 896 (9th Cir. 2008). Most important, however,

the Ninth Circuit recognized that, rather than asking

the bankruptcy court to modify the discharge order or

moving for relief under Rule 60, Espinosa

allowed the bankruptcy court’s discharge to

become final, and the time to appeal lapsed

long ago.... Instead, Espinosa sought to

enforce the discharge injunction against

(USA Funds]. The obvious problem, of

course, is that the discharge injunction

simply does not run against [USA Funds]

because the bankruptcy court’s discharge

* The Ninth Circuit’s reference to Alice in Wonderland no

doubt foreshadowed what was to come for the student loan

industry.

23

order did not cover its debt. [USA Funds]

was thus free to collect its debt, and the

bankruptcy court seems to have misread its

own order when it held otherwise.

Id. at 898-99. Under Travelers, even if the discharge

order failed to give Espinosa the “benefit of his

bargain” as illegally provided for in his chapter 13

plan, the discharge became “final on direct review

(whether or not proper exercises of the bankruptcy

court jurisdiction and power), [and] it became res

judicata” against Espinosa. See Travelers, 129 S. Ct.

at 2205.

Despite conceding the finality of the discharge

order, the consequences of Espinosa’s failure to

appeal, and the bankruptcy court’s legally erroneous

decision against USA Funds, the Ninth Circuit

remanded the case to the bankruptcy court with “our

express leave to consider whether its discharge order

. was entered as a result of a clerical error [under

Rule 60(a)).” Jd. at 899."

* In remanding to the bankruptcy court, the Ninth Circuit

noted that the Tenth Circuit approved the bankruptcy court’s

use of Rule 60(a) in Mersmann to amend an identically-styled

discharge order. Espinosa, 530 F.3d at 899 (citing Educ. Credit

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

1039-40 & n.5 (10th Cir. 2007)). The noted comment in

Mersmann is dicta, at best, and is superfluous to the Ninth

Circuit’s use of Rule 60(a) here. The -onflicting discharge order

was not at issue in Mersmann. Moreover, Mersmann overruled

its earlier Andersen decision, thereby forbidding’ the

dischargeby-declaration practice in the Tenth Circuit. Had the

(Continued on following page)

24

3. The corrected 2008 discharge order

was void because the court altered

the parties’ substantive rights.

Rule 60(a) allows a bankruptcy court to correct a

clerical mistake, oversight, or omission in a

judgment, order, or other part of the record, whenever

one is found. Correction of “lejrrors that affect

substantial rights of the parties, however, are beyond

the scope of rule 60(a).” Mullins v. Nickel Plate

Mining Co., Inc., 691 F.2d 971, 973 (11th Cir. 1982).

Here, the bankruptcy court exceeded its authority

under Rule 60(a) because the corrected discharge

order completely changed USA Funds’ substantive

rights, rights that had vested a decade before in

reliance on the order. See id.

Courts “plainly halve] jurisdiction to interpret

and enforce [their] own prior orders.” Travelers, 129

S. Ct. at 2205. But the bankruptcy court’s alteration

of its 1997 discharge order went well beyond

“interpretation” and was per se improper under

Rule 60(a). Rule 60(a) “is concerned primarily with

mistakes that do not really attack the party's

fundamental right to the judgment at the time it was

entered. It permits the correction of irregularities

which becloud but do not impugn it.” United States v.

discharge order not been altered in Espinosa, Espinosa’s

contempt motion and the appeal to the Ninth Circuit would have

been “pointless.” Espinosa, 530 F.3d at 896. And had the

discharge order not been altered, presumably the Ninth Circuit

would not have ultimately ruled as it did.

25

Stuart, 392 F.2d 60, 62 (3d Cir. 1968). In this

instance, USA Funds had the fundamental right to

rely on the discharge order that was entered by the

bankruptcy court in 1997 — an order that was entered

in full compliance with the law and was never

challenged by Espinosa.

Even the Ninth Circuit acknowledged that it is

“an open question” as to whether, in 1997, the

bankruptcy court could have entered an order giving

effect to Espinosa’s illegal plan. Espinosa, 553 F.3d at

898. Nonetheless, the Ninth Circuit remanded with

express leave to do just that.

On remand, the bankruptcy court corrected the

discharge order to include discharge of the student

loans, noting that “it was the clear intent of the court,

as reflected in the chapter 13 Plan, as approved by

the court that all student loan-related obligations

were to be discharged if the debtor successfully

completed and performed the Plan.”’’ Espinosa never

challenged or appealed the order, and the bankruptcy

court failed to correct it in 2003 even when that order

was the basis of Espinosa’s contempt motion. The

bankruptcy court’s alteration five years later and,

* The judge who “corrected” the order to reflect the

bankruptcy court’s “clear intent” was not the judge who

purportedly reviewed Espinosa’s chapter 13 plan in 1992, signed

the plan confirmation order in 1993, and signed the discharge

order in 1997. The original judge passed away in 2001, seven

years before the clerical error issue was even raised.

26

then only with nudging from the Ninth Circuit, is

untenable under Rule 60(a).

Finally, while the bankruptcy court below may

have “corrected” the discharge order to give effect to

the factual language in the plan, it would be absurd

to allow a bankruptcy court to make a lawful, final

order unlawful under Rule 60(a). Cf Warner, III v.

City of Bay St. Louis, 526 F.2d 1211, 1212 (5th Cir.

1976). Such license “would significantly weaken the

policy of finality as embodied in the Federal Rules.”

Id. (citing Moore, Federal Practice, Vol. 6(a), at 4043

(1973)).”

The bankruptcy court’s alteration of a lawful,

final discharge order “‘concern{s] the outer reaches of

a bankruptcy court’s jurisdiction.’” Travelers, 129

S. Ct. at 2203 (citing In re Johns-Manville Corp., 517

F.3d 52, 55 (2d Cir. 2008)). Undoubtedly, a

bankruptcy court has jurisdiction to enter discharge

orders and to interpret and enforce its prior orders.

Travelers, 129 S. Ct. at 2205. But a bankruptcy court

exceeds its jurisdiction by entering a discharge order

in violation of the Bankruptcy Code, and that order

i

Such a challenge to the court’s 1997 discharge order by

Espinosa would have been appropriate under Rule 59 or Rule

60(b). But Fspinosa’s time to challenge the 1997 discharge order

under these rules lapsed more than a decade ago. Cf. Warner,

111, 526 F.2d at 1213, n.4.

27

is therefore void. Windsor v. McVeigh, 93 U.S. 274,

282-83 (1876). In Windsor, this Court stated that

[t]hough the court may possess jurisdiction of

a cause, of the subject-matter, and of the

parties, it is still limited in its modes of

procedure, and in the extent and character of

its judgments. It must act judicially in all

things, and cannot then transcend the power

conferred by law. [Judgments so entered]

would not be merely erroneous; they would

be absolutely void; because the court in

rendering them would transcend the limits of

its authority in those cases.

Id.; see also Gagnon v. United States, 193 U.S. 451,

457 (1904) (holding courts have authority to amend

“any defect in the process or pleadings, upon such

conditions as it shall, in its discretion and by its rules,

prescribe” (emphasis addded)).

For the same reasons the plan confirmation order

was void, supra, the bankruptcy court here lacked

authority, by statute and “by its rules,” to enter a

discharge order that discharged student loan debt

without a showing of undue hardship. See generally

Am. Trucking Ass’ns v. Frisco Transp. Co., 358 U.S.

133, 146 (1958). By rewriting its lawfully entered

discharge order more than a decade later to give

effect “to the clear intent of the court as reflected in

the chapter 13 plan,” the court used Rule 60(a) as a

guise to alter its previous order to reflect the

subsequently condoned illegal discharge practice

28

sanctioned in Pardee. This renders the 2008 altered

discharge order void. Cf. id.

Nothing in the Bankruptcy Code or Rules

compels a bankruptcy court to enter an unlawful

discharge order simply because it confirmed an

unlawful plan, notwithstanding 11 U.S.C. § 1327. An

illegal order at one stage of the bankruptcy process

cannot dictate an illegal order at the end of the

process. The discharge order cannot be the “getaway

car” for the illegal plan confirmation order, especially

in the same litigation. And even if the bankruptcy

court intended to give effect to the illegal plan and

confirmation order, the court lacked authority under

Rule 60(a) and under the Bankruptcy Code to correct

a lawful discharge order 11 years later. The 2008

altered discharge order is void. The 1997 discharge

order became final and was res judicata against

Espinosa.

Travelers does not save either party in this case.”

At best, it offsets the finality of the two conflicting

“In the duel of conflicting final orders, however, the

discharge order would win as the order having the final say.

While a plan confirmation order is a final order for the purposes

of appeal, the actual discharge of debt is consummated only by

the discharge order. In other words, without the discharge order,

the plan confirmation order has no legal effect. See Educ. Credit

Mgmt. Corp. v. Coleman (In re Coleman), 560 F.3d 1000, 1005

(9th Cir. 2009); In re Jones, 352 B.R. 813, 819-20 & n.13. (Bankr.

S.D. Tex. 2006) (discharge order, not plan confirmation order, is

the final order in a chapter 13 because plan confirmation order

can be modified at any time under 11 U.S.C. § 1329).

29

orders. More importantly, it does not provide the

answer to fixing the practical problem at hand here,

that is, debtors should not be allowed to avoid their

statutorily-imposed burden by slipping a sentence

into an administrative document and avoiding basic

procedural rules that every other litigant must follow.

Espinosa is an aberration. It validates a practice that

violates Congressional intent and this Court’s

precedent.

C. A plan confirmation order is not res

judicata to issues that were not

actually litigated.

Two circuits also rely on a res judicata analysis to

conclude that a plan confirmation order has no

preclusive effect on an issue that could not or should

not have been litigated at the plan confirmation

hearing. As a general matter, res judicata will be

invoked only if 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.

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

30

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”). Thus, courts cannot

confirm a plan that violates § 1325.

Student loan debt is specifically excepted from

the discharge under 11 U.S.C. § 1328(a)(2) unless the

debtor makes “a specific factual showing” of undue

hardship. Whelton, 432 F.3d at 155. Slipping 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.”).

The Ninth Circuit considered but rejected this res

judicata analysis, stating that the Mersmann and

Whelton decisions do not offer any persuasive reasons

31

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.” /d.

The Ninth Circuit’s fractured analysis and its

conclusion violate 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 v. Ahlers, “[wl]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

rationale of Pardee, a case that has become an outlier.

Pardee’s analysis is wrong: it 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 plan confirmation

hearing. Espinosa’s analysis is irreconcilable with the

Bankruptcy Code and this Court’s precedent and

must be reversed.

32

Ill. The Ninth Circuit’s Decision Paves the

Path for Debtors to Discharge Child

Support, Spousal Maintenance, Tax Debt,

and Wrongful Death Judgments Through

Chapter 13 Bankruptcies.

Espinosa’s aberrant holding is dangerous because

it could easily extend beyond the context of student

loan undue hardship cases into other presumptively

nondischargeable debts. Its harm is immeasurable.

Under the Ninth Circuit’s rationale, debts such as child

support, spousal maintenance, tax debt, court-ordered

restitution, criminal fines and penalties, and others

would all be susceptible to discharge via plan

language. 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’

interest in recovering full payment of debts in these

categories outweighis|] the debtors’ interest in a

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

U.S. 279, 287 (1991)). The Ninth Circuit’s approach

allows all debtors 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 these rules are meant to provide, Congress's

intent that these debts be nondischargeable in

33

bankruptcy proceedings, and the uniform application

of bankruptcy laws.

IV. The Ninth Circuit’s Decision Makes a

Mockery of Bankruptcy Process and

Encourages Unethical Conduct.

Even as limited to the student loan context, the

Ninth Circuit’s decision will have an enormous

impact on the uniform application of the Bankruptcy

Code, the student loan industry, the federal financial

interest, and the efficiency of bankruptcy courts’

process. If this Court were to adopt the Ninth

Circuit’s approach giving preclusive effect to

discharge-by-declaration plan language, = every

student loan debtor will attempt it. Indeed, it would

cost nothing for the debtor to slip a sentence 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

unquestionably illegal. Fed. R. Bankr. P. 9011; see

also Espinosa, 553 F.3d at 1202. Bankruptcy

attorneys would face an ethical conundrum between

zealous advocacy on behalf of 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.”).

34

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 practice.

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 by statute and rule

to an adversary proceeding to determine undue

hardship, as the Ninth Circuit has 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).

Adopting the Ninth Circuit’s approach will cause

bankruptcy courts and creditors to be overly

burdened in a futile exercise of entertaining and

granting countless objections to confirmation. Some

loans will be discharged by use of plan language.

Some loans will not. Some attempts will be caught by

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.

°

35

CONCLUSION

Only this Court can stop the illegal discharge

of student loan debt through the chapter 13 plan

confirmation process. Unless Espinosa is reversed,

the certain consequences will be the rise of

gamesmanship, mockery of bankruptcy process, and

serious damage to the federal financial interest.

Countenancing the practice of discharge-by-declaration,

at any level, erodes the fundamental processes that

embody this Court’s jurisprudence. This Court should

reverse the Ninth Circuit to restore certainty and

consistency formulated by the Bankruptcy Code and

Rules.

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