The United States Supreme Court issued a unanimous judgment affirming the Ninth Circuit’s finding for the debtor in the case of United Student Aid Funds, Inc. v. Espinosa on March 23, 2010. Espinosa, a Chapter 13 debtor, sought to discharge the interest that had accrued on his student loan while paying the principle via the payment plan. He had included the student loan as part of his plan rather than initiating an adversary proceeding to determine undue hardship. The student loan creditor received actual notice of the plan, but did not object to the partial payment. The bankruptcy court confirmed the plan, the debtor honored it and was discharged in 1997. After several years had passed, USAF tried to collect the unpaid interest on the loan. Espinosa appealed to the bankruptcy court to enforce the discharge. USAF responded with a motion to void confirmation of the plan under Federal Rules of Civil Procedure, 60(b)(4). The Supreme Court found that Rule 60(b) relieves a party of a final judgment only in the rare circumstance that the “judgment is premised either on a certain type of jurisdictional error or on a violation of due process that deprives a party of notice or the opportunity to be heard.” The Court began its analysis with the finding that the statutory requirements of undue hardship and the initiation of an adversary proceeding are not jurisdictional. The issue then, was whether USAF received adequate notice to satisfy due process. The Court found that the existence of actual notice, albeit not the type of notice proscribed by the bankruptcy rules, was sufficient to satisfy due process.
The Court addressed USAF and the Amicus, U.S. government’s, argument that the bankruptcy court’s order is void because it went beyond the court’s power. The Court did find that the failure to comply with §§ 523(a)(8) and 1328(a) before confirming the plan was a “legal error.” But the Court went on to note that the error did not rise to the level necessary to void a final judgment. This was particularly true in this case since the creditor had actual notice and was not allowed to “sleep on its rights.”
The Court did not agree with a facet of the Ninth Circuit’s decision: the one stating that a bankruptcy court could confirm a plan which would discharge a student loan without an adversary proceeding so long as the creditor did not object.
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