Monday, April 5, 2010

FYI: Sup Ct Says Non-Compliance w/ Rule 7001(6) Did Not Void Discharge of Student Loan Debt

The United States Supreme Court recently held that a bankruptcy court’s confirmation of a Chapter 13 plan that proposed a discharge of interest on student loan debt was not void under Fed R. Bank. P. 60(b)(4), even though in confirming the plan and ultimately discharging the student loan interest, the bankruptcy court failed to comply with the requirements of the Federal Bankruptcy Code and the Federal Rules of Bankruptcy Procedure that an undue hardship determination in an adversary proceeding must be made in order to discharge student loan debt.  A copy of the opinion is attached.  

As you may recall, student loan debt is only dischargeable in bankruptcy if failure to discharge the debt would impose an “undue hardship” on the debtor.  Pursuant to Fed. R. Bank. P. 7001(6), bankruptcy courts are required to make this undue hardship determination in an adversary proceeding. 

In this case, a Chapter 13 debtor filed a plan with the Bankruptcy Court that proposed a discharge of interest on his student loan debt, but in doing so, failed to initiate an adversary proceeding as required by Rule 7001(6).  The Bankruptcy Court confirmed the plan without holding an adversary proceedingThe student loan creditor received notice of the plan, but did not object to it, did not file an appeal after confirmation of the plan without an adversary proceeding and only sought to collect the ultimately discharged student loan interest three years after it was discharged.  The debtor then filed a motion with the Bankruptcy Court asking it to enforce its discharge order, and the student loan creditor filed a motion asking the Bankruptcy Court to rule that its order confirming the plan was void under Fed. R. Bank. P. 60(b)(4).

The Bankruptcy Court rejected the creditor’s arguments that (1) the discharge was inconsistent with the Bankruptcy Code and (2) its due process rights had been violated because the debtor failed to serve it with the summons and complaint required for an adversary proceeding.  The District Court reversed, and the Ninth Circuit reversed the District Court, agreeing with the Bankruptcy Court’s holding.  The Supreme Court granted certiorari to resolve a disagreement among the Courts of Appeals as to whether an order that confirms the discharge of a student loan debt in the absence of an undue hardship finding or an adversary proceeding, or both, is a void judgment under Fed. R. Bank P. 60(b)(4).

The Supreme Court agreed that the confirmation order was not void under Rule 60(b)(4).  Justice Thomas delivered the unanimous opinion of the Court.

In affirming the Ninth Circuit’s holding that the confirmation order was not void, the Supreme Court looked to Fed. R. Bank. P. 60(b)(4), which provides an exception to the finality of a bankruptcy court’s order confirming a debtor’s proposed plan if the final judgment is “void.”  The Court explained that Rule 60(b)(4) applies “only in the rare instance” where a judgment is premised on: 1) a certain type of jurisdictional error or 2) a violation of due process that deprives a party of notice or the opportunity to be heard, and the error in this case did not fall into either of those categories.

As for jurisdictional defects, relief is generally only granted for exceptional cases where there was not even an “arguable basis” for jurisdiction.  The Court found no such “arguable basis” inquiry necessary in this case, given that the undue hardship requirement is a precondition, not a limitation and the requirement derives from the Bankruptcy Rules, which are procedural, not jurisdictional.  As to whether there was a violation of due process that deprived the creditor to be heard in this case, the Court found that the debtor’s failure to serve the creditor with a summons and complaint deprived the creditor of a right granted by a procedural rule, but did not amount to a violation of its constitutional right to due process, given that the creditor received actual notice of the filing and contents of the plan. 

The Court also disagreed with the creditor’s attempts to expand the universe of judgment defects that support Rule 60(b)(4) relief, more specifically, an attempt to argue that the confirmation order was void because the bankruptcy court lacked statutory authority to confirm the plan absent a finding of undue hardship.  The Court explained that the bankruptcy court made a legal error in failing to find undue hardship before confirming the debtor’s plan, but that the order remained binding on the creditor because the creditor had notice of the error and failed to timely appeal and Rule 60(b)(4) “does not provide a license for litigants to sleep on their rights.”

Finally, the Court found that the Ninth Circuit erred in holding that a bankruptcy court must confirm a plan proposing the discharge of a student loan debt without an undue hardship determination in an adversary proceeding unless the creditor timely raises a specific objection, noting that this was “a step too far,” and finding that the Bankruptcy Code makes plain that bankruptcy courts have the authority to direct a debtor to conform his or her plan to the Code. 

Let me know if you have any questions.  Thanks.


Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

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