Espinosa v. United Student Funds ( 2008 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
FRANCISCO J. ESPINOSA,  No. 06-16421
Plaintiff-Appellant,
v.  D.C. No.
CV-04-00447-RCC
UNITED STUDENT AID FUNDS, INC.,
OPINION
Defendant-Appellee.

Appeal from the United States District Court
for the District of Arizona
Raner C. Collins, District Judge, Presiding
Argued and Submitted April 16, 2008
Submission Vacated June 24, 2008
Resubmitted August 29, 2008
San Francisco, California
Filed October 2, 2008
Before: Alex Kozinski, Chief Judge, A. Wallace Tashima
and N. Randy Smith, Circuit Judges.
Opinion by Chief Judge Kozinski
14019
14022 ESPINOSA v. UNITED STUDENT AID FUNDS
COUNSEL
Michael J. Meehan, Munger Chadwick, Tucson, Arizona;
James L. Robinson, Jr., Robinson & Rylander, P.C., Tucson,
Arizona, for the plaintiff-appellant.
Madeleine C. Wanslee, Gust Rosenfeld P.L.C., Phoenix, Ari-
zona, for the defendant-appellee.
OPINION
KOZINSKI, Chief Judge:
In our earlier opinion in this case, Espinosa v. United Stu-
dent Aid Funds, Inc., 530 F.3d 895 (9th Cir. 2008), we
remanded to the bankruptcy court for a determination under
Rule 60(a) whether exclusion of petitioner’s student debt from
its discharge order was the result of a clerical error. The bank-
ruptcy court confirmed that:
the inclusion of paragraph 1(c) in the Discharge
Order [which exempted student loan obligations
from the general discharge] was inserted because of
a clerical mistake, because it was the clear intent of
the Court, as reflected in the Chapter 13 Plan, as
approved by the Court, that all student loan-related
obligations were to be discharged if the debtor suc-
cessfully performed and completed the Plan.
Order of August 20, 2008. We thus finally have presented to
us the question that the parties briefed and argued: Whether
a debtor may obtain discharge of a student loan by including
it in a Chapter 13 plan, if the creditor fails to object after
notice of the proposed plan.
ESPINOSA v. UNITED STUDENT AID FUNDS 14023
Facts
Espinosa filed a Chapter 13 petition and proposed plan that
provided for repayment of $13,250 in student loans to United
Student Aid Funds, Inc. (Funds). Funds was notified and filed
a proof of claim in the amount of $17,832.15.1 The bank-
ruptcy court eventually confirmed the plan, and the Chapter
13 Trustee mailed Funds a notice advising it that “[t]he
amount of the claim filed differs from the amount listed for
payment in the plan. Your claim will be paid as listed in the
plan.” The notice also contained the following warning:
If an interested party wishes to dispute the above
stated treatment of the claim, it is the responsibility
of the party to address the dispute. The claim will be
treated as indicated above unless the Trustee
receives within 30 days from this mailing, a written
request for different treatment. The request should
set forth the specific grounds for alternative treat-
ment and should be filed with the Clerk of the Court,
with a copy mailed to the Trustee at [address
deleted]. [Emphasis added.]
Funds did not object and Espinosa successfully completed the
plan. The bankruptcy court then granted him a discharge.
Three years later, Funds began intercepting Espinosa’s
income tax refunds to satisfy the unpaid portion of the student
loan. Espinosa petitioned the bankruptcy court for an order
holding Funds in contempt for violating the discharge injunc-
tion. See 11 U.S.C. § 524(a)(2). Funds cross-moved for relief
from the bankruptcy court’s order confirming the plan, on the
ground that the order had been entered in violation of Funds’s
rights under the Bankruptcy Code and Rules.
1
The difference between these two amounts appears to be interest. See
n.4 infra.
14024 ESPINOSA v. UNITED STUDENT AID FUNDS
This is the nub of Funds’s argument: To initiate bankruptcy
proceedings, a Chapter 13 debtor must notify creditors by
mail of the deadline for filing objections and the date of the
confirmation hearing. Fed. R. Bankr. P. 2002(b). Espinosa did
this. However, student loans may not be discharged under
Chapter 13 unless the debtor can show “undue hardship,” 11
U.S.C. § 523(a)(8), and such a showing can only be made in
an adversary proceeding. See Fed. R. Bankr. P. 7001(6). To
initiate an adversary, the debtor must file a complaint, id.
7003, which must be served on the student loan creditor along
with a summons, id. 7004. Espinosa didn’t do this. Instead
Espinosa simply listed the student debt in his Chapter 13 plan,
which the bankruptcy court confirmed. Espinosa then made
the payments specified in the plan, and the bankruptcy court
eventually entered a discharge order. Funds based its motion
for relief from this order on Espinosa’s failure to initiate an
adversary and his consequent failure to obtain a judicial deter-
mination of undue hardship.
The bankruptcy court rejected Funds’s argument. It held
that Funds had violated the discharge injunction and ordered
Funds to cease all collection activity against Espinosa. It also
denied Funds’s motion for relief from the confirmed plan,
holding that the plan became final when it was confirmed and
that Funds should have objected to any procedural defect
before confirmation. Funds appealed to the district court,
which reversed. According to the district court, Funds was
denied due process because it wasn’t served with a complaint
and summons. Espinosa appeals.
Analysis
Funds makes both a statutory and a constitutional argument
for setting aside the confirmed bankruptcy plan. These argu-
ments turn on the fact that Espinosa didn’t obtain a judicial
determination of undue hardship.
[1] 1. Statutory Argument. Funds argues that the bank-
ruptcy court should have set aside Espinosa’s discharge
ESPINOSA v. UNITED STUDENT AID FUNDS 14025
because Espinosa didn’t comply with the additional proce-
dures required by the Bankruptcy Code and Rules to dis-
charge student debt. Great Lakes Higher Educ. Corp. v.
Pardee (In re Pardee), 193 F.3d 1083, 1086 (9th Cir. 1999),
which is on all fours with our case, forecloses this argument.
As here, the student loan debtor in Pardee didn’t employ
these additional procedures, and the creditor there didn’t file
any objections to the proposed Chapter 13 plan, which pro-
vided that the student loan debt would be discharged. Id. at
1084. The bankruptcy court confirmed the plan, and eventu-
ally discharged the student loan debt. Id. The creditor subse-
quently argued that the confirmed plan wasn’t final under 11
U.S.C. § 1327(a), because the creditor wasn’t given the bene-
fit of the additional procedures applicable to the discharge of
student loans. Pardee, 193 F.3d at 1086. We firmly rejected
this argument, following the Tenth Circuit’s lead in Andersen
v. UNIPAC-NEBHELP (In re Andersen), 179 F.3d 1253 (10th
Cir. 1999). In essence, Pardee held that a discharge is a final
judgment and cannot be set aside or ignored because a party
suddenly claims, years later, that the trial court committed an
error.
Two circuits have disagreed with Pardee, and accepted
Funds’s statutory argument. See Educ. Credit Mgmt. Corp. v.
Mersmann (In re Mersmann), 505 F.3d 1033, 1047-49 (10th
Cir. 2007) (en banc) (overruling Andersen); Whelton v. Educ.
Credit Mgmt. Corp., 432 F.3d 150, 154 (2d Cir. 2005). These
opinions divine some sort of conflict between the Bankruptcy
Code’s finality provision, 11 U.S.C. § 1327(a), and those pro-
visions of the Code and Rules that call for an adversary pro-
ceeding before a student loan debt may be discharged. We see
no such conflict; both provisions can operate fully, within
their proper spheres.
The provision giving student loan creditors a right to spe-
cial procedures comes into play when the case is pending
before the bankruptcy court. If a debtor proposes to discharge
a student loan debt without invoking the special procedures
14026 ESPINOSA v. UNITED STUDENT AID FUNDS
applicable to such debts, the creditor can object to the plan
until the debtor shows undue hardship in an adversary pro-
ceeding.
But there are many reasons a student loan creditor might
not object to such a Chapter 13 plan. The creditor might, for
example, believe that the debtor would be able to make a con-
vincing showing of undue hardship, and thus see no point in
wasting the debtor’s money, and its own, litigating the issue.
Or, the creditor may decide that a Chapter 13 plan presents its
best chance of collecting most of the debt, rather than spend-
ing years trying to squeeze blood out of a turnip. Or, the cred-
itor may hope that the debtor will make some payments on the
plan but ultimately fail to complete it, in which case the credi-
tor will have collected a portion of the debt and still be free
to collect the rest later.2 Or, the creditor may overlook the
notice or fail to understand its legal implications.
[2] Regardless, when the creditor is served with notice of
the proposed plan, it has a full and fair opportunity to insist
on the special procedures available to student loan creditors
by objecting to the plan on the ground that there has been no
undue hardship finding. Rights may, of course, be waived or
forfeited, if not raised in a timely fashion. This doesn’t mean
that these rights are ignored, or that a judgment that is entered
after a party fails to assert them conflicts with the statutory
scheme or is somehow invalid.
2
This is not an idle hope; an estimated two-thirds of Chapter 13 plans
ultimately fail. Scott F. Norberg & Andrew J. Velky, Debtor Discharge
and Creditor Repayment in Chapter 13, 39 Creighton L. Rev. 473, 509
n.74 (2006) (“[D]ata . . . show a continuation of the [Chapter 13 plan]
failure rate at about two-thirds.”) (citing Lynn M. LoPucki, Common
Sense Consumer Bankruptcy, 71 Am. Bankr. L.J. 461, 474-75 (1997));
National Bankruptcy Review Commission, Bankruptcy: The Next Twenty
Years 233 (1997), available at http://govinfo.library.unt.edu/nbrc/report/
08consum.pdf (“For more than a decade, two-thirds of all Chapter 13
plans have failed before the debtor completes payments, and sometimes
before unsecured creditors have received anything at all.”).
ESPINOSA v. UNITED STUDENT AID FUNDS 14027
[3] The Bankruptcy Code’s finality provision comes into
play much later in the process, after the bankruptcy proceed-
ings come to an end. A bankruptcy discharge order is a final
judgment and, even without the special protection of section
1327(a), a final judgment cannot be ignored or set aside just
because it was the result of an error. Errors committed during
the course of litigation must be corrected by way of a timely
appeal. We have therefore “recognized the finality of confir-
mation orders even if the confirmed bankruptcy plan contains
illegal provisions.” Pardee, 193 F.3d at 1086 (citing Trulis v.
Barton, 107 F.3d 685 (9th Cir. 1995), Lawrence Tractor Co.
v. Gregory (In re Gregory), 705 F.2d 1118 (9th Cir. 1983),
and numerous other cases from across the country). Were the
rule otherwise, no judgment would ever be conclusive, as a
party aggrieved by it could endlessly re-litigate errors suppos-
edly committed by the trial court.
[4] After a judgment (including a discharge) is finalized,
and the time for appeal has run, the judgment can only be
reconsidered in the limited circumstances provided by Rule
60(b). Mersmann and Whelton pay scant attention to 60(b) or
the caselaw thereunder, which strictly cabins the circum-
stances under which a judgment can be reopened after it
becomes final. See, e.g., Gaydos v. Guidant Corp. (In re Gui-
dant Corp. Implantable Defibrillators Products Liability
Litig.), 496 F.3d 863, 866 (8th Cir. 2007) (“Rule 60(b) autho-
rizes relief in only the most exceptional of cases.”); United
States v. Hartwell, 448 F.3d 707, 722 (4th Cir. 2004)
(“[W]hen deciding whether an order is ‘void’ under . . . Rule
60(b)(4) for lack of subject matter jurisdiction, courts must
look for the rare instance of a clear usurpation of power.”);
Kramer v. Gates, 481 F.3d 788, 792 (D.C. Cir. 2007) (“Rule
60(b)(6) should be only sparingly used and may not be
employed simply to rescue a litigant from strategic choices
that later turn out to be improvident.”) (internal quotation
marks omitted). Instead, both circuits elide the requirements
14028 ESPINOSA v. UNITED STUDENT AID FUNDS
of 60(b) by treating this as a question of res judicata. Whelton,
432 F.3d at 155; Mersmann, 505 F.3d at 1049-50.3
[5] This analysis is wrong on two counts. First, what we
have here is not a question of res judicata—giving the judg-
ment in the bankruptcy case preclusive effect in another case.
The debtor here—like those in Mersmann and Whelton—
sought to reopen the original case in order to enforce the dis-
charge injunction, which came into force by operation of law
upon entry of the discharge. A discharge injunction does not
operate by way of res judicata; it is, rather, an equitable rem-
edy precluding the creditor, on pain of contempt, from taking
any actions to enforce the discharged debt. See 2 Collier
Bankruptcy Manual (3d rev. ed.) ¶ 524.02[2][c] (“Civil con-
tempt is the normal sanction for violations of the discharge
3
Mersmann also has what it calls a statutory argument, 505 F.3d at
1047-49, but this passage in the opinion proves nothing more than that the
order confirming the plan and the subsequent discharge probably were
erroneous and might have been successfully appealed. The court doesn’t
explain what difference this makes when dealing with a judgment that
long ago became final. Even an incorrect judgment is binding, unless and
until it is re-opened and modified. This portion of the Mersmann opinion
thus carries no independent force because it proves something that is both
obvious and beside the point.
Whelton appears to have been misled by a stray remark in one of our
opinions, Enewally v. Washington Mutual Bank (In re Enewally), 368 F.3d
1165, 1173 (9th Cir. 2004), to the effect that “the confirmed plan has no
preclusive effect on issues that must be brought by an adversary proceed-
ing.” This statement was correct in the circumstances presented in Ene-
wally, where “the bankruptcy court specifically reserved the question at
issue [during plan confirmation] because it had been raised via an adver-
sary proceeding.” Id. It is true, of course, that a plan can have no preclu-
sive effect on matters that have been specifically reserved for resolution
by way of an ongoing adversary proceeding. We had no occasion in Ene-
wally to consider the situation where there is no adversary and the case is
resolved entirely by confirmation of the plan. Anything Enewally has to
say as to matters not presented in that case is, in any event, dicta and thus
not binding on us. Reading Enewally broadly to speak to that hypothetical
situation would also bring it into conflict with Pardee, which addresses
precisely this issue.
ESPINOSA v. UNITED STUDENT AID FUNDS 14029
injunction.”) (footnote omitted); id. ¶ 524.02[2] (discharge
“provides for a broad injunction against not only legal pro-
ceedings, but also any other acts to collect a discharged debt
as a personal liability of the debtor”). This includes garnish-
ments, attachments, self-help and all other means of collection
—not merely the filing of another lawsuit. 11 U.S.C.
§ 524(a)(2); 2 Collier Bankruptcy Manual (3d rev. ed.)
¶ 524.02[2]. A discharge judgment could also have res judi-
cata effect, if the creditor were to try to enforce the debt by
bringing a post-discharge lawsuit, but the discharge injunction
prevents him from even commencing the second suit where
the res judicata issue could be litigated. There was no second
lawsuit in our case, nor (insofar as we can tell) in Mersmann
and Whelton. Res judicata thus has no application to a case
like ours, or those considered by the Second and Tenth Cir-
cuits.
Even if res judicata were the relevant doctrine, neither
Mersmann nor Whelton offer any persuasive reasons why the
discharge order here should be denied full preclusive effect.
Both cases seem to go off on the theory that the student loan
debt couldn’t be discharged by the Chapter 13 plan because
the creditor was not served with a complaint and summons,
as required for the commencement of an adversary proceed-
ing. Whelton, 432 F.3d at 155; Mersmann, 505 F.2d at
1049-50. But the creditor in our case (as in those other cases)
did get proper notice of the proposed Chapter 13 plan, and so
knew perfectly well that if the plan were approved and satis-
fied, the debtor would be granted a discharge of the student
debt listed in the plan.4 Had the creditor wanted to insist on
4
In our case, the creditor was served with the “Notice of Commence-
ment of Case Under Chapter 13 of the Bankruptcy Code, Meeting of Cred-
itors, and Fixing of Dates.” Attached to this notice was a copy of the
proposed Chapter 13 plan, which carried the following prominent warn-
ing: “WARNING IF YOU ARE A CREDITOR YOUR RIGHTS MAY
BE IMPAIRED BY THIS PLAN.” There follows a detailed description of
debtor’s assets and liabilities, a payment schedule and a great deal of other
14030 ESPINOSA v. UNITED STUDENT AID FUNDS
an adversary, it could have objected to the Chapter 13 plan on
the ground that there was no judicial finding of undue hard-
ship. Had Funds so objected, the bankruptcy court would have
been required to disapprove the plan and Espinosa would
have been put to the hard choice of commencing an adversary
or abandoning Chapter 13. But Funds didn’t object to the plan
and didn’t appeal the order confirming the plan, as it well
could have. See In re Gregory, 705 F.2d at 1121. Instead, it
accepted the payments made by the debtor during the plan’s
life and then acted as if the whole thing never happened. See
p.14024 supra.
It makes a mockery of the English language and common
sense to say that Funds wasn’t given notice, or was somehow
ambushed or taken advantage of. The only thing the creditor
pertinent information. One section of the plan is titled “Education
Loan(s)” and lists all of Funds’s loans, for a total of $13,250. The plan
specifies that this amount should be paid in full, followed by a paragraph
stating as follows:
The amounts claimed by the United Student Loan Aid Funds,
Inc., et. al. for capitalized interest, penalties, and fees shall not be
paid for the reasons that the same are penalties and not provided
for in the loan agreement between the Debtor and the lender.
The subsequent paragraph provides as follows: “Any amounts or claims
for student loans unpaid by this Plan shall be discharged.” Paragraph 6 of
the plan is titled “OBJECTIONS” and provides as follows: “Objections,
by any creditor, must be filed seven (7) days prior to the hearing on Con-
firmation of Plan along with a copy to the Trustee and Debtor’s counsel.”
Paragraph 7 is titled “PROOF OF CLAIM” and states as follows:
As a creditor you must file your proof of claim in order to get
paid the amounts provided for in this plan. If you do not file your
proof of claim by the deadline date you will not receive anything
even if the Plan provides for payment. The deadline for filing
proofs of claim is set forth in the Notice Of Commencement [Of]
Case Under Chapter 13 Of The Bankruptcy Code, Meeting of
Creditors, And Fixing of Dates which you have received from the
Clerk of the United States Bankruptcy Court.
As noted, Funds filed a proof of claim, but no objection to the plan.
ESPINOSA v. UNITED STUDENT AID FUNDS 14031
was not told is that it could insist on an adversary proceeding
and a judicial determination of undue hardship. But that’s less
a matter of notice and more of a tutorial as to what rights the
creditor has under the Bankruptcy Code—a long-form
Miranda warning for bankers. If that were the standard for
adequate notice, every notification under the Bankruptcy
Code would have to be accompanied by Collier’s Treatise,
lest the creditor overlook some rights it might have under the
Code.
Mersmann recognizes this problem when it states (without
citation) that this kind of notice is somehow different from
ordinary notices because it “goes to the heart of the creditor’s
notice of the bankruptcy plan itself.” 505 F.3d at 1050. But
it’s not clear why letting the creditor know, in plain terms,
that its rights will be impaired by the proposed plan—and
then leaving it up to the creditor and his lawyers to figure out
what objections or remedies are available—doesn’t satisfy the
Tenth Circuit’s “heart of the . . . notice” standard. After all,
we aren’t talking here about destitute widows and orphans, or
people who don’t speak English or can’t afford a lawyer. The
creditors in such cases are huge enterprises whose business it
is to administer the very kinds of debts here in question. If
this kind of notice to sophisticated parties who have ample
resources to protect their rights is inadequate for purposes of
res judicata, then the concept of notice has no meaning and
res judicata is a fairy tale.
While we are bound by Pardee, we have taken a close look
at the contrary holdings of our sister circuits in order to deter-
mine whether we have strayed off course, in which case we
would call for rehearing en banc to correct our caselaw. But
we don’t find the reasoning of the two other circuits persua-
sive. Seeing no reason to change course, we continue to fol-
low Pardee.
2. Funds also argues that the discharge order is void
because Funds was denied due process, as it was never served
14032 ESPINOSA v. UNITED STUDENT AID FUNDS
with a complaint and summons as required by Fed. R. Bankr.
P. 7004. Three circuits have held, like the district court below,
that a student loan debtor’s failure to commence an adversary
proceeding by serving the student loan creditor with a com-
plaint and summons, denies the creditor due process. Ruehle
v. Educ. Credit Mgmt. Corp. (In re Ruehle), 412 F.3d 679,
682-83 (6th Cir. 2005); In re Hanson, 397 F.3d 482, 486 (7th
Cir. 2005); Banks v. Sallie Mae Servicing Corp. (In re Banks),
299 F.3d 296, 302-03 (4th Cir. 2002). Because we did not
consider this argument in Pardee or any other case, circuit
law does not preclude us from addressing it.
We begin our analysis with Rule 60(b), the gateway for set-
ting aside any final judgment. Because the judgment is more
than a year old, the first three subsections of 60(b) cannot be
relied on, Fed. R. Civ. P. 60(c)(1), and are inapplicable in any
event. Subsection 5, dealing with satisfied judgments, is simi-
larly inapplicable. Subsections 4 and 6, however, are possibil-
ities: If the opposing party is given no notice at all of the
lawsuit, or notice is so inadequate as to violate due process,
any judgment entered against that party would be void (sub-
section 4), and such constitutionally deficient service would
certainly be a just reason for relief from the judgment (subsec-
tion 6). See, e.g., Owens-Corning Fiberglass Corp. v. Ctr.
Wholesale, Inc. (In re Ctr. Wholesale, Inc.), 759 F.2d 1440,
1448-51 (9th Cir. 1985); Baldwin v. Credit Based Asset Ser-
vicing and Securitization, 516 F.3d 734, 737-38 (8th Cir.
2008).
[6] The standard for what amounts to constitutionally ade-
quate notice, however, is fairly low; it’s “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 objection.” Mullane v. Cent. Han-
over Bank & Trust Co., 339 U.S. 306, 314 (1950). In re Greg-
ory rejected an argument that Chapter 13 notice of a proposed
plan is constitutionally defective because it does not apprise
ESPINOSA v. UNITED STUDENT AID FUNDS 14033
each creditor of how its own claim will be disposed of by the
plan:
When the holder of a large, unsecured claim such as
Lawrence receives any notice from the bankruptcy
court that its debtor has initiated bankruptcy pro-
ceedings, it is under constructive or inquiry notice
that its claim may be affected, and it ignores the pro-
ceedings to which the notice refers at its peril.
“Whatever is notice enough to excite attention and
put the party on his guard and call for inquiry, is
notice of everything to which such inquiry may have
led. When a person has sufficient information to lead
him to a fact, he shall be deemed to be conversant of
it.” D.C. Transit Systems, Inc. v. United States, 531
F.Supp. 808, 812 (D.D.C. 1982). (citations omitted.)
The notice included the names of the bankruptcy
judge, the trustee, and Gregory’s attorney, and pre-
sumably any of them could have helped Lawrence
obtain a copy of the plan or informed it as to the
plan’s proposal concerning its claim. If Lawrence
had made any inquiry following receipt of the notice,
it would have discovered that it needed to act to pro-
tect its interest.
705 F.2d at 1123 (emphasis added).
[7] The reasoning of In re Gregory is controlling here, not
only because it is law of the circuit, but because it’s entirely
consistent with Mullane and the more than a half century of
due process caselaw that follows it. If a party is adequately
notified of a pending lawsuit, it is deemed to know the conse-
quences of responding or failing to respond, even if gaining
actual knowledge requires inquiry into court files, hiring a
lawyer or conducting legal research. Indeed, it would be virtu-
ally impossible to operate a legal system if due process
required more notice than that.
14034 ESPINOSA v. UNITED STUDENT AID FUNDS
[8] As noted, Funds here did receive actual notice of
Espinosa’s bankruptcy case; we know this both from docu-
ments in the record, which show receipt, and from the fact
that Funds presented a proof of claim. The notices Funds did
receive also warned of the consequences of failing to object—
which is more than due process requires. A creditor receiving
such notice would have known that its debt could be
adversely affected by the proposed plan, and that it needed to
file an objection if it wished to avoid that result.5 Funds raised
no such objection, nor did it appeal the order confirming the
plan. We cannot say that Funds was taken by surprise or was
denied due process. Quite the contrary: Funds appears to have
been a willing participant, perfectly happy to receive the ben-
efits of the Chapter 13 plan, but unwilling to suffer the conse-
quences of its failure to file an objection.
The three circuits that have held that the creditor is denied
due process in circumstances such as these appear to have a
different understanding of what due process requires. As best
we can follow their reasoning, it is that a creditor who is enti-
tled to heightened notice by statute is also entitled to such
heightened notice as a matter of due process. This footnote
from In re Banks, the first circuit case to adopt this novel
approach, tries to explain this rationale: “We do not today
hold that the Constitution in itself requires a summons and
service of process to discharge student loan debt. We merely
confirm that where the Bankruptcy Code and 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.” 299 F.3d at 303 n.4. Accord In re
Hanson, 397 F.3d at 486 (“student loan creditors justifiably
5
Even after the bankruptcy court confirmed the plan, Funds had an
opportunity to dispute it. The notice attached to the proposed plan specifi-
cally advised that the “amount of the claim [Funds] filed differs from the
amount listed for payment in [Espinosa’s] plan,” and warned Funds that
its “claim will be paid as listed in the plan” unless the Chapter 13 Trustee
received notice within 30 days from Funds that it “wishes to dispute the
above stated treatment of the claim.” Funds did not object.
ESPINOSA v. UNITED STUDENT AID FUNDS 14035
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
property rights may be affected.”); In re Ruehle, 412 F.3d at
683. The Seventh Circuit in Hanson goes so far as to say that
“Hanson’s failure to serve [the creditor] with a summons and
an adversary proceeding complaint effectively denied [the
creditor] the opportunity of presenting an objection prior to
the adjudication of its rights.” 397 F.3d at 486 (citing Mul-
lane, 339 U.S. at 313-14).
We do not find this reasoning persuasive and thus have no
occasion to call for rehearing en banc to consider overruling
In re Gregory. To begin with, we find it both wrong and dan-
gerous to hold that the standard for what amounts to constitu-
tionally adequate notice can be changed by legislation. The
constitutional standard, as we understand it, requires that a
party affected by the litigation obtain sufficient notice so that
it is able to take steps to defend its interests. Congress can, of
course, give rights to additional notice, but we find it difficult
to see how this can affect the floor provided by due process—
either to increase or diminish it.
[9] Even if Congress could affect the constitutional stan-
dard, it didn’t do so here: Congress made it quite clear that a
creditor need only get ordinary notice of a Chapter 13 plan to
be bound by its terms. That Congress provided heightened
notice requirements for an adversary proceeding, which didn’t
take place here, is of no consequence. Had there been an
adversary proceeding, and had the creditor not been served
with a complaint and summons, the creditor may then have
been free to ignore the adversary until it was properly served.
But here (and in the similar cases from other courts) there was
no adversary proceeding; the creditor’s rights were cut off by
the Chapter 13 plan, precisely as specified in the notice the
creditor did receive. We reject the idea that a creditor who is
in the business of administering student loans has a constitu-
tional right to ignore a properly served notice that clearly
14036 ESPINOSA v. UNITED STUDENT AID FUNDS
specifies that its debt will be discharged on successful com-
pletion of the plan.6
In short, we find the due process argument even less per-
suasive than the statutory argument, despite the eagerness of
some of our sister circuits and other courts to adopt it. What
appears to be going on is that courts are re-casting what may
be a simple statutory violation as a denial of due process so
that they can set aside judgments with which they’re unhappy.
This approach is not consistent with the theory of objective
judging, which calls for us to apply the law fairly to the facts
and let the chips fall where they may. We see no reason to
reconsider the approach we adopted in In re Gregory, which
6
Our Bankruptcy Appellate Panel’s opinion in In re Repp suffers from
the same defect in reasoning. The opinion there bemoans “an unfair Catch-
22” and even a “double Catch-22” that the student loan creditor suppos-
edly confronts. Educ. Credit Mgmt. Corp. v. Repp (In re Repp), 307 B.R.
144, 153 (9th Cir. BAP 2004). We don’t see any Catch-22: A creditor who
wants to force the debtor to follow the statutory procedure for discharging
student debt need only object to the proposed plan on the ground that there
has not been a proper undue hardship finding. The debtor must then pro-
cure such a finding by bringing an adversary proceeding and serving the
creditor with a complaint and summons. As Judge Ryan points out in his
well-reasoned dissent, the creditor in Repp (like the one in our case) was
not subjected to any kind of unfairness:
It should be pointed out that ECMC was a creditor, had filed a
claim, and knew or should have known that its rights could be
affected by the plan. It cannot stick its head in the sand, ignore
the plan terms, and later claim foul play because it is adversely
impacted by the plan. Due process does not place substance over
form. Here, the substance is that ECMC had actual knowledge of
the plan terms and chose to default. It cannot now seek a second
bite of the apple by way of a due process argument.
Id. at 156. The Repp majority would have done well to adopt the view of
its dissenting colleague and follow circuit law as announced by Pardee
and In re Gregory. In re Repp and cases following it are overruled. See,
e.g., Sallie Mae Servicing Corp. v. Ransom (In re Ransom), 336 B.R. 790,
797-98 (9th Cir. BAP 2005); County of Ventura Tax Collector v.
Brawders (In re Brawders), 325 B.R. 405, 414 (9th Cir. BAP 2005).
ESPINOSA v. UNITED STUDENT AID FUNDS 14037
we believe is fully consistent with the Supreme Court’s teach-
ings in Mullane, and with fairness and justice as well.
Conclusion
It is apparent that a number of courts in our circuit, includ-
ing the district court below, are uncomfortable with the prac-
tice of some Chapter 13 debtors to seek to discharge their
student debts by working them into their Chapter 13 plans.
Some bankruptcy judges have announced that they won’t con-
firm plans that seek to discharge student loan debts without an
adversary proceeding, even when the creditor fails to object
to the plan. See, e.g., Patton v. U.S. Dep’t of Educ. (In re Pat-
ton), 261 B.R. 44, 48 (Bankr. E.D. Wash. 2001); In re Web-
ber, 251 B.R. 554, 557-58 (Bankr. D. Ariz. 2000). In fact, one
of these opinions has suggested that inclusion of a “non-
dischargeable” debt in a Chapter 13 plan “may be the subject
of sanctions.” In re Patton, 261 B.R. at 48.
[10] For reasons explained above, we view matters quite
differently. Our long-standing circuit law holds that student
loan debts can be discharged by way of a Chapter 13 plan if
the creditor does not object, after receiving notice of the pro-
posed plan, Pardee, 193 F.3d at 1086, and that such notice is
not constitutionally inadequate. In re Gregory, 705 F.2d at
1123. We find it highly unlikely that a creditor whose busi-
ness it is to administer student loans will be misled by the cus-
tomary bankruptcy procedures or somehow be bamboozled
into giving up its rights by crafty student debtors. If the credi-
tor fails to object, it is doubtless the result of a careful calcula-
tion that this course is the one most likely to yield repayment
of at least a portion of the debt. In such circumstances, bank-
ruptcy courts have no business standing in the way. Cases
such as In re Webber and In re Patton are, to that extent,
overruled.
[11] The district court’s judgment reversing the bankruptcy
court is reversed. The case is remanded to the bankruptcy
14038 ESPINOSA v. UNITED STUDENT AID FUNDS
court for reinstatement of the order enforcing the discharge
injunction and for a determination whether the creditor acted
willfully in violating the injunction under the standard we
announced in Zilog, Inc. v. Corning (In Re Zilog, Inc.), 450
F.3d 996 (9th Cir. 2006).7
REVERSED and REMANDED.
7
As we held in Zilog:
A party who knowingly violates the discharge injunction can be
held in contempt under section 105(a) of the bankruptcy code.
See In re Bennett, 298 F.3d at 1069; Walls v. Wells Fargo Bank,
N.A., 276 F.3d 502, 507 (9th Cir. 2002) (holding that civil con-
tempt is an appropriate remedy for a willful violation of section
524’s discharge injunction). In Bennett, we noted that the party
seeking contempt sanctions has the burden of proving, by clear
and convincing evidence, that the sanctions are justified. We
cited with approval the standard adopted by the Eleventh Circuit
for violation of the discharge injunction: “[T]he movant must
prove that the creditor (1) knew the discharge injunction was
applicable and (2) intended the actions which violated the injunc-
tion.”
450 F.3d at 1007 (citing Renwick v. Bennett (In re Bennett), 298 F.3d
1059, 1069 (9th Cir. 2002) (citing Hardy v. United States (In re Hardy),
97 F.3d 1384, 1390 (11th Cir. 1996)). That the creditor may have believed
that the discharge was inappropriately entered, or that it could be set aside
under Rule 60(b), is of no consequence. A creditor is not free to violate
the discharge injunction because it has doubts as to the validity of the dis-
charge. If the creditor believes the discharge is defective, it may petition
the bankruptcy court to reopen and set aside the judgment under Rule
60(b), but it may not commence collection proceedings unless and until
the court grants such relief. If the bankruptcy court finds that the creditor
here willfully violated the injunction, it shall, at the very least, impose
sanctions to the extent necessary to make Espinosa whole. See 2 Collier
Bankruptcy Manual (3d rev. ed.) ¶ 524.02[2][c] (“In cases in which the
discharge injunction was violated willfully, courts have awarded debtors
actual damages, punitive damages and attorney’s fees.”) (footnote omit-
ted).