Educational Credit Management Corp. v. Repp (In Re Repp) , 2004 Bankr. LEXIS 405 ( 2004 )

RYAN, Bankruptcy Judge,

dissenting.

The majority disregards the Ninth Circuit’s holding in Pardee based on ECMC’s claim that it was not provided due process. The majority follows the reasoning in Banks, which refused to follow Pardee, and reverses the bankruptcy court. I respectfully disagree with the majority’s views and therefore dissent.

The Pardee court agreed with the BAP that “Great Lakes’ failure to object to the plan or to appeal the confirmation order ‘constitutes a waiver of its right to collaterally attack the confirmed plan postconfir-mation on the basis that the plan contains a provision contrary to the Code.’ ” 193 F.3d at 1085.

In Pardee, the Ninth Circuit pointed out that Pardee’s plan contained a provision discharging post-petition interest on their student loan debt, and the creditor (Great Lakes) had notice of the plan and the discharge provision. However, Great Lakes “failed to take an active role in protecting its own interests.” Id. at 1086. The Ninth Circuit agreed with the Tenth Circuit’s view in Andersen that a creditor cannot sit on its rights and expect the bankruptcy court or trustee to protect its interests. Id. Therefore, it gave preclusive effect to the confirmation order.

The facts here are consistent with Par-dee. The creditor (ECMC) had actual notice of the confirmation hearing and received a copy of the plan. Instead of reviewing the plan and filing an objection to the offending discharge provision, ECMC sat on its rights and did not object. It also failed to seek a timely reconsideration or appeal the plan order. Only after the plan was performed years later and a discharge entered did ECMC raise the due process argument in response to the Repps’ declaratory judgment action.

As stated, the Ninth Circuit has decided that when a student loan creditor has actual notice, in accordance with Rule 2002(b), of a plan discharge provision that adversely affects it, the creditor must object or it will be held to have waived the objection. Inherent within this principle of law is that due process has been satisfied. I acknowledge that the issue of due process was not specifically raised in Pardee. However, the idea that a creditor with more than twenty-five days notice of a plan containing a provision that adversely affects it can ignore the proceeding, sit on its rights, and then raise a due process argument years later defies common sense.

The Supreme Court in Mullane established the standard for due process as “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.” 339 U.S. at 314, 70 S.Ct. 652. An inadequate notice results in a void order. See Center Wholesale, 759 F.2d at 1448. Obviously, the notice must be sufficient to inform the interested party that its rights could be adversely affected, thereby providing the party with a choice to appear or default. See Mullane, 339 U.S. at 314, 70 S.Ct. 652. The party must also be given sufficient time to appear. Id. Further, the type of notice must be of a kind that will inform the party with reasonable certainty. Id. at 315, 70 S.Ct. 652.

In Center Wholesale, the Ninth Circuit held that the notice provided did not meet the due process standards for timeliness and specificity “in light of the Bankruptcy Code’s statutory requirements, safeguards, and remedies.” 759 F.2d at 1448. The bankruptcy court had issued a final order approving use of cash collateral that adversely affected secured creditor Owens-Corning. Notice was given by a one-day mailgram that provided insufficient information to permit Owens-Corning to prepare and present its objections. Id.

The facts here are dramatically different. ECMC received actual notice of the plan hearing and a copy of the plan with the twenty-five days notice provided for in Rule 2002(b). ECMC had plenty of time to review the plan and file an objection. As the Supreme Court stated in Memphis Light, Gas and Water Div. v. Craft, 436 U.S. 1, 14, 98 S.Ct. 1554, 56 L.Ed.2d 30 (1978), “[t]he purpose of notice under the Due Process Clause is to apprise the affected individual of, and permit adequate preparation for, an impending ‘hearing.’ ” ECMC certainly knew, or should have known, because the plan clearly stated, that confirmation of the plan would lead to discharge of its claim. It had more than sufficient time to prepare and present its objections. However, it simply chose to sit on its rights and waive its opportunity to object.

Despite a similar factual backdrop, the Fourth Circuit in Banks chose to disregard the res judicata precedent of the Ninth and Tenth Circuits. The Banks court held 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 preclu-sive effect.” 299 F.3d at 303 n. 4. This per se rule in the Fourth Circuit is contrary to the expressed principles governing due process set forth in Mullane. Mullane does not hold that failure to follow a rule of service alone suffices to establish a lack of due process. According to Banks and the majority, the failure to follow Rule 7001 and serve ECMC with a summons and complaint in accordance with Rule 7004(b)(3) and give ECMC 30 days to answer per se results in a lack of due process.

This is contrary to Mullane’s guidance that the notice must be reasonably calculated to inform the interested party of the substance of the action and give the party a fair opportunity to respond. 339 U.S. at 314-15, 70 S.Ct. 652. This necessitates a case by case analysis. Constitutional due process is not automatically violated with the breach of a service rule. In Banks, the Fourth Circuit refused to give res judicata affect to the confirmation order, not because ECMC lacked actual notice of the impact of the plan on it or an opportunity to prepare an obligation, but simply because it did not get the requisite Rule 7001 procedural rights. This is simply not the appropriate test for deciding if ECMC received due process.

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.

The majority also cites to our decision in Loloee as further support that ECMC was denied due process. But the facts in Lo-loee are very different than what we have here. In Loloee, GMAC was not properly served in accordance with Rule 9014, no copy of the notice was served, the notice did not suggest that GMAC’s lien priority was disputed, and the service did not accord with the requirements of the local rules. See 241 B.R. at 660. Most importantly, the bankruptcy court held no hearing. See id. at 658. Therefore, GMAC had no opportunity to be heard. Lastly, the language in the order was ambiguous and failed to put GMAC on notice that its lien rights were adversely impacted. See id. at 661. As we said, “[hjolders of liens that may be adversely affected are entitled to unambiguous notice and an adequate opportunity to reflect and to respond.” 241 B.R. at 662. GMAC did not have that right, but as night is different from day, ECMC did here.

Lastly, the majority and some courts take the position that there is an element of unfairness here. They take the position that the debtor and debtor’s attorney should not seek to discharge student loan debt through a plan. If this is a court’s position, it can follow Judge Haines’ approach in Webber and deny confirmation of a plan with such a provision. The chapter 13 trustee can object, if appropriate. Also, the court can sanction under Rule 9011 to the extent that the inclusion of such provisions is inappropriate as a matter of law. [I would point out, however, that the issue of the dischargeability of interest on a student loan (which was the provision in Pardee) has not yet been decided by the Ninth Circuit. See Pardee, 193 F.3d at 1085 n. 3.] Therefore, there are various ways of attacking this perceived unfairness problem without circumventing the res ju-dicata holding of Pardee and without stretching the concept of due process beyond its appropriate boundaries.

Accordingly, for all the above reasons, I respectfully dissent and would affirm the bankruptcy court.