Hanson, Craig v. Educational Credit ( 2005 )

In the
United States Court of Appeals
For the Seventh Circuit
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No. 04-2131
IN RE: CRAIG D. HANSON,
Debtor-Appellant.
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Appeal from the United States District Court
for the Western District of Wisconsin.
No. 04 C 55—John C. Shabaz, Judge.
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ARGUED NOVEMBER 12, 2004—DECIDED FEBRUARY 2, 2005
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Before BAUER, MANION, and EVANS, Circuit Judges.
BAUER, Circuit Judge. Debtor-appellant Craig Hanson
filed for Chapter 13 bankruptcy relief in November 1992,
listing only his unsecured student loan debt of approxi-
mately $31,500 on his Chapter 13 schedules. After Hanson’s
Chapter 13 plan was confirmed without objection, Hanson
made monthly payments of $135 over 60 months on his
student loan, and the bankruptcy court entered an order
discharging his debt in September 1997. The discharge
order was erroneous because the Bankruptcy Code makes
student loan debt nondischargeable absent a showing of
undue hardship by the debtor, and Hanson had made no
such showing. Despite the error, the order went unchal-
lenged until May 2003, when creditor Educational Credit
Management Corporation (“ECMC”) filed a motion for relief
from the discharge order in the bankruptcy court. The
bankruptcy court granted ECMC’s motion, and the district
court affirmed. We affirm.
2 No. 04-2131
I. Background
Between 1980 and 1987, Hanson borrowed money from
Great Lakes Higher Education Corporation (“Great Lakes”)
to finance his undergraduate and graduate education at the
University of Wisconsin-River Falls. Hanson defaulted on
the student loan debt in July 1989, and Great Lakes
obtained a default money judgment against him in Decem-
ber 1992 in the amount of $31,583.77. In November 1992,
Hanson filed a voluntary petition (the “Petition”) for
Chapter 13 relief. After receiving notice of the Petition,
Great Lakes moved to vacate the default judgment against
him, with the right to reopen if the bankruptcy was dis-
missed. The state court granted Great Lakes’ motion.
Great Lakes timely filed a proof of claim in the amount of
$35,531.08. Hanson’s Chapter 13 Plan (the “Plan”) proposed
to pay $135 monthly to Great Lakes over 60 months, which
was 19% of the claim. The Plan was confirmed without
objection. At no time did Hanson file an adversary proceed-
ing to determine the dischargeability of his student loan.
Hanson completed payments under the Plan, and the
bankruptcy court entered a discharge order on September
11, 1997. The order provided, in relevant part:
1. Pursuant to 11 U.S.C. Section 1328(a), the debtor is
discharged from all debts provided for by the plan
or disallowed under 11 U.S.C. Section 502, except
any debt:
....
(c) for a student loan or educational benefit over-
payment as specified in 11 U.S.C. Section
523(a)(8) in any case in which discharge is
granted prior to October 1, 1996.
Pursuant to the terms of the order, Hanson’s student loan
debt was discharged because the discharge was granted
No. 04-2131 3
after October 1, 1996. Unfortunately, the discharge order
reflected an October 1, 1996 sunset provision that already
had been repealed by Congress. The result of the error was
that Hanson’s student loan debt was discharged without
any showing of undue hardship, which is required by 11
U.S.C. § 523(a)(8) prior to the discharge of student loan
debt.
No objection to the error was raised until May 2003, when
ECMC, Great Lakes’ successor-in-interest, filed a motion for
relief from the order under Rule 60(b)(4) of the Federal
Rules of Civil Procedure. The bankruptcy court granted
ECMC’s motion on the ground that the discharge order was
void because it violated ECMC’s due process rights.1 The
district court affirmed.
II. Discussion
A. Standard of Review
Although we generally review a lower court’s Rule 60(b)
decisions for abuse of discretion, Blaney v. West, 209 F.3d
1027, 1031 (7th Cir. 2000), we review challenges to Rule
60(b)(4) decisions de novo to the extent they turn on errors
of law. Federal Election Comm’n v. Al Salvi for Senate
Committee, 205 F.3d 1015, 1019 (7th Cir. 2000).
1
Although Great Lakes was Hanson’s initial student loan
creditor, ECMC currently holds the student loan note and, for
the sake of simplicity, we will refer to ECMC as the creditor
throughout this opinion.
4 No. 04-2131
B. Discharge of Student Loans
Student loan debts are presumptively nondischargeable
in bankruptcy proceedings. 11 U.S.C. § 523(a)(8). Debtors
can overcome this presumption by making an affirmative
showing that excepting the student loan debt from dis-
charge would impose an undue hardship on the debtor
or the debtor’s dependents. Id. The Bankruptcy Rules
require the debtor to file an “adversary proceeding” against
the holder of the student loan debt to make such a showing.
FED. R. BKRTCY. P. 4007(d), 7001(6); Tennessee Student
Assistance Corp. v. Hood, 124 S.Ct. 1905, 1913, 158 L. Ed.
2d 764 (2004). An adversary proceeding requires the service
of a summons and a complaint. FED. R. BKRTCY. P. 7001(6),
7003, 7004; Hood, 124 S.Ct. at 1913.
A number of student loan debtors have circumvented this
process by inserting undue hardship findings or student
loan or loan interest discharge provisions in their proposed
plans. See, e.g., In re Banks, 299 F.3d 296 (4th Cir. 2002); In
re Ruehle, 307 B.R. 28 (B.A.P. 6th Cir. 2004). Apparently,
the hope is that an unsuspecting bankruptcy court will
confirm the plan and that the lender will not recognize the
discharge by declaration ploy in time to object to confirma-
tion or to file an appeal. The result is contrary to the
express language of the Bankruptcy Code and Rules: The
debtor obtains a discharge of his student loan debt without
filing an adversary proceeding to establish undue hardship.
Other student debtors have achieved the same
result—discharge of student loans absent a showing of
undue hardship—due to bankruptcy courts’ use of outdated
discharge forms that erroneously reflect a previously
repealed sunset provision connected to 11 U.S.C. §
523(a)(8). See, e.g., In re Tyler, 285 B.R. 635 (Bankr. W.D.
Tex. 2002).
Hanson falls into the latter category. His attorney did not
include an undue hardship finding or mention the discharge
No. 04-2131 5
of Hanson’s student loan debt in the proposed plan. Never-
theless, Hanson’s failure to file an adversary proceeding in
conjunction with his bankruptcy is puzzling. The only debt
listed was his presumptively nondischargeable student loan
debt and he did not initiate an adversary proceeding in an
effort to overcome the presumption. It may be that Hanson’s
attorney was unaware that student loan debt is
nondischargeable in the absence of a showing of undue
hardship at an adversary proceeding or, as the district court
surmised, that the Plan was proposed in the hope that
Congress would repeal § 523(a)(8) and render Hanson’s debt
dischargeable. Regardless of his intentions, Hanson re-
ceived a windfall: The bankruptcy court discharged his
student loan debt without any showing of undue hardship.
We must decide whether Hanson gets to keep his windfall
due to the passage of time without any challenge from
ECMC or whether entry of the discharge order violated
ECMC’s due process rights so that the passage of time is
immaterial. FED. R. CIV. P. 60(b) (no time limit on relief
from judgment or order if judgment or order is void);
Robinson Eng’g Co. Pension Plan & Trust v. George, 223
F.3d 445, 448 (7th Cir. 2000) (“A judgment is void for the
purposes of Rule 60(b)(4) if the court that rendered it lacked
jurisdiction of the subject matter, or of the parties, or if it
acted in a manner inconsistent with due process of law.”).
At least three circuits have addressed this issue. The Tenth
Circuit started the line of case law in 1999 when it rejected
a student loan creditor’s collateral challenge to a discharge
provision contained in a confirmed Chapter 13 plan. In re
Anderson, 179 F.3d 1253, 1254 (10th Cir. 1999). Although
the debtor had inserted an undue hardship finding in her
proposed plan without filing an adversary proceeding, the
court faulted the creditor for failing to object to confirma-
tion or timely appeal the discharge by declaration. Id. at
1258. The Ninth Circuit followed suit in In re Pardee, 193
F.3d 1083 (9th Cir. 1999). Then, the Fourth Circuit created
6 No. 04-2131
a circuit split by holding that due process entitles a student
loan creditor to the heightened notice provided for by the
Bankruptcy Code and Rules. Banks, 299 F.3d at 302-03. See
also Ruehle, 307 B.R. 28, 37 (B.A.P. 6th Cir. 2004) (follow-
ing Banks and criticizing attorneys for inserting student
loan discharge by declaration provisions in the wake of
Anderson and Pardee).
In a recent student loan discharge by declaration case, the
Tenth Circuit retreated from its holding in Anderson and
opined that Anderson was wrongly decided and should be
reconsidered. Poland v. Educ. Credit Mgmt. Corp., 382 F.3d
1185 (10th Cir. 2004). The debtor in Poland proposed a plan
that purported to discharge her student loan debt if no
timely proof of claim was filed. Id. at 1187. The plan was
confirmed, the creditor filed its proof of claim one day late,
the untimely claim was disallowed, and the student loan
debt was discharged without a showing of undue hardship.
Id. The Tenth Circuit reversed, distinguishing Anderson
because the plan under consideration did not contain a
finding of undue hardship. Id. at 1188. Though the court did
not overrule Anderson, it recognized the decision’s problem-
atic consequences and questionable rationale:
The panel is of the view that Anderson was wrongly
decided and should be reconsidered. The unfortunate
result of Anderson is that astute attorneys now insert
student loan discharge language (after today, complete
with a finding of undue hardship) hoping to achieve
preclusive effect, notwithstanding: (1) Bankruptcy Code
§ 523(a)(8) explicitly precludes the discharge
of a debtor’s student loan absent a showing of undue
hardship, (2) Bankruptcy Rules specifically require
a successful adversary proceeding, complete with in-
dividualized service of process, to establish undue
hardship and discharge a student loan, and (3) lack
of the required notice under the Bankruptcy Rules
proscribes preclusive effect.
No. 04-2131 7
Id. at 1189 n.2.
We embrace the analysis and holding of the Fourth
Circuit in Banks and the Tenth Circuit in Poland, and we
respectfully disagree with the Ninth Circuit’s decision in
Pardee. The decisions in Banks and Poland have greater
persuasive force because they are consistent with Congress’
unmistakable intent to make student loan debt
nondischargeable absent a showing of undue hardship.
Moreover, cases like Anderson and Pardee permit debtors to
flout both substantive and procedural provisions of the
Bankruptcy Code and Rules through a meaning-
less incantation of undue hardship in their proposed
plans. Although we recognize the strong policy favoring
finality of confirmation orders, due process entitles creditors
to the heightened notice provided for by the Bankruptcy
Code and Rules, and the dictates of due process trump
policy arguments about finality. See Mullane v. Central
Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S.Ct. 652,
94 L. Ed. 865 (1950) (“An elementary and fundamental
requirement of due process in any proceeding which is to be
afforded finality is notice reasonably calculated, under all
the circumstances, to apprise interested parties of the
pendency of the action and afford them an opportunity to
present their objections.”).
The instant case is arguably distinguishable from the
cases discussed above because Hanson benefitted from the
bankruptcy court’s error rather than a discharge by declara-
tion provision. However, the focus of our inquiry is on the
process afforded to ECMC, and ECMC received as little
process in this case as the creditors in Banks and Poland.
Hanson’s failure to serve ECMC with a summons and an
adversary proceeding complaint effectively denied ECMC
the opportunity of presenting an objection prior to the
adjudication of its rights. See Mullane, 339 U.S. at 313-14(“[The] opportunity to be heard . . . must precede the
deprivation of property at issue.”).
8 No. 04-2131
Hanson criticizes ECMC for sitting on its rights and
failing to timely challenge the discharge order. However,
student loan creditors justifiably rely on the explicit
notice provisions of the Bankruptcy Code and Rules and
have no reason to act until the service of a summons for
an adversary proceeding apprises them that their prop-
erty rights may be affected. As noted by the Supreme Court
in Mullane, due process requires “notice and the opportu-
nity for hearing appropriate to the nature of the case” prior
to deprivation of property rights, and the creditor in this
case was denied the pre-deprivation notice and hearing that
are required in bankruptcies involving student loans.
Mullane, 339 U.S. at 313.
The recent Supreme Court decision in Hood does not
compel a different result. Hood, 124 S.Ct. 1905. The Court
granted certiorari in Hood to determine whether the
Bankruptcy Clause of the Constitution, which gives Con-
gress the power to establish national bankruptcy
laws, empowers Congress to abrogate Eleventh Amendment
state sovereign immunity from private suits in the context
of bankruptcy discharge matters. Id. at 1908. The jurisdic-
tional issue arose in Hood after the petitioner, a state entity
that guarantees student loans, filed a motion to dismiss an
adversary proceeding on the basis of Eleventh Amendment
sovereign immunity. Id. at 1909. The Court held that an
undue hardship determination was not a suit against the
State for purposes of the Eleventh Amendment because the
proceeding was an in rem proceeding with jurisdiction
predicated on the res of the bankruptcy estate. Id. at 1912-
13. Consequently, the Court did not reach the constitutional
question upon which certiorari was granted. Id. In explain-
ing its conclusion, the Court acknowledged that service of
process ordinarily is an indignity to the sovereignty of the
state, but declined to give that requirement dispositive
weight, noting that the service of a summons was indistin-
No. 04-2131 9
guishable in practical effect from proceeding by motion. Id.
at 1914. The Court also noted that § 523(a)(8) does not
require a summons and that a debtor could proceed by
motion in the absence of Bankruptcy Rule 7001(6). Id.
Notably, Hood did not involve a due process challenge or
noncompliance with the Bankruptcy Code or Rules. More-
over, the characterization of a proceeding as an in rem
proceeding does not extinguish a creditor’s due process
rights. See Mullane, 339 U.S. at 312; Ehorn v. Sunken
Vessel, 294 F.3d 856, 859 (7th Cir. 2002). In addition, the
Hood Court’s suggestion, in an entirely different context,
that a debtor could proceed by motion in the absence of the
Bankruptcy Rules does not authorize debtors to ignore the
requirements of the Rules. Consequently, Hood is not on
point, and Hanson’s reliance on it is misplaced.
We wish to emphasize that our holding is a narrow one.
We do not hold that the due process clause requires the
service of a summons and adversary proceeding prior to the
discharge of student loan debt. Rather, “we merely confirm
that where the Bankruptcy Code and Bankruptcy Rules
require a heightened degree of notice, due process entitles
a party to receive such notice before an order binding the
party will be afforded preclusive effect.” Banks, 299 F.3d at
302. Due to the lack of compliance with the Bankruptcy
Code and Rules, the bankruptcy discharge order was void
and ECMC was properly granted relief pursuant to Rule
60(b)(4). In re Escobedo, 28 F.3d 34, 35 (7th Cir. 1994)
(failure to comply with Bankruptcy Code renders plan
nugatory).
10 No. 04-2131
III. Conclusion
For the foregoing reasons, we AFFIRM the decision of the
bankruptcy court.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—2-2-05