In re Ruehle

• Decision Date: 17 March 2004
• Docket Number: BAP No. 03-8066.
• Citation: 307 B.R. 28
• Parties: In re Stephanie RUEHLE, Debtor. Stephanie Ruehle, Plaintiff-Appellant, v. Educational Credit Management Corporation, Defendant-Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Sixth Circuit

307 B.R. 28

In re Stephanie RUEHLE, Debtor Stephanie Ruehle, Plaintiff-Appellant, v. Educational Credit Management Corporation, Defendant-Appellee.

BAP No. 03-8066.

United States Bankruptcy Appellate Panel of the Sixth Circuit.

Argued: February 4, 2004.

Decided and Filed: March 17, 2004.

COPYRIGHT MATERIAL OMITTED

Donald M. Miller, Sr., Canton, OH, argued on brief, for Appellant.

Daniel S. Fisher, St. Paul, MN, argued, Frederick S. Coombs III, Harrington, Hoppe & Mitchell, Youngstown, OH, on brief, for Appellee.

Before: AUG, HOWARD, and LATTA, Bankruptcy Appellate Panel Judges.

OPINION

AUG, Chief Judge.

The chapter 13 debtor, Stephanie Ruehle (the "Debtor"), appeals the bankruptcy court's Memorandum of Decision granting the Motion to Vacate Discharge as to Educational Credit Management Corporation (the "Motion to Vacate"). The confirmation order was vacated pursuant to Federal Rule of Civil Procedure 60(b)(4), made applicable in bankruptcy cases by Federal Rule of Bankruptcy Procedure 9024.¹ The bankruptcy court granted the Motion to Vacate on the basis that Educational Credit Management Corporation ("ECMC") was denied due process of law by the Debtor's discharge of her student loan through her plan rather than by filing a separate adversary proceeding. We affirm the bankruptcy court's well-reasoned decision.

I. ISSUES ON APPEAL

The issue in this appeal is whether the bankruptcy court erred in vacating its order confirming the Debtor's chapter 13 plan. In our analysis, we must consider whether the provisions of 11 U.S.C. § 1327(a) providing that a confirmed plan is binding on the debtor and creditor are trumped by ECMC's due process rights set forth in the Fifth Amendment to the United States Constitution.

II. JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Appellate Panel of the Sixth Circuit (the "BAP") has jurisdiction to decide this appeal. The United States District Court for the Northern District of Ohio has authorized appeals to the BAP. A "final order" of a bankruptcy court may be appealed by right under 28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment." Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citations omitted).

The Panel reviews the bankruptcy court's conclusions of law de novo. See Nicholson v. Isaacman (In re Isaacman), 26 F.3d 629 (6th Cir.1994). "A de novo review allows the reviewing panel to examine the interpretation and application of the relevant statutes independent of the determination of the bankruptcy court." Peerless Ins. Co. v. Miller (In re Miller), 228 B.R. 399, 400 (6th Cir. BAP 1999) (citation omitted).

"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." Banks v. Sallie Mae Servicing Corp. (In re Banks), 299 F.3d 296, 300 (4th Cir.2002).

III. FACTS

The Debtor filed her chapter 13 petition and plan on July 28, 1998. She states in her brief that her chapter 13 petition included one secured debt for an automobile and her unsecured student loan in the amount of $17,000 owed at that time to Bank One/Great Lakes Higher Education Corporation. The Debtor had previously discharged all of her unsecured debt, other than the student loan, in a chapter 7 case that closed a mere two months before she filed her chapter 13 petition. The Debtor's chapter 13 plan included the following provision discharging the Debtor's student loan:

(16) All timely filed and allowed unsecured claims, including the claim of Bank One/Great Lakes Higher Education, which are 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.

As noted by the bankruptcy court, this or similar plan language has become known as a "discharge by declaration" provision.

No objections were filed to the Debtor's plan and it was confirmed on October 16, 1998. Subsequent to confirmation of her plan, the Debtor's student loan was assigned to ECMC. An order discharging the Debtor was entered on April 27, 2001, and the case was closed on May 1, 2001.

On December 19, 2002, ECMC filed a motion to reopen the case which was granted on December 23, 2002. Thereafter, on January 27, 2003, ECMC filed its Motion to Vacate the Debtor's discharge as to the student loan. In bringing its Motion to Vacate, ECMC relied on Civil Rule 60(b)(4) and (6).

On July 17, 2003, the bankruptcy court granted the Motion to Vacate based on its finding that ECMC had been denied due process of law and that the order granting confirmation of the Debtor's plan was void pursuant to Civil Rule 60(b)(4). The bankruptcy court found that Civil Rule 60(b)(6) was not applicable to the present case. The Debtor filed her timely appeal.

IV. DISCUSSION

Section 523(a)(8) of the Bankruptcy Code provides:

A discharge under section 727, 1141, 1228(a), or 1328(b) of this title does not discharge an individual debtor from any debt ... for an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution, or for an obligation to repay funds received as an educational benefit, scholarship, or stipend, unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents.

Pursuant to Bankruptcy Rules 4007 and 7001(6) an action to determine dischargeability of a debt must be brought as an adversary proceeding.² In this case, the Debtor attempted to circumvent the requirements of Bankruptcy Rules 4007 and 7001(6) by discharging her student loan through the above-quoted language in her chapter 13 plan. She further circumvented the requirement that the debtor bear the burden of proving that repayment of the debt would constitute an undue hardship. Dolph v. Penn. Higher Educ. Assistance Agency (In re Dolph), 215 B.R. 832, 836 (6th Cir. BAP 1998).

Section 1325(a)(1) provides that the bankruptcy court "shall confirm a plan if ... the plan complies with the provisions of this chapter and with the other applicable provisions of this title." The Seventh Circuit has stated that "[a] bankruptcy court lacks the authority to confirm any plan unless it `complies with the provisions of this chapter and with the other applicable provisions of this title.'" In re Escobedo, 28 F.3d 34, 35 (7th Cir.1994) (citing § 1325(a)(1)). It is uncontested that the provisions of the Debtor's confirmed chapter 13 plan did not comply with the provisions of the Bankruptcy Code and Bankruptcy Rules in that the Debtor failed to file an adversary proceeding to seek to discharge her student loan. Further, the Debtor's plan did not comply with § 1322(b) setting forth the permitted contents of a chapter 13 plan. Paragraphs (1) through (9) of § 1322(b) include specific matters that may be included in the plan, none of which relate to discharging a student loan. Paragraph (10), the catch-all provision, specifies that the plan may "include any other appropriate provision not inconsistent with this title." 11 U.S.C. § 1322(b) (emphasis added). There is no authority in the Bankruptcy Code or Bankruptcy Rules for including a discharge by declaration provision in the Debtor's plan. The provision "is an interloper in the plan; it can have no legal status." Educ. Credit Mgmt. Corp. v. Whelton (In re Whelton), 299 B.R. 306, 312 (Bankr.D.Vt.2003) (analyzing § 1322 regarding contents of a plan and § 1328(a)(2) specifically excepting student loan debts from the discharge of all debts provided for by the plan). However, since the Debtor's plan was confirmed, we now have to decide whether the discharge by declaration provision is enforceable. Id.

Bankruptcy Code § 1327(a) provides:

The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.

Civil Rule 60(b) provides that the court may relieve a party from a final judgment, order, or proceeding under certain circumstances. The pertinent circumstance here is where "the judgment is void." Fed.R.Civ.P. 60(b)(4).

Motions under [Civil Rule 60(b)] subsections (4), (5) and (6) may be made within a "reasonable time," which we have determined is dependent upon the facts in a case, including length and circumstances of delay in filing, prejudice to opposing party by reason of the delay, and circumstances warranting equitable relief.

Eglinton v. Loyer (In re G.A.D., Inc.), 340 F.3d 331, 334 (6th Cir.2003). "A Rule 60(b)(4) motion leaves no margin for the court's discretion as the judgment is either void or not." Pearson v. Dept. of Educ. (In re Pearson), 279 B.R. 612, 615 (Bankr.M.D.Ga.2002) (citing Burke v. Smith, 252 F.3d 1260, 1263 (11th Cir.2001)).

Under Rule 60(b)(4), if the rendering court lacked subject matter jurisdiction, the underlying judgment is void, and it is per se an abuse of discretion to deny a movant's motion to vacate.

Eglinton, 340 F.3d at 335-36. Likewise, the judgment is void if the court lacked jurisdiction over the affected party because of a lack of notice resulting in a violation of due process and it would be a "per se abuse of discretion to deny the movant's motion to vacate." Id.; see e.g., Pearson, 279 B.R. at 615 (judgment is void under Rule 60(b)(4) if the court lacked jurisdiction of either the parties or...