412 F.3d 679 (6th Cir. 2005), 04-3525, In re Ruehle

Docket Nº:04-3525.
Citation:412 F.3d 679
Party Name:In re: Stephanie RUEHLE, Debtor. Stephanie Ruehle, Plaintiff-Appellant, v. EDUCATIONAL CREDIT MANAGEMENT CORPORATION, Defendant-Appellee.
Case Date:June 23, 2005
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

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412 F.3d 679 (6th Cir. 2005)

In re: Stephanie RUEHLE, Debtor.

Stephanie Ruehle, Plaintiff-Appellant,



No. 04-3525.

United States Court of Appeals, Sixth Circuit

June 23, 2005

Submitted: April 26, 2005.

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Donald M. Miller, Sr., Canton, Ohio, for Appellant. Daniel S. Fisher, St. Paul, Minnesota, for Appellee.

Before: DAUGHTREY and GIBBONS, Circuit Judges; SARGUS, District Judge. [*]

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DAUGHTREY, Circuit Judge.

This case comes to us from the Bankruptcy Appellate Panel, which affirmed the bankruptcy court's order vacating the discharge under Chapter 13 of debtor Stephanie Ruehle's student loans because she failed to initiate an adversary hearing and establish "undue hardship," as required by 11 U.S.C. § 523(a)(8) and Federal Rule of Bankruptcy Procedure 7001(6). In response to Educational Credit Management's motion for relief under Federal Rule of Civil Procedure 60(b)(4), filed in the bankruptcy court following the debtor's purported "discharge by declaration," Ruehle invoked the provisions of 11 U.S.C. § 1327(a), contending that the confirmed plan was binding and, therefore, that relief was barred by the doctrine of res judicata. The bankruptcy court rejected this argument, holding that the discharge had been obtained in violation of the creditor's substantial due process rights and was therefore not merely illegal, but void. The Bankruptcy Appellate Panel affirmed, describing the bankruptcy court's decision as "well-reasoned." We fully agree both with the result and with the Panel's assessment of the bankruptcy court's opinion.

The record indicates that Ruehle had received $17,000 in unsecured student loans from Bank One/Great Lakes Higher Education Corporation in order to attend the University of Akron between 1990 and 1995. In July 1998, she filed a Chapter 13 bankruptcy petition that scheduled only two debts: a secured debt for an automobile lease and the unsecured student loan debt at issue here. The plan that she proposed called for repayment of 5 percent of her student loans over a period of 40 months, at $50.00 a month, and included the following plainly illegal provision that purported to discharge the student loan debt without an adversary proceeding, a process called "discharge by declaration":

All timely filed and allowed unsecured claims, including the ... government guaranteed education loans, shall be paid five percent (5%) of each claim, and the balance of each claim shall be discharged. Pursuant to 11 U.S.C. Section 523(a)(8), excepting the aforementioned education loans from discharge will impose an undue hardship on the debtor and the debtor's dependents. Confirmation of debtor's plan shall constitute a finding to that effect and that said debt is dischargeable.

Despite the wording of the discharge, the petition indicated that at the time of filing, Ruehle was 26 years old, single, and had no dependents.

The proposed discharge violated both the Bankruptcy Code, U.S.C. § 523(a)(8), and Federal Rule of Bankruptcy Procedure 7001(6). These provisions require that to justify the discharge of a student loan debt, a debtor must establish undue hardship by filing a complaint for an adversarial hearing and serving the creditor with a summons. See Fed. R. Bankr.P. 7003 and 7004. Because that procedure was not followed in this case, the creditor did not file an objection to Ruehle's "discharge by declaration" and, despite the obvious code and rule violations, her Chapter 13 plan was confirmed in October 1998. Ruehle completed all payments under the plan and received a discharge in April 2001.

In the meantime, Ruehle's student loans had been assigned by the original lender to Educational Credit Management Corporation, a "private, non-profit corporation that provides specialized guarantor services to the United States Department of Education

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within the Federal Family Education Loan...

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