Amicus Curiae Brief — United Student Aid Funds, Inc. v. Espinosa
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In The
Supreme Court of the Gnited States
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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
NATIONAL COUNCIL OF HIGHER EDUCATION
LOAN PROGRAMS, INC., INSUPPORT OF
PETITIONER, UNITED STUDENT AID FUNDS, INC.
°
STEVEN L. THOMAS, Esq. WVSB#3738
Kay Casto & CHANEY PLLC
Post Office Box 2031
Charleston, West Virginia 25237-2031
(304) 345-8900
Counsel for Amicus Curiae
COCKLE LAW BRIEF PRINTING CO (800) 25-6964
OR CALL COLLECT 402) 42-2831
7 Ale ee
Bory 6 (604 fj 00°
i
TABLE OF CONTENTS
Page
STATEMENT OF INTEREST OF AMICUS
NERC SE RAS Se A SO OO RE ORE 1
STATEMENT OF THE CASE ..................:cccesseeeeeee 4
SUMMARY OF ARGUMENT. .......... cece eeeeeeeeeeeee 9
TTT vechisdchntisihieiasasrsantaainin» <sinsiinininiecnsiiaiioneniieadiainibene 12
CONGRESS EMPOWERED THIS COURT TO
ESTABLISH PROCEDURAL DUE PROCESS
IN BANKRUPTCY CASES VIA THE BANK-
SE concrnissenrocteicensdajeininsatiaiermipenainnaduts 12
THE PRACTICE OF “DISCHARGE BY DECLA-
RATION” IN CHAPTER 13 PLANS VIOLATES
PROCEDURAL DUE PROCESS BECAUSE
STUDENT LOAN GUARANTY AGENCIES
ARE DENIED THE OPPORTUNITY TO
PARTICIPATE IN BANKRUPTCY CASESG........ 16
IN ESPINOSA THE NINTH CIRCUIT CON-
FLATES THE CONCEPTS OF SERVICE AND
NOTICE AND IGNORES THE _ SELF-
EXECUTING EXCEPTION OF STUDENT
LOANS FROM DISCHARGE........0...0.0...00...00.. 28
IN ESPINOSA THE NINTH CIRCUIT CON-
FLATES ACTUAL NOTICE OF THE PLAN
WITH ACTUAL NOTICE OF IMPROPER
“DISCHARGE BY DECLARATION” LAN-
GUAGE WITHIN THE PLAN.................00seccc00. 32
ll
TABLE OF CONTENTS — Continued
Page
THIS COURT HAS ESTABLISHED THE STAN-
DARD FOR PROCEDURAL DUE PROCESS
IN BANKRUPTCY CASES BY PROMUL-
GATING THE BANKRUPTCY RULESG............. 37
SEE ic inccistbinticebicedtndniandideviaideusscnimmmnanss 40
ill
TABLE OF AUTHORITIES
Page
CASES
American Bank and Trust Company v. Jardine
Insurance Services Texas, Inc. (In re Barton
Industries, Inc.), 104 F.3d 1241 (10th Cir.
Andersen v. Higher Education Assistance
Foundation (In re Andersen), Case No. 96-
ey RY GD BID Picvcvicncvcenccnncnceussonsesesoeens 22, 23
Andersen v. Higher Education Assistance
Foundation (In re Andersen), 215 B.R. 792
CRE TN SII TI os ccinentesencconnccesonuncuocsones 23, 24
Andersen v. UNIPAC-NEBHELP, 179 F.3d
ee ee Ee ceinduinsinnbeisceguroasone 5, 22
Banks v. Sallie Mae Servicing Corp.
(In re Banks), 299 F.3d 296
I I ecinicrsicchdcesiateaenreninannaiionius 15, 21, 35, 37, 38
Brunner v. New York State Higher Education
Services Corp. (In re Brunner), 46 B.R. 752
I hl aatisiaeannneies 15
Educational Credit Management Corp. v.
Mersmann (In re Mersmann), 505 F.3d 1033
or nidinaaameddaaniaaabesed 5, 29
Espinosa v. United Student Aid Funds, Inc.
(In re Espinosa), 553 F.3d 1193 (9th Cir.
SEI hisses ssicsepeinaniinaradadedhintin sdebmnsinipaabibesoondiate passim
In re Boyken, 246 B.R. 825 (Bankr. E.D. Va.
IIs: cspnsscusacis lasadelaniabeoinaiameaosamemiamanaumaiaieds 14, 35, 36
iv
TABLE OF AUTHORITIES — Continued
Page
In re Foster, Case No. 09-30603 (Bankr. S.D.
a as esemnctinnsegieal 3
In re Hanson, 397 F.3d 482 (7th Cir. 2005) ............... 38
In re Penrod, 50 F.3d 459 :
Se ME ic cicindeicipitiitcitanneciinweeiaiian 23, 24, 25, 26, 28
Lawrence Tractor Co. v. Gregory (In re Gregory),
705 F.2d 1118 (9th Cir. 1983)................ 14, 33, 34, 35
Mullane v. Central Hanover Bank & Trust Co.
EN Gy CE CIID orccscivnnivcseussccccsscocssessonens 22, 38, 39
Ruehle v. Educational Credit Management
Corp. (In re Ruehle), 412 F.3d 679 (6th Cir.
SIs cuaduscahiisdiieasicas ta lant bias daeiepaihidhinnlinaitaisehbsduibicaenditiliemieoees 38
Tennessee Student Assistance Corp. v. Hood,
Gk | Ree eee 13, 15, 21, 29
Travelers Indemnity Co. v. Bailey, 129 S.Ct.
i io liucanaon 27, 28
United Student Aid Funds, Inc. v. Pena (In re
Pena), 155 F.3d 1108 (9th Cir. 1998)...........0.......4.. 16
Whelton v. Educational Credit Management
Corp. (In re Whelton), 432 F.3d 150 (2d Cir.
a eR eS ee AES se ne pe eR OT 29
CONSTITUTIONAL AND STATUTORY PROVISIONS
I ic eccoainceramenndalieuiainiamead 37
4 ERE RD ene aa ee a 9, 12, 13, 38
ee INT Biiciinsscssanncniaiiasnbidnubiaiacinasanieensineonned 6
Vv
TABLE OF AUTHORITIES — Continues
Page
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RE Fe Bek MII ccecscccncascccossverossncennsinnennaneneilanneanan 24, 25
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Be SNS HITE lc:icivnicenionie-cosisncenscinnaniiteensiiaaileaaiaan 20, 32, 34
RE Pits SID cccceccscccscssessssinsoisttnnnasteaiiiaumiaal 3,17
Be Pes Se ccesinccencesoscncescensesnencodemnesneiiuaiiaannnane 34
Be Bi TID vsesccincecccssesnccesunncunnensssaanmeieaenieenaanne 24
Be Fe Scr cnctinesstaccsiconnstassiicsnmeubeiaie 4, 21, 33, 35
BD Ue As Ce i escterncessrscsscccntenccssnsnentunbiiaieamanalada 39
BP OF BGs. Gee OO GUD. cnesccvescsncssncccnsisessanstutnieamialiaaa 1
Be ls CIPD kccecnnssccncsntasenteinisuinenmeadanaaaee 9,13
RULES
Bee Gs Tie BI encccnccenscssisnnssonnineneniienttiiedamaungaiaaa 27
PE, TR, Ge, Bie eR cin esicocccncssvicnsuessinsedsnteeanmnaml 8, 40
PU. Te BI Be BIO oc ncncnciscncencnsnivssscteeeiupniennenenaen 17
FED. R. BANKR. P. 2002 .................00000 10, 13, 14, 29, 34
UD. T. GEITEED. Fe TID co censsecenscensessssctuccsnnmumai passim
PUD. TE, OAPI. Fe. TI accce ress sccevnsensisinntionesenniiannt 19
go eS SS eee ater 17, 18
PU, Tike BOUIITER. Te TID srt siesnckesssccsccsnccsasennaaianianalaaia 17
PU, Ts. IEE. Te SPD ss cvicrscnscniciscccnuiicuntenteenmmmmiania 17
oe ener 10, 14, 15, 31
vi
TABLE OF AUTHORITIES — Continued
Page
| 15, 36, 39
Le 8, 15, 29, 36
I a ccscenseonvecones 14, 15, 36
EE, Be PUPP ccccccccescccesccccsesesscssenccscsesoceese 36
RE A) te 6, 29
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I, OE ID oc scncvccccosccveconesocossccsonseceseecs 19
I I I oa cncnnccoccenncsccccosceevevsses 8, 14, 15
I tr I on. ccscccnccnscecesscccssccnssesaccoes 29
ES LS ee 14, 29
I I sscunnsescosnntoccuscseuess 8, 40
REGULATIONS
SE ae 2
Be ee EDD o.coccccccccsccesccscssccceseccesss 2, 18,19
ass cs occanccenseseososenseorosasnonsns 2
ID oo oscs sc scvccvcncesceescoccccasacssesaccesa 18
ee es SEEM EOE) scvccccccccvascccovesssevecssssssccocers 18
Vii
TABLE OF AUTHORITIES - Continued
Page
OTHER AUTHORITIES
Fiscal Year 2008 Audited Annual Report of
Chapter 13 Standing Trustees, http://www.
usdoj.gov/ust/eo/private_trustee/library/chapter
13/docs/ch13ar08-AARpt. xls 2.0.00... .c cece eece eee eeeeee eens 16
Student Loan Default Prevention Initiative Act
of 1990 (Pub. L. No. 101-508, §3007 (1990))............ 4
The National Council of Higher Education Loan
Programs, Inc. (“NCHELP”) respectfully files this
brief in support of Petitioner, United Student Aid
Funds, Inc.'
STATEMENT OF INTEREST
OF AMICUS CURIAE
NCHELP is the largest student loan trade
association, representing a nationwide network of
guaranty agencies, secondary markets, lenders, loan
servicers, collectors, schools and other organizations
that provide financial assistance to millions of
American students and their families each year
through the Federal Family Education Loan Program
(the “FFELP”). The FFELP is a guaranteed student
loan program that has helped over 60 million
students obtain a post-secondary education since its
establishment by Congress as part of the Higher
Education Act of 1965 (codified at 20 U.S.C. §1071
et seq.). As described in the President’s fiscal year
‘ Pursuant to Sup. Ct. R. 37.6, NCHELP states that no
counsel for a party authored this brief in whole or in part, and
no person other than NCHELP has made a monetary contri-
bution to the preparation or submission of this brief (recognizing
that NCHELP is a trade association and its activities are funded
by membership dues and assessments). All parties have
consented to the filing of this brief by NCHELP, and their
consent letters are on file with the Clerk’s Office. Counsel of
record for all parties received notice at least ten (10) days prior
to the due date of NCHELP’s intention to file this brief.
2
2010 budget, the outstanding balance of FFELP
guaranteed student loans was $413 Billion as of
September 30, 2008. Administering the FFELP is a
complex endeavor, which is the subject of detailed
regulations promulgated by the United States
Department of Education (the “Department”).
By regulation, the Department tasks FFELP
lenders and guaranty agencies with responsibility for
taking specific actions after a bankruptcy case is
commenced by a student loan debtor. These appli-
cable regulations are found at 34 C.F.R. §682.402.
When a FFELP borrower simultaneously files a
chapter 13° bankruptcy petition and plan without
contemporaneously filing an adversary proceeding
seeking a determination of undue hardship, the
lender is required to file a bankruptcy claim with the
guaranty agency within 30 days of the date it receives
notice of the first meeting of creditors. 34 C.F.R.
§682.402(g)(2). The guaranty agency then is required
to participate in the bankruptcy case, as detailed in
34 C.F.R. §682.402(i).
Because the FFELP operates nationwide, lenders
receive bankruptcy notices from all 94 judicial
districts in the United States. When lenders file
bankruptcy claims with guaranty agencies, the
guaranty agencies then are confronted with a huge
logistical problem: there is no national form of
~ Chapter 13 of the United States Bankruptcy Code, 11
U.S.C. $1301 et seq. (the “Bankruptcy Code” or “Code’”).
3
chapter 13 plan. As guaranty agencies receive at least
94 different forms of chapter 13 plan, the Ninth
Circuit’s holding will lead zealous debtors’ counsel to
seek to gain an unfair advantage by burying improper
“discharge by declaration” language in chapter 13
plans. The Ninth Circuit’s endorsement of discharge
by declaration would force guaranty agencies to hire
additional staff to scrutinize every chapter 13 plan for
language which has no foundation under the
Bankruptcy Code. Given the extraordinarily short
deadline for lodging objections to confirmation in
chapter 13 cases, a certain number of chapter 13
plans with illegal language are bound to escape
detection.
In fact, given the current statutory time frame
for the plan confirmation hearing (Code §1324(b)), the
deadline for objections to plan confirmation may
expire before the guaranty agency can process the
lender’s bankruptcy claim. See Jn re Foster, Case No.
09-30603 (Bankr. S.D. W.Va. 2009). (Chapter 13
petition and plan both filed on Friday, August 7, 2009;
notice of creditors meeting issued on August 10, 2009,
establishing September 14, 2009 deadline for objec-
tions to confirmation.) If the chapter 13 plan in such
a case includes “discharge by declaration” language,
the result ordained by the Ninth Circuit literally
imposes an impossible burden on NCHELP’s member
* These dates appear on the court’s electronic docket,
accessible through the ECF system.
4
guaranty agencies (allowing time for delivery by
standard mail and 30 days for the lender to file its
bankruptcy claim).
Due to the intractable practical implications of
the Ninth Circuit’s endorsement of “discharge by
declaration”, NCHELP requests this Court to
consider this Amicus brief on behalf of its constituent
guaranty agencies.
4
STATEMENT OF THE CASE
Effective November 5, 1990, 11 U.S.C. §1328(a)
was amended by the Student Loan Default
Prevention Initiative Act of 1990 (Pub. L. No. 101-
508, §3007 (1990)) to make student loan debts
described in 11 U.S.C. §523(a)(8) nondischargeable
in chapter 13 cases. Less than two months later,
Doreen Andersen commenced the age of “discharge by
declaration” in chapter 13 practice. On December 27,
1990, Ms. Anderson filed her chapter 13 petition and
plan containing the following provisions:
All timely filed and allowed unsecured
claims, including the claims of Higher
Education Assistance Foundation ... which
are government guaranteed education loans,
shall be paid ten percent (10%) of each claim,
and the balance of each claim shall be
discharged. Pursuant to 11 U.S.C. §523(a\(8),
excepting the aforementioned education
loans from discharge will impose an undue
hardship on the debtor and the debtor’s
5
dependents. Confirmation of debtor’s plan
shall constitute a finding to that effect and
that said debt is discharged.
The Higher Education Assistance Foundation (“HEAF”),
the responsible guaranty agency, filed an untimely
objection to the plan, which was denied for that
reason. Andersen v. UNIPAC-NEBHELP, 179 F.3d
1253, 1254 (10th Cir. 1999), overruled by Educational
Credit Management Corp. v. Mersmann (In _ re
Mersmann), 505 F.3d 1033 (10th Cir. 2007).
On December 7, 1992 (while Doreen Andersen
was still performing her chapter 13 plan), Francisco
Espinosa filed his chapter 13 petition and plan. Mr.
Espinosa’s bankruptcy schedules listed as his only
debt the student loans held by United Student Aid
Funds, Inc. (“USA Funds”). Thus, Espinosa’s chapter
13 plan was an artifice for a surgical attack on his
student loan debt, under cover of a generic pleading.
Espinosa’s plan proposed to pay only the
principal amount of his student loans, unilaterally
declaring that “amounts claimed by [USA Funds] for
capitalized interest, penalties, and fees shall not be
paid for the reasons that the same are penalties and
not provided for in the loan agreement between the
debtor and the Jender. Any amounts or claims for
student loans unpaid by this Plan _ shall be
discharged.” Espinosa’s plan did not contain any
language declaring that repayment of such amounts
would constitute undue hardship.
6
Even though USA Funds’ claim was the only debt
addressed in the plan, and the plan effected a
unilateral resolution of an evidentiary dispute, the
caption of Espinosa’s plan did not evince his intent to
adjudicate a dispute with USA Funds. Instead, the
plan merely recited a generic warning statement that
the rights of creditors may be impaired. Espinosa did
not mail his plan to USA Funds’ agent for service
of process, but instead to the address maintained
by USA Funds to receive loan payments. Thus,
Espinosa’s plan did not fit the form prescribed for
resolution of an evidentiary dispute (an adversary
proceeding pursuant to Rule 7003 of the Federal
Rules of Bankruptcy Procedure (“Bankruptcy
Rule(s)” or “Rule(s)”)) and was not served on an
appropriate agent pursuant to Bankruptcy Rule
7004(b)(3).
USA Funds responded to the notice of Espinosa’s
bankruptcy case by doing the only thing it was
required to do by the Bankruptcy Code and Rules: it
timely filed a proof of claim.* In 1992 (and today)
nothing in the Bankruptcy Code or Rules provides a
good faith basis for chapter 13 debtors to insert
“discharge by declaration” language into their plans.
However, Bankruptcy Code §502(a)(1) specifically
provides that a timely filed proof of claim is deemed
allowed. Espinosa did not file an objection to USA
“As Espinosa had defaulted on his student loans
prepetition, his notes were held by USA Funds when the
bankruptcy case was commended.
7
Funds’ proof of claim and no order was entered by the
bankruptcy court disallowing any portion of such
claim.
USA Funds did not file an _ objection to
confirmation of the plan. On May 6, 1993, the
bankruptcy court entered a form Order Confirming
chapter 13 Plan, containing an incantation that “(t)he
Plan has been proposed, and its acceptance procured,
in good faith and not by any means, promises or acts
forbidden by law.” The court made this finding
despite the fact that (i) Espinosa’s plan provided for
the discharge of a portion of his student loans without
an adjudication of undue hardship, a concept which
has no foundation under the Bankruptcy Code or
Rules; (ii) the caption of Espinosa’s plan did not
evince his intent to adjudicate an evidentiary dispute
with USA Funds, despite the fact that its claims were
the only debts addressed in his plan; and (iii)
Espinosa did not serve his plan on USA Funds’ agent
for service of process, but instead mailed the plan to
its general address for receipt of payments. The
bankruptcy court’s order did not contain any finding
of undue hardship.
After the bankruptcy court Order Confirming
chapter 13 Plan had become final and non-appealable
under Bankruptcy Rule 8002, on June 10, 1992, the
chapter 13 trustee mailed a pleading captioned
“Trustee's Notice To Creditor” to USA Funds’ address
for receipt of payments. The “Trustee’s Notice To
Creditor” is a fugitive pleading; it has no foundation
under the Bankruptcy Code and Rules. See, e.g.,
8
FepD. R. BANKR. P. 7003 and 9014. USA Funds did not
respond to the “Trustee’s Notice To Creditor.”
Espinosa performed his plan as proposed and the
bankruptcy court entered a form discharge order on
May 30, 1997, generally discharging all debts
provided for by the plan, specifically excepting
student loans from this discharge. Espinosa did not
appeal from the entry of that order.
In 2000, collection efforts resumed. On June 23,
2003, Mr. Espinosa filed a motion to reopen his case
and, on October 2, 2003, he filed a motion for
violation of the discharge injunction, contempt,
sanctions and damages. On October 30, 2003, USA
Funds filed a response to Espinosa’s motion, together
with a cross motion for relief from the confirmation
order pursuant to Federal Rule of Civil Procedure
(“FRCP”) 60(b)4) and Bankruptcy Rule 9024. On
August 12, 2004, the bankruptcy court entered an
order finding that the discharge injunction had been
violated, but denying the Debtor’s request for
contempt, sanctions and damages. On appeal, the
district court reversed, holding that the confirmation
order was void for lack of due process due to the
absence of an adversary proceeding.
When this case reached the Ninth Circuit, that
court first remanded the matter to the bankruptcy
court to answer the question whether the original
discharge order (which provided that Espinosa’s
student loan debt had not been discharged) was the
result of a clerical error. The bankruptcy court ruled
9
that a clerical error had occurred and entered an
order discharging Mr. Espinosa’s_ student loan
obligations. The Ninth Circuit then reversed the
district court and remanded the case to the bank-
ruptcy court for reinstatement of the order enforcing
the discharge injunction and for a determination
whether USA Funds acted willfully in violating the
injunction. Espinosa v. United Student Aid Funds,
Inc. (In re Espinosa), 553 F.3d 1193, 1205 (9th Cir.
2008).
Sd
SUMMARY OF ARGUMENT
The Bankruptcy Code gives debtors extraor-
dinary powers to reorder contract rights among and
between themselves and their creditors, provided that
creditors are afforded notice and opportunity for a
hearing. Bankruptcy Code §102(1) explains that this
phrase means after such notice as is appropriate in
the particular circumstances and such opportunity for
a hearing as is appropriate in the particular circum-
stances. This is the Bankruptcy Code’s due process
mission statement.
The Bankruptcy Code itself never specifies what
process is due in any particular circumstance.
Instead, in 28 U.S.C. §2075, Congress gave this Court
“the power 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 Bankruptcy Rules, this Court
10
broadly distinguished between matters requiring
general notice (those affecting general administration
of bankruptcy cases and all creditors generally, but
none specifically), and matters requiring service of
process (those implicating the rights of specific
parties). Bankruptcy Rule 2002 articulates the
manner of giving general notice and includes the time
for filing objections to confirmation of a chapter 13
plan. Bankruptcy Rules 7001 governs notice where
the rights of specific parties are in dispute and
includes proceedings to determine dischargeability of
a debt. Rule 7001 requires the dispute to be properly
framed by summons and complaint with service upon
an authorized agent.
The exception of student loans from discharge is
self-executing. Debtors must affirmatively secure a
hardship determination. Thus, the Bankruptcy Code
does not provide a good faith basis for “discharge by
declaration” language in chapter 13 plans.
Hundreds of thousands of chapter 13 cases are
commenced every year. The Bankruptcy Code and
Rules implement a true “rocket docket” to cope with
this deluge of cases. However, there is no national
form of chapter 13 plan. Given the pervasive nature
of the FFELP, student loan guaranty agencies receive
a cornucopia of forms of chapter 13 plans from the 94
judicial districts in the United States, with an
arbitrarily short period of time to respond. In fact,
given the nature of chapter 13 practice, the deadline
for objections to plan confirmation can actually expire
before the guaranty agency receives the chapter 13
11
plan. Student loan guaranty agencies do not receive
notice of “discharge by declaration” plan language in
a reasonable form within a reasonable time to
actually participate in chapter 13 bankruptcy cases.
The Ninth Circuit’s analysis of this issue con-
flates the concepts of “service” and “notice” under the
Bankruptcy Rules. Service connotes a summons and
complaint which properly frames the issue, which is
served on an authorized agent. Chapter 13 plans with
concealed “discharge by declaration” language which
are mailed to student loan lockboxes flout this
principle.
The Ninth Circuit compounds this error by
equating actual notice that a chapter 13 plan has
been filed with actual notice that the plan contains
improper “discharge by declaration” language.
Holders of nondischargeable claims generally have no
duty to actually read plans. The most economical way
to administer the FFELP is to file a proof of claim,
accept whatever distribution is forthcoming under
the plan, and resume collection after the case is
concluded.
Finally and most critically, the Ninth Circuit errs
by failing to recognize that this Court, not Congress,
has articulated the ground rules for procedural due
process in bankruptcy cases. The practice of discharge
by declaration is not a means employed by one who is
desirous of actually informing a student loan creditor
that the issue of dischargeability has been brought
into play. Thus, the practice of including “discharge
12
by declaration” language in chapter 13 plans operates
to deny procedural due process to student loan
guaranty agencies.
+
ARGUMENT
USA Funds’ brief thoroughly explains why a
bankruptcy court confirmation and discharge order
which purports to discharge student loan debt
without an adjudication of undue hardship is void for
exceeding the power and authority granted by
Congress to bankruptcy courts in the Bankruptcy
Code. This brief will focus on the reasons why the
practice of “discharge by declaration” in chapter 13
plans operates to deny procedural due process to
student loan guaranty agencies.
o
CONGRESS EMPOWERED THIS
COURT TO ESTABLISH PROCEDURAL
DUE PROCESS IN BANKRUPTCY CASES
VIA THE BANKRUPTCY RULES
The phrase “after notice and a hearing” appears
throughout the Bankruptcy Code as a preface to
powers given to debtors to radically reorder contract
rights among and between themselves and their
creditors. Bankruptcy Code §102(1) explains that this
phrase “means after such notice as is appropriate in
the particular circumstances, and such opportunity
for a hearing as is appropriate in the particular
13
circumstances[.]” Bankruptcy jurisdiction in general
is in rem and this is true for proceedings to determine
the dischargeability of a debt by a bankruptcy court.
Tennessee Student Assistance Corp. v. Hood, 541 U.S.
440, 447 (2004). The rule of construction in
Bankruptcy Code §102(1) thus anticipates that due
process must be observed in a bankruptcy case before
property rights, including dischargeability of claims,
may be adjudicated.
The Bankruptcy Code itself never specifies the
quantum or manner of giving notice required in any
particular context. Instead, Congress empowered this
Court, as the ultimate arbiter of what process is due,
to specif’ what manner of notice must be given in
each context under the Code. In 28 U.S.C. §2075, this
Court is given “the power 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 Bankruptcy Rules, this
Court has broadly distinguished between matters
requiring general notice (those affecting the general
administration of bankruptcy cases and all creditors
generally, but none_ specifically) and matters
requiring service of process (those implicating the
rights of specific parties). Bankruptcy Rule 2002
articulates the manner of giving general notice. The
subjects covered by Rule 2002 include the date fixed
for the meeting of creditors, filing proofs of claim,
objections to discharge and objections to a chapter 13
plan. Once a bankruptcy case is filed, all creditors are
14
charged with notice and a duty of inquiry that these
events, which occur in every case, will take place on a
specified date. See Lawrence Tractor v. Gregory (In re
Gregory), 708 F.2d 1118, 1123 (9th Cir. 1983).
Bankruptcy Rules 7001 and 9014 govern notice
where the rights of specific parties are in dispute.
These are events that do not automatically occur in
every bankruptcy case. Thus, adversary proceedings
and contested matters must be initiated by summons
and complaint or motion, and served on the affected
creditor at the address of its agent for service of
process. See FED. R. BANKR. P. 7004 and 9014(b).
Taken together, the Bankruptcy Code and Rules were
designed to satisfy the due process requirement of
adequate notice to parties whose interests may be
affected in bankruptcy cases. See In re Boyken, 246
B.R. 825, 828 (Bankr. E.D. Va. 2000). As explained by
the Fourth Circuit:
Bankruptcy Rule 2002(b) does not require
specific notice of [chapter 13] plan provisions
affecting a particular creditor, nor does it
require the notice to be served in a particular
manner or upon any particular person.
‘There are many aspects to and actions that
may be taken in bankruptcy cases which
affect the general administration of the case
and all creditors generally, but none
specifically.” ... generally, such matters
require ‘notice’ but not service of process... .
When the rights of specific parties become an
issue, however, service of the initiating
15
motion or objection on the affected party is
required. ... FED. R. BANKR. P. 7003, 7004.
Banks v. Sallie Mae Servicing Corp. (In re Banks),
299 F.3d 296, 301 (4th Cir. 2002) (citations omitted).
Thus, when the rights of specific parties become an
issue, the Bankruptcy Rules require the debtor to
both properly frame the dispute (by complaint or
motion) and properly serve the pleading on one
authorized to accept service of process for the affected
creditor. FED. R. BANKR. P. 7001, 7004 and 9014.
With respect to student loans, Bankruptcy Code
§523(a)(8) is “self executing.” Hood, 541 U.S. at 450.
Thus, “[uJnless the debtor affirmatively secures a
hardship determination, the discharge order will not
include a student loan debt.” Jbid. In the Bankruptcy
Rules, this Court prescribes that a proceeding to
determine the dischargeability of a debt is an
adversary proceeding. FED. R. BANKR. P. 7001(6). An
adversary proceeding is a civil action commenced by
filing a complaint with the bankruptcy court, which is
then served, together with a summons, in the manner
necessary to effect service of process. FED. R. BANKR.
P. 7004. The debtor then must shoulder the burden of
proving undue hardship, which is a formidable task.”
* In considering whether excepting a student loan from
discharge will impose an undue hardship, the majority of courts
including those in the Ninth Circuit follow the three-part test
first set forth in Brunner v. New York State Higher Education
Services Corp. (In re Brunner), 46 B.R. 752 (S.D.N.Y. 1985), aff'd
(Continued on following page)
16
These are the building blocks of procedural due
process.
¢
THE PRACTICE OF “DISCHARGE
BY DECLARATION” IN CHAPTER 13
PLANS VIOLATES PROCEDURAL
DUE PROCESS BECAUSE STUDENT
LOAN GUARANTY AGENCIES ARE DENIED
THE OPPORTUNITY TO PARTICIPATE
IN BANKRUPTCY CASES
According to the Fiscal Year 2008 Audited Annual
Reports of Chapter 13 Standing Trustees, 323,591
chapter 13 cases were commenced in 2008.° This
translates into an average of more than 3,442 new
chapter 13 cases filed in each judicial district.
Because of the magnitude of chapter 13 filings, a
natural tension exists between the court’s need to
efficiently administer these cases while making sure
that due process is accorded.
When a debtor with student loans simul-
taneously files a chapter 13 petition and plan, two
complex chains of events are set into concurrent
motion: (i) the timetable for objections to and
confirmation of the plan; and (ii) the regulatory
831 F.2d 395 (2nd Cir. 1987). See United Student Aid Funds, Inc.
v. Pena Un re Pena), 155 F.3d 1108 (9th Cir. 1998).
‘ This report can be found at http://www.usdoj.gov/ust/eo/
private_trustee/library/chapter13/docs/chl3ar0&-AAR pt xls.
17
response by the student loan lender and guaranty
agency.
Chapter 13 plans are frequently filed with the
petition, and if not, must be filed within 15 days
thereafter per Bankruptcy Rule 3015(b). When the
chapter 13 plan is filed with the petition, the plan or
a summary of the plan (the “Plan Document”) is
mailed together with Official Form B9I (the “Initial
Notice”) to creditors at the address furnished by the
debtor with the petition. FED. R. BANKR. P. 3015,
1007(a). In the case of a student loan creditor, the
debtor will usually furnish the address to which
payments are being mailed — generally, a lockbox
service maintained for student loans. The Initial
Notice contains the date for the confirmation hearing,
the bar date for filing proofs of claim and the date for
the first meeting of creditors.
Now for the technical part: Rule 2003(a) specifies
that the meeting of creditors in a chapter 13 case
shall be held no fewer than 20 and no more than 50
days after the petition date. Bankruptcy Code
§1324(b) specifies that the hearing on confirmation of
the chapter 13 plan may be held not earlier than 20
days and not later than 45 days after the meeting of
creditors. Finally, Bankruptcy Rule 2002(b) specifies
that the clerk or some other person as the court may
direct shall give all creditors not less than 25 days
notice by mail of the date fixed for filing objections to
and the hearing to consider confirmation of the
chapter 13 plan.
18
Under Department of Education regulations, the
bankruptcy filing triggers another sequence of events.
A student loan lender is required to file a bankruptcy
claim with the applicable guaranty agency within 30
days of the date it receives notice of the first meeting
of creditors, which is included in the Initial Notice. 34
C.F.R. §682.402(g)(2). The lender is not charged with
the responsibility for filing objections to the plan. 34
C.F.R. §682.402(i)(2). Instead, the guaranty agency is
directed to participate in the chapter 13 case and file
any necessary objections to the plan. 34 C.FR.
§682.402(i)(2)(i11). However, because Bankruptcy Rule
2002(b) only requires 25 days notice of the time for
filing objections to and the hearing to consider
confirmation of a chapter 13 plan, frequently the
guaranty agency does not have adequate time to
actually participate in any given case. This system
practically guarantees that, if discharge by declara-
tion becomes the law of the land, a substantial
number of chapter 13 plans will evade detection,
regardless of the level of diligence exercised by the
guaranty agency.
To illustrate, under the Bankruptcy Code and
Rules, a debtor having FFELP loans could file a
chapter 13 petition and plan on Tuesday, September
1, 2009. The bankruptcy clerk’s office would typically
issue the Initial Notice the next day. Pursuant to
Bankruptcy Rule 2003(a), the meeting of creditors
19
could be set as early as Friday, September 25, 2009.'
This notice might also provide for the hearing to
consider confirmation of the debtor’s plan to be held
on Thursday, October 15, 2009, with objections to
confirmation due on September 30, 2009. If the
debtor in this hypothetical has student loans which
are not defaulted, the debtor will list his lender as a
creditor, and will probably use the creditor’s address
for receipt of payments. The bankruptcy clerk in turn
will mail the Initial Notice to this address, pursuant
to Rule 2002(g)(2).
The debtor’s FFELP lender is required to file a
bankruptcy claim with the applicable guaranty
agency within 30 days of the date it receives the
Initial Notice. 34 C.F.R. §682.402(g)(2). If the lender
received the Initial Notice on Thursday, September 3,
2009, the lender would have at least until October 2,
2009 to file a bankruptcy claim with the guaranty
agency. By that time, the deadline for objecting to
confirmation of the plan — September 30 in this
hypothetical — has already passed.
Even if the guaranty agency receives the chapter
13 plan from the lender before the deadline for
objections to confirmation, the plan follows no
required form. There is no national form of chapter 13
‘ This hypothetical assumes that the clerk adds three days
for mailing pursuant to Bankruptcy Rule 9006(f), even though
this rule does not apply to notices, per se
20
plan. As there are 94 judicial districts in the United
States and its territories, there are at least 94 forms
of chapter 13 plan. If the plan contains “discharge by
declaration” language, there are innumerable ways
for this language to be buried therein. This follows
because neither the Bankruptcy Code nor Rules
provide any good faith basis for debtors to include
“discharge by declaration” language in the plan.
“Discharge by declaration” in a chapter 13 plan
flouts procedural due process at every turn. The plan
bears no resemblance whatsoever to a complaint. A
complaint very clearly identifies the plaintiff and
defendant, and is designed to pinpoint the contro-
versy between those parties. A chapter 13 plan on the
other hand is designed to separate creditors by class,
and specify the treatment of each class of claims.
The treatment of creditors within classes must be
the same, and the debtor may not discriminate
unfairly against any class so designated. 11 U.S.C.
§§1322(a)(3), (b)(1). These are matters which affect
all creditors generally, by class, and thus notice is
appropriate via Bankruptcy Rule 2002(b). A chapter
13 plan is not designed to procure adjudication of a
discrete evidentiary dispute between the debtor and
one of his creditors.
If Espinosa is affirmed, student loan guaranty
agencies will be subject to deluge by a cornucopia of
plan forms, each potentially containing “discharge by
declaration” language buried in ways limited only by
the imagination of zealous debtors’ counsel. Guaranty
agencies will be forced to hire new staff to scrutinize
21
a limitless variety of plans within an arbitrarily short
period of time. Regardless of their level of diligence, a
significant number of improper plans are bound to
evade detection.
As this Court noted in Hood, “(cjreditors
generally are not entitled to personal service before a
bankruptcy court may discharge a debt.” 541 U.S. at
451. A chapter 13 plan properly describes the
conditions by which the debtor proposes to procure a
discharge of general unsecured debts pursuant to
Bankruptcy Code §1328, a matter which affects all
creditors generally, but none specifically. Banks, 299
F.3d at 301. When debtors conceal “discharge by
declaration” language in chapter 13 plans, with notice
limited to that allowed under Bankruptcy Rule
2002(b), the affected guaranty agency is denied its
right to specific notice by service of a summons and
complaint.
Thus, the chapter 13 practice of “discharge by
declaration” operates to deny procedural due process
to student loan guaranty agencies. To accord due
process,
[tlhe notice must be of such nature as
reasonable to convey the required informa-
tion, .. . and it must afford a reasonable time
for those interested to make an appear-
ance.... [Wlhen 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
22
[guaranty agency] might reasonably adopt to
accomplish it.
Mullane v. Central Hanover Bank & Trust, 339 U.S.
306, 314-15 (1950). The practice of “discharge by
declaration” satisfies none of these prerequisites.
Most clearly, this practice does not afford student
loan guaranty agencies a reasonable time to make
their appearance.
To take a real world example, in Andersen, the
guaranty agency (HEAF) actually filed a belated
objection to confirmation, which was denied by the
court because it was untimely. In retrospect, this was
a glaring sign that the notice procedure in place did
not afford the guaranty agency a reasonable time to
make its appearance. When the issue arose, the
bankruptcy court stated the issue as follows:
whether a debtor may, by including language
in a plan, discharge an otherwise non-
dischargeable debt in chapter 13.... The
real issue is whether the plan provisions
here constitute a binding adjudication of
hardship.
Andersen v. Higher Education Assistance Foundation
(In re Andersen), Case No. 96-05277 (Bankr. KS 1997)
(Doc. #16 at p. 6). In analyzing this issue, the
bankruptcy court rejected Ms. Andersen’s argument
that res judicata operates to bar a determination of
dischargeability:
“a judicial determination of undue hardship
requires that the debtor bring an adversary
23
proceeding. As the District Court for this
district stated: [E]very published decision
has uniformly held Section 523(a\8) to be “self
executing.” ... (citations omitted) Debtor
had the burden to seek a formal judicial
determination of the nondischargeability of
her student loans. Language in a plan does
not constitute a judicial determination of
hardship. HEAF and the other creditors
were entitled to a higher level of due process
before the confirmation of the plan invokes
the concept of res judicata. Congress’ clear
intent to except student loans from discharge
cannot be overcome simply by inserting
language into a proposed plan providing a
confirmation of the plan constitutes a finding
of undue hardship. Because the debtor did
not formally seek a determination of
dischargeability, the student loan debts are
nondischargeable.
Id. at p. 9.
The bankruptcy court’s Order in Andersen is
terse, clear and correct, reflecting a result that
appeared to the court to be self-evident. However, on
appeal, HEAF did not argue that it lacked adequate
notice of Andersen’s plan prior to confirmation,
leading the Tenth Circuit Bankruptcy Appellate
Panel (“BAP”) to conclude “that due process has been
accorded.” Andersen v. Higher Education Assistance
Fourdation (In re Andersen), 215 B.R. 792, 795 (10th
Cir. BAP 1998). The BAP reached this erroneous
conclusion by relying on precedent from chapter 11
cases, principally In re Penrod, 50 F.3d 459 (7th Cir.
24
1995). The BAP looked to Penrod because Bankruptcy
Code §1141 contains language analogous to that
found in Bankruptcy Code §1327. Code §1141(a)
provides that
... the provisions of a confirmed plan bind
the debtor ... and any creditor ... whether
or not the claim or interest of such creditor
. is impaired under the plan and whether
or not such creditor ... has accepted the
plan.
Penrod in fact states a well-reasoned analysis of the
binding effect of a chapter 11 confirmation order.
However, the Tenth Circuit BAP’s reliance on Penrod
and its progeny (215 B.R. at 794) is misplaced in the
analysis of chapter 13 “discharge by declaration,”
because student loan creditors in chapter 13 cases are
not accorded time to actually participate.
In Penrod, the creditor filed a proof of claim
reflecting its lien on the Penrods’ hogs. The Penrods
did not object to the creditor’s claim nor question
the validity of its lien. Their plan recognized the
creditor’s secured claim and provided that it would be
paid in full with interest. However, the plan was
silent regarding whether the creditor would retain its
lien on the Penrods’ hogs, post confirmation. After the
Penrods’ plan was confirmed and went into effect,
they sold their hogs for slaughter, without remitting
to the creditor proceeds from this sale. The creditor
then filed suit in state court, claiming that the
Penrods’ failure to remit these proceeds violated the
security agreement between the parties. The Penrods
25
responded by asking the court to hold the creditor in
contempt for violating the plan confirmation order. 50
F.3d at 461.
The question in Penrod was whether the credi-
tor’s lien passed through the bankruptcy unaffected.
Judge Posner found that it did not, because
Bankruptcy Code §1141(c) specifies that “except as
otherwise provided in the plan or in the order
confirming the plan, after confirmation of a plan, the
property dealt with by the plan is free and clear of all
claims and interests of creditors. ...” Id. at 462-63.
However, Judge Posner’s analysis contains a critical
predicate:
when lien holders participate in a bank-
ruptcy proceeding, and especially in a
reorganization, they know that their liens
are likely to be affected, and indeed
altered. ...
We have concluded that the default rule for
secured creditors who file claims for which
provision is made in the plan or reorgani-
zation is extinction and is found in the Code
itself. Section 1141(c) provides with imma-
terial exceptions that ‘except as provided in
the plan or in the order confirming the plan,
after confirmation of a plan, the property
dealt with by the plan is free and clear of all
claims and interests of creditors. ... This is
provided, we emphasize, that the holder
of the lien participated in the reorgani-
zation. If he did not, his lien would not
26
be ‘property dealt with by the plan’ and
so this section would not apply.
Id. at 462-63 (emphasis added).
There is a critical difference between the typical
chapter 11 case and the chapter 13 practice of dis-
charge by declaration. In the typical chapter 11 case,
the plan is not filed with the petition. This was
certainly true in Penrod. The Penrods filed their
chapter 11 petition on March 27, 1987." On May 12,
1987, the creditor’s predecessor-in-interest (Clinton
County Farm Bureau Cooperative) filed its notice of
appearance and request for service by its counsel.”
More than a year later, on May 6, 1988, the Penrods
filed their disclosure statement and chapter 11 plan
of reorganization. During this interval, the creditor’s
predecessor-in-interest filed its proof of claim. The
bankruptcy court entered an order approving the
Penrods’ disclosure statement on October 19, 1988,
and finally entered an order confirming the Penrods’
plan of reorganization on June 21, 1990.
These facts led Judge Posner to conclude that the
affected creditor in fact had participated in the
Penrods’ bankruptcy case. As the secured creditor had
filed a notice of appearance and request for service by
* Case No. 87-30501 in the United States Bankruptcy Court
for the Northern District of Indiana, of record through the ECF
system.
* Id. at Doc. No. 24 (reflecting the creditor’s predecessor-in-
interest).
27
counsel, the Penrods’ disclosure statement and plan
of reorganization were served on its counsel, pursuant
to FRCP 5(b) incorporated in Bankruptcy Rule 7005.
In the chapter 11 context, where creditors are found
to have participated, such creditors will have noted
their appearance by counsel, and transmittal of the
disclosure statement and plan of reorganization to
counsel qualifies as service.
By contrast, student loan guaranty agencies are
denied the ability to participate in a chapter 13 case
where the debtor proposes a plan containing “dis-
charge by declaration” language. In such a case, the
Plan Document is not transmitted in a manner
sufficient to qualify as service of process. Moreover,
the “rocket docket” endemic to chapter 13 practice
simply does not allow sufficient time for a guaranty
agency to participate, particularly where “discharge
by declaration” language is buried in 94 different
forms of chapter 13 Plan Document.
This analysis is completely consistent with this
Court’s recent decision in Travelers Indemnity Co. v.
Bailey, 129 S.Ct. 2195 (2009). In Travelers, this Court
made the following salient observation:
So long as respondents or those in privity
with them were parties to Manville’s
bankruptcy proceeding, and were given a fair
chance to challenge the bankruptcy court’s
subject-matter jurisdiction, they cannot
challenge it now by resisting enforcement of
the 1986 orders.
28
Id. at 2198. In Travelers, this Court recognizes the
same principal stated by Judge Posner in Penrod.
Where affected creditors have proper notice of a
bankruptcy case and a reasonable time to make their
appearance, due process is satisfied. However, where
the circumstances demonstrate that an affected
creditor has not been accorded proper notice or a
reasonable time to make its appearance, then due
process is not satisfied. See American Bank and Trust
Company v. Jardine Insurance Services Texas, Inc. (In
re Barton Industries, Inc.), 104 F.3d 1241, 1245 (10th
Cir. 1997).
Sd
IN ESPINOSA THE NINTH CIRCUIT
CONFLATES THE CONCEPTS OF SERVICE
AND NOTICE AND IGNORES THE
SELF-EXECUTING EXCEPTION OF
STUDENT LOANS FROM DISCHARGE
In its analysis, the Ninth Circuit commits the
fundamental error of confusing the _ distinction
between service and notice under the Bankruptcy
Rules, then manages to lose track of the critical
concept that the exception of student loans from
discharge is self-executing — all in the same sentence:
“when the creditor is served with notice of the
proposed plan, it has a full and fair opportunity to
insist on the special procedures available to student
loan creditors by objecting to the plan... .” Espinosa,
553 F.3d 1193, 1199 (emphasis added).
29
USA Funds was not served with anything in
Espinosa. Service implies service of process. Service
connotes a summons and complaint or motion which
properly frames the evidentiary issue pursuant to
Bankruptcy Rule 7003 or 9014(a), which is then
served according to Bankruptcy Rule 7004(b)(3) or
9014(b). Here, there was no summons and complaint
nor even a motion, and notice was of the garden
variety provided in Bankruptcy Rule 2002. The notice
received does not qualify as service on USA Funds.
Moreover, the exception of student loan debt from
discharge is self-executing. Hood, 541 U.S. at 450.
The debtor has the burden of securing an undue
hardship determination. /bid. To do so, the debtor
must file a complaint and serve it on the student loan
creditor. These are not “special procedures” which are
“available to student loan creditors.” Guaranty
agencies do not have to opt in and debtors are not
allowed to opt out of due process. The Ninth Circuit’s
suggestion otherwise is impossible to square with
Hood.
The Ninth Circuit again improperly conflates the
concepts of service and notice when it states that:
the creditor in our case (as in [Mersmann
and Whelton|) did get proper notice of the
Educational Credit Management Corp. v. Mersmann (In
re Mersmann), 505 F.3d 1033 (10th Cir. 2007); Whelton v.
Educational Credit Management Corp. In re Whelton), 432 F.3d
150 (2d Cir. 2005).
30
proposed Chapter 13 plan, and so knew
perfectly well that if the plan were approved
and satisfied, the debtor would be granted a
discharge of the student debt listed in the
plan. In our case, the creditor was served
with the ‘Notice of Commencement of Case
Under Chapter 13 of the Bankruptcy Code,
Meeting of Creditors and Fixing of Dates.’
Attached to this notice was a copy of the
proposed Chapter 13 plan which carried the
following prominent warning: “WARNING IF
YOU ARE A CREDITOR YOUR RIGHTS
MAY BE IMPAIRED BY THIS PLAN.” There
follows a detailed description of debtor’s
assets and liabilities, a payment schedule
and a great deal of other pertinent
information. One section of the plan is
entitled “education loan(s)” and lists all of
Fund’s loans, for a total of $13,250. The plan
specifies that this amount should be paid in
full, followed by a paragraph stating as
follows:
The amounts claimed by the United
Student Loan Aid Funds, Inc., et al.
for capitalized interest, penalties
and fees shall not be paid for
reasons that the same are penalties
and not provided for in the loan
agreement between the debtor and
the lender. The subsequent para-
graph provides as follows: ‘any
amounts or claims for student loans
unpaid by this. plan shall be
discharged.’ ...
31
Espinosa, 553 F.3d at 1200-201 (emphasis added).
Once again, USA Funds did not receive service of any
pleading. Instead, it received mere notice that a
chapter 13 case had been filed along with a plan
containing a generic “warning” that if you are a
creditor, your rights may be impaired by this plan. Of
course, in Espinosa’s plan, USA Funds was the only
creditor, and the improper language effecting a
discharge by declaration was buried on page 4.
Moreover, Espinosa’s chapter 13 plan did not
contain very much “pertinent information” whatso-
ever. Espinosa’s chapter 13 plan is a form document,
most of which is completely inapplicable to his
bankruptcy case.'’ It is not until page 4 of the plan
that the reader uncovers the concealed evidentiary
dispute. In reality, Espinosa’s entire bankruptcy case
was predicated on this provision, which is buried in
an improper pleading.
"In fact, Espinosa’s chapter 13 plan is a_ veritable
“Pandora’s Box” of potential mischief. At Paragraph 4 on Page 2
of the plan, Espinosa purports to nullify liens if specific creditors
do not file a proof of claim within seven (7) days of the first
scheduled confirmation hearing date. In fact, the notice of
commencement of case sets a bar date of April 14, 1993, for filing
proofs of claim. This date is one day before the date set for the
confirmation hearing. Thus, the plan purports to nullify liens
(another dispute governed by Bankruptcy Rule 7001) without
proper notice and rewrites the bar date for filing proofs of claim.
According to the Ninth Circuit's logic, this apparently is not a
problem.
32
In response to the notice of Espinosa’s chapter 13
plan, USA Funds did the only thing it was required to
do: it filed a proof of claim. The Bankruptcy Code
simply does not allow debtors to declare that their
student loans shall be discharged without an
adversary proceeding. In fact, Bankruptcy Code
§1322(b)\(11) forbids “discharge by declaration” of
otherwise nondischargeable debts in chapter 13
plans. As the holder of a nondischargeable claim, USA
Funds had no duty to even read Espinosa’s chapter 13
plan. If there is no duty to read the plan, USA Funds
cannot be charged with actual notice of evidentiary
disputes buried in the plan.
¢
IN ESPINOSA THE NINTH CIRCUIT
CONFLATES ACTUAL NOTICE OF THE PLAN
WITH ACTUAL NOTICE OF IMPROPER
“DISCHARGE BY DECLARATION”
LANGUAGE WITHIN THE PLAN
The Ninth Circuit suggests that due process was
satisfied in Espinosa’s case because USA Funds had
actual notice of the “discharge by declaration” in
Espinosa’s plan:
Funds here did receive actual notice of his
bankruptcy case; we know this both from
documents in the record, which show receipt,
and the fact that Funds presented a proof of
claim. Because ‘due process does not require
actual notice, ... it follows a fortiori that
actual notice satisfies due process. We find
33
the argument that the Constitution requires
something more than the actual notice
strained to the point of the bizarre.
Id. at 1203.
Here, the Ninth Circuit conflates actual notice
that a chapter 13 plan had been filed with actual
notice that such chapter 13 plan _ contained
improperly concealed language effecting discharge by
declaration. Nothing in the Bankruptcy Code or Rules
can be fairly read to impose a duty to read a chapter
13 plan on a creditor holding a nondischargeable
claim. In fact, a compelling public policy argument
suggests that student loan guaranty agencies should
not incur costs to review chapter 13 plans. Because
student loans are nondischargeable in bankruptcy,
the most economical way to administer chapter 13
cases and save taxpayer dollars is to simply file a
proof of claim, accept whatever distribution is
forthcoming under the debtor’s plan, then resume
collection after the case concludes. This minimizes
the cost of administering the FFELP, maximizes the
amount available to be re-loaned under that program
and reduces the amount of the government’s loss (due
to the federal guaranty).
The Ninth Circuit relies on Lawrence Tractor Co.
v. Gregory Un re Gregory), 705 F.2d 1118 (9th Cir.
1983), as support for its flawed analysis. Gregory
concerned a chapter 13 plan filed by a convicted
embezzler on November 8, 1979. At that time,
Bankruptcy Code §1328(a) allowed for the discharge
34
of embezzlement debts. Thus, in the context of
Gregory, the creditor was no different from any other
unsecured creditor whose debt was subject to dis-
charge.
Once a chapter 13 bankruptcy petition is filed, all
unsecured creditors are properly charged with
knowing all things which occur in every chapter 13
case; for example, that a plan will be filed and there
will be a deadline for objections to such plan.
Unsecured creditors are also properly charged with
knowing what a chapter 13 plan shall provide and
what it may provide under Bankruptcy Code §1322.
Unsecured creditors are further properly charged
with knowing the standards for confirmation of a
chapter 13 plan under Bankruptcy Code §1325,
including the requirement that the plan be proposed
in good faith. 11 U.S.C. §1325(a)(3). These matters
occur in every chapter 13 case.
The issue in Gregory was whether a convicted
embezzler who proposes a chapter 13 plan with zero
payment to unsecured creditors is proposing a plan in
good faith. The Ninth Circuit was correct in finding
that the affected creditor was “under constructive or
inquiry notice that its claim may be affected, and it
ignores the proceedings to which the notice refers at
its peril.” Jd. at 1123. Because every chapter 13 plan
must be proposed in good faith, all creditors with
notice of the plan are properly charged with knowing
this. As such, notice pursuant to Rule 2002 of
Gregory's chapter 13 plan was adequate.
35
By contrast, Bankruptcy Code §1328(a) specifi-
cally excepts student loans from discharge, and the
exception is self-executing. Not all chapter 13 debtors
request a determination of whether their student
loan debts should be discharged on the basis of undue
hardship. Thus, there is no reason for a guaranty
agency to presume that the dischargeability of
student loans will necessarily arise in a chapter 13
case. Therefore, Gregory in fact lends no support to
Espinosa, and the Ninth Circuit’s refusal to call for
rehearing en banc in this case on the basis that it
would thereby be required to consider overruling
Gregory is simply wrong.
In Banks, the Fourth Circuit aptly explained the
distinction between actual notice that a chapter 13
plan has been filed (which triggers a duty of inquiry
upon general unsecured creditors) with actual notice
that a discrete evidentiary dispute has been
commenced. Writing for the Fourth Circuit, Senior
Judge Baldock (sitting by designation from the Tenth
Circuit), provides this explanation:
Bankruptcy Rule 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. “There are
many aspects to and actic~s that may be
taken in bankruptcy cases which affect the
general administration of the case and all
creditors generally, but none _ specifically.’
In re Boyken, 246 B.R. 825, 828-29 (Bankr.
E.D. Va. 2000). Generally such matters
36
require “notice,” but not service of process.
Id. When the rights of specific parties
become an issue, however, service of the
initiating motion or objection on the affected
party is required. Jd. FED. R. BANKR. P. 7003,
7004. Mailing the proposed plans, the
hearing notice and the confirmation order
satisfied the notice requirement under Rule
2002, but not the service and summons
requirement of 7004. ...
The district court properly concluded due
process entitles a student loan creditor to
specific notice of the Debtor’s intent to
discharge any portion of the debt. Section
523(a)(8) “explicitly precludes the discharge
of the debtor|’s] student loan debts absent a
showing of undue hardship.” The Bank-
ruptcy Code and Rules require debtors to
bring an adversary proceeding to establish
undue hardship. Fep. R. BANkKR. P.
7001(6).... Initiation of an adversary
proceeding requires a summons and service
of process under Rule 7004(b). Feb. R.
BANKR. P. 7003, 7004. Banks failed to initiate
an adversary proceeding to establish undue
hardship. As a result, ECMC did not receive
the requisite notice of Banks’ intent to
discharge post-petition interest on _ his
student loan debts. For lack of adequate
notice, the confirmation and discharge orders
discharging the interest are not entitled to
preclusive effect.
37
Id. at 301-02 (citations omitted, in part). In Footnote
4, the Fourth Circuit proceeds to make the following
observation:
We do not today hold that the Constitution in
itself requires a summons and a service of
process to discharge student loan debt. We
merely confirm that where the Bankruptcy
Code and Rules require a heightened degree
of notice, due process entitles a party to
receive such notice before an order binding
the party will be afforded preclusive effect.
Ibid. Thus, the Fourth Circuit properly recognized
that the Bankruptcy Rules establish procedural due
process rights in bankruptcy cases.
.
THIS COURT HAS ESTABLISHED THE
STANDARD FOR PROCEDURAL DUE
PROCESS IN BANKRUPTCY CASES BY
PROMULGATING THE BANKRUPTCY RULES
The Fifth Amendment to the Constitution does
not expressly require a summons and service of
process to discharge a student loan debt. However,
this Court certainly has authority to articulate the
ground rules for procedural due process in bank-
ruptcy cases to ensure that property rights are not
deprived without due process of law. The Ninth
Circuit failed to grasp this principle when it rejected
38
the due process analysis from the Fourth, Seventh
and Sixth Circuits,” stating that
{[wle find it both wrong and dangerous to
hold that the standard for what amounts
to constitutionally adequate notice can be
changed by legislation.
553 F.3d at 1204. This is the Ninth Circuit’s most
crucial and fundamental mistake. This Court, not
Congress, set the standard for what amounts to
constitutionally adequate notice.
Bankruptcy Code §102(1) provides that the
phrase “after notice and a hearing means after such
notice as is appropriate in the particular circum-
stances, and such opportunity for a hearing as is
appropriate in the particular circumstances... .” In
Code §102(1), Congress unmistakably co-opts the
standard for procedural due process adopted by this
Court in Mullane:
An elementary and fundamental require-
ment of due process in any proceeding which
is to be accorded finality is notice reasonably
calculated, under all the circumstances, to
apprise interested parties of the pendency of
the action and afford them an opportunity to
present their objections. ... The notice must
be of such nature as reasonably to convey the
‘* See Banks, Ruehle v. Educational Credit Management
Corp. Un re Ruehle), 412 F.3d 679 (6th Cir. 2005), Jn re Hanson,
397 F.3d 482 (7th Cir. 2005).
39
required information, ... and it must afford
a reasonable time for those interested to
make their appearance. ... 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 adopt
to accomplish it.
Id. at 314. Acting pursuant to 11 U.S.C. §2075, this
Court has specified “the forms of process, writs,
pleadings and motions, and practice and procedure in
cases under Title 11” by adopting the Bankruptcy
Rules. This clearly articulates the standard for
procedural due process in bankruptcy cases.
The practice of burying “discharge by dec-
laration” language in chapter 13 plans by debtors’
counsel who know that “a proceeding to determine
the dischargeability of a debt” must be brought by
adversary proceeding pursuant to Bankruptcy Rule
7001(6), clearly is not a means employed by one who
is desirous of actually informing a student loan
creditor that the issue of dischargeability has been
brought into play. This is especially true of Francisco
Espinosa, whose chapter 13 petition listed his student
loans as his only debts. If Mr. Espinosa had actually
wanted to inform USA Funds that he wished to
contest the dischargeability of any part of his student
loans, he would have commenced an adversary
proceeding by filing a complaint, then served it
together with a summons. Espinosa’s failure to do
this denied due process to USA Funds, and thus the
40
bankruptcy court’s confirmation order is void
pursuant to FRCP 60(b)(4) and Bankruptcy Rule
9024.
¢
CONCLUSION
The judgment of the Court of Appeals should be
reversed, and the case remanded with instructions to
affirm the judgment of the district court.
Respectfully submitted,
STEVEN L. THOMAS, Esq.
WVSB#3738
Kay Casto & CHANEY PLLC
Post Office Box 2031
Charleston, West Virginia
25327-2031
(304) 345-8900
Counsel for Amicus Curiae
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.