In re Andersen, 98-3049.

• Decision Date: 07 June 1999
• Docket Number: No. 98-3049.,98-3049.
• Citation: 179 F.3d 1253
• Parties: In re Doreen Ann ANDERSEN, Debtor. Doreen Ann Andersen, Plaintiff-Counter-Defendant-Appellee. v. UNIPAC-NEBHELP, Defendant, and Educational Credit Management Corporation, successor to Transitional Guaranty Agency and successor in interest to Higher Education Assistance Foundation, Defendant-Counter-Claimant-Appellant, United Student Aid Funds, Inc., Amicus Curiae.
• Court: U.S. Court of Appeals — Tenth Circuit

179 F.3d 1253

In re Doreen Ann ANDERSEN, Debtor Doreen Ann Andersen, Plaintiff-Counter-Defendant-Appellee. v. UNIPAC-NEBHELP, Defendant, and Educational Credit Management Corporation, successor to Transitional Guaranty Agency and successor in interest to Higher Education Assistance Foundation, Defendant-Counter-Claimant-Appellant United Student Aid Funds, Inc., Amicus Curiae.

No. 98-3049.

United States Court of Appeals, Tenth Circuit.

June 7, 1999.

N. Larry Bork, Goodell, Straton, Edmonds & Palmer, Topeka, Kansas (Jodean A. Thronson, Staff Attorney, Educational Credit Management Corporation, St. Paul, Minnesota, with him on the brief), for Defendant-Counter-Claimant-Appellant.

Donald B. Clark, Wichita, Kansas, for Plaintiff-Counter-Defendant-Appellee.

Mac D. Finlayson, Flowers and Finlayson, P.C., Tulsa, Oklahoma, filed an amicus brief for United Student Aid Funds, Inc.

Before ANDERSON and McWILLIAMS, Circuit Judges, and COOK, District Judge.^*

COOK, District Judge.

Defendant-Appellant Educational Credit Management Corporation brings this appeal from a final order of the Tenth Circuit Bankruptcy Appellate Panel, reversing the judgment of the United States Bankruptcy Court for the District of Kansas. We have jurisdiction by virtue of 28 U.S.C. § 158(d), and we affirm.

I. Background

The parties have stipulated to the relevant and material facts. On December 27, 1990, the debtor herein, Doreen Andersen, filed for bankruptcy under chapter 13. At the time that the petition was filed, Andersen had outstanding student loan obligations, and the underlying promissory notes were held by various institutions. The claims of Higher Education Assistance Foundation (HEAF) and UNIPAC-NEBHELP represented the balance due on four student loan promissory notes executed by Andersen.¹ HEAF was the guaranty agency for the promissory notes, and UNIPAC-NEBHELP was the lending bank. Subsequent to Andersen filing her petition in bankruptcy, HEAF filed three proofs of claim for the balance due on the four notes.

Andersen filed a chapter 13 plan containing the following language:

All timely filed and allowed unsecured claims, including the claims of Higher Education Assistance Foundation and UNIPAC-NEBHELP, which are government guaranteed education loans, shall be paid ten percent (10%) of each claim, and the balance of each claim shall be discharged. Pursuant to 11 U.S.C. § 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.

HEAF filed an untimely objection to the plan, which was denied for that reason. The plan, which included the above language, was subsequently confirmed. HEAF did not appeal the order of confirmation.

HEAF ceased operations on December 31, 1993, during the course of Andersen's bankruptcy, and transferred the majority of its bankruptcy loan portfolio, including Andersen's promissory notes, to the United States Department of Education. Also during the course of Andersen's bankruptcy, in May 1994, the Department of Education transferred title of these promissory notes to Educational Credit Management Corporation (ECMC), which operates as a non-profit educational loan guaranty agency under the Federal Family Education Loan Program (FFELP).

Andersen completed all payments under the confirmed plan and was granted a discharge on December 22, 1994. ECMC reviewed Andersen's account during the course of processing the discharge and determined that the second and third promissory notes had not reached default status before Andersen filed for bankruptcy. Pursuant to the FFELP, ECMC initiated repurchase proceedings for the second and third notes with UNIPAC-NEBHELP, and the repurchase was completed on March 10, 1995. UNIPAC-NEBHELP took title to the second and third notes, and ECMC remained the guarantor of the repurchased notes.

Because Andersen had defaulted on the first and fourth notes prior to filing for bankruptcy, ECMC initiated collection proceedings on those notes, and on January 9, 1995, ECMC sent Andersen a letter requesting payment of the first and fourth notes. Andersen's counsel responded with a letter directed to ECMC on January 30 stating that the debt had been discharged. ECMC promptly replied and expressed its position that the debt was not discharged. ECMC continued collection activity, requesting payment on July 20, August 3, and August 10, 1995.

Andersen reopened her bankruptcy case on September 25, 1995, for the purpose of filing a complaint to determine the dischargeability of the debt which ECMC was attempting to collect. At that point, ECMC ceased collection activity. However, the reopening of the case constituted a basis for UNIPAC-NEBHELP to file a claim for payment of the second and third notes. ECMC paid UNIPAC-NEBHELP's claim on March 15, 1996, and title to the second and third notes was transferred back to ECMC.

Upon outlining these stipulated facts, the United States Bankruptcy Court for the District of Kansas stated the issue as follows: "whether a debtor may, by including language in a plan, discharge an otherwise nondischargeable debt in Chapter 13." The court noted that the real issue is "whether the plan provisions here constitute a binding adjudication of hardship." Reasoning that a judicial determination of undue hardship required Andersen to bring an adversary proceeding, wherein she would have had the burden of proof on the issue, the court held that, "Including language in a proposed Chapter 13 plan, which provides that student loans are discharged after completion of plan payments and that confirmation of the plan constitutes a finding of undue hardship, is not sufficient to overcome the presumption of nondischargeability of student loan debts." Responding to Andersen's argument that the confirmed plan nevertheless constituted res judicata on the issue of the dischargeability of the student loans, the court said that,

Language in a plan does not constitute a judicial determination of hardship. HEAF and the other creditors were entitled to a higher level of due process before the confirmation of the plan invokes the concept of res judicata. Congress' clear intent to except student loans from discharge cannot be overcome simply by inserting language into a proposed plan providing that confirmation of the plan constitutes a finding of undue hardship.

The court concluded that, because Andersen did not formally seek a determination of dischargeability, her student loans, in the amount of $15,085.42,² were not discharged under the confirmed plan.

Andersen appealed the decision to the Tenth Circuit Bankruptcy Appellate Panel (BAP). In re Andersen, 215 B.R. 792 (10th Cir. BAP 1998). Citing the fact that the issue herein arose after confirmation of the plan and after entry of the order of discharge, id. at 794, the BAP held that confirmation of the plan constituted a finding of undue hardship, rendering the student loans dischargeable. Id. at 796. The BAP thus reversed the ruling of the lower court, concluding that "the ultimate order of discharge properly discharged the balance of the student loan obligation." Id. This appeal followed.

II. Discussion

The relevant facts are stipulated, and we review de novo the BAP's conclusions of law. Woodcock v. Chemical Bank, 45 F.3d 363, 367 (10th Cir.1995). The Bankruptcy Code generally provides that a discharge does not discharge a debtor from a debt arising from an educational loan unless excepting such debt from discharge will impose an undue hardship on the debtor and the debtor's dependents.³ 11 U.S.C. § 523(a)(8).⁴ This general exception to the discharge of educational loans is applicable to the present chapter 13 case by virtue of 11 U.S.C. § 1328(a)(2).⁵ Based on these provisions, ECMC argues that the determination of undue hardship is self-executing and requires a formal adversary proceeding, apart from the plan process. As we note above, the Bankruptcy Court agreed with ECMC's position and held that Andersen's student loans were not discharged, despite the confirmed plan's contrary language. ECMC further argues that the BAP erred in reversing the judgment of the lower court and shifting the burden of proving a lack of undue hardship to the creditor. While we agree with certain propositions advanced by ECMC, we disagree with the conclusion which ECMC seeks to draw from those propositions in this case.

We note at the outset that ECMC is correct in stating that the "debtor bears the burden of demonstrating undue hardship" with respect to the dischargeability of educational loans. Woodcock, 45 F.3d at 367. And, we may assume that the Bankruptcy Court correctly held that a debtor must normally prove undue hardship by bringing an adversary proceeding directed to that issue. See Buford v. Higher Education Assistance Foundation, 85 B.R. 579, 581-82 (D.Kan.1988); Bankruptcy Rule 7001. However, these statements do not resolve the present issue before us. The real issue here is not whether Andersen properly met her burden of proving an undue hardship, which she clearly did not, but whether confirmation of the plan constitutes a binding adjudication of hardship.

In the present case, Andersen placed language in her proposed plan that, if confirmed, would clearly have a negative impact on the claims of HEAF and UNIPAC-NEBHELP. As discussed above, the plan provided that these claims shall be paid ten percent, and the balance of each claim shall be discharged. Recognizing the requirement that such claims may only be discharged upon a finding of undue hardship, Andersen further provided in her plan that excepting such loans from discharge will impose an undue hardship, that confirmation of the plan shall constitute a finding to that effect, and that the debt is dischargeable.

Despite the inclusion of this adverse provision in the...