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Tuesday, April 13, 2010
Espinosa Bankruptcy Decision Offers Insight on Standards for Void Orders By Robert J. Kerwin, Esq.

Espinosa Bankruptcy Decision Offers Insight on Standards for Void Orders

By Robert J. Kerwin, Esq.

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.

 

Robert Kerwin 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 rkerwin@tbhr-law.com.

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).




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