On March 24, 2010, the United States Supreme Court in United Student Aid Funds, Inc. vs. Espinosa,
559 U.S. ___ (2010) unanimously affirmed the Ninth Circuit Court of
Appeal"s decision to let stand an erroneous Order of a U.S. Bankruptcy
Court. The Order confirmed a Chapter 13 Plan that discharged a portion
of the debtor's presumptively nondischargeable student loan debt. See 11 U.S.C. § 523(a)(8).
In the underlying bankruptcy case, the Chapter 13 Debtor failed to initiate an adversary proceeding in accordance with Fed. R. Bankr. P. 7001(6)
to determine that his student loans were an undue hardship, and thus
dischargeable. The student loan lender did not object to the Plan,
notwithstanding that it had received notice and that it had filed a
proof of claim subsequent to receiving the Plan in an amount greater
than that provided in the Plan. No timely appeal from the Order
confirming the Chapter 13 Plan was taken by the lender. Several years
later, the lender sought to collect the unpaid balance on the student
loan. In the ensuing litigation, the lender attempted to correct the
Order confirming the Plan pursuant to Fed. R. P. 60(b)(4) (as made applicable under Fed. R. Bankr. P. 9024).
The position advanced by the lender was that because the debtor failed
to initiate an adversary proceeding to determine undue hardship as
specifically required by the Bankruptcy Rules, the debtor violated both
the Bankruptcy Code and the lender"s due process rights. The Ninth
Circuit Court of Appeals determined that the Bankruptcy Court
committed, at most, a legal error and that such was not a basis for
setting aside the confirmation order as void under Rule 60(b).
Supreme Court Justice Clarence Thomas, writing on
behalf of the Court, examined whether the Order confirming the Chapter
13 Plan and discharge of the student loan interest was a "void"
judgment under Federal Rule of Civil Procedure 60(b)(4).
This Rule authorizes a Court to relieve a party from a final judgment
if the judgment is void. The Court indicated that the provision is
applicable only in limited circumstances. "[A] void judgment is one so
affected by a fundamental infirmity that the infirmity may be raised
even after the judgment becomes final." United Student Aid Funds, Inc. v. Espinosa, 559 U.S. ___, No. 08-1134, slip op. at 8 (March 23, 2010), available at http://www.supremecourt.gov/opinions/09pdf/08-1134.pdf.
"[R]ule 60(b)(4) applies only in the rare instance where a judgment is
premised either on a certain type of jurisdictional error or on a
violation of due process that deprives a party of notice or the
opportunity to be heard." Id. Since the lender did not argue that
the Bankruptcy Court's error was jurisdictional, the Court
acknowledged that the jurisdictional basis was inapplicable (as Section
523(a)(8) is only a precondition to obtaining a discharge, and not a limitation on the bankruptcy court"s jurisdiction). Id. at 9.
As to the lender's due process argument, the Court
distinguished a right granted by a procedural rule from a violation of a
constitutional right to due process. Espinosa at 10. Focusing
upon the fact that the lender had received actual notice of the
contents of the Plan, the Court concluded that any due process rights
were "more than satisfied." Id. Importantly, the Court expressed
no view as to the conditions under which orders confirming Chapter 13
plans purporting to discharge certain other nondischargeable debts,
including those falling under § 523(a)(1) (specified tax debts), might subsequently be deemed void. Id.
at 11-12, fn.10. Reflecting upon the lender's position that it had no
obligation to object to the Debtor's Plan until an adversary
proceeding was commenced and it was served with the corresponding
summons and complaint, the Court offered a blunt warning: "[R]ule 60
(b)(4) does not provide a license for litigants to sleep on their
rights." Id. at 13.
Espinosa was in many respects a mixed result for
various parties in interest. The Court took issue with the Ninth
Circuit's view that, absent a timely objection from a creditor, a
Bankruptcy Court must confirm the discharge of student loan debt even
though no finding of undue hardship had been made. Instead, the Court
held that under the Bankruptcy Code, a Bankruptcy Court has an
"obligation" to direct a debtor to conform his plan to the requirements
of § 1328(a)(2) and 523(a)(8). Espinosa at 15-16. Moreover, though the Court acknowledged the possibility that some might view the Espinosa
decision as encouraging unscrupulous trial tactics, the Court also
reminded practitioners that sanctions may apply. Quoting from an
earlier decision Taylor v. Freeland & Kronz,
503 U.S. 638, 644 (1992), the Court cautioned that "[d]ebtors and
their attorneys face penalties under various provisions for engaging in
improper conduct in bankruptcy proceedings." Such a reminder seems
appropriate, but given the sheer volume of filings, vigilance in this
area will be no easy task.
is a Member in the Boston firm of Tarlow, Breed, Hart & Rodgers,
P.C. His practice involves the representations of creditors including
municipalities in the U.S. Bankruptcy Courts. On behalf of the
International Municipal Lawyers Association, Mr. Kerwin filed a brief as
Amicus Curiae the U.S. Supreme Court. Comments concerning this
article may be sent to firstname.lastname@example.org.
A version of this article appeared in Massachusetts Lawyers Weekly on April 12, 2010. The published article may be viewed here (registration may be required for access).