In re Ruehle, No. 98-62381.

• Decision Date: 17 July 2003
• Docket Number: No. 98-62381.
• Citation: 296 B.R. 146
• Parties: In re Stephanie RUEHLE, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Ohio

Page 146

296 B.R. 146

In re Stephanie RUEHLE, Debtor.

No. 98-62381.

United States Bankruptcy Court, N.D. Ohio, Eastern Division.

July 17, 2003.

COPYRIGHT MATERIAL OMITTED

Donald M. Miller, Canton, OH, for debtor.

Matthew J. Thompson, Nobile, Needleman & Thompson LLC, Columbus, OH, for creditor.

MEMORANDUM OF DECISION

RUSS KENDIG, Bankruptcy Judge.

This matter is before the court on a motion filed on January 27, 2003 pursuant to Fed.R.Civ.P. 60(b)(4) and (6), incorporated by Fed.R.Bankr.P. 9024, for relief from an order discharging the student loan debt owed to Educational Credit Management Corporation (hereafter "ECMC").¹ Stephanie Ruehle (hereafter "Debtor") filed a response in opposition on February 27, 2003. The matter was taken under advisement. For the following reasons, ECMC's motion is GRANTED because the order discharging the student loan debt is void pursuant to Fed.R.Civ.P. 60(b)(4).

The court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334(b) and the General Order of Reference entered in this district on July 16, 1984. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A). The following are the court's findings of fact and conclusions of law pursuant to Fed.R.Bankr.P. 7052.

I. Summary of the Case and Issue

Debtor confirmed and completed a chapter 13 plan containing a clearly illegal student loan provision. It provided for discharging the student loan without an adversary proceeding. ECMC, the student loan lender, did not object or appeal. Debtor received her discharge on April 27, 2001, including the discharge of the remainder of her student loan debt. This procedure has been called "discharge by declaration." In re Evans, 242 B.R. 407, 413 (Bankr.S.D.Ohio 1999). ECMC seeks to unravel the process over one year after the discharge was entered.

The issue is whether a chapter 13 discharge granted pursuant to an illegal student loan provision is void pursuant to Fed.R.Civ.P. 60. Several courts have addressed this issue. A majority hold that a confirmed plan is res judicata, thereby placing the burden on the creditor to object to the offensive plan provision prior to confirmation. A minority hold that a "discharge by declaration" plan provision does not afford a creditor due process and is void. This court joins a growing minority holding that such provisions should not be given res judicata effect due to a lack of due process.

II. Facts

The facts are not in dispute. Debtor filed a petition for relief under Chapter 13 of Title 11 of the United States Code on July 28, 1998. Debtor's schedules listed only one unsecured debt and one secured debt.² The secured debt was actually an executory contract with American Honda Finance for a lease on a 1997 Honda. The only other debt was the unsecured priority debt listed as owed to Bank One/Great Lakes Higher Education Corp. in the amount of $17,000.00 for student loans. This debt was assigned to ECMC on October 12, 1999. Debtor's plan, also filed July 28, 1998, consisted solely of the unsecured priority student loan debt for $17,000.00. The plan proposed to pay 5% of the debt over approximately forty months at $50.00 a month.³ The plan contained the following provision:

(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.⁴ Confirmation of debtor's plan shall constitute a finding to that effect and that said debt is dischargeable.

¶ 16 of Debtor's plan filed July 28, 1998. No objections to the plan were filed and it was confirmed on October 16, 1998, Debtor completed all payments under the confirmed plan, was granted a discharge on April 21, 2001, and the case closed on May 1, 2001. ECMC moved to reopen the case on December 19, 2002, which motion was granted on December 23, 2002. Thereafter, ECMC filed its motion to vacate the discharge as to the debt owed to it.

III. Procedural Nature of ECMC's Motion

ECMC seeks relief from the discharge order pursuant to Fed.R.Civ.P. 60(b)(4) and (6). Bankruptcy Rule 9024 incorporates Fed.R.Civ.P. 60 with three exceptions. Bankruptcy Rule 9024(1), (2) and (3) list certain actions that are subject to specific time limits not affected or altered by the language of Fed.R.Civ.P. 60. Bankruptcy Rule 9024(1) does not apply to the facts of this case because the matter at issue is not a motion to reopen a case nor does it involve claim allowance. Subsection (2) is also not applicable because it deals with revoking a discharge in a chapter 7 case pursuant to 11 U.S.C. § 727(e). Subsection (3) of Fed.R.Bankr.P. 9024 is also inapplicable but warrants a brief discussion.

Bankruptcy Rule 9024(3) states that "a complaint to revoke an order confirming a plan may be filed only within the time allowed by § 1144, § 1230, or § 1330." Section 1330 permits revocation of a confirmation order within 180 days of such if the order was procured through fraud. Bankruptcy Rule 7001(5) requires that an action to revoke a confirmation order be brought in an adversary proceeding. ECMC is not seeking to revoke the order confirming Debtor's chapter 13 plan pursuant to § 1330(a). Nor is ECMC seeking to revoke Debtor's discharge pursuant to § 1328(e), which also requires an adversary proceeding pursuant to Fed.R.Bankr.P. 7001(4).

ECMC filed a motion seeking to find the discharge order void pursuant to Fed.R.Civ.P. 60(b)(4) or to be granted relief from the discharge order pursuant to Fed.R.Civ.P. 60(b)(6). A motion pursuant to Fed.R.Civ.P. 60 does not require an adversary proceeding. Nor is a motion pursuant to Fed.R.Civ.P. 60(b)(4) subject to any time limitations. "While Rule 60(b) requires motions under subsections (1), (2), and (3) to be made not more than one year after the judgment challenged, motions under subsection (4) are excepted, and thus may be brought at any time." Medical Distribution, Inc. v. Quest Healthcare, Inc., No. 3:00CV-154-H, 2002 U.S. Dist. LEXIS 1692, at *3-4 (W.D.Ky. Feb. 1, 2002) (citing 11 Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure: Civil, § 2862 (2nd ed.1995); United States v. Studak, No. 32X 5571, 1994 U.S. Dist. LEXIS 12959, *4-5 (E.D.Mich. Aug. 19, 1994) (granting motion for vacatur nearly sixty years after judgment was entered stating that a motion pursuant to Rule 60(b)(4) which alleges a judgment is void may be brought at any time)).

If a judgment is found to be void, it is considered a legal nullity and a court has no discretion in determining whether it should be set aside. Studak, 1994 U.S. Dist. LEXIS 12959, at *4 (citing Jordon v. Gilligan, 500 F.2d 701, 704 (6th Cir.1974); Combs v. Nick Garin Trucking, 825 F.2d 437, 441 (D.C.Cir.1987); (further citations omitted)). A void judgment must be vacated.

Vacating a void discharge order pursuant to Fed.R.Civ.P. 60(b)(4) is different than revoking a discharge pursuant to § 1328(e). A motion to revoke a discharge under § 1328(e) is only permitted if three conditions are met: (1) the motion is brought within one year of the discharge; (2) the discharge was procured through fraud; and (3) movant did not know of the fraud until after the discharge was entered. 11 U.S.C. § 1328(e). If these three conditions are met a court may grant a motion to revoke a chapter 13 discharge. A motion brought pursuant to Fed.R.Civ.P. 60(b)(4) alleges that the discharge order is void and is a legal nullity due to, in this case, a lack of due process. Black's Law Dictionary defines "void" as "[n]ull; ineffectual; nugatory; having no legal force or binding effect; unable, in law, to support the purpose for which it was intended." BLACK'S LAW DICTIONARY 1411 (5th ed.1979). A void order has no legal effect and is treated as if it never existed. Revocation is defined by Black's as "[t]he recall of some power, authority, or thing granted." BLACK'S LAW DICTIONARY 1187 (5th ed.1979). This implies that if an order is revoked the court had the power or authority to enter it, whereas an order that is void due to a lack of due process is a legal nullity entered by a court without authority to do so. ECMC argues that the discharge order is void pursuant to Fed.R.Civ.P. 60(b)(4) due to a lack of due process. If the court agrees with this argument and determines that the discharge order is void the court must vacate it, not revoke it. This is further discussed in section V subsection (C) hereafter.

IV. Arguments Presented

ECMC makes two arguments pursuant to Fed.R.Civ.P. 60. First, ECMC agues that it should be relieved of the judgment because it is void pursuant to Fed.R.Civ.P. 60(b)(4). ECMC also avers it is entitled to relief pursuant to Fed.R.Civ.P. 60(b)(6) which allows relief from judgment for additional reasons not otherwise listed that a court finds justifiable. ECMC contends that the discharge violates § 523(a)(8) and Fed.R.Bankr.P. 7001(6) because the discharge of a student loan debt can be procured only through an adversary proceeding.

Debtor argues that res judicata applies to bar ECMC's attempt to vacate the discharge. Debtor also counters ECMC's arguments pursuant to Fed.R.Civ.P. 60. Debtor argues that pursuant to Fed.R.Civ.P. 60(b)(4) void judgments are only those entered by a court lacking jurisdiction, not judgments that are erroneous. Debtor contends that there was no jurisdictional defect in this case. Debtor also avers that Fed.R.Civ.P. 60(b)(6) only applies to circumstances not addressed in the first five numbered subsections of the rule, and ECMC cannot use section (b)(6) to argue legal error since legal error is addressed in section (b)(1).⁵

V. Analysis

The Bankruptcy Code and Rules provide a clear procedure for the discharge of...