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Student Loans
Supreme Court Upholds Student Loan Discharge Without Proof of Hardship
KEVIN MCVEIGH, ESQ., Andrews Publications Staff Writer
Bankruptcy Litigation Reporter
http://west.thomson.com/product/40287246/product.asp
A bankruptcy court's discharge of a student loan was not a void judgment even though the Chapter 13 debtor did not prove undue hardship through an adversary proceeding, a unanimous U.S. Supreme Court has ruled.
United Student Aid Funds Inc. v. Espinosa, No. 08-1134, 2010 WL 1027825 (U.S. Mar. 23, 2010).
United Student Aid Funds Inc. waived its right to contest the discharge granted to Francisco Espinosa, who repaid only part of the loan under his bankruptcy plan, the high court held.
While the partial discharge was granted in error by the bankruptcy judge, the error did not render the judgment void, Justice Clarence Thomas wrote for the Supreme Court. By failing to lodge a timely objection or appeal, United was barred from challenging the discharge, he said.
Espinosa filed for Chapter 13 protection in the U.S. Bankruptcy Court for the District of Arizona. His repayment plan proposed to pay United $13,250 of the $17,800 he owed on his student loans.
The plan circumvented Bankruptcy Code Section 523(a)(8), which provides that student loans may be discharged only when the debtor proves in an adversary proceeding that payment of the loan will cause an undue hardship.
United did not object to the plan, despite receiving notice of its contents. The Bankruptcy Court confirmed the plan and granted Espinosa a discharge upon successful completion of his payments.
Three years later United began intercepting Espinosa's income tax refunds and applying the funds to the unpaid portion of the student loans.
Espinosa asked the Bankruptcy Court to hold United in contempt for violating the discharge injunction, and the company responded with a motion seeking relief from the order confirming the Chapter 13 plan.
The Bankruptcy Court ruled that United violated the discharge injunction and ordered it to cease all collection activity against Espinosa.
United appealed. It argued that the order confirming the plan was legally void because the lender did not receive adequate notice of the proposed student loan discharge, thus violating its due-process rights.
Espinosa countered that United waived its right to contest the discharge.
The U.S. District Court for the District of Arizona reversed the Bankruptcy Court's decision, but the 9th U.S. Circuit Court of Appeals found the discharge valid on appeal.
In the Supreme Court's opinion, Justice Thomas said a void judgment is one "so affected by a fundamental infirmity that the infirmity may be raised after the judgment becomes final." Judgments are not void simply because they were granted in error, he added.
Espinosa's failure to file an adversary complaint deprived United of a right granted by the Federal Rules of Bankruptcy Procedure, the court found, and the bankruptcy judge's failure to find undue hardship before confirming the plan was a legal error. However, the lender still could have filed a timely objection or appeal, according to the opinion.
Citing the high court's precedent in Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306 (1950), Justice Thomas said that due process requires notice that is "reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objection."
United received actual notice of the contents of Espinosa's Chapter 13 plan. Thus, the lack of notice from an adversary action did not amount to a due-process violation, the high court concluded.
Attorneys:
Petitioner: Charles W. Wirken, Madeleine C. Wanslee and Sean P. O'Brien, Gust Rosenfeld, Phoenix
Respondent: James L. Robinson Jr., Robinson & Rylander, Tucson, Ariz.; Michael J. Meehan, Munger Chadwick, Tucson
Government: Toby J. Heytens, U.S. Solicitor General's office, Washington, D.C.
To comment, ask questions or contribute articles, contact West.Andrews.Editor@ThomsonReuters.com.
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