Espinosa v. United Student Aid Funds, Inc. ( 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—San Francisco, California
Filed June 24, 2008
Before: Alex Kozinski, Chief Judge, A. Wallace Tashima
and N. Randy Smith, Circuit Judges.
Per Curiam Opinion
7293
7294 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.
ESPINOSA v. UNITED STUDENT AID FUNDS 7295
Madeleine C. Wanslee, Gust Rosenfeld P.L.C., Phoenix, Ari-
zona, for the defendant-appellee.
OPINION
PER CURIAM:
Espinosa obtained $13,250.00 in student loans from United
Student Aid Funds, Inc. (Funds). He later filed a Chapter 13
bankruptcy petition and plan. The plan provided that he repay
the $13,250.00 principal, and that accrued capitalized interest,
penalties, and fees be discharged. The clerk of the bankruptcy
court mailed a notice of commencement and a copy of the
proposed plan to Funds, which gave Funds the usual notice of
the date and time of the plan confirmation hearing and the
deadline for filing objections to the plan. Funds then filed a
proof of claim for $17,832.15, which presumably included
unpaid accrued capitalized interest, penalties, and fees. But
Funds filed no objections to the plan, and as there were no
other creditors, the bankruptcy court confirmed the plan as
proposed. Espinosa subsequently paid Funds $13,250.00 over
the course of four years, at which point the plan was com-
pleted and the bankruptcy court issued a discharge order, filed
May 30, 1997. Curiously, the discharge order provided that
Espinosa was “discharged from all debts provided for by the
plan . . . except any debt . . . for a student loan,” which contra-
dicted the terms of the plan and pretty much rendered the
whole exercise pointless from Espinosa’s point of view. Cur-
iouser still, Espinosa did not seek reconsideration of the dis-
charge order, nor did he appeal.
Three years after the discharge order was filed, Funds
began “offsetting” or “intercept[ing]” Espinosa’s income tax
refunds to satisfy the unpaid portion of the student loan. (The
parties don’t explain what they mean by “offsetting” and “in-
tercept[ing],” but we assume they mean that Funds somehow
7296 ESPINOSA v. UNITED STUDENT AID FUNDS
got ahold of Espinosa’s income tax refund check, and kept the
money for itself.) Espinosa petitioned the bankruptcy court
for an order holding Funds in contempt for violating the dis-
charge injunction. 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 vio-
lation of Funds’s rights under the Bankruptcy Code and
Rules, and the Due Process Clause.
This is the nub of Funds’s argument: To satisfy its obliga-
tions under the Bankruptcy Code, a Chapter 13 debtor usually
only has to notify creditors by mail of the deadline for filing
objections and when the confirmation hearing will occur, Fed.
R. Bankr. P. 2002(b), as Espinosa did here. However, student
loans may be discharged under Chapter 13, 11 U.S.C.
§ 1328(a)(2), only if the debtor can show “undue hardship,”
id. § 523(a)(8), and such a showing can only be made in an
adversary proceeding, Fed. R. Bankr. P. 7001(6). To initiate
an adversary proceeding, a debtor must file a complaint, id.
7003, which must be served on the creditor along with a sum-
mons, id. 7004. Espinosa didn’t commence an adversary pro-
ceeding and therefore did not obtain a judicial declaration of
“undue hardship.” Absent such a declaration, Funds argues,
the bankruptcy court lacked authority to discharge the student
loan debt by means of the Chapter 13 plan. Funds’s motion
for relief from the discharge order was based on the fact that
Espinosa obtained his discharge without following the
statutorily-prescribed procedures for discharging student loan
debt.
The bankruptcy court held that Funds violated the dis-
charge injunction and ordered Funds to cease all collection
activities against Espinosa. The court 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 confir-
mation. Funds appealed to the district court, which reversed.
According to the district court, the order confirming the plan
ESPINOSA v. UNITED STUDENT AID FUNDS 7297
is void because Funds received insufficient notice and was
thus denied due process. Espinosa appeals.
Funds argues that the confirmed bankruptcy plan is void,
because Funds didn’t receive service of a complaint and sum-
mons and there was no adversary proceeding to establish
“undue hardship,” which the Bankruptcy Code and Rules
require as a condition for discharging a student loan debt. We
rejected this argument in Pardee v. Great Lakes Higher Edu-
cation Corp. (In re Pardee), 193 F.3d 1083, 1086 (9th Cir.
1999). Like Funds, the creditor in Pardee received notice of
the debtor’s proposed Chapter 13 plan, which provided for
discharge of the student loan debt without the benefit of an
adversary proceeding or an undue hardship finding. Id. at
1084. The creditor did not object, the bankruptcy court con-
firmed the Chapter 13 plan and the student loan debt was
eventually discharged. Id. Years later, the creditor argued that
the confirmed plan wasn’t final under 11 U.S.C. § 1327(a),
because the debtor had failed to follow the proper procedures
for obtaining a student loan discharge. Pardee, 193 F.3d at
1086. We pointed out in Pardee that the creditor there, like
Funds here, had timely notice of the Chapter 13 plan and
failed to object. We held that the creditor “should have raised
this argument [about the absence of an adversary proceeding
and a finding of undue hardship] in the bankruptcy court by
objecting to the plan prior to its confirmation, or by appealing
the bankruptcy court’s confirmation of the plan. It failed to do
either.” Id.Relying on the Tenth Circuit’s opinion in Andersen v.
UNIPAC-NEBHELP (In re Andersen), 179 F.3d 1253, 1258
(10th Cir. 1999), overruled by Educ. Credit Mgmt. Corp. v.
Mersmann (In re Mersmann), 505 F.3d 1033, 1046-47 (10th
Cir. 2007) (en banc), we held that “[i]f a creditor fails to pro-
tect its interests by timely objecting to a plan or appealing the
confirmation order, ‘it cannot later complain about a certain
provision contained in a confirmed plan, even if such a provi-
sion is inconsistent with the Code.’ ” Pardee, 193 F.3d at7298 ESPINOSA v. UNITED STUDENT AID FUNDS
1086. In reaching this conclusion, Pardee also relied on a
long line of cases, from our circuit and elsewhere, that “recog-
nized the finality of confirmation orders even if the confirmed
bankruptcy plan contains illegal provisions.” Id.; see, e.g.,
Andersen, 179 F.3d at 1258; In re Szostek, 886 F.2d 1405,
1409-10 (3d Cir. 1989); Republic Supply Co. v. Shoaf, 815
F.2d 1046, 1049-50 (5th Cir. 1987); Lawrence Tractor Co. v.
Gregory (In re Gregory), 705 F.2d 1118, 1121 (9th Cir.
1983); Ground Sys., Inc. v. Albert (In re Ground Sys., Inc.),
213 B.R. 1016, 1020 (B.A.P. 9th Cir. 1997); In re Walker,
128 B.R. 465, 468 (Bankr. D. Idaho 1991).
Since Pardee, there have been significant developments in
this area of the law: Two other circuits have rejected Pardee’s
reasoning—significantly including the Tenth Circuit, which
overruled its own Andersen opinion, on which Pardee princi-
pally relied. Mersmann, 505 F.3d at 1046-47; Whelton v.
Educ. Credit Mgmt. Corp., 432 F.3d 150, 154 (2d Cir. 2005).
Our own Bankruptcy Appellate Panel has questioned the rea-
soning of Pardee, albeit by a divided vote. Educ. Credit
Mgmt. Corp. v. Repp (In re Repp), 307 B.R. 144, 148 n.3
(B.A.P. 9th Cir. 2004). And three circuits, as well as our
Bankruptcy Appellate Panel, have held that the procedures
employed here violate the creditor’s due process rights.
Ruehle v. Educ. Credit Mgmt. Corp. (In re Ruehle), 412 F.3d
679, 684 (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 (4th Cir. 2002); Repp, 307 B.R. at
154.
It is thus fair to say that our position in Pardee is in the
minority; indeed, among the circuits we now stand alone.
Thus, while we (as a three-judge panel) are bound to follow
Pardee as controlling circuit law, we must not blind ourselves
to developments elsewhere. If we were persuaded that our
position is erroneous, we would have the right, and perhaps
even the duty, to bring the matter to the attention of our col-
ESPINOSA v. UNITED STUDENT AID FUNDS 7299
leagues and suggest that an en banc court be convened to
reconsider the matter afresh.
[1] We have therefore taken a look at the cases from the
other circuits and do not immediately find them persuasive;
the rationale of Pardee and Andersen, relying as it does on
straightforward notions of notice and waiver, seem far more
consistent with accepted principles concerning the finality of
judgments that transcend this particular corner of the law. But
we have no occasion to resolve this matter because, as previ-
ously noted, the discharge order in this case simply did not
discharge Espinosa’s student loan debt. Indeed, it specifically
excluded the student loan debt from the discharge. See p.7295
supra. This order was, to be sure, inconsistent with Espinosa’s
Chapter 13 plan’s terms; in effect, the bankruptcy court did
not make good on its promise to the debtor that, if he satisfied
the terms of the plan, it would discharge all of his listed debts.
Whether the bankruptcy court could have been held to that
promise, and compelled to issue an order discharging the stu-
dent debt, is an open question. Espinosa could have tested that
proposition by asking the bankruptcy court to modify its order
to discharge the student loan debt and, failing that, taken an
appeal. But he did not. Rather, he allowed the bankruptcy
court’s discharge order to become final, and the time to
appeal lapsed long ago. Nor did Espinosa seek to reopen the
judgment by way of Federal Rule of Civil Procedure 60. See
Fed. R. Bankr. P. 9024. Instead, Espinosa sought to enforce
the discharge injunction against Funds. The obvious problem,
of course, is that the discharge injunction simply does not run
against Funds because the bankruptcy court’s discharge order
did not cover its debt. Funds was thus free to collect its debt,
and the bankruptcy court seems to have misread its own order
when it held otherwise.
[2] Much the same seems to have happened in Mersmann,
505 F.3d at 1039-40 & n.5, where the court found that “the
clerk of the bankruptcy court automatically generates the dis-
7300 ESPINOSA v. UNITED STUDENT AID FUNDS
charge orders and simply failed to tailor it [sic] to the facts of
Mersmann’s case.” In Mersmann, the bankruptcy court cor-
rected the discharge orders pursuant to Federal Rule of Civil
Procedure 60(a). 505 F.3d at 1040. Here, Espinosa did not
seek a correction of the order, and the bankruptcy court did
not correct the order sua sponte, as it is permitted to do by
Rule 60(a). It is possible that the bankruptcy court was
unaware of the precise language of its discharge order, and
was under the mis-impression that the order did cover the stu-
dent loan debt; that seems to be the most plausible inference
from its order enforcing the discharge injunction against
Funds. And it is possible that neither party brought the precise
language of the discharge order to the bankruptcy court’s
attention, as the parties said barely anything about it in their
briefs before us.
[3] We therefore remand the case to the district court, with
instructions for it to remand to the bankruptcy court. On
remand, the bankruptcy court has our express leave to con-
sider whether its discharge order in this case was entered as
a result of a clerical error and, if so, whether to correct it so
as to conform to Espinosa’s Chapter 13 plan. See Travelers
Cas. and Surety Co. v. Pac. Gas and Elec. Co., No. 04-15605,
2008 WL 1970961, at *1 (9th Cir. May 8, 2008). The remand
shall be for this limited purpose and no other, and shall last
the earlier of 60 days or until such time as the bankruptcy
court enters an order addressing this issue.
The parties shall notify us within 5 days of the entry of the
bankruptcy court’s order, and we shall determine at that time
whether the case requires further briefing or can be resubmit-
ted on the existing briefs and arguments.
SUBMISSION VACATED; REMANDED FOR A LIM-
ITED PURPOSE.