In re Patti Jan MERSMANN, Debtor,
Educational Credit Management Corporation, Appellant,
v.
Patti Jan Mersmann, Appellee,
United Student Aid Funds, Inc., and United States of America, Amici Curiae.
In re Connie Ann Seiwert, Debtor,
Connie Ann Seiwert, Appellant,
v.
Educational Credit Management Corporation, Appellee.
United States Court of Appeals, Tenth Circuit.
*1034 *1035 *1036 *1037 Daniel Fisher, Educational Credit Management Corporation, St. Paul, Minnesota (Scott M. Browning and Craig R. Welling, Rothgerber Johnson & Lyons LLP, Denver, CO, with him on the briefs) for Appellant in 05-3013.
John R. Hooge, Attorney at Law, Lawrence, KS, for Appellee in 05-3013.
Peter R. Maier, Appellate Staff (Leonard Schaitman Appellate Staff, and Peter D. Keisler, Assistant Attorney General, with him on the brief) Civil Division, Department of Justice, Washington, D.C., for Amicus Curiae United States in 05-3013.
Mac D. Finlayson, Morrel, West, Saffa, Craige & Hicks, Inc., Tulsa, OK, on the *1038 brief for Amicus Curiae United Student Aid Funds, Inc. in 05-3013.
Lynn D. Lauver, Attorney at Law, Topeka, KS, on the brief for Appellant in 05-3024.
Daniel Fisher, Educational Credit Management Corporation, St. Paul, Minnesota, Scott M. Browning and Craig R. Welling, Rothgerber Johnson & Lyons LLP, Denver, CO, on the brief for Appellee in 05-3024.
Before TACHA, Chief Judge, SEYMOUR, KELLY, HENRY, BRISCOE, LUCERO, MURPHY, HARTZ, O'BRIEN, McCONNELL, TYMKOVICH, and HOLMES, Circuit Judges.
TYMKOVICH, Circuit Judge.
I. Introduction
These appeals ask us to reconsider our Circuit's precedent concerning the discharge in bankruptcy of student loan debts. Under the Bankruptcy Code, student loans are non-dischargeable unless the student-debtor proves that continued payment is an "undue hardship." 11 U.S.C. § 523(a)(8). Since 1999, we have allowed students to establish undue hardship simply by submitting language in a proposed Chapter 13 plan, which, if unobjected to by a creditor and approved by the court, is later uncontestable. Andersen v. UNIPAC-NEBHELP (In re Andersen),
Since our holding in Andersen, only one other circuit has followed our lead. See Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee),
Here, Educational Credit Management Corporation, along with the United States Government as a friend-of-the-court, argues that discharge-by-declaration violates due process and should not be entitled to the benefit of res judicata. Debtors Patti Jan Mersmann and Connie Ann Seiwert ask us to reaffirm Andersen. A panel of this Court considered the arguments in these two cases on January 16, 2007. After reviewing the merits, the panel recommended that the Court revisit its holding in Andersen. Accordingly, the panel sua sponte called for a poll of the full court to consolidate these two cases and to consider the cases en banc. The participating members of this Court unanimously voted to consolidate these cases and grant an initial en banc review.
Because we find that the discharge of student loans without an adversary proceeding violates the Bankruptcy Code and Rules and is not entitled to res judicata effect, we now overrule Andersen. We also apply our decision prospectively only, so today's holding has no effect on these consolidated appeals. We therefore AFFIRM the Bankruptcy Appellate Panel's orders in Mersmann and Seiwert.
II. Background
These two appeals have slightly different factual and procedural backgrounds.
*1039 A. Mersmann
Patti Jan Mersmann, a resident of Kansas, obtained a student loan initially issued by Union Financial Services-1, Inc. c/o UNIPAC Service Corporation and Norwest Bank. On July 15, 1998, Mersmann filed a voluntary petition for bankruptcy under Chapter 13. Union Financial filed a proof of claim on August 3, 1998 and then transferred the loan to a guaranty agency, National Student Loan Program (NSLP), on October 5, 1998. NSLP then provided notice of the assignment of the loan to Educational Credit Management Corporation (ECMC) on January 16, 2001.[1] ECMC is a private, non-profit guaranty agency under the Higher Education Act, 20 U.S.C. § 1071, which guarantees private lender loans to student borrowers who attend eligible institutions of higher education. ECMC, thus, provides guarantor services for student loans against default and, in turn, is reinsured by the United States Department of Education. See 20 U.S.C. §§ 1085(j) and 1078(c).
Mersmann submitted a confirmation plan that called for a partial repayment of the student loan and a discharge of the debt at the end of the plan with her petition. The plan specifically stated, "Note 10% of all general, unsecured creditors are to be paid through plan. Upon completion of plan and payment of said 10% of general, unsecured creditors, all remaining unsecured debts, including school loans that are non-dischargeable in chapter 7 cases, shall be discharged." Mersmann Aplt. App. Vol. I at 49. At the time, Mersmann maintained a balance of $12,569 on her student loan. ECMC received notice of the plan, but did not lodge any objection. The bankruptcy court issued an order confirming the plan on December 9, 1998.
A few months later, on February 19, 1999, Mersmann sought to amend the plan to include the following language,
(1) School loans that are non-dischargeable in chapter 7 cases to be treated as general unsecured creditors and as follows: 10% of all allowed general, unsecured creditors are to be paid through plan, after payment of allowed secured creditors. Upon completion of planned payment of said 10% of allowed general, unsecured creditors, all remaining unsecured debts, including school loans that are otherwise non-dischargeable in chapter 7 cases, shall be discharged. Said completion of the plan shall result in a finding that it would be an undue hardship for the Debtor to have to pay any additional monies to the special class of school loans not otherwise dischargeable.
Id. at 58. Such language would constitute a discharge-by-declaration upon confirmation.
Again, ECMC received notice of the amendment, but failed to object. The bankruptcy court granted the amendment on May 25, 1999. Four years later, Mersmann completed the plan and the bankruptcy court discharged Mersmann's existing debts pursuant to the plan on June 2, 2003. Despite the plan's terms, the discharge order specially excepted from discharge "a student loan or educational benefit overpayment as specified in 11 U.S.C. Section 523(a)(8) in any case in which discharge is granted." Id. at 76.
Following her discharge, ECMC attempted to collect the remaining balance on Mersmann's student loan debt. She asserted that her student loan had been discharged through her plan under 11 *1040 U.S.C. § 1327. On September 15, 2003, ECMC filed a Rule 60b(4)[2] and (6)[3] of the Federal Rules of Civil Procedure motion to vacate the bankruptcy court's discharge order claiming that it violated due process because the hardship determination was obtained without adequate notice and an adversary proceeding. Mersmann opposed the motion and cross-moved to amend the discharge order under Rule 60(a)[4] to recognize the discharge of her student loans.
In a single opinion consolidating four similarly-situated debtors, the bankruptcy court found for Mersmann, denied the 60(b) motions, and amended the discharge order to excise the language excluding student loans.[5]See Educ. Credit Mgmt. Corp. v. Boyer (In re Boyer),
B. Seiwert
Connie A. Seiwert received student loans from the Nebraska Student Loan Program c/o UNIPAC Service Corporation and Windham Professionals (NebSLP). After encountering personal financial difficulties, Seiwert filed for bankruptcy on December 19, 1996. Seiwert's plan included her student loan for the amount of $22,000. NebSLP filed a proof of claim with a principal balance of $26,259, plus interest of $2,769, for a total of $29,028. Seiwert's trustee objected to NebSLP's proof of claim and the bankruptcy court entered an order dividing the claims into (1) a special class of unsecured claim (student loans) for $22,000 and (2) a general unsecured claim for $7,028.
As a part of her Chapter 13 proceedings, Seiwert submitted a confirmation plan to the bankruptcy court that provided,
Student Loan creditors will be paid the remaining unpaid original principal amount [of $22,000]. . . . During the pendency of the Bankruptcy Proceeding, no interest or penalties will accrue on these debts or claims. All such debts other than the remaining unpaid original principal amount of the loans remaining unpaid upon completion of the plan will be discharged upon entry of any discharge hereunder.
Seiwert Aplt.App. at 35. Through this provision, while agreeing to pay the loan balance of $22,000, Seiwert sought to discharge any pre-petition interest, as well as any post-petition interest or penalties that *1041 accrued on that debt during the Chapter 13 proceedings. NebSPL received notice of the plan but did not object to confirmation of the plan. The plan was orally confirmed on February 25, 1997 and an order to the same effect was filed on March 10, 1997.
On January 11, 2001, ECMC obtained Seiwert's loan from her lender as a result of her filing for bankruptcy. After making payments for several years, Seiwert successfully paid off her debts under the terms of the plan, including payments to NebSLP/ECMC totaling $22,000. On March 28, 2002, the bankruptcy court entered an order granting Seiwert a discharge pursuant to 11 U.S.C. § 1328(a). The discharge order also excepted from discharge debts "[f]or a student loan or educational benefit overpayment as specified in 11 U.S.C. Section 523(a)(8) in any case in which discharge is granted." Id. at 50. The court entered a final decree on July 2, 2002 and Seiwert's Chapter 13 case was closed.
In 2003, ECMC attempted to collect amounts on Seiwert's student loan it claimed were still owing, including over $7,000 in unpaid principal and interest. In response, on April 21, 2003, Seiwert filed a motion in the bankruptcy court seeking to hold ECMC in contempt for seeking payment of a discharged loan subject to a final decree. ECMC contested the motion, arguing that Seiwert's discharge of her student loans was void because she never commenced an adversary proceeding to determine that continued payment of her student loan constitutes an undue hardship, as required by the Bankruptcy Code.
In the consolidated case with Mersmann's and two others, again relying on Andersen, the bankruptcy court determined that Seiwert's discharge was valid as to the remaining interest on the student loan but concluded the unpaid principal was not discharged because the confirmed plan only discharged up to $22,000 of the principal under its terms. On appeal, the BAP reversed the ruling pertaining to the interest based on Poland, a decision issued after the bankruptcy court's order. In Poland, a panel of this Court held that Andersen required a confirmation plan or discharge order to contain an express finding of "undue hardship" to discharge a student loan. Since Seiwert's Chapter 13 plan contained no finding of undue hardship, the BAP concluded that Seiwert's final decree did not discharge the unpaid interest she still owed on her student loan. BAP Decision, Aplt. Br. at 15.[6] Seiwert appeals the BAP's order contending that Poland's decision conflicts with Andersen's broad language of finality and that the discharge of the interest owed on her student loan should be recognized.
III. Analysis
On appeal from BAP decisions, we independently review the bankruptcy court's decision. Houlihan Lokey Howard & Zukin Capital v. Unsecured Creditors' Liquidating Trust (In re Commer. Fin. Servs.),
A. Legal Framework
1. Statutory Background
Government-backed student loans originated from the government's policy of promoting access to educational opportunities. 4 Collier on Bankruptcy ¶ 523.14[1] (15th ed. rev.2006). Federally-sponsored student loans began with the National Defense Education Act of 1958, Pub.L. No. *1042 85-864, Title II, §§ 201-09, 72 Stat. 1580, 1583-87 (1958) (establishing the currently-named Perkins Loan program), and the Higher Education Act of 1965, Pub.L. No. 89-329, 79 Stat. 1219 (1965) (establishing the currently-named Stafford Loan program), which provide federal funds for low-interest loans to students to attend eligible institutions of higher education. Under the programs, the federal government insures or guarantees lenders and guarantors that the government will repay student loans in the event of a borrower's default. Collier, supra, ¶ 523.14[1].[7] Without this guarantee, Congress feared "most lenders would otherwise refuse to fund a student's pursuit of higher education." Seth J. Gerson, Separate Classification of Student Loans in Chapter 13, 73 Wash. U.L.Q. 269, 280 (1995) (providing a thorough history of student loan debts in bankruptcy).
Over time, Congress looked increasingly with disfavor on the discharge of student loans in bankruptcy and has progressively foreclosed its availability. The presumption of non-dischargeability of student loans reflects the view that student loans are "enabling loans" allowing individuals to improve their own human capital and increase their income potential, but the fruits of the student loans (i.e., the education) cannot be "seiz[ed], garnish[ed], or repossess[ed]" in case of default. Kevin C. Driscoll Jr., Eradicating the "Discharge by Declaration" for Student Loan Debt in Chapter 13, 2000 U. Ill. L.Rev. 1311, 1315-16 (2000).
Limitations on the discharge ability of student loans serve two purposes: (1) "preventing abuses of the educational loan system by restricting the ability to discharge a student loan shortly after a student's graduation," and (2) "safeguarding the financial integrity of governmental entities and nonprofit institutions that participate in educational loan programs." Collier, supra, ¶ 523.14[1]; see also Educ. Credit Mgmt. Corp. v. Polleys,
Since before 1978, when the then-governing Bankruptcy Act permitted student loans to be discharged, the requirements for student loan discharge have become progressively more restrictive. In 1978, Congress enacted the Bankruptcy Code making student loans nondischargeable in Chapter 7 cases for the first five-years of repayment unless it would constitute an "undue hardship." Bankruptcy Reform Act of 1978, Pub.L. No. 95-598, § 523(a)(8), 92 Stat. 2549, 2591 (1978). In 1990, the waiting period was extended to seven years. Federal Debt Collection Procedures Act of 1990, Pub.L. No. 101-647, § 3621(2), 104 Stat. 4933, 4965 (1990). Also in 1990, Congress added these restrictions on student loan discharge to bankruptcy cases filed under Chapter 13. Student Loan Default Prevention Initiative Act of 1990, Pub.L. No. 101-508, § 3007, 104 Stat. 1388, 1388-28 (1990).
In 1998, Congress amended § 523 of the Bankruptcy Code to its current form, eliminating the option for student loan discharge after seven years. Higher Education Amendments of 1998, Pub.L. No. 105-244, Title IX, § 971(a), 112 Stat. 1581, 1837 (1998).[8] Accordingly, now student loans may not be discharged in Chapter 7 or 13 cases, except for the one narrow *1043 circumstance when "excepting such debt from discharge . . . would impose an undue hardship on the debtor and the debtor's dependents." 11 U.S.C. § 523(a)(8) (emphasis supplied).
Undue Hardship. To prove "undue hardship," the debtor must establish three elements: (1) the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living if forced to repay the loans; (2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) the debtor has made good faith efforts to repay the loans. Polleys,
Under the Bankruptcy Rules, the debtor must prove the elements of "undue hardship" in an adversary proceeding. Fed. R. Bankr.P. 7001(6) (defining a "proceeding to determine the dischargeability of a debt" as an adversary proceeding). An adversary proceeding is a subpart of a bankruptcy case that has all the trappings of civil litigation. Like a civil trial, adversary proceedings (1) are governed by discovery rules, id. R. 7026, (2) can be adjudicated by summary judgment, id. R. 7056, (3) are subject to the award of costs, id. R. 7054(b), and (4) are appealable, id. R. 8001(a).
Furthermore, and more significantly for this case, the notice requirements to initiate an adversary proceeding are more exacting than the notice required for confirmation of a Chapter 13 plan. The Bankruptcy Rules demand heightened, individualized service of process for adversary proceedings, while they only dictate generalized notice for confirmation of a plan.
Plan Confirmation. To confirm a plan, notice need only be sent by mail to all "parties in interest" not less than twenty-five days of the time for filing objections and the hearing to consider confirmation of the plan. Id. R.2002(b). The notice goes only to the creditor's address provided by the debtor's list of creditors or schedule of liabilities, unless the creditor designates an address. Id. R 2002(g)(2). Rule 2002(b) notice regarding Chapter 13 plans, moreover, need only include a summary of the plan, not the actual plan. Id. R. 3015(d). Accordingly, Rule 2002 does not require specific notice of a plan provision's effect on a particular creditor, nor does it require notice to be served in any particular manner or upon any particular person.
Adversary Proceeding. To initiate an adversary proceeding, a debtor must fulfill the highly specific service of process requirements. Id. R. 7001(6). First, the debtor must file a complaint, which must be served alongside a summons on the creditor-defendant. Id. R. 7003 and 7004. Where the creditor is a corporation, service of the complaint requires a summons delivered upon "an officer, a managing or general agent, or to any agent authorized by appointment or by law to receive service of process." Id. R. 7004(b)(3). The obligation to answer the adversary proceeding complaint is not triggered until the complaint is "duly served." Id. R. 7012(a). Once duly served, the creditor-defendant has thirty days to file its answer and thirty-five days if the creditor is the United States. Id. Without proper service, the defendant cannot be said to have "failed to plead or otherwise defend as provided by these *1044 rules." Fed.R.Civ.P. 55(a), incorporated by Fed. R. Bankr.P. 7055.
2. Tenth Circuit Precedent
The central question in these appeals is whether discharge-by-declaration satisfies the highly specific requirements and safeguards of an adversary proceeding to accord it respect under the principles of res judicata and to withstand the demands of due process. Our case law suggests conflicting answers.
a. In re Andersen
We first confronted this question in Andersen,
When the creditor attempted to collect on the student loan post-discharge, the debtor reopened the case in bankruptcy court, which ruled in favor of the creditor. The court found that the discharge-by-declaration language in the plan did not "constitute a judicial determination of hardship" because the "creditors were entitled to a higher level of due process before the confirmation of the plan invokes the concept of res judicata." Id. at 1255. On appeal, the BAP reversed the bankruptcy court holding that the discharge order properly discharged the student loan obligation. Id.
On appeal, the panel in Andersen stressed the importance of a creditor's obligation to protect its own interests and not "simply sit on its rights." Id. at 1256. More importantly, Andersen held that, despite the failure to comply with the Bankruptcy Code's requirements, the order of confirmation discharging the student loan debt was nonetheless final and entitled to res judicata effect. The panel found that the "strong policy of finality" outweighed the plan's failure to conform with the statutory provisions of the Bankruptcy Code requiring an adversary proceeding. Id. at 1258. According to the panel, the confirmation of a Chapter 13 plan represents a binding determination of the rights and liabilities of the parties with notice of the proposed confirmation plan and that it is "res judicata as to the issue of hardship." Id. at 1259. The panel reasoned, "[t]o permit [the creditor] to prevail at this late stage, subsequent to the order of discharge and several years after the plan was confirmed, would not only diminish the reliability and finality of the confirmed plan, but would surely disrupt [the debtor's] reasonable and settled expectations regarding her future financial planning." Id. at 1259. The panel accordingly affirmed the BAP's decision.
In a footnote, the Andersen panel also found that discharge-by-declaration does not raise due process concerns since the creditor in the case did not complain of inadequate notice. Id. at 1257 n. 6. The panel noted, "we do not perceive a due process issue here. Rather . . . given the *1045 fact that [the creditor] does not complain that it lacked adequate notice of [the debtor's] plan prior to confirmation, it appears that due process has been accorded." Id. (internal quotes omitted).[9]
b. In re Poland
A few years later, in Poland, we examined the scope of Andersen in circumstances where the confirmation plan and discharge order did not contain express findings of undue hardship. See generally Poland,
Poland thus strictly limited Andersen to situations where a finding of undue hardship is expressly included in the confirmed plan or confirmation order. Id. at 1188. While recognizing the res judicata effect of a confirmation order following circumstances in Andersen, the Poland panel went on "to emphasize, as we did in Andersen, that the proper way to discharge a student loan debt is through an adversary proceeding where the debtor establishes undue hardship." Id. at 1189.
More significantly, the panel in Poland candidly observed that Andersen, while binding precedent, was "wrongly decided and should be reconsidered." Id. at 1189 n. 2. In its view,
The unfortunate result of Andersen is that astute attorneys now insert student loan discharge language . . . into Chapter 13 plans hoping to achieve preclusive effect, notwithstanding: (1) Bankruptcy Code § 528(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 individualized service of process, to establish undue hardship and discharge a student loan, and (3) lack of required notice under the Bankruptcy Rules proscribes preclusive effect.
Id.
Other courts within our jurisdiction have similarly refused to accept a broad reading of Andersen. See, e.g., In re Lemons,
3. Other Authorities
Our holding in Andersen has also generated considerable opposition and only one court has followed our lead in permitting discharge-by-declaration. See In re Pardee,
The Fourth, Sixth and Seventh Circuits have ruled against the concept of discharge-by-declaration on due process grounds. See Banks v. Sallie Mae Servicing Corp. (In re Banks),
In Banks, the Fourth Circuit recognized that although a confirmation order is generally afforded preclusive effect, "we cannot defer to such an order if it would result in a denial of due process."
Following the Fourth Circuit's lead, the Seventh Circuit also rejected discharge-by-declaration on due process grounds in Hanson,
The Sixth Circuit came to the same conclusion in Ruehle.
First, it ignores the clear intent of Congress and the Judicial Conference in favor of individual judicial legislation. Congress, in the Code, and the Judicial Conference, in the rules, require an adversary proceeding. Second, it enriches and emboldens those who take what is not theirs and legitimizes it with court sanction. Those who push past the edge *1047 of propriety in fundamental rights are rewarded.
Id.
Finally, the Second Circuit proscribed discharge-by-declaration on narrow statutory and res judicata grounds. In Whelton v. Educ. Credit Mgmt. Corp., the court concluded, "although confirmed plans are res judicata to issues therein, the confirmed plan has no preclusive effect on issues that must be brought by an adversary proceeding, or were not sufficiently evidenced in a plan to provide adequate notice to the creditor."
The Whelton court recognized res judicata is properly invoked only where there is (1) an adjudication on the merits, (2) privity of parties, and (3) the matter involved claims that were or could have been raised in the previous action. Id. at 155. First, discharge-by-declaration fell short of these requirements because the debtor's failure to comply with the notice requirements of the Code and Rules precluded the claim from being properly raised in the previous action. Id. Second, since none of the elements of "undue hardship" were pleaded or proven by the debtor, nor found by the bankruptcy court in discharging the debt, the "undue hardship" showing was not adjudicated on the merits. Id. Such elements could not be established in a summary proceeding. Id.
In conclusion, the Whelton court held, "[b]ecause the [debtor] failed to serve [the creditor] and affirmatively establish such undue hardship in an adversary proceeding, his liability on the loan survives the purported discharge." Id. at 156.
We find this line of analysis persuasive and now adopt it.
B. Overturning Andersen
ECMC and the United States, as amicus, ask us to limit or overturn Andersen on (1) due process grounds as articulated in Banks, Ruehle, and Hanson, or (2) statutory and res judicata grounds, as set forth to Whelton. While Andersen's conclusion that due process was satisfied has been cast into considerable doubt by subsequent cases, since we find the statutory and res judicata arguments dispositive, we need not revisit the due process question in this opinion.
We thus turn to the statutory and res judicata arguments.
1. Statutory Grounds
Under the Bankruptcy Code, "a confirmed plan bind[s] the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan." 11 U.S.C. § 1327(a). This provision serves the same purpose as the general doctrine of res judicata. 8 Collier, supra, ¶ 1327.02[1]. "There must be finality to a confirmation order so that all parties may rely upon it without concern that actions which they may thereafter take could be upset because of a later change or revocation of the order." Id. As there are limits to res judicata, there are also limits to § 1327(a)'s broad language of finality. Discharge-by-declaration deserves no preclusive effect under § 1327(a) because it fails to comport with the provisions of the Bankruptcy Code and Rules governing discharge.
Several good reasons support this conclusion. First, through § 523(a)(8), Congress evinced the unmistakable *1048 intent to make student loan debts "presumptively nondischargeable" and to "singl[e them] out for an individualized adjudication." Tenn. Student Assistance Corp. v. Hood,
A discharge under section . . . 1328(b) of this title does not discharge an individual debtor from any debt . . . for an educational . . . loan made . . . unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor.
11 U.S.C. § 523(a)(8). When a debt is not automatically dischargeable, Bankruptcy Rule 7001(6) commands that the debt must not be discharged without an adversary proceeding.
The Supreme Court has held that § 523(a)(8) is "self-executing" and "[u]nless the debtor affirmatively secures a hardship determination, the discharge order will not include a student loan debt." Hood,
Second, applying § 1327(a)'s preclusive effect to discharge-by-declaration conflicts with other specific provisions of the Code. Section 1328(a)(2), for example, states that "as soon as practicable after completion by the debtor of all payments under the plan, . . . the [bankruptcy] court shall grant the debtor a discharge of all debts provided for by the plan . . ., except any debt . . . of the kind specified in . . . paragraph . . . (8) . . . of section 523(a)." Section 523(a)(8) is, of course, the provision making student loan debts presumptively nondischargeable and § 1328(a)(2) applies the provision to Chapter 13 cases. Giving preclusive effect to a discharge-by-declaration through § 1327(a) renders part of § 1328(a)(2) nugatory. "When general and specific statutory provisions apparently contradict, it is well-established that the two may exist together, the specific provision qualifying or limiting the general." United States v. Shewmaker,
Third, § 1325(a)(1) of Code permits the confirmation of a plan only if it is consistent with the rest of the Code. "Courts shall confirm a plan if . . . the plan complies with the provisions of this chapter [11 U.S.C. §§ 1301 et seq.]." 11 U.S.C. § 1325(a)(1). Discharge-by-declaration does not do so.
For these reasons, discharge-by-declaration violates the general maxim that the Bankruptcy Code and Rules "be construed so that their provisions are harmonious with each other." Turner v. SBA (In re Turner),
Accordingly, we conclude that a bankruptcy court lacks authority to confirm a plan provision that seeks to discharge a student loan debt without an adversary proceeding proving "undue hardship."[12]
2. Res Judicata Grounds
In addition to the statutory basis for overruling Andersen, res judicata analysis also supports this conclusion.
Res judicata requires the satisfaction of four elements: (1) the prior suit must have ended with a judgment on the merits; (2) the parties must be identical or in privity; (3) the suit must be based on the same cause of action; and (4) the party must have had a full and fair opportunity to litigate the claim in the prior suit. Nwosun v. Gen. Mills Rests., Inc.,
Discharge-by-declaration fails several of these requirements. First of all, proper notice is the linchpin of a party's "full and fair opportunity to litigate" a claim. Res judicata will not apply where there is inadequate notice. Simply put, the failure to sufficiently apprise a creditor of a pending action which could eliminate the creditor's interest is a "deficiency that would undermine the fundamental fairness of the original proceedings." Petromanagement Corp. v. Acme-Thomas Joint Venture,
It is true that a line of cases holds that confirmed plans deserve res judicata effect notwithstanding conflicts with the Bankruptcy Code or Rules. Our decision in Andersen relied heavily on this principle. See Andersen,
Discharge-by-declaration also fails the first element of res judicatawhether the claim was "adjudicated on the merits." Res judicata only bars a collateral attack on claims that were "actually litigated and those that were or could have been raised in the first action." Sil-Flo, Inc. v. SFHC, Inc.,
We thus agree with those courts that conclude bankruptcy matters requiring an adversary proceeding do not meet these requirements. See, e.g., Cen-Pen Corp. v. Hanson,
In short, if an issue must be raised through an adversary proceeding it will not have a preclusive effect unless it is actually litigated.[13]
3. Other Considerations
Denying preclusive effect to a discharge-by-declaration also furthers other goals of the bankruptcy system. First, bankruptcy attorneys are freed from the ethical conundrum of deciding between (1) zealous advocacy on behalf of their clients and (2) the requirement that they only present good faith, non-frivolous issues. Bankruptcy attorneys may be caught on the horns of a dilemma between aggressively pursuing a discharge-by-declaration on behalf of clients and ensuring that their clients meet the elements of an "undue hardship" in good faith. See, e.g., Driscoll, supra, at 1332-1334; Ain, supra note 12, at 718-19.
Second, prohibiting discharge-by-declaration in these circumstances rightfully places the burden of pleading and proving the elements of "undue hardship" on the debtor. Considering the myriad actors and procedures involved in the guarantee, insurance, and re-insurance of student loan *1051 debts on the creditors' side, it is logical and cost effective to require debtors to bring the requested discharge to the attention of creditors before creditors are bound by the confirmation plan.
* * *
In conclusion, we find that the Bankruptcy Code and Rules and principles of res judicata deny preclusive effect to a confirmation provision permitting the discharge of student loan debts without the benefit of an adversary proceeding to establish "undue hardship." We acknowledge that providing debtors with a "fresh start" is the principle purpose of the Bankruptcy Code, see Marrama v. Citizens Bank, ___ U.S. ___,
Accordingly, Andersen is overruled.
C. Prospectivity
In overruling Andersen, we must also decide whether to administer this rule retroactively to Mersmann and all pending cases or apply it prospectively only.
1. General Principles
We consider several factors in determining whether a current judicial rule in the civil context should be given retroactive effect or whether the previously existing rule should govern. See Chevron Oil Co. v. Huson,
Since Chevron, the Court's standard has evolved in many ways, leaving in its wake a confusing path for courts to navigate. See, e.g., Griffith v. Kentucky,
Consequently, since our decision today "overrul[es] clear past precedent," we must determine whether to apply the rule retroactively or prospectively. We acknowledge that courts should hesitate to apply new civil rules prospectively only, and the reliance interest of particular litigants is irrelevant. See Harper,
Prospective operation of the rule in this case satisfies the relevant Chevron factors. Andersen has been the precedent of the Circuit since 1999; hence, all potential debtors and creditors in the Circuit have been on notice of the legality of discharge-by-declaration for nearly eight years. Equity disfavors disturbing the finality of these cases. The purpose of this new rule is to correct a misinterpretation of the Bankruptcy Code and Rules. Revisiting past cases involving discharge-by-declaration does not further that goal, and could lead to the reopening of cases long thought settled.
Accordingly, the Chevron factors and general equities of bankruptcy law counsel in favor of a prospective-only application of this new interpretation. Debtors without a confirmed plan as of the publication of this opinion, thus, may not seek a discharge of their student loan debts without first establishing "undue hardship" through an adversary proceeding.
2. Application to Mersmann
Since we apply this decision prospectively only, Andersen remains the governing law for Mersmann. As the bankruptcy court confirmed a plan with a finding of "undue hardship," the "order of confirmation is res judicata as to the issue of hardship," Andersen,
3. Application to Seiwert
In Seiwert's case, no binding determination of hardship exists since she did not include express "undue hardship" language in her confirmation plan as required by Poland. Instead, Seiwert argues Poland conflicts with Andersen's broad language of finality and was wrongly decided. Since Andersen is still good law in Seiwert's appeal, we must decide this question.
Seiwert reasons that ECMC's failure to object to her confirmation plan calling for the discharge of her student loan precludes its collateral attack on the confirmation order. Rather, she argues mere notice of the proposed confirmation plan was enough to satisfy her obligation under Andersen since "once a bankruptcy plan is confirmed, it is binding on all parties and all questions that could have been raised pertaining to the plan, are entitled to res judicata effect." Seiwert Opening Br. at 8.
We disagree with this assessment. As we recognized in Poland, requiring an express finding of undue hardship in a confirmation plan or order strikes a reasonable balance between Andersen's concern for finality and the Bankruptcy Code's explicit *1053 mandate that student loans be presumptively non-dischargeable. Andersen and Poland are thus not inconsistent, and, notwithstanding our decision to overturn Andersen today, Poland governs Seiwert's case. Accordingly, the interest on Seiwert's student loan debt was not discharged.
IV. Conclusion
For the foregoing reasons, we overrule Andersen. Henceforth, a confirmation order's determination of "undue hardship" established without an adversary proceeding, as required by the Bankruptcy Code and Rules, is no longer entitled to preclusive effect. Since we choose to apply this new rule prospectively only, Andersen and Poland remain the governing law for Mersmann and Seiwert and we AFFIRM the BAP's decisions in these cases.
HARTZ, Circuit Judge, joined by McCONNELL, Circuit Judge, concurring/dissenting:
I join all of Judge Tymkovich's opinion except Section III(C), entitled "Prospectivity." In my view, our decision overruling Andersen v. UNIPACNEBHELP (In re Andersen),
In reaching this conclusion I do not need to adopt the view of the concurring opinions by Justices Blackman and Scalia in James B. Beam Distilling Co. v. Georgia,
The first factor (that we are overruling a precedent) is the only one that favors prospectivity, and even then, the weight of the factor is reduced somewhat because the criticism of Andersen by other circuits (perhaps portending overruling by the Supreme Court) and by our own opinion in Poland v. Educational Credit Management Corp. (In re Poland),
The other two factors support retroactivity. The underlying rationale for our decision in this case is that a creditor should not be deprived of its rights in a bankruptcy proceeding unless it receives proper notice (and then can litigate the issue in an adversary proceeding). Proper notice is fundamental to our conception of fair procedure. To apply our decision purely prospectively is to bless a prior denial of legal rights without a fair procedure. Such application does not advance, but retards, the operation of the legal principle pronounced by today's decision. In our legal tradition we do not turn a blind eye to prior deprivations of fair procedure. *1054 When a person does not receive constitutionally adequate notice of a legal proceeding, the person is not bound by a resulting judgment. See Orner v. Shalala,
As for the third factor, the majority opinion misconceives the impact of retroactivity. Retroactivity will not cause any massive reopening of old cases. We are concerned solely with cases in which the bankruptcy court has entered an order discharging a student loan. Such an order can be reopened only under Fed.R.Civ.P. 60(b). But a motion to reopen under that rule must "be made within a reasonable time." Fed.R.Civ.P. 60(b); see Foster,
NOTES
Notes
[*] After examining the briefs and the appellate record, a three-judge panel determined unanimously that oral argument would not be of material assistance in the determination of this appeal. See Fed. R.App. P. 34(a); 10th Cir. R. 34.1(G). By Order of this Court dated January 2, 2007, this cause was therefore ordered submitted without oral argument.
[1] For the sake of simplicity, ECMC and all its predecessors-in-interest are referred to as "ECMC."
[2] A motion to vacate a judgment because the "judgment is void." Fed.R.Civ.P. 60(b)(4).
[3] A motion to vacate a judgment for "any other reason justifying relief from the operation of the judgment." Fed.R.Civ.P. 60(b)(6).
[4] A motion to correct "[c]lerical mistakes in judgments, orders, or other parts of the record." Fed.R.Civ.P. 60(a).
[5] The bankruptcy court's 60(a) ruling is not at issue in this appeal. The lower court found that the clerk of the bankruptcy court automatically generates the discharge orders and simply failed to tailor it to the facts of Mersmann's case. Such an error is within the purview of Rule 60(a) motions to amend.
[6] Seiwert does not appeal the portion of the order relating to unpaid principal amounts.
[7] When a student loan lender notifies a guaranty agency of a borrower's default or petition for bankruptcy, the guaranty agency acquires the claim. 34 C.F.R. §§ 682.406(a)(5) and 682.402(f)(5). Upon receiving notice of a loan default, the government reimburses the guaranty agency. Id.
[8] Subsequent amendments to § 523 do not affect the "undue hardship" requirement.
[9] ECMC argues that Andersen was solely a res judicata case and did not reach the due process issue. Because we reverse Andersen, we need not reach this issue here.
[10] Similar to the reaction in this Circuit, the Ninth Circuit's decision has generated some intra-circuit criticism. See, e.g., Educ. Credit Mgmt. Corp. v. Repp (In re Repp),
[11] See, e.g., Kevin C. Driscoll Jr., Eradicating the "Discharge by Declaration" for Student Loan Debt in Chapter 13, 2000 U. Ill. L.Rev. 1311 (2000) (discharge-by-declaration is not entitled to res judicata and violates due process); Keith C. Owens, The Perils of Plan Confirmation: Speak Now or Forever Hold Your Peace, 23-8 Am. Bankr.Inst. J. 12 (2004) (finding that discharge-by-declaration fails to satisfy due process); Craig Gargotta, Should Chapter 13 Plans Discharge Student Loans?, 24-2 Am. Bankr.Inst. J. 8 (2005) (attacking the res judicata basis for discharge-by-declaration). But see, Farris E. Ain, Never Judge a Bankruptcy Plan by its Cover: The Discharge of Student Loans Through Provisions in a Chapter 13 Plan, 32 Sw. U.L.Rev. 703 (2003) (supporting discharge-by-declaration based on the need for finality).
[12] This conclusion is consistent with another one of our recent student loan cases. We have previously held that a bankruptcy court may not grant a "partial" discharge of a student loan debt pursuant to its 11 U.S.C. § 105(a) equitable powers if the court determines that the debtors fail to satisfy § 523(a)(8)'s "undue hardship" determination in an adversary proceeding. Alderete v. Educ. Credit Mgmt. Corp. (In re Alderete),
[13] Discharge-by-declaration also fails to plead or prove actual hardship. To establish "undue hardship," we require the debtor to show: (1) the maintenance of a certain standard of living for the debtor and dependents; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for the payment period; and (3) that the debtor has made good faith efforts to repay the loans. Educ. Credit Mgmt. Corp. v. Polleys,
Unless the bankruptcy court orders otherwise, the debtor must only file: (1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a schedule of executory contracts and unexpired leases; and (4) a statement of financial affairs. Fed. R. Bankr.P. 1007(b); 11 U.S.C. § 521. It is difficult to see how bankruptcy courts could find "specific articulable facts" of hardship based solely on the schedules provided to the court with the bankruptcy petition. For an example of these schedules, see Mersmann Aplt.App. Vol. I at 21-49; Seiwert Aplt.App. at 9-33.
[14] It is worth noting Mersmann sought to insert the undue hardship language into her plan in February 1999well after the BAP decision approving discharge-by-declaration was filed on January 26, 1998. We affirmed the BAP decision in Andersen on June 7, 1999shortly after the confirmation of her plan, but well before the order discharging her debts.