United Student Aid Funds, Inc. v. Espinosa

United Student Aid Funds, Inc., Petitioner

v

Francisco J. Espinosa, Defendant.

Supreme Court of the United States

08-1134

Factual Background

The debtor (defendant) in this case filed a plan with the Bankruptcy Court that proposed to discharge a portion of his student loan debt, but he failed to initiate the adversary proceeding as required for such discharge.  The creditor (petitioner) received notice of, but did not object to, the plan, and failed to file an appeal after the Bankruptcy Court subsequently confirmed the plan.  Years later, the creditor filed a motion under Federal Rule of Civil Procedure 60(b)(4) asking the Bankruptcy Court to rule that its order confirming the plan was void because the order was issued in violation of the Code and Rules.

Issue

The court decided whether an order that confirms the discharge of a student loan debt, in the absence of an undue hardship finding or an adversary proceeding, or both, is a void judgment.

Discussion

The court confirmed that Chapter 13 permits individual debtors to develop a plan to repay all or a portion of their debts over a period of time specified in the plan.  Also a proposed bankruptcy plan becomes effective upon confirmation and will result in a discharge of the debts listed in the plan if the debtor completes the payments the plan requires.

The court observed that under Chapter 13 of the Bankruptcy Code (Code), a debtor may obtain a discharge of certain government-sponsored student loan debts only if failure to discharge that debt would impose an undue hardship on the debtor and his dependents.  Further, the Federal Rules of Bankruptcy Procedure require bankruptcy courts to make this undue hardship determination in an adversary proceeding which the party seeking the determination must initiate by serving a summons and complaint on his adversary.

The court further observed that conserving assets is an important concern in a bankruptcy proceeding.  The court assumed that, in some cases, a debtor and creditor may agree that payment of a student loan debt will cause the debtor an undue hardship sufficient to justify discharge.  In such a case, there is no reason that compliance with the undue hardship requirement should impose significant costs on the parties or materially delay confirmation of the plan.  Neither the Code nor the Rules prevent the parties from stipulating to the underlying facts of undue hardship, and neither prevents the creditor from waiving service of a summons and complaint.  But, to comply with bankruptcy code, the bankruptcy court must make an independent determination of undue hardship before a plan is confirmed, even if the creditor fails to object or appear in the adversary proceeding.

The court found that in issuing its judgment, the Court of Appeals looked beyond the narrow question whether the Bankruptcy Court’s order confirming Espinosa’s plan was void.  It canvassed other bankruptcy court decisions within the Circuit that presented a different question, whether a bankruptcy court presented with a debtor’s plan that proposes to discharge a student loan debt, in the absence of an adversary proceeding to determine undue hardship, should confirm the plan despite its failure to comply with the Code and Rules.  The court concluded that bankruptcy courts must confirm a plan proposing the discharge of a student loan debt without a determination of undue hardship in an adversary proceeding unless the creditor timely raises a specific objection.

Conclusion

The court granted certiorari to resolve a disagreement among the Courts of Appeals as to whether an order that confirms the discharge of a student loan debt in the absence of an undue hardship finding or an adversary proceeding, or both, is a void judgment.


Inside United Student Aid Funds, Inc. v. Espinosa