The Perils of Plan Confirmation Speak Now or Forever

Journal Issue

Oct 2004

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This article discusses the
recent trend of debtor counsel to include in their client's
reorganization plan provisions that violate the Bankruptcy
Code—especially provisions that purport to discharge student loan
debt that is otherwise nondischargeable. Although plans containing an
illegal "discharge by declaration" should never be confirmed,
many bankruptcy courts have held that once the plan is confirmed, these
illegal provisions are generally enforceable and cannot be challenged
collaterally in a subsequent proceeding if a creditor with notice of the
plan failed to object to the plan or appeal the confirmation order.<a href="#2" name="2a">2</a> Creditors
are therefore advised to closely monitor all plans, disclosure statements
and confirmation orders to ensure that their claims are treated in a manner
consistent with the Bankruptcy Code.

This article also discusses several bankruptcy
decisions resulting in the nullification or vacation of confirmation
orders approving such illegal plan provisions on the basis that the plan
proponent's attempt to discharge student loans without initiating
an adversary proceeding, as required by the Federal Rules of Bankruptcy
Procedure (Bankruptcy Rules), violates the Due Process Clause of the
Fifth Amendment to the U.S. Constitution.

Finally, this article addresses whether plan
proponents and their attorneys should be sanctioned under Bankruptcy Rule
9011 for seeking to confirm such illegal plan provisions.

<h4>Bankruptcy Code's Codification of Res Judicata</h4>

In every chapter of the Bankruptcy Code where
reorganization plans or debt adjustments are permitted, the Bankruptcy Code
has codified the common-law principle of res
judicata. See 11 U.S.C. §1141(a) ("the provisions of a
confirmed plan bind the debtor...and any creditor...."); 11 U.S.C.
§1327(a); 11 U.S.C. §1227(a); 11 U.S.C. §944. As discussed
below, these general res judicata provisions often come into conflict with specific
provisions found elsewhere in the Bankruptcy Code or the Bankruptcy Rules.
As the Ninth Circuit Bankruptcy Appellate Panel (BAP) has noted,
"[t]he concept of the preclusive effect of final orders is a basic
principle of American [j]urisprudence."<a href="#3" name="3a">3</a> In accordance with this
concept, the U.S. Supreme Court has recognized that "[i]t is for the
court of first instance to determine the question of the validity of the
law, and until its decision is reversed for error by orderly review, either
by itself or by a higher court, its orders based on its decision are to be
respected."<a href="#4" name="4a">4</a>

<h4>Plans Containing Illegal Provisions Are Generally Binding Unless Appealed</h4>

Although it seems counterintuitive that a bankruptcy
plan provision that violates the Bankruptcy Code could ever be enforced,
courts have generally embraced this concept with few exceptions. After
surveying the case law on this issue, two principles emerge: First,
bankruptcy judges are human. Although one would expect that a judge would
never confirm a plan that is inherently unconfirmable, such unconfirmable
plans occasionally squeak by without notice. Given the heavy workload of
many judges, it should come as no surprise that judges often rely on the
parties to protect their own interests and raise objections when
appropriate. Second, a party with notice of a plan confirmation proceeding
who fails to timely object to an illegal plan, or appeal the confirmation
order, generally cannot challenge the legality of the confirmation order in
a later proceeding.

<h4>Unenforceable Provision Given Preclusive Effect</h4>

In Great Lakes Higher
Educ. Corp. v. Pardee (In re Pardee), 218 B.R.
916, 925 (BAP 9th Cir. 1998), aff'd., 193 F.3d 1083 (9th Cir. 1999), the debtors filed a chapter
13 plan that expressly discharged post-petition interest on a student loan
obligation. The lender, who was served with a copy of the plan and notice
of the plan confirmation hearing, failed to object to the discharge
provision on the ground that it violated §§1328(a)(2)<a href="#5" name="5a">5</a> and
523(a)(8)<a href="#6" name="6a">6</a> of the Bankruptcy Code, or timely appeal the confirmation
order.

After the plan was confirmed, the student loan lender
attempted to collect post-petition interest on its nondischargeable student
loan claim. The debtors filed a motion to enforce the discharge provision
in the confirmed plan and to enjoin the lender from pursuing its collection
efforts. The bankruptcy court granted the motion, and the Bankruptcy
Appellate Panel (BAP) affirmed. The BAP held that although post-petition
interest on a nondischargeable student loan obligation is nondischargeable
under §§1328(a)(2) and 523(a)(8), the illegal plan provision was
nonetheless enforceable under §1327(a),<a href="#7" name="7a">7</a> which recognizes the concept
of finality of confirmation orders. The BAP, citing "overwhelming
Ninth Circuit authority [that a confirmation order must be accorded res judicata effect] and the
general principle upholding the preclusive effect of final orders,"
held that the illegal discharge provision could not be challenged in a
collateral proceeding.<a href="#8" name="8a">8</a> The BAP also held that a party who fails to object
to the plan or appeal the confirmation order is precluded from doing so in
a subsequent proceeding.<a href="#9" name="9a">9</a>

Judge Christopher M.
Klein dissented from the portion of the opinion
that affirmed the bankruptcy court's injunction prohibiting the
student loan creditor from collecting the illegally discharged student loan
debt on the basis that "(1) the chapter 13 plan provision purporting
to discharge a nondischargeable debt is unenforceable; and (2) the
bankruptcy court exceeded its §105 jurisdiction to issue orders
'necessary or appropriate' to carry out the Bankruptcy Code
when it issued an injunction to enforce a chapter 13 plan provision that
plainly violates the Bankruptcy Code."<a href="#10" name="10a">10</a> First, Judge Klein asserted
that the majority erroneously determined that the student loan
creditor's defense to the debtor's motion for injunctive relief
was a "collateral" attack on the confirmation order. Rather,
Judge Klein asserted that the opposition to the motion for injunctive
relief was "a direct attack premised on lack of jurisdiction as to
which res judicata
is not a bar."<a href="#11" name="11a">11</a> Second, Judge Klein argued that the confirmation
order should be reversed because the bankruptcy court did not have
jurisdiction to enjoin the collection of student loan debts in disregard of
the plain language of §523(a)(8), which bars the discharge of student
loans.<a href="#12" name="12a">12</a> Finally, Judge Klein asserted that the specific statutory command
against the dischargeability of student loan obligations trumped the
general res judicata provision of §1327(a).<a href="#13" name="13a">13</a> Judge Klein opined that the
"affirmance in this appeal would license ambushes and would function
as judicial legislation substituting our judgment for that of Congress by
enacting a new exception to the student loan nondischargeability provision
at §523(a)(8) and by repealing part of §1328(a)(2)."<a href="#14" name="14a">14</a>

The Ninth Circuit Court of Appeals affirmed the
bankruptcy court on the same grounds articulated by the BAP:

<blockquote>
We find no reason to depart from the well-settled
policy that confirmation orders are final orders that are given preclusive
effect. Regardless of whether the plan should have been confirmed with the
discharge provision, the BAP was correct in holding that "the plan is
res judicata as to
all issues that could have or should have been litigated at the
confirmation hearing."<a href="#15" name="15a">15</a>
</blockquote>

<h4>Other Bankruptcy Cases</h4>

Pardee was neither the
first nor last decision in which a bankruptcy court has confirmed plans
containing provisions not permitted under the Bankruptcy Code. Many other
courts have confirmed bankruptcy plans that should have never been
confirmed, or have held that parties who fail to object to a plan provision
or appeal a confirmation order are bound by the plan even if adherence with
the confirmation order would be inequitable. With few exceptions, a party
who fails to timely appeal the confirmation order cannot collaterally
challenge the illegal plan provision in a later proceeding.<a href="#16" name="16a">16</a> As one court
has aptly noted, "[t]o deny preclusive effect to a confirmation
order invites...chaos...."<a href="#17" name="17a">17</a> Another court has noted:

<blockquote>
This court will not knowingly confirm a plan which
contains language that attempts to discharge student loan debt independent
of an adversary proceeding [footnote omitted]. Inclusion of plan
provisions which attempt to circumvent determination by adversary
proceeding of dischargeability of student loans through the plan
confirmation process is improper, but plans confirmed with such provisions
will be binding on the parties if the confirmation order is not appealed or
revoked. 11 U.S.C. §1330. However, inclusion of these provisions may
be the subject of sanctions.<a href="#18" name="18a">18</a>
</blockquote>

The res judicata effect of confirmed plans applies equally to debtors and
creditors. For example, in Knupfer v. Wolfberg
(In re Wolfberg), 255 B.R. 879 (BAP 9th Cir.
2000), aff'd., 2002 WL 1334745 (9th Cir. Jun. 14, 2002), the Ninth Circuit
BAP held that two chapter 11 debtors who had proposed a plan that provided
a 100 percent payout to unsecured creditors primarily from the sale of
their residence were precluded by the plan confirmation order from amending
their schedules to assert a homestead exemption. Consummation of the
debtors' chapter 11 plan, which contemplated the appointment of a
post-confirmation trustee to liquidate the debtors' assets if
creditors were not paid in full by July 1, 1999, was premised on the
debtors' projection that they could sell their residence for $16
million.

Unfortunately for the debtors, they did not claim a
homestead exemption, presumably because they believed that they would be
entitled to any surplus after the creditors' claims were paid in
full. However, after the post-confirmation trustee sold the debtors'
residence for $10 million, the debtors amended their schedules to claim a
homestead exemption in the amount of $125,000. The bankruptcy court allowed
the debtors to amend their schedules to claim a homestead exemption over
the trustee's objection on the basis that Bankruptcy Rule 1009(a)
allows amendment of schedules at any time before the case is closed.
However, the BAP reversed, holding that the confirmation order was entitled
to res judicata
effect, and that the bankruptcy court's interpretation of Bankruptcy
Rule 1009(a) was erroneous because the Bankruptcy Rules cannot
"abridge, enlarge or modify any substantive right."<a href="#19" name="19a">19</a>

Thus, Wolfberg is instructive for the fact that all parties whose
substantive rights could be impaired under a reorganization plan must
carefully review the plan to ensure that their rights are protected. Once a
plan is confirmed, a debtor generally cannot be relieved from the
unintended consequences of poor draftsmanship, just as a creditor with
notice of the plan confirmation hearing generally cannot collaterally
attack provisions of a plan that should never have been confirmed in the
first place.

<h4>Due Process Challenge to Discharge by Declaration</h4>

However, courts have begun to devise several theories
to relieve creditors from plan confirmation orders that would otherwise be
unenforceable but for the creditor's failure to object to the plan or
appeal the confirmation order. One such theory is premised on the Due
Process Clause of the Fifth Amendment to the U.S. Constitution.

In late October 2003, the Ninth Circuit BAP revisited
the issue of whether a chapter 13 plan confirmation order is enforceable
when the plan contains an illegal provision purporting to discharge student
loan debts when the creditor fails to object to the plan or appeal the
confirmation order. See Educ. Credit Mgmt.
Corp. v. Repp (In re Repp), 307 B.R. 144 (BAP
9th Cir. 2004). The opening line in Repp, which was authored by Judge Klein (the dissenting Judge in
Pardee), aptly
describes in military terms<a href="#20" name="20a">20</a> the tension between courts that apply res judicata to uphold
plans that would otherwise be unenforceable and courts that have found such
provisions unenforceable on other grounds:

This is the next skirmish in the war over the use of
"illegal" chapter 13 plan provisions to discharge student loan
debts notwithstanding a statute that excepts such debts from the chapter 13
discharge. The pro-discharge forces won the last
"discharge-by-declaration" engagement in [Pardee].<a href="#21" name="21a">21</a>
</blockquote>

In Repp, the debtors (a husband and wife) sought to discharge student
loan debt through their chapter 13 plan. The court confirmed the plan
containing the illegal "declaration by discharge" without
objection, and the Education Credit Management Corporation (ECMC), the
student loan creditor, did not appeal the confirmation order. ECMC, which
acquired the student loan debt from Northwest Education Loan Association
(NELA), timely filed a proof of claim in the debtors' bankruptcy
case. However, ECMC did not object to the plan or appeal the confirmation
order because a copy of the plan was mailed to NELA at the postal lockbox
where payments were sent. Nearly two years after ECMC filed its proof of
claim, the debtors filed a complaint for declaratory relief seeking a
determination that the plan was res judicata pursuant to §1327 of the Bankruptcy Code and Pardee. The debtors also alleged
that the student loan debt should be discharged for undue hardship under
§523(a)(8). ECMC answered and counter-claimed that the confirmation
order was null and void because no adversary proceeding was initiated prior
to the plan being filed, and sought a declaratory judgment that the
discharge by declaration violated its Fifth Amendment due process rights.
The bankruptcy court, relying on Pardee, granted the motion, and the creditors appealed.

The BAP reversed, holding that the plan was void and
unenforceable with respect to the student loan discharge because it
violated ECMC's due process rights. The court noted that due process
requires that notice "must be reasonably calculated, under all the
circumstances, to apprise interested parties of the pendency of the action
and afford them an opportunity to object. It must be of such a nature as
reasonably to convey the required information and afford a reasonable time
for response."<a href="#22" name="22a">22</a> However, the court noted that "the method
chosen for notice was calculated to minimize the chance that it would come
to the attention of persons in the position to make litigation decisions
for the creditor."<a href="#23" name="23a">23</a> The court held that because a determination of
whether a debtor qualifies for a discharge of student loans based on undue
hardship requires the initiation of an adversary proceeding (see Fed. R. Bankr. P. 7001(6)),
which must be served on an officer, a managing or general agent, or any
other agent authorized to receive service of process (see Fed. R. Bankr. P. 7004(b)(3)),<a href="#24" name="24a">24</a> the
illegal declaration by discharge in the chapter 13 plan did not afford the
student loan creditor sufficient notice to satisfy due process. The court
noted:

The fact that it was an "illegal"
provision connotes two important expectations upon which the student loan
creditor is entitled to rely. First, one is entitled to expect that the
bankruptcy court will perform its independent duty to confirm only those
plans that do not contravene the Bankruptcy Code and rules of procedure
[citations omitted]. Second, Rule 7001(6)'s requirement of an
adversary proceeding creates the reasonable expectation that a
§523(a)(8) dischargeability issue need not be responded to, and will
not be addressed by the court, until there has been proper service of a
summons and complaint pursuant to Rule 7004.<a href="#25" name="25a">25</a>
</blockquote>

Thus, the court, citing the "emerging consensus
on the point," held that "[t]he minimal service requirements
for chapter 13 plan confirmations cannot be used as a way to stay below the
creditor's radar and elude the obligation to demonstrate 'undue
hardship' in an adversary proceeding in the usual adversary format.
Although stealth may achieve surprise at the tactical level, the strategic
problem is that 'below the radar' is also fatally below the due
process threshold."<a href="#26" name="26a">26</a>

In his dissent, Judge Ryan noted that because ECMC
had actual notice of the confirmation hearing and received a copy of the
plan, the case is virtually indistinguishable from Pardee, and thus the bankruptcy
court's order should be affirmed.<a href="#27" name="27a">27</a>

<h4>Don't Fail to Object to Illegal Plan</h4>

Although the facts in Pardee and Repp are virtually indistinguishable, it is important to note that the
student loan creditor never raised due process as a possible defense to the
enforceability of the plan confirmation order. Although Judge Klein raised
due process as an issue in his dissent in Pardee, the majority declined to address the due-process argument
because it was not raised at the trial level or on appeal. Thus, Pardee is distinguishable.

In addition, although the Repp majority found that notice of the
plan was adequate, the court equated the debtor's failure to follow
procedural rules for commencing an adversary proceeding to determine the
nondischargeability of the student loan obligation with a violation of the
student loan creditor's due process rights. But all that due process
requires is that notice "must be reasonably calculated, under all the
circumstances, to apprise interested parties of the pendency of the action
and afford them an opportunity to object."<a href="#28" name="28a">28</a> It does not necessarily
follow that the debtor's failure to strictly comply with procedural
requirements for initiating an adversary proceeding results in a denial of
due process. The majority's decision arguably rewards creditors who
fail to diligently protect their rights by unwinding plans simply because a
creditor did not read the plan. On the other hand, because the proper
procedure for initiating an action to discharge student loan debt is the
commencement of an adversary proceeding, it is understandable (especially
in a chapter 13 context where plans are routinely confirmed with
minimal involvement by impacted creditors) that creditors might not take
the time to scan such plans for "illegal" provisions that
violate the Bankruptcy Code, assuming that the plan proponent would comply
with all procedural requirements. Although the Ninth Circuit in Pardee recognized this tension,
the decision nevertheless instructs that a creditor's failure to
object to an illegal plan or appeal the confirmation order is dispositive.<a href="#29" name="29a">29</a>

<h4>No Lienstripping by Ambush</h4>

Recently, the Ninth Circuit Court of Appeals
rejected a chapter 13 debtor's argument that a secured creditor was
precluded from challenging a confirmed chapter 13 plan that purported to
"lien strip" a secured claim by paying it over the life of the
plan.<a href="#30" name="30a">30</a> The court noted that a plan confirmation order is not res judicata as to issues that
must be brought by an adversary proceeding:<a href="#31" name="31a">31</a>

<blockquote>
We have recently observed that in the unique
bankruptcy context, "the principle of res
judicata should be invoked only after careful
inquiry because it blocks unexplored paths that may lead to
truth...." Latman v. Burdette, 366 F.3d 774, (9th Cir. 2004) (internal quotation marks and
citations omitted). Although confirmed plans are res judicata to issues therein, the
confirmed plan has no preclusive effect on issues that must be brought by
an adversary proceeding, or were not sufficiently evidenced in a plan to
provide adequate notice to the creditor. In other words, if chapter 13 plan
provisions do not adequately identify a secured creditor's modified
claims, to hold that the plan modified the claim "would be to allow
lienstripping by ambush." [citations omitted].<a href="#32" name="32a">32</a>

</blockquote>

The court held that "[i]f an issue must be
raised through an adversary proceeding, it is not part of the confirmation
process, and unless it is actually litigated, confirmation will not have a
preclusive effect."<a href="#33" name="33a">33</a>

In light of the Ninth Circuit's holding in Enewally, Pardee's future
remains unclear. Although the Ninth Circuit cited Pardee for the proposition that a plan
confirmation order is generally entitled to res
judicata effect if not appealed, the court did
not attempt to distinguish Pardee when it carved out an apparent exception for plan
provisions requiring the commencement of an adversary proceeding.

As Judge Klein noted in Repp, it appears that there is emerging case law outside the
Ninth Circuit that relies on the Due Process Clause to defeat illegal plan
confirmation orders. Indeed, just one week before Repp was decided, the Sixth Circuit
BAP in In re Ruehle, 307 B.R. 28 (BAP 6th Cir. 2004), affirmed the bankruptcy
court's motion to vacate a confirmation order because the
plan's "discharge by declaration" of the debtor's
student loan debt violated the creditor's due process rights as such
debts may only be discharged by filing a separate adversary proceeding.<a href="#34" name="34a">34</a>

<h4>Availability of Rule 9011 Sanctions for Filing "Illegal" Plan</h4>

Although some courts may find that due process is
satisfied when the creditor receives actual notice of the confirmation
hearing and a copy of the plan, as noted in Judge Ryan's dissent in Repp,<a href="#35" name="35a">35</a> creditors are not
without recourse. For example, several courts have imposed sanctions on
debtors or their attorneys who seek to confirm a plan containing an illegal
discharge provision (rather than filing an adversary proceeding to
determine the dischargeability of student loan obligations based on undue
hardship). Bankruptcy Rule 9011(b)(2) authorizes a court to impose
sanctions for papers presented to the court that are not warranted by
existing law or by a good-faith argument for the extension, modification or
reversal of existing law.

As discussed above, the inclusion of a plan provision
purporting to discharge student loan debt in a chapter 13 plan directly
violates the plain language of §523(a)(8) of the Bankruptcy Code and
circumvents the requirement of filing an adversary proceeding to prove
undue hardship pursuant to Bankruptcy Rule 7001(6). Courts have denied
confirmation of a chapter 13 plan containing illegal discharge provisions,
despite the debtor's argument that he or she could not afford to file
an adversary proceeding.<a href="#36" name="36a">36</a> In In re Mammel, 221 B.R. 238, 241 (Bankr. N.D. Iowa 1998), the court
reasoned that the Code and the Bankruptcy Rules define the requirements for
resolving dischargeability issues in a manner that is best suited to
provide due process and procedural safeguards to all parties. Permitting
debtors to circumvent the process of determining dischargeability issues
would undermine existing law:

In addition, the inclusion of a student loan discharge
provision has not been viewed as an exercise of good faith. At least one
court has characterized this practice as a "trap for unwary
creditors" that "trivializes the entire process and reduces it
to a game of chance."<a href="#37" name="37a">37</a> Another court defined the problem as follows:
The court is concerned that counsel for debtors may begin to view this
issue as a "can't lose" proposition. If [the attorneys]
include the student loan addendum and the plan is confirmed without
objection, they can argue that the student loan obligation is discharged
under the doctrine of res judicata and the authority of Andersen and Pardee. If an objection is raised, they simply strike the addendum and
are no worse off than if they hadn't tried.<a href="#38" name="38a">38</a>
</blockquote>

Debtors may attempt to use the illegal discharge
provision to avoid payment completely, running contrary to the philosophy
of chapter 13, which "allow[s] a debtor in good faith to pay
legitimate obligations on a pro rata basis."<a href="#39" name="39a">39</a> In light of these considerations, courts
have recognized a need to deter the inclusion of student loan discharge
provisions. Several courts have responded by imposing sanctions under
Bankruptcy Rule 9011 against proponents of illegal provisions or their
attorneys.<a href="#40" name="40a">40</a>

Some debtors have relied on Pardee and Andersen to support their inclusion of
a student loan discharge provision in a chapter 13 plan.<a href="#41" name="41a">41</a> However, neither
Pardee nor Andersen authorized the practice
of discharging student loan debt by declaration in violation of the
Bankruptcy Code. The Tenth Circuit Court of Appeals in Andersen expressly stated that the
discharge provision did not comply with the Code.<a href="#42" name="42a">42</a> Although the courts may
have enforced the discharge provisions based on the need for finality of
the confirmation orders, the courts also acknowledged those same provisions
violated the Code.<a href="#43" name="43a">43</a> Another court has added that its decision to enforce
the confirmation order should not be interpreted as an approval or
validation of the plan language at issue.<a href="#44" name="44a">44</a>

Similarly, neither Pardee nor Andersen afford protection to plan proponents or their attorneys
from Bankruptcy Rule 9011(b) sanctions for filing a plan that contains an
illegal "discharge by declaration." Both Andersen and Pardee held that the
debtor's discharge was allowed once a confirmation order had been
confirmed, regardless of the validity of the discharge provision.

In an analogous situation, the U.S. Supreme Court in Taylor v. Freeland & Kronz,
503 U.S. 638 (1992), held that if an exemption is claimed by a debtor and
there is no timely objection, then it is deemed allowed regardless of the
validity of the exemption. However, allowance of the exemption does not
make an invalid exemption valid. The Court noted that Bankruptcy Rule 9011
sanctions were available to deter improper exemptions.<a href="#45" name="45a">45</a> Relying on Taylor, at least one court
concluded that the res judicata effect of confirmation orders "provides no protection
from the imposition of sanctions under Bankruptcy Rule 9011(b)."<a href="#46" name="46a">46</a>

<h4>Conclusion</h4>

There is a split of authority as to whether a plan
confirmation order that confirms a plan containing an "illegal"
provision that violates the Code precludes a party with notice of the plan
from challenging the illegal plan provision in a collateral proceeding. The
general rule is that although a plan containing such an illegal provision
should never have been confirmed in the first place, it is binding on all
parties with notice of the plan who fail to object to the plan or appeal
the confirmation order.

Nevertheless, some courts have begun to devise legal
and equitable theories to vacate or nullify confirmation orders approving
such illegal plans. For example, some courts have held that a plan
containing an illegal "discharge by declaration" violates a
creditor's due-process rights because the plan proponent failed to
follow the proper procedure for initiating an adversary proceeding to
determine the dischargeability of the debt.

Unfortunately, there is uncertainty even within
circuits as to whether service of the plan and disclosure statement
satisfies a creditor's due process rights notwithstanding the plan
proponent's failure to comply with the procedural rules for
discharging student loan debt. Until this uncertainty is resolved,
creditors are advised to read all plans and disclosure statements and
timely object when appropriate, lest they waive their right to later
challenge the enforceability of a plan containing an illegal provision in a
collateral proceeding.

Fortunately, creditors who do not diligently monitor
a bankruptcy case are not without recourse. Any party in interest may seek
sanctions against the proponent of an illegal plan under Bankruptcy Rule
9011 if the plan proponent and/or his attorney files a plan that does not
comply with the Code. In particular, debtor's counsel should think
twice before attempting to discharge student loan obligations in a chapter
13 plan without initiating an adversary proceeding, lest they find
themselves pleading with the court as to why sanctions should not be
imposed under Rule 9011.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> Mr. Owens
serves as senior counsel in the Los Angeles office of Foley & Lardner
LLP, where he specializes in bankruptcy law, creditors' rights and
commercial litigation. The author wishes to thank Michael Gelfond
(associate, Hooper, Lundy & Bookman Inc.) and Conway Cho (Loyola Law
School, Los Angeles (Class of 2006)) for their research assistance. <a href="#1a">Return to article</a>

<a name="2">2</a> See Great Lakes Higher Educ. Corp. v. Pardee (In re
Pardee), 218 B.R. 916, 925 (BAP 9th Cir. 1998),
aff'd., 193
F.3d 1083 (9th Cir. 1999). <a href="#2a">Return to article</a>

<a name="3">3</a> Pardee, 218 B.R. at 923. <a href="#3a">Return to article</a>

<a name="4">4</a> Celotex Corp. v. Edwards, 514
U.S. 300, 313, 115 S.Ct. 1493, 1501, 131 L.Ed.2d 403, 413 (1995) (citations
and internal quotations marks omitted). <a href="#4a">Return to article</a>

<a name="5">5</a> Section
1328(a)(2) of the Bankruptcy Code provides, in pertinent part, "the
court shall grant the debtor a discharge of all debts provided for by the
plan or disallowed under §502 of this title, except any debt...(2) of
the kind specified in paragraph...(8)...of §523(a) of this
title." <a href="#5a">Return to article</a>

<a name="6">6</a> Section
523(a)(8) of the Bankruptcy Code provides in pertinent part "any
debt...(8) for an educational benefit overpayment or loan made, insured or
guaranteed by a governmental unit, or made under any program funded in
whole or in part by a governmental unit or nonprofit institution, or for an
obligation to repay funds received as an educational benefit, scholarship
or stipend, unless excepting such debt from discharge under this paragraph
will impose an undue hardship on the debtor and the debtor's
dependents." <a href="#6a">Return to article</a>

<a name="7">7</a> Section
1327(a) of the Bankruptcy Code provides that "the provisions of a
confirmed plan bind the debtor and each creditor, whether or not the claim
of such creditor is provided for by the plan, and whether or not such
creditor has objected to, has accepted or has rejected the plan." <a href="#7a">Return to article</a>

<a name="8">8</a> Pardee, 218 B.R. at 926. <a href="#8a">Return to article</a>

<a name="9">9</a> Id. at 922-26. <a href="#9a">Return to article</a>

<a name="10">10</a> Id. at 927. <a href="#10a">Return to article</a>

<a name="11">11</a> Id. at 932. <a href="#11a">Return to article</a>

<a name="12">12</a> Id. at 935-36. <a href="#12a">Return to article</a>

<a name="13">13</a> Id. at 936-41. <a href="#13a">Return to article</a>

<a name="14">14</a> Id. at 927. <a href="#14a">Return to article</a>

<a name="15">15</a> Pardee, 193 F.3d at 1086 (citing Pardee, 218 B.R.
at 925). <a href="#15a">Return to article</a>

<a name="16">16</a> See, e.g., Stratosphere Litig. L.L.C. v. Grand Casinos
Inc., 298 F.3d 1137, 1143 (9th Cir. 2002)
(holding that confirmation order barred successor trustee from collaterally
challenging illegal plan provision that discharged the liabilities of third
parties); Andersen v. UNIPAC-NEBHELP (In re Andersen), 179 F.3d 1253, 1254 (10th Cir.
1999) (holding that confirmation order was res
judicata on the issue of undue hardship even
though plan provision purporting to discharge student loan without proof of
undue hardship was inconsistent with the Bankruptcy Code because creditor
failed to timely challenge the plan language); In re K.D. Co., 254 B.R. 480, 490-91
(BAP 10th Cir. 2000) (chapter 11 provision allowing unpaid administrative
claimants to seek disgorgement from certain identified professionals rather
than from all administrative claimants was binding and enforceable on
professionals even though plan provision was inconsistent with the
Bankruptcy Code because professionals had notice of the confirmation
hearing and failed to timely object to the plan or appeal the confirmation
order.); Factors Funding Co. v. Fili (In re
Fili), 257 B.R. 370, 372-74 (BAP 1st Cir.
2001) (affirming bankruptcy court's disallowance of proof of claim
filed before the claims bar date, but after chapter 13 plan was confirmed
on res judicata
grounds because plan unambiguously provided that claim would be disallowed
in total and discharged); Lawrence v. Educ.
Credit Mgmt. Corp., 251 B.R. 467, 472-73 (E.D.
Va. 2000) (student loan creditor with notice of a chapter 13 plan provision
waived right to object to plan where creditor never objected to plan and
accepted payment from chapter 13 trustee); Khabbaz
v. Sallie Mae Servicing Corp. (In re El Khabbaz), 264 B.R. 204, 208 (Bankr. N.D. Iowa 2001) (recognizing that
"a majority of courts enforce offending plan provisions even though
acknowledging the provision may be contrary to the Code") (citations
omitted); In re Taylor, 280 B.R. 711, 714 (Bankr. S.D. Ala. 2001) (creditor that failed
to object to treatment of its claim in chapter 13 plan and amended plans or
appeal the confirmation order could not object to treatment of its claim
more than four years after entry of the confirmation order even if
treatment was not authorized under the Bankruptcy Code); Patton v. U.S. Dep't. of Educ. (In re Patton), 261 B.R. 44, 48 (Bankr. E.D. Wash. 2001) (precluding
post-confirmation challenge of student loan discharge for undue hardship,
although noting that inclusion of illegal discharge provision may be
grounds for sanctions); Educ. Credit Mgmt.
Corp. v. York (In re York), 250 B.R. 842, 844
(Bankr. D. Del. 2000) (holding that confirmation order is res judicata on discharge of
post-petition student loan interest). Cf. In
re Vincent, 293 B.R. 467, 470 (Bankr.
E.D. Ark. 2003) (noting that although creditor who failed to object to plan
that purported to discharge interest on secured claim would normally be
bound by confirmation order, debtor was nevertheless required to pay
amended claim in full, and debtor's obligation would not be
discharged, where debtor had been barred from objecting to amended claim as
discovery sanction). <a href="#16a">Return to article</a>

<a name="17">17</a> In re Ramey, 301 B.R. 534, 545
(Bankr. E.D. Ark. 2003) (holding that order confirming chapter 13 plan that
provided for treatment of secured claim as mere unsecured claim was
entitled to res judicata effect and prevented creditor from belatedly asserting that
its claim should have been treated as a secured claim). <a href="#17a">Return to article</a>

<a name="18">18</a> Patton, 261 B.R. at 48
(citations omitted). <a href="#18a">Return to article</a>

<a name="19">19</a> Wolfberg, 255 B.R. at
883. <a href="#19a">Return to article</a>

<a name="20">20</a> It is
perhaps not surprising that this opinion is peppered with military
references given that Judge Klein (and Judge John E. Ryan, who wrote the
majority opinion in Pardee and the dissent in Repp) served in the U.S. Armed Forces during the Vietnam War. <a href="#20a">Return to article</a>

<a name="21">21</a> Repp, 307 B.R. at 146. <a href="#21a">Return to article</a>

<a name="22">22</a> Id. at 149. <a href="#22a">Return to article</a>

<a name="23">23</a> Id. <a href="#23a">Return to article</a>

<a name="24">24</a> Id. at 150. <a href="#24a">Return to article</a>

<a name="25">25</a> Id. at 152-53. <a href="#25a">Return to article</a>

<a name="26">26</a> Id. at 154. <a href="#26a">Return to article</a>

<a name="27">27</a> Id. at 154-56. <a href="#27a">Return to article</a>

<a name="28">28</a> Id. at 149. <a href="#28a">Return to article</a>

<a name="29">29</a> At the time that this article is written, it is
unclear whether Pardee is still the law in the Ninth Circuit. It is undeniable that Repp takes the wind out of Pardee's sails. Any
student loan creditor that falls asleep at the switch can look to Repp as a basis for
challenging confirmation orders that confirm plans containing illegal plan
provisions on res judicata grounds. <a href="#29a">Return to article</a>

<a name="30">30</a> Enewally v. Wash. Mut. Bank (In re Enewally), 368 F.3d 1165 (9th Cir. 2004). <a href="#30a">Return to article</a>

<a name="31">31</a> Id. at 1172-1173. <a href="#31a">Return to article</a>

<a name="32">32</a> Id. <a href="#32a">Return to article</a>

<a name="33">33</a> Id. at 1173 (quoting Cen-Pen Corp. v. Hanson, 58 F.3d 89,
93 (4th Cir. 1995) (quoting In re Beard, 112 B.R. 951, 956 (Bankr. N.D. Ind. 1990))). <a href="#33a">Return to article</a>

<a name="34">34</a> See, also, Hanson v. Educ. Credit Mgmt. Corp. (In re Hanson), 308 B.R. 903 (W.D. Wis. 2004) (recognizing a growing
number of cases holding that due process requirements for the discharge of
a student loan are satisfied only by the initiation of an adversary
proceeding). <a href="#34a">Return to article</a>

<a name="35">35</a> Repp, 307 B.R. at 154. <a href="#35a">Return to article</a>

<a name="36">36</a> In re Webber, 251 B.R.
554, 557-58 (Bankr. D. Ariz. 2000) (denying confirmation order of a chapter
13 plan because the inclusion of a student loan discharge provision
violated Bankruptcy Rule 7001(6)). <a href="#36a">Return to article</a>

<a name="37">37</a> Mammel, 249 B.R. at 243. <a href="#37a">Return to article</a>

<a name="38">38</a> In re Evans, 242 B.R.
407, 411-12 (Bankr. S.D. Ohio 1999) (citations omitted). <a href="#38a">Return to article</a>

<a name="39">39</a> Mammel, 249 B.R. at 243. <a href="#39a">Return to article</a>

<a name="40">40</a> See, e.g., Evans, 242 B.R. at
412-13 (holding that debtor's attorney was required to show cause why
the inclusion of the student loan discharge provision in the debtor's
chapter 13 plan did not violate Rule 9011(b) so as to subject him to
sanctions and denying the chapter 13 plan confirmation); In re Hensley, 249 B.R. at 323-24
(Bankr. W.D. Okla. 2000) (holding that bankruptcy counsel's
intentional inclusion of the student loan discharge language was both
unethical and sanctionable conduct pursuant to Rule 9011, but deferring
sanctions on condition that counsel strike the offending provisions from
the confirmed plan); In re Lemons, 285 B.R. 327, 333 (Bankr. W.D. Okla. 2002) (holding that
inclusion of language terminating the accrual of interest and discharging
expenses and penalties related to the student loan debt warranted the
imposition of sanctions); In re Wright, 279 B.R. 886, 889 (Bankr. D. Kan. 2002) (holding that,
absent a good-faith basis, the inclusion of a student loan discharge
provision in the hope that it will trap the unwary student loan creditor
should result in the imposition of sanctions); Patton, 261 B.R. at 48 (noting
the inclusion of undue hardship student loan discharge provisions in
chapter 13 plans may be grounds for sanctions, even after the plans were
confirmed and the provisions were found to be binding on the parties). <a href="#40a">Return to article</a>

<a name="41">41</a> See Evans, 242 B.R. at 412; Hensley, 249 B.R. at
323-24. <a href="#41a">Return to article</a>

<a name="42">42</a> Andersen, 179 F.3d at 1259. <a href="#42a">Return to article</a>

<a name="43">43</a> Andersen, 179 F.3d at 1259; Pardee, 193 F.3d at 1086 (citing Andersen, 179 F.3d
at 1259). <a href="#43a">Return to article</a>

<a name="44">44</a> Patton, 261 B.R. at 48. <a href="#44a">Return to article</a>

<a name="45">45</a> Taylor, 503 U.S. at 644,
112 S.Ct. at 1648, 118 L.Ed.2d at 288. <a href="#45a">Return to article</a>

<a name="46">46</a> See Hensley, 249 B.R. at 323. <a href="#46a">Return to article</a>

Journal Authors

Keith Charles Owens

Journal Date

Friday, October 1, 2004 - 12:00

Bankruptcy Rule

2004