United Student Aid Funds v. Espinosa

Special statutory process required to discharge student loans

A person declaring bankruptcy must file a plan outlining, among other things, which debts shall be discharged. See 11 U.S.C. § 1321–22. Once a court approves and confirms the plan and orders the discharge of the debts that will not be repaid, all matters are presumed settled according to the confirmed plan. See 11 U.S.C. § 1327. However, when declaring bankruptcy and preparing such a plan, student loans are generally considered non-dischargeable, unless paying them would cause undue hardship for the debtor. See 11 U.S.C. § 1328(a)(2); 11 U.S.C. § 523(8)(a)(i). In order to discharge a student loan, a special adversary proceeding generally needs to take place. See Fed. R. Bankr. P. 7001(6); Brief for Petitioner, United Student Aid Funds, Inc. at 5. However, the courts are split as to whether such an order loses its finality when no adversary proceeding took place to determine if the student loans should have been discharged. See Espinosa v. United Student Aid Funds, Inc., 553 F.3d 1193, 1198 (9th Cir. 2008).

Can a bankruptcy court discharge liability for student loans without specialized adversary proceedings?

Petitioner United Student Aid Funds (“Funds”) argues that student loan debt cannot be discharged without proving hardship in a specialized adversary proceeding. See Brief for Petitioner at 16. Funds claims that the plain language of the relevant bankruptcy statutes makes it clear that Congress intended student loans to be presumptively non-dischargeable. See id. at 17 (citing 11 U.S.C. §1328(a)). In support of this view, Funds cites Tennessee Student Assistance Corp. v. Hood, where the Supreme Court indicated that student loans are “presumptively non-dischargeable” unless they would inflict undue hardship on the debtor. See Brief for Petitioner at 18 (citing Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440, 450 (2004)). Funds argues that Congress expressly and presumptively made student loans non-dischargeable to prevent harm to the public interest and abuses of the educational loan system. See Brief for Petitioner at 18–20. Funds also points out that Congress has added more and more restrictions over the past thirty years to prevent abusive discharges of student loans in bankruptcy proceedings, such as if a student discharged student loans in bankruptcy proceedings shortly after graduation, and then went on to enjoy the fruits of higher earning power made possible by their education without repaying their loans. See id. at 20–23.

Funds also stresses that the rule that student loans are presumptively non-dischargeable is self-executing, meaning that a student loan cannot be discharged unless the debtor first successfully establishes undue hardship. See Brief for Petitioner at 23–25 (citing Tennessee Student Assistance Corp., 541 U.S. at 450 (2004)). According to Funds, permitting student loan discharges by simply including them in the bankruptcy plan without adversary proceedings (“discharge by declaration”) strips creditors of this statutory protection. See Brief for Petitioner at 23–25. Thus, according to Funds, it is immaterial that Funds did not object to the initial repayment plan, as the student loans could not be legally discharged without Espinosa first demonstrating undue hardship in an adversarial proceeding. See id. at 33, 40.

Funds argues that a lack of adversary proceedings to establish undue hardship voids a court order that discharges student loans. See Brief for Petitioner at 25. In this respect, Funds argues that a plan to discharge a non-dischargeable debt would violate the bankruptcy provisions of the U.S. Code, and therefore no court may issue an order confirming such a plan. See id. at 30; see also 11 U.S.C. § 1325. Funds points out that it is well established that court decisions made without the necessary authority or in contravention of the law are simply void and can, thus, not be considered res judicata or final. See id. at 31, 36–37, 40–42 (citing United States ex rel. Wilson v. Walker, 109 U.S. 258 (1883)). Funds cites Vallely v. Northern Fire & Marine Ins. Co. in which the Court stated that “[i]f [courts] act beyond [their] authority, and certainly in contravention of it, their judgments and orders are regarded as nullities. They are not voidable, but simply void, and this even prior to reversal.” See id. at 31 (citing Vallely v. Northern Fire & Marine Ins. Co., 254 U.S. 348, 353-54 (1920)).

On the other hand, Respondent Francisco J. Espinosa claims that the relevant statutes indicate on their face that if the court confirms a discharge, then student loans become dischargeable. See Brief for Respondent, Francisco J. Espinosa at 20–21. Espinosa adds that the order confirming his plan is valid and final even if it contains legal errors because it has passed direct review. See id. at 21-22. As such, Espinosa claims that all issues associated with the order, regardless of whether they were addressed by the parties, are considered res judicata—meaning that they are settled and can neither be raised nor decided again in court. See id. at 21-22.

Espinosa continues by addressing Funds’ argument that the confirmation order was void due to a lack of adversary proceedings and distinguishes the Supreme Court precedents Funds cited. See Brief for Respondent at 27–28. According to Espinosa, the reason why the judgment was void in Walker was because the court had no jurisdiction over the matter at issue. See id. at 27 (citing Walker, 109 U.S. 258 (1883)). Espinosa points out that in the present case, however, the bankruptcy court did have jurisdiction over the student loans at issue and that Walker is therefore inapplicable. See Brief for Respondent at 27. Instead, Espinosa suggests that Supreme Court jurisprudence shows that only in very rare circumstances—where a court significantly departs from its granted authority—can a judgment be considered void. See id. at 25–26. Espinosa cites Travelers Indem. Co. v. Bailey, where the Supreme Court indicated that a judgment could be found non-binding in particularly extreme circumstances, such as when the court lacked subject-matter jurisdiction. See id. (citing Travelers Indem. Co. v. Bailey, 129 S.Ct. 2195, 2206 n. 6 (2009)). Since the bankruptcy court was not acting in a completely different jurisdictional area than usual here, Espinosa claims that the present case does not involve the extreme circumstances that would warrant considering the decision by the bankruptcy court void. See Brief for Respondent at 26–27.

Espinosa also argues that if the creditor fails to object to the discharge before the bankruptcy court confirms the repayment plan, the creditor is bound and has waived all of its objections. See Brief for Respondent at 31–32. Espinosa does not believe that a self-executing provision making student loans generally non-dischargeable is sufficient to make a Chapter 13 nonbinding when a creditor had its chance to object to the plan and did not take the opportunity to do so. See id. at 31–33. As such, Espinosa claims this is a “waiver case” and that even if student loan discharges generally require separate proceedings, these proceedings can be, and have been in this case, waived. See id. at 35-36.

Does discharging a student loan in bankruptcy proceedings violate due process if the creditor did not receive the kind of notice typical to adversary proceedings?

Funds believes that a notice typical of adversary proceedings is absolutely necessary to satisfy due process requirements to inform a creditor that a debtor is attempting to discharge student loan debts. See Brief for Petitioner at 51–52. Specifically, Funds insists that unlike a general notice in bankruptcy proceedings, a heightened notice, including serving a summons, is required when discharging a student loan. See id. at 52–53. Funds stresses that Espinosa only mailed his plan to its post office box, providing only minimal notice, which failed to meet the due process requirements of notice and an opportunity to be heard that “Congress prescribed to be due” to student loan creditors. See id. at 53.

Espinosa counters that this case does not involve questions of due process because Funds did receive actual notice and knew when and how it could object to the repayment plan. See Brief for Respondent at 35-36. Instead, Espinosa claims this case is a waiver case because actual notice spoils any kind of due process violations claims. See id. at 35–38. Espinosa also rejects Funds claim that it was entitled to the kind of notice required in adversary proceedings, pointing out that the authority cited by Funds only established that notice was required—but not what kind. See id. at 38–39. Espinosa argues that there is nothing in the language of the relevant statute that would indicate an adversary proceeding is necessary to satisfy due process requirements. See id. at 40-41 (citing 11 U.S.C. 523(a)(8)). Neither Congress nor the Supreme Court can establish any special due process guarantees of the Constitution. See Brief for Respondent at 40–43. Likewise, Espinosa argues that the notice it gave Funds fulfills all requirements of due process and that the fact that Funds has to deal with a lot of bankruptcy cases has no bearing on due process analysis. See id. at 43, 46.