In re Banks

• Decision Date: 05 August 2002
• Docket Number: No. 02-1005.,02-1005.
• Citation: 299 F.3d 296
• Parties: In re Christopher BANKS; In re Diane M. Banks, Debtors. Christopher Banks, Plaintiff-Appellant, v. Sallie Mae Servicing Corporation; Educational Credit Management Corporation, Defendants-Appellees. United States of America, Amicus Curiae.
• Court: U.S. Court of Appeals — Fourth Circuit

299 F.3d 296

In re Christopher BANKS; In re Diane M. Banks, Debtors Christopher Banks, Plaintiff-Appellant, v. Sallie Mae Servicing Corporation; Educational Credit Management Corporation, Defendants-Appellees United States of America, Amicus Curiae.

No. 02-1005.

United States Court of Appeals, Fourth Circuit.

Argued June 5, 2002.

Decided August 5, 2002.

COPYRIGHT MATERIAL OMITTED

ARGUED: Mark Bennett Peterson, Ogle & Peterson, P.C., Charlottesville, Virginia, for Appellant. Steven Leftridge Thomas, Kay, Casto & Chaney, P.L.L.C., Charleston, West Virginia, for Appellees. Frank A. Rosenfeld, Appellate Staff, Civil Division, United States Department of Justice, Washington, D.C., for Amicus Curiae. ON BRIEF: Jeffrey A. Streiffer, Educational Credit Management Corporation, St. Paul, Minnesota, for Appellees. Robert D. McCallum, Jr., Assistant Attorney General, John L. Brownlee, United States Attorney, William Kanter, Appellate Staff, Civil Division, United States Department of Justice, Washington, D.C., for Amicus Curiae.

Before WILKINSON, Chief Judge, MOTZ, Circuit Judge, and BALDOCK, Senior Circuit Judge of the United States Court of Appeals for the Tenth Circuit, sitting by designation.

Affirmed by published opinion. Senior Judge BALDOCK wrote the opinion, in which Chief Judge WILKINSON and Judge DIANA GRIBBON MOTZ, joined.

BALDOCK, Circuit Judge.

Plaintiff-Appellant Christopher Banks brought an adversary proceeding before the United States Bankruptcy Court for the Western District of Virginia, seeking a declaratory judgment that, pursuant to the provisions of his confirmed Chapter 13 plan, he was not liable for post-petition interest on his student loan debt. Banks and Defendant Appellee Educational Credit Management Corporation (ECMC) filed cross motions for summary judgment. The bankruptcy court ruled in Banks' favor. ECMC appealed and the district court reversed. Banks appeals the district court order. We have jurisdiction pursuant to 28 U.S.C. § 158(d) and 28 U.S.C. § 1291. We affirm.

I.

In 1994, Banks filed a Chapter 13 petition seeking bankruptcy protection from a variety of debts including approximately $23,000 in federally guaranteed student loans. His initial and amended Chapter 13 plans treated Sallie Mae, the holder of his student loan notes, as the sole member of a separate class of unsecured creditors.¹ The plans each provided:

During the pendency of this case, no interest, penalties, late charges, or costs of collection, including attorneys fees, shall accrue.... Upon his discharge, Debtor ... shall be liable for only the unpaid balance of his prepetition debt.

Copies of the plans, along with a notice of the confirmation hearing, were mailed to Sallie Mae at a general address Banks provided. Sallie Mae and its assignees filed no objections to the plan and did not appear at the hearing.

On November 21, 1994, the bankruptcy court issued and mailed to creditors a confirmation order adopting the plan. The confirmation order provided the Trustee would pay Sallie Mae $4,103.23, which "SHALL BE APPLIED TO PRINCIPAL. NO INTEREST, PENALTIES, LATE CHARGES, OR COSTS OF COLLECTION (INCLUDING ATTORNEY'S FEES) SHALL ACCRUE." ECMC, Sallie Mae's assignee, does not dispute that it received the proposed plans, the hearing notice, and the confirmation order.

In 1999, the bankruptcy court issued a discharge order, closing the Chapter 13 case. Shortly thereafter, ECMC informed Banks by letter that it had applied the $4,103 in payments to interest rather than principal, had capitalized the remaining interest, and that he still owed $43,341.95.² Banks moved to reopen his Chapter 13 case, and filed an adversary proceeding seeking a declaration that the confirmation and discharge orders had discharged all post-petition interest that accrued during the pendency of the Chapter 13 proceeding.

The bankruptcy court ruled in Banks' favor, holding the confirmation order is res judicata, barring ECMC from challenging its enforcement. The court agreed with ECMC that post-petition interest should not have been ordered discharged absent an adversary hearing in which Banks proved undue hardship. Nevertheless, the court concluded "the finality of confirmation makes the post-petition interest tolling provision res judicata." The court relied on the Tenth Circuit decision in Andersen v. UNIPAC NEBHELP (In re Andersen), 179 F.3d 1253, 1258 (10th Cir.1999), and the Ninth Circuit Bankruptcy Panel's decision in Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee), 218 B.R. 916 (9th Cir.BAP1998), aff'd, 193 F.3d 1083 (9th Cir.1999), in which each court held the judicial policy favoring finality of confirmation must prevail even if the plan contained provisions contrary to the Bankruptcy Code.

ECMC appealed and the district court reversed, holding ECMC's claim for post-petition interest survived the discharge order. Although recognizing the conflict with Ninth and Tenth Circuit precedent, the district court held the confirmed plan did not operate as res judicata to bar collection of the interest. The court reasoned that while ECMC received copies of Banks' Chapter 13 plans, due process required a heightened degree of notice. The court also noted Banks' failure to initiate an adversary proceeding which would have provided such notice, and which is required under the Bankruptcy Code and Rules. The court concluded: "While the Court recognizes that sophisticated lenders such as ECMC, Great Lakes, and Sallie Mae should not turn a blind eye to the confirmation process, ... neither should they fall victim to a Chapter 13 plan that flouts both bankruptcy law and the constitution."

On appeal, Banks asserts: (1) the district court erred in concluding the plan provision mandating the non-accrual of post-petition interest required an adversary hearing; and (2) the district court erred in concluding the confirmation process violated ECMC's due process rights.

II.

Where a district court acts in its capacity as a bankruptcy appellate court, we review the bankruptcy court's decision independently. See Kielisch v. Educ. Credit Mgmt. Corp. (In re Kielisch), 258 F.3d 315, 319 (4th Cir.2001). We review the bankruptcy court's factual findings for clear error. Id. We review de novo the bankruptcy court's legal conclusions. Id. Whether a Chapter 13 plan provision required an adversary proceeding and whether the confirmation process violated a creditor's due process rights are both legal questions we review de novo.

A.

Student loans are nondischargeable in bankruptcy unless the Debtor can prove excepting the debt from discharge would impose an undue hardship. See 11 U.S.C. §§ 523(a)(8), 1328(a)(2). Post-petition interest on a nondischargeable debt also is nondischargeable. Bruning v. United States, 376 U.S. 358, 363, 84 S.Ct. 906, 11 L.Ed.2d 772 (1964); In re Kielisch, 258 F.3d at 324. Under Bruning, the Debtor remains personally liable following a bankruptcy discharge for post-petition interest on nondischargeable debts. 376 U.S. at 363, 84 S.Ct. 906; In re Kielisch, 258 F.3d at 324 (citing Bruning and finding post-petition interest on student loans nondischargeable in a Chapter 13 proceeding).

The Bankruptcy Code and Rules require Debtors to bring an adversary proceeding to determine the dischargeability of their student loans. Fed.R.Bankr.P. 7001(6). See also In re Kielisch, 258 F.3d at 324; In re Andersen, 179 F.3d at 1258. Debtors also must bring an adversary proceeding to discharge post-petition interest on student loan debt. See In re Kielisch, 258 F.3d at 324. Banks asserts an adversary proceeding was not required in this case because the plan provision sought to prohibit the accrual of post-petition interest and not to discharge interest accrued. This is a distinction without a difference. Federal Regulations direct creditors on a defaulted student loan debt to apply payments received first toward accrued interest and then to the principal balance. 34 C.F.R. § 682.404(f). Unpaid interest may be capitalized. Id. A Chapter 13 plan provision mandating that interest does not accrue clearly acts as a discharge of the post-petition interest the creditor is entitled to receive. Under Kielisch, such a provision must be the subject of an adversary hearing:

Allowing the Debtor to pay off loan principal without first permitting the application of the payment to satisfy postpetition interest would reduce the overall amount that the Debtors would have to pay ... thus allowing the Debtors to accomplish indirectly what they could not accomplish directly under the plain language of § 523(a)(8), i.e., a partial discharge of the interest on their student loan debts without a showing of undue hardship.

Id. at 324. The district court correctly concluded the plan provision mandating the non-accrual of post-petition interest required an adversary hearing.

B.

The Bankruptcy Code and Rules place the burden on the Debtor to file adversary proceedings to determine the dischargeability of student loan debts. See 11 U.S.C. § 523(a)(8), Fed. R. Bankr.P. 7001(6); see also In re Kielisch, 258 F.3d at 324. A Debtor commences an adversary proceeding by filing a complaint. Fed. R. Bankr.P. 7003. Where the creditor is a corporation, service of the complaint requires a summons delivered upon "an officer, a managing or general agent, or to any agent authorized by appointment or by law to receive service of process." Fed. R. Bankr.P. 7004(b)(3). The creditor-defendant has thirty days from the issuance of summons to file its answer. Fed. R. Bankr.P. 7012. The adversary proceeding is treated as a separate dispute between the Debtor and Creditor, subject to the procedural guidelines and safeguards contained in the Federal Rules of Civil Procedure. Fed. R. Bankr.P. 7001. As in a civil trial, the bankruptcy court rules on the dispute only after a trial or upon receipt of a dispositive motion. Id. In an adversary proceeding, the Debtor bears the burden of...