The U.S. Supreme Court just ruled 9-0 in United Student Aid Funds Inc. v. Espinosa, 559 U.S. ____ (2010), which held that the bankruptcy court’s order confirming the debtor’s plan is not voidable under Federal Rule of Civil Procedure 60(b) when no jurisdictional and/or due process violations have occurred. The Court noted that United’s remedy should have been to timely appeal the confirmation order, which it did not do. The Court further noted that while it is the duty of the bankruptcy court to make a finding of undue hardship, the lack of that finding amounted to legal error, and therefore, the confirmation order is binding.
Espinosa filed a chapter 13 plan that treated only the principal portion of the student loan debt, and the remainder of the claim would be subject to discharge. United received actual notice of these provisions, filed a proof of claim and failed to object to confirmation or raise any issues regarding the violation of the rules of procedure. The plan was subsequently confirmed by the bankruptcy court. Espinosa completed his plan and received a discharge order, discharging, among other things, the balance of the student loan owed to United. Post-discharge, United sought to collect. Espinosa filed a motion to enforce the discharge order in the bankruptcy court, which was granted. The district court reversed, and Espinosa appealed. The Ninth Circuit reversed the district court, holding that the bankruptcy court committed legal error in confirming the plan; however, as actual notice was admitted by United, the error did not provide a basis for setting aside the valid judgment.
In affirming the Ninth Circuit’s ruling, the Supreme Court noted that Rule 60(b)(4), the rule United used to seek relief from the confirmation order, only voided judgments in instances where there was a jurisdictional deficiency or lack of due process. The Court further went on to note that in order to void a judgment based on jurisdictional grounds, the Court issuing the judgment would have to assert a clear “usurpation of power” and lack even an “arguable basis” for jurisdiction.
United’s next contention was that Espinosa failed to follow the Rules of Bankruptcy Procedure, specifically Rule 7004(b)(3), and that this deprived United of its due process for failure to serve a summons and complaint. The Court rejected this argument, indicating that due process only requires notice “reasonably calculated, under all circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” See Mullane v. Central Hanover Bank and Trust Co., 547 U.S. 220 (1950). As United had actual notice of the pendency of the proceedings, the procedural deficiencies of Espinosa did not entitle United to void the judgment based on Rule 60(b)(4).
Lastly, United argued that the order confirming the plan was void due to the bankruptcy court lacking the authority to confirm the plan absent the finding of hardship. United argued that 11 U.S.C. §§523(a)(8) and 1325(a)(1) read together voided a confirmation order that discharged student loan debt without a finding of undue hardship. The Court found that the failure of the bankruptcy court to find an undue hardship did not render the confirmation order void, but was merely legal error on the Court’s behalf. The Court pointed out that United had notice of the error and failed to object and/or timely appeal, and that absent those remedies, Rule 60(b)(4) did not allow United to set aside the judgment.
The Supreme Court also acknowledged the bankruptcy court’s duty to not confirm plans that have provisions that attempt to circumvent the requirements of 11 U.S.C. §1325(a) and other applicable provisions of the Code. The Court seemed to instruct bankruptcy courts to direct debtors to conform to the requirements of the statute and indicated that bankruptcy courts had “the obligation” to police plans that failed to conform to BAPCPA’s requirements.
Going forward, it appears that debtors will be able to include provisions in chapter 13 plans that run afoul of the statute’s requirements on the hope that a plan will get confirmed prior to the creditor being able to act. In fact, the Supreme Court noted the potential of bad-faith litigation tactics as a part of this ruling, and even suggested that Congress might enact additional provisions to address the situation likely to follow from this ruling. The remedy, the Court noted, would be the bankruptcy court’s powers to sanction under Federal Rule of Bankruptcy Procedure 9011. This ruling will require creditors, trustees and interested parties to review plans very carefully, watching for clever debtors who seek to confirm plans that may try to discharge taxes, student loans, marital obligations, etc. and plans that fail to follow the Federal Rules of Bankruptcy Procedure.