In re Webber
| Decision Date | 09 August 2000 |
| Docket Number | No. 00-2817-PHX-RJH.,00-2817-PHX-RJH. |
| Citation | 251 BR 554 |
| Parties | In re Kari Kristin WEBBER, Debtor. |
| Court | U.S. Bankruptcy Court — District of Arizona |
Mark Johnson, Mesa, AZ, for Debtor.
Mary Ellen Beardsley, Assistant Attorney General, Office of the Attorney General, Anchorage, AK, for Alaska Commission on Postsecondary Education.
Madeleine C. Wanslee, Gust Rosenfeld, P.L.C., Phoenix, AZ, for United Student Aid Funds and Educational Credit Management Corporation.
Ralph McDonald, Phoenix, AZ, Chapter 13 Trustee.
May a chapter 13 plan provide that repayment of the debtor's student loans would constitute an undue hardship, and consequently upon successful completion of all plan payments the debtor's student loan debts will not be excepted from the discharge? This Court concludes such plan provisions are improper.
Debtor Kari Webber filed a chapter 13 plan, through counsel, which provided in paragraph 3(j)(2)(A):
DISCHARGE OF STUDENT LOANS — Kari Webber can not maintain based on current income and expenses, a minimum standard of living if forced to repay student loans. She has made good faith efforts to repay the loans. State of affairs is likely to persist for a significant portion of the student loan repayment period. Upon successful completion of the chapter 13, the student loans will not be excepted from discharge.
The State of Alaska, by the Alaska Commission on Postsecondary Education, the Education Credit Management Corporation, and the United Student Aid Funds, Inc. filed objections to confirmation of the chapter 13 plan, and specifically objected to its attempt to discharge their student loan debts in the confirmation process. The Court heard those objections on July 12, 2000. At the hearing, Debtor's counsel agreed to file an amended plan that eliminates the objectionable provision, but counsel for the objectors nonetheless requested a ruling on their objection due to the recurring nature of the problem.
Government guaranteed student loan debts are generally not dischargeable unless failure to discharge them would pose an "undue hardship" on the debtor and the debtor's dependents. 11 U.S.C. § 523(a)(8). The Ninth Circuit has held that Congress' use of the adjective "undue" means that the hardship must be more than a mere hardship. United Student Aid Funds, Inc. v. Pena (In re Pena), 155 F.3d 1108, 1111 (9th Cir.1998), citing In re Brunner, 46 B.R. 752, 753 (S.D.N.Y. 1985), aff'd, 831 F.2d 395 (2d Cir.1987). To demonstrate undue hardship, a debtor must establish that: (1) the debtor cannot maintain, based on current income and expenses, a minimal standard of living if forced to repay the loans; (2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) the debtor has made good faith efforts to repay the loans. Pena, 155 F.3d at 1111.
The language of Debtor's plan was obviously drafted to satisfy that Pena standard, but Debtor did not seek to establish those facts through an adversary proceeding. Federal Rule of Bankruptcy Procedure (hereinafter "Bankruptcy Rule") 7001(6) requires that such a determination be made in the context of an adversary proceeding, and Bankruptcy Rules 7003 and 7004 require that such adversary proceeding be commenced by the filing of a complaint and service of a summons.
Yet despite the lack of an adversary proceeding, if the plan were confirmed as drafted, the discharge of the student loans could not be challenged in a collateral proceeding, because the confirmation order would have res judicata effect, even if the offending provision violated the Bankruptcy Code or Rules. Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee), 193 F.3d 1083, 1086-87 (9th Cir. 1999); Andersen v. UNIPAC-NEBHELP (In re Andersen), 179 F.3d 1253 (10th Cir.1999); United States v. Black (In re Black), No. 99-0267, 2000 U.S.Dist. LEXIS 5880 (D.Ariz. March 30, 2000). To avoid that result the governmental student loan agencies must monitor and affirmatively object to chapter 13 plans that contain such provisions, instead of awaiting the service of a summons and complaint seeking to establish the debtor's undue hardship.
Because such objections were duly filed here, this is not a collateral attack on a confirmation order, but rather a timely and proper direct objection. Therefore the holdings of Pardee and Andersen have no bearing. The Ninth Circuit's Pardee opinion expressly declined to decide the issue of the propriety of the plan provision discharging postpetition interest on student loans, although it noted the clear weight of authority was that such interest was nondischargeable. 193 F.3d at 1085 and n. 4. The Tenth Circuit stated in Andersen that the discharge provision "did not comply with the Code," 179 F.3d at 1259, but that was dictum given the holding based on res judicata.
A handful of bankruptcy court decisions have condemned such attempts to discharge student loans by plan provisions that, if not objected to, would obviate the necessity of an adversary proceeding to establish the undue hardship. Perhaps the earliest such case was In re Mammel, 221 B.R. 238 (Bankr.N.D.Iowa 1998), in which the plan simply provided that the student loan debts would be discharged upon confirmation. Upon the trustee's objection (but not that of the lenders), that court found seven reasons why such a provision was objectionable, but most of them do not apply here. The most obvious objection to the Mammel plan provision was that it violated 11 U.S.C. § 1328 by purporting to discharge student loan debts immediately upon confirmation rather than upon completion of all plan payments. 221 B.R. at 240-41. That provision also constituted unfair discrimination in violation of § 1322(b)(1), because such immediately discharged debts would presumably not share pro rata in the payments made on other unsecured debts during the life of the plan. Id. at 242. Neither of these problems exists with the Webber plan provision, because it purports to discharge the student loan only upon completion of the plan, the same as other unsecured debt. The Webber provision also alleviates the problem the Mammel court found with a simple discharge provision that evades the Debtor's burden of proof under § 523, because the Webber provision seeks to establish, in the confirmation process, the facts necessary to support the finding of undue hardship under the applicable Ninth Circuit test. Consequently of all the objections found by the Mammel court, the only one significantly applicable here is that the plan provision is contrary to Bankruptcy Rule 7001(6) by evading the necessity of an adversary proceeding.
The court in In re Evans, 242 B.R. 407, (Bankr.S.D.Ohio 1999), condemned such plan provisions more strongly, relying primarily on the evasion of the adversary proceeding to establish the undue hardship. Among other things, that court noted that Bankruptcy Rule 7004(b)(4) and (5) establish special service procedures for service of adversary proceedings on agencies of the United States, which may not apply to the simple notice of the date to object to the plan. 242 B.R. at 410. The court also noted that it may be improper to attempt to establish undue hardship in the confirmation process, where a...
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