553 F.3d 1193 (9th Cir. 2008), 06-16421, Espinosa v. United Student Aid Funds, Inc.

Docket Nº:06-16421.
Citation:553 F.3d 1193
Party Name:Francisco J. ESPINOSA, Plaintiff-Appellant, v. UNITED STUDENT AID FUNDS, INC., Defendant-Appellee.
Case Date:October 02, 2008
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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553 F.3d 1193 (9th Cir. 2008)

Francisco J. ESPINOSA, Plaintiff-Appellant,

v.

UNITED STUDENT AID FUNDS, INC., Defendant-Appellee.

No. 06-16421.

United States Court of Appeals, Ninth Circuit

October 2, 2008

Argued and Submitted April 16, 2008.

Submission Vacated June 24, 2008.

Resubmitted Aug. 29, 2008.

Amended Dec. 10, 2008.

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[Copyrighted Material Omitted]

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Michael J. Meehan, Munger Chadwick, James L. Robinson, Jr., Robinson & Rylander, P.C., Tucson, AZ, for the plaintiff-appellant.

Madeleine C. Wanslee, Gust Rosenfeld P.L.C., Phoenix, AZ, for the defendant-appellee.

Appeal from the United States District Court for the District of Arizona; Raner C. Collins, District Judge, Presiding. D.C. No. CV-04-00447-RCC.

Before: ALEX KOZINSKI, Chief Judge, A. WALLACE TASHIMA and N. RANDY SMITH, Circuit Judges.

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ORDER AMENDING OPINION AND AMENDED OPINION

ORDER

The opinion filed October 2, 2008 is amended as follows:

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After the sentence ending with " persuasive," insert: " Rather, we agree with Judge Lundin that ‘ Pardee and Andersen stand soundly for the better-reasoned principle that notice of how the Chapter 13 plan affects creditors' rights is all that the Constitution, the Bankruptcy Code and the Bankruptcy Rules require to bind creditors to the provisions of a confirmed plan under § 1327(a).’ Keith M. Lundin, Chapter 13 Bankruptcy § 229.1 (3d ed.2000 & Supp.2004)."

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Before the sentence beginning with " Seeing no reason," start a new paragraph and insert: " Funds also relies heavily on Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440, 124 S.Ct. 1905, 158 L.Ed.2d 764 (2004). But as Judge Lundin explains, Hood is at best unhelpful and more likely undermines Funds's argument:

Admittedly, sovereign immunity, not the preclusive effect of confirmation, was the issue in Hood; but the point remains that the Supreme Court recognized in Hood that an adversary proceeding initiated by complaint and summons is not a statutory or constitutional prerequisite to adjudication of the discharge of a student loan. Many of the cases taking issue with Pardee and Andersen declare the contrary view that the discharge of a student loan by any procedure other than adversary proceeding violates due process. This premise is not consistent with Hood.

Keith M. Lundin, Chapter 13 Bankruptcy § 346.1 (3d ed. 2000 & Supp.2004)."

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After the sentence ending with " proof of claim," insert: " Because ‘ due process does not require actual notice,’ Jones v. Flowers, 547 U.S. 220, 225, 126 S.Ct. 1708, 164 L.Ed.2d 415 (2006), it follows a fortiori that actual notice satisfies due process. We find the argument that the Constitution requires something more than actual notice strained to the point of the bizarre."

Page 14034, Line 4

Start a new paragraph at the sentence beginning with " The notices"

Page 14034, Lines 4-5

Replace " Funds did receive" with " Funds received"

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Delete " ; County of Ventura Tax Collector v. Brawders ( In re Brawders ), 325 B.R. 405, 414 (9th Cir.BAP2005)"

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Replace " If the creditor fails to object" with " If the creditor is notified and fails to object"

The petition for rehearing en banc is denied. See Fed R.App. P. 35. No further petitions may be filed and all pending motions are denied.

OPINION

KOZINSKI, Chief Judge:

In our earlier opinion in this case, Espinosa v. United Student Aid Funds, Inc., 530 F.3d 895 (9th Cir.2008), we remanded to the bankruptcy court for a determination under Rule 60(a) whether exclusion of petitioner's student debt from its discharge order was the result of a clerical error. The bankruptcy court confirmed that:

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the inclusion of paragraph 1(c) in the Discharge Order [which exempted student loan obligations from the general discharge] was inserted because of a clerical mistake, because it was the clear intent of the Court, as reflected in the Chapter 13 Plan, as approved by the Court, that all student loan-related obligations were to be discharged if the debtor successfully performed and completed the Plan.

Order of August 20, 2008. We thus finally have presented to us the question that the parties briefed and argued: Whether a debtor may obtain discharge of a student loan by including it in a Chapter 13 plan, if the creditor fails to object after notice of the proposed plan.

Facts

Espinosa filed a Chapter 13 petition and proposed plan that provided for repayment of $13,250 in student loans to United Student Aid Funds, Inc. (Funds). Funds was notified and filed a proof of claim in the amount of $17,832.15.1 The bankruptcy court eventually confirmed the plan, and the Chapter 13 Trustee mailed Funds a notice advising it that " [t]he amount of the claim filed differs from the amount listed for payment in the plan. Your claim will be paid as listed in the plan." The notice also contained the following warning:

If an interested party wishes to dispute the above stated treatment of the claim, it is the responsibility of the party to address the dispute. The claim will be treated as indicated above unless the Trustee receives within 30 days from this mailing, a written request for different treatment. The request should set forth the specific grounds for alternative treatment and should be filed with the Clerk of the Court, with a copy mailed to the Trustee at [address deleted]. [Emphasis added.]

Funds did not object and Espinosa successfully completed the plan. The bankruptcy court then granted him a discharge.

Three years later, Funds began intercepting Espinosa's income tax refunds to satisfy the unpaid portion of the student loan. Espinosa petitioned the bankruptcy court for an order holding Funds in contempt for violating the discharge injunction. See 11 U.S.C. § 524(a)(2). Funds cross-moved for relief from the bankruptcy court's order confirming the plan, on the ground that the order had been entered in violation of Funds's rights under the Bankruptcy Code and Rules.

This is the nub of Funds's argument: To initiate bankruptcy proceedings, a Chapter 13 debtor must notify creditors by mail of the deadline for filing objections and the date of the confirmation hearing. Fed. R. Bankr.P.2002(b). Espinosa did this. However, student loans may not be discharged under Chapter 13 unless the debtor can show " undue hardship," 11 U.S.C. § 523(a)(8), and such a showing can only be made in an adversary proceeding. See Fed. R. Bankr.P. 7001(6). To initiate an adversary, the debtor must file a complaint, id. 7003, which must be served on the student loan creditor along with a summons, id. 7004. Espinosa didn't do this. Instead Espinosa simply listed the student debt in his Chapter 13 plan, which the bankruptcy court confirmed. Espinosa then made the payments specified in the plan, and the bankruptcy court eventually entered a discharge order. Funds based its motion for relief from this order on Espinosa's failure to initiate an adversary and his consequent failure to obtain a judicial determination of undue hardship.

The bankruptcy court rejected Funds's argument. It held that Funds had violated the discharge injunction and ordered

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Funds to cease all collection activity against Espinosa. It also denied Funds's motion for relief from the confirmed plan, holding that the plan became final when it was confirmed and that Funds should have objected to any procedural defect before confirmation. Funds appealed to the district court, which reversed. According to the district court, Funds was denied due process because it wasn't served with a complaint and summons. Espinosa appeals.

Analysis

Funds makes both a statutory and a constitutional argument for setting aside the confirmed bankruptcy plan. These arguments turn on the fact that Espinosa didn't obtain a judicial determination of undue hardship.

1.

Statutory Argument. Funds argues that the bankruptcy court should have set aside Espinosa's discharge because Espinosa didn't comply with the additional procedures required by the Bankruptcy Code and Rules to discharge student debt. Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee ), 193 F.3d 1083, 1086 (9th Cir.1999), which is on all fours with our case, forecloses this argument. As here, the student loan debtor in Pardee didn't employ these additional procedures, and the creditor there didn't file any objections to the proposed Chapter 13 plan, which provided that the student loan debt would be discharged. Id. at 1084. The bankruptcy court confirmed the plan, and eventually discharged the student loan debt. Id. The creditor subsequently argued that the confirmed plan wasn't final under 11 U.S.C. § 1327(a), because the creditor wasn't given the benefit of the additional procedures applicable to the discharge of student loans. Pardee, 193 F.3d at 1086. We firmly rejected this argument, following the Tenth Circuit's lead in Andersen v. UNIPAC-NEBHELP ( In re Andersen ), 179 F.3d 1253 (10th Cir.1999). In essence, Pardee held that a discharge is a final judgment and cannot be set aside or ignored because a party suddenly claims, years later, that the trial court committed an error.

Two circuits have disagreed with Pardee, and accepted Funds's statutory argument. See Educ. Credit Mgmt. Corp. v. Mersmann ( In re Mersmann ), 505 F.3d 1033, 1047-49 (10th Cir.2007) (en banc) (overruling Andersen ); Whelton v. Educ. Credit Mgmt. Corp., 432 F.3d 150, 154 (2d Cir.2005). These opinions divine some sort of conflict between the Bankruptcy Code's finality...

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