In re Evans

• Decision Date: 17 November 1999
• Docket Number: Bankruptcy No. 99-14366.
• Citation: 242 BR 407
• Parties: In re Terrie W. EVANS, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

242 B.R. 407 (1999)

In re Terrie W. EVANS, Debtor.

Bankruptcy No. 99-14366.

United States Bankruptcy Court, S.D. Ohio, Western Division.

November 17, 1999.

John W. Rose, Cincinnati, OH, for debtor.

MEMORANDUM DENYING CONFIRMATION AND REQUIRING ATTORNEY TO SHOW CAUSE

JEFFERY P. HOPKINS, Bankruptcy Judge.

The Debtor, Terrie W. Evans, filed a chapter 13 petition and plan on August 11, 1999. The Debtor's plan contains a provision that is labeled as a "student loan addendum." The language of this addendum seeks to discharge a student loan guaranteed by the U.S. Department of Education upon completion of payments under the plan. The addendum reads as follows:

All timely filed and allowed unsecured claims, including the claims of U.S. Department of Education, 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. Confirmation of debtor\'s plan shall constitute a finding to that effect and that said debt is dischargeable.

The issue before the Court, raised sua sponte, is whether the Debtor's plan should be confirmed when it contains the foregoing addendum. A confirmation hearing was held on October 26, 1999. Neither the U.S. Department of Education or the Chapter 13 Trustee filed an objection to confirmation of the plan. The Debtor's attorney argues that the plan, as proposed, is confirmable under the authority of Andersen v. UNIPAC-NEBHELP (In re Andersen), 179 F.3d 1253 (10th Cir.1999) and that other courts in this district have confirmed such plans absent objection by a creditor or the Trustee.

CONFIRMATION: 11 U.S.C. § 1325

This Court is aware of at least six published cases, including one from this district, where courts were confronted with this issue. See In re Key, 128 B.R. 742 (Bankr.S.D.Ohio 1991) (Aug, J.); see also In re Stevens, 236 B.R. 350 (Bankr. E.D.Va.1999); In re Evans, 235 B.R. 133 (Bankr.S.D.Fla.1999) (Miami Division); In re Hinton, 231 B.R. 384 (Bankr.S.D.Fla. 1999) (West Palm Beach Division); In re Galey, 230 B.R. 898 (Bankr.S.D.Ga.1999); In re Mammel, 221 B.R. 238 (Bankr. N.D.Iowa 1998). Each of these courts denied confirmation on the ground that plan language seeking to discharge a student loan through the plan process violates the Bankruptcy Code and Rules. See id. Specifically, these student loan provisions violate the substantive requirements of 11 U.S.C. § 523(a)(8) in that the Debtor is not required to prove undue hardship or even experience circumstances that would support such a finding. Evans, 235 B.R. at 135; Hinton, 231 B.R. at 385; Mammel, 221 B.R. at 241.¹ They also violate Fed. R.Bankr.P. 7001(6), which requires that any determination of the dischargeability of a debt be resolved by adversary proceeding. Stevens, 236 B.R. at 352; Evans, 235 B.R. at 136; Hinton 231 B.R. at 385; Galey, 230 B.R. at 899; Mammel, 221 B.R. at 241; Key, 128 B.R. at 743. Similarly, such a provision circumvents the procedural safeguards established for determining dischargeability.² Evans, 235 B.R. at 135 (absence of appropriate notice); Galey, 230 B.R. at 899-900 (absence of due process, including appropriate notice); Mammel, 221 B.R. at 241 (proposed student loan provision "renders superfluous those rules relating to adversary complaints"). Judge Aug, after examining the legislative history of the applicable Code sections, summarized the foregoing concerns as follows:

Congress has enacted both substantive and procedural provisions for determining whether particular debts are dischargeable. Were discharge available by virtue of a . . . provision in the Chapter 13 plan, this framework would be unnecessary.

Key, 128 B.R. at 743.

Moreover, the creditor in this proceeding, the U.S. Department of Education, enjoys a heightened notice and service requirement under the applicable rules of civil procedure. Fed.R.Bankr.P. 7004(b)(4) provides, in relevant part, that proper service on the United States is accomplished by "mailing a copy of the summons and complaint addressed to the civil process clerk at the office of the United States attorney for the district in which the action is brought and by mailing a copy of the summons and complaint to the Attorney General of the United States at Washington, District of Columbia." As with Fed.R.Civ.P. 4(I), when proper service of process has not been made upon the United States under Rule 7004(b)(4), the United States has not been made a party to an action and a court is without jurisdiction to enter judgment against the United States. See Bland v. Britt, 271 F.2d 193, 194 (4th Cir.1959) (holding service requirements under Fed.R.Civ.P. 4 to be jurisdictional); In re Morrell, 69 B.R. 147, 149-50 (N.D.Cal.1986) ("The requirement of service upon the Attorney General and the United States Attorney is not a technical exercise or a nuisance to be inflicted upon the private bar in bankruptcy litigation."); In re Schweitzer, 145 B.R. 292 (Bankr.E.D.Ark.1992) (noting that the failure to effect proper service deprives the court of personal jurisdiction); see generally 4A Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 1106 (2d ed.1987) ("It is axiomatic that no valid judgment can be entered against the United States without proper service.").³

As noted previously, at the October 26, 1999 confirmation hearing the Debtor's attorney argued that the "student loan addendum" is properly included in the Debtor's plan under the authority of Andersen. In Andersen, the Debtor filed a chapter 13 plan containing language nearly identical to that in question in this case.⁴ No timely objections to confirmation were filed and the plan was confirmed. The debtor completed her plan payments and obtained a discharge. A student loan creditor thereafter initiated collection proceedings against the debtor. The debtor reopened her bankruptcy case and filed a complaint to determine the dischargeability of the debt. The bankruptcy court held that the debtor's student loan obligations were not discharged under the confirmed plan. On appeal, the Tenth Circuit Bankruptcy Appellate Panel reversed, concluding that confirmation of the chapter 13 plan bound the creditor to the plan's treatment of the student loan obligation under the theory of res judicata. See Andersen v. Higher Education Assistance Foundation (In re Andersen), 215 B.R. 792 (10th Cir. BAP 1998). The Tenth Circuit affirmed. See Andersen, 179 F.3d at 1260; see also In re Pardee, 193 F.3d 1083 (9th Cir.1999) (holding that provision in chapter 13 plan discharging postpetition interest on a student loan is binding on creditor under theory of res judicata where objection was not raised prior to plan confirmation and confirmation order was not appealed).

The Debtor's reliance upon Andersen is misguided. In Andersen and Pardee, the plan had already been confirmed when the validity of the student loan provision was raised. No objections were raised prior to confirmation. In this case, as well as the six cases previously cited, an objection to the student loan provision was raised prior to confirmation.⁵ As such, neither Andersen or Pardee are applicable in this situation given that their holdings were premised upon the res judicata effect of two confirmed plans. Had the issue in Andersen and Pardee been raised prior to confirmation, a different result likely would have occurred given that both decisions contain language indicating that the plans at issue would not have been confirmed had the issue been raised prior to confirmation. See Andersen, 179 F.3d at 1259 ("Although the provision at issue did not comply with the Code, it is now too late for ECMC to make the argument that HEAF failed to timely raise."); Pardee, 193 F.3d 1083, 1086 ("If a creditor fails to protect its interest by timely objecting to a plan or appealing the confirmation order, it cannot later complain about a certain provision contained in a confirmed plan, even if such a provision is inconsistent with the Code."). Accordingly, the Debtor's plan cannot be confirmed so long as it contains the "student loan addendum."⁶

SANCTIONS: FED.R.BANKR.P. 9011

Fed.R.Bankr.P. 9011(b) provides in material part:

Representations to the Court. By presenting to the court (whether by signing, filing, submitting, or later advocating) a petition, pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person\'s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, —

. . . .

(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a non-frivolous argument for the extension, modification, or reversal of existing law or the establishment of new law.

The Sixth Circuit has construed Rule 9011 as subjecting an attorney to sanctions if a paper filed by the attorney was not warranted by existing law or a good faith argument for the extension, modification or reversal of existing law. See In re Downs, 103 F.3d 472, 481 (6th Cir.1996). The Court does not see how the student loan addendum in the plan proposed by the Debtor is warranted by existing law or a good faith argument for the extension, modification or reversal of the same. Every case that this Court is aware of that addresses the issue now before it holds that a provision in a chapter 13 plan that seeks to discharge a student loan violates the Bankruptcy Code and Rules. Notwithstanding, the Debtor's attorney has drafted a plan containing such a provision and advocated for confirmation of the same even though the Code is clear that a plan is not to be confirmed unless it "complies with the provisions of chapter 13 and with the other applicable provisions of title 11." See 11 U.S.C. § 1325(a)(1).

The Court is concerned that counsel for debtors may...