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

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA43085015_0455%3A14

## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2010
- **Citation:** 559 U.S. 260

## Text

| 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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA43085015_0455%3A14. Public record. Not legal advice.