Educational Credit Management Corp. v. Repp (In Re Repp)Educational Credit Management Corp. v. Repp (In Re Repp)
Lead Opinion
OPINION
This is the next skirmish in the war over the use of “illegal” chapter 13 plan provisions to discharge student loan debts notwithstanding a statute that excepts such debts from the chapter 13 discharge. The pro-discharge forces won the last “discharge-by-declaration” engagement in Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee),
The specific question, still open in the Ninth Circuit, is whether a student loan creditor whose collection rights would be terminated by a chapter 13 plan provision is entitled to notice substantially equivalent to the notice required for the adversary proceeding prescribed by the Federal Rules of Bankruptcy Procedure for determining a student loan’s discharge status under
Appellant asks us to follow the Fourth Circuit’s lead in Banks v. Sallie Mae Servicing Corp. (In re Banks),
We agree with the Fourth Circuit to the extent that notice less than that which results from compliance with Rule 7004’s requirement for serving a complaint on a corporate defendant flunks due process. Thus, we REVERSE and REMAND.
FACTS
Appellees, Aaron and Stephanie Repp, filed a joint chapter 13 bankruptcy petition and a chapter 13 plan on October 8, 1999.
Their chapter 13 plan proposed to pay $50.00 per month for 36 months (with $700.00 of the $1,800.00 total going to debtors’ counsel), based on monthly employment income of $6,612.00, and contained the following term:
Ail timely filed and allowed unsecured claims, including the claims of the U.S. Dept. of Education, Aman Collection Service, and any other person or entity who is owed a governmental sponsored or governmental guaranteed educational loan, shall be paid their proratа [sic] share as an unsecured creditor only; and the balance of each of such claims shall be discharged. Pursuant to11 U.S.C. § 523(a)(8) , excepting the aforementioned education loans from discharge will impose an undue hardship on the debtor and the debtor’s dependent children [the Repps had no children]. Confirmation of the debtor’s plan shall constitute a finding by this court to that effect and that said debt is dischargea-ble.
One of the debts in the chapter 13 case was based on a $2,625.00 student loan that Aaron Repp had taken out in 1995, at age 21, the principal of which was paid down to $1,983.54.
Northwest Education Loаn Association (“NELA”) owned and serviced the loan until December 7, 1999, when it was assigned to Educational Credit Management Corporation (“ECMC”).
ECMC filed a proof of claim on December 21, 1999, for $2,465.39, including unpaid interest, costs, and fees.
A copy of the plan was mailed to NELA at the postal lockbox’ where payments were sent.
The notice that accompanied the plan stated that any objection to plan confirmation must be filed and served “no later than twenty-one (21) days after the conclusion of the meeting of creditors or within twenty-five (25) days from the date of service of the plan, whichever is later.”
A discharge under
In September 2002, the Repps filed a two-count adversary proceeding against NELA and ECMC. Count one sought a declaratory judgment that the binding effect of the plan term, pursuant to
ECMC answered and counterclaimed for a declaratory judgment “that the portion of the confirmation order providing that the balance of the debtors’ educational loans shall be discharged upon plan completion is null and void, as no advеrsary proceeding was initiated prior to that provision, and the provisions violates the Fifth Amendment due process rights of defendant ECMC under U.S.C.A. Const. Amend. 5.”
On cross-motions for summary judgment, the bankruptcy court granted the
This timely appeal ensued.
JURISDICTION
The bankruptcy court’s subject-matter jurisdiction was based on
ISSUE
Whether due process requires that a student loan creditor, whose debt would be discharged by a chapter 13 plan provision, receive the kind of notice required for the adversary proceeding that is the method prescribed by
STANDARD OF REVIEW
Whether adequate due process notice was given in any particular instance is a mixed question of lаw and fact that we review de novo. Demos v. Brown (In re Graves),
DISCUSSION
The Ninth Circuit held in Pardee that, regardless of whether a chapter 13 plan should originally have been confirmed, the preclusive effect of plan confirmation orders extended to a provision discharging a student loan notwithstanding
Our slate, however, is not entirely clean. We have, in an analogous situation, sustained a due process challenge to the use of a sale order as a vehicle to short-circuit the requirement of an adversary proceeding to resolve a priority dispute among lienors. Loloee,
I
The cornerstone of modern due process analysis is Mullane v. Central Hanover Bank & Trust Co.,
The key inquiry is whether the method chosen for service is “reasonably certain” to convey the required information and “not substantially less likely” to convey notice than other known and feasible methods. As the Court put it:
But when notice is a person’s due, рrocess which is a mere gesture is not due process. The means employed must be such as one desirous of actually informing the absentee might reasonably adopt to accomplish it. The reasonableness and hence the constitutional validity of any chosen method may be defended on the ground that it is in itself reasonably certain to inform those affected, or, where conditions do not reasonably permit such notice, that the form chosen is not substantially less likely to bring home notice than other of the feasible and customary methods.
Mullane,
The nub of the problem in this appeal is that the methоd chosen for notice was calculated to minimize the chance that it would come to the attention of persons in the position to make litigation decisions for the creditor.
A fundamental purpose of the Federal Rules of Bankruptcy Procedure is to set forth what process is due in various categories of bankruptcy matters.
The category in question involves how one is to proceed to make the ultimate determination upon which the Bankruptcy Code makes the discharge of a student loan debt turn: whether “excepting such debt from discharge under this paragraph will impose аn undue hardship on the debt- or and the debtor’s dependents.”
A
The rules prescribe that “a proceeding to determine the dischargeability of a debt” be an adversary proceeding conducted under Part VII of the Federal Rules of Bankruptcy Procedure.
The differences between an adversary proceeding under the Federal Rules of Bankruptcy Procedure and a civil action under the Federal Rules of Civil Procedure are slight. Klein, Bankruptcy Rules Made Easy (2001): A Guide to the Federal Rules of Civil Procedure that Apply in Bankruptcy, 75 Am. Bankr. L.J. 35, 38-39, 52-55 (2001).
Rule 7004(a) directly incorporates Civil Rule 4(c)(1), which mandates that the summons be served “together with a copy of the complaint.”
Although bankruptcy service procedure permits nationwide service of the summons and complaint by first class mail,
Service by mail upon a corporation must be directed to the same persons that Civil
It is likewise axiomatic that prоper service is a prerequisite to entry of default and default judgment for affirmative relief. Without proper service, the defendant cannot be said to have “failed to plead or otherwise defend as provided by these rules.”
The merits of an adversary proceeding are resolved by trial, which is a bench trial in the case of a dischargeability proceeding.
At the conclusion of the bench trial, the court is required to make findings of fact аnd conclusions of law.
In the case of a
In order to establish the requisite “undue hardship,” the debtor has the burden to demonstrate: (1) inability to maintain, based on current income and expenses, a minimal standard of living if forced to repay the student loan; (2) additional circumstances indicating that this state of affairs is likely to persist for a considerable period; and (3) good faith efforts tо repay the loan. United Student Aid Funds, Inc. v. Pena (In re Pena),
Since a dischargeability adversary proceeding is a “core proceeding” that a bankruptcy judge is authorized to “hear and determine,” it culminates with a judgment entered in the same manner as a civil action.
B
The procedure for confirming a chapter 13 plan is materially different from adversary proceeding procedure and, moreover,
Notice of the time fixed for filing objections and the hearing on chapter 13 plan confirmation is given to all creditors pursuant to Rule 2002(b).
The
Unlike
Chapter 13, unlike chapter 11, is not predicated on a negotiation model in which creditors have the leverage attendant to their ability to accept or reject a plan. Chapter 13 creditors generally have no opportunity to negotiate their treatment under a plan and are left only with their рower to object that the plan does not comply with the terms of the statute. Compare
Of greatest significance, nothing in the structure of chapter 13 plan confirmation procedure contemplates the resolution of discrete disputes that ordinarily require adversary proceedings to resolve.
III
The ultimate question is whether the notice of the student loan discharge рrovision in Repp’s chapter 13 plan was, in the words of the Supreme Court in Mullane, “reasonably calculated to reach” the persons at ECMC and NELA who are responsible for making litigation decisions. Mullane,
In assessing this question, we bear in mind that error greater than merely incorrect procedure is needed in order to offend the Due Process Clause of the Fifth Amendment. Owens-Coming Fiberglas Corp. v. Ctr. Wholesale, Inc. (In re Ctr. Wholesale, Inc.),
As to the basic chapter 13 plan, notice was adequate. Since no proof of claim was on file when
The student loan discharge provision, however, was a so-called “illegal” provision that did not belong in a chapter 13 plan. In re Webber,
The fact that it was an “illegal” provision connotes two important expectations upon which the student loan creditor is entitled to rely. First, one is entitled to expect that the bankruptcy court will perform its independent duty to confirm only those plans that do not contravene the Bankruptcy Code and rules of procedure.
Second,
This expectation of a heightened degree of notice is reinforced within
To hold that student loan creditors are not entitled to defer responding to a
In Banks, on essentially the same facts as the instant appeal, the Fourth Circuit ruled that ECMC did not receive the requisite notice of the debtor’s intent to discharge his post-petition interest on his student loan debt and held that “[f]or lack of adequate notice, the confirmation and discharge orders discharging the interest are not entitled to preclusive effect.” Banks,
We agree with the Fourth Circuit’s Banks analysis, which is consistent with our Loloee decision, and note an emerging consensus on the point. Ruehle v. Educ. Credit Mgmt. Corp (In re Ruehle),
The minimal service requirements for chapter 13 plan confirmations cannot be used as a way to stay below the creditor’s radar and elude the obligation to demonstrate “undue hardship” in an adversary proceeding in the usual adversarial format. Although stealth may achieve surprise at the tactical level, the strategic problem is that “below the radar” is also fatally below the due process threshold.
* * * * ❖ *
The оrder granting the debtor’s summary judgment motion will be reversed on due process grounds.
Since count two of the complaint, which the court closed out as moot, presented the
Accordingly, we REVERSE and REMAND for further proceedings.
Notes
. The Ninth Circuit’s ruling widened a split with the Seventh Circuit by siding with the Tenth Circuit on the question of the effect of "illegal” chapter 13 plan provisions. Compare, In re Escobedo,
. Although the Pardee panel indicated that the student loan discharge question "could have or should have been litigated at the confirmation hearing,” Pardee,
The analysis under Restatement § 24 (“Dimensions of 'Claim' for Purposes of Merger or Bar — General Rule Concerning Splitting”) is to be done "pragmatically, giving weight to such considerations as whether the facts are related in time, space, origin, or motivation, whether they form a convenient trial unit, and whether their treatment as а unit conforms to the parties' expectations or business understandings or usage.” Restatement (2d) of Judgments § 24 ("Restatement”) (emphasis supplied); see, e.g., Costantini v. Trans World Airlines,
Moreover, even if a student loan discharge-ability question could be regarded as part of the same "transaction” for purposes of claim preclusion under Restatement § 24, the Pardee panel did not consider whether Restatement
While the absence of analysis under Restatement §§ 24 and 26 suggests that the Pardee preclusion doctrine might not be firmly rooted, we proceed on the assumption Pardee is viable precedent.
. The dissent to the BAP decision in Pardee indicated that a due process issue lurked in the case. Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee),
.The precise question in chapter 13 is whether the debt is "of the kind specified” in § 523(a)(8) because § 1328(a)(2) provides that "the court shall grant the debtor a discharge of all debts provided for by the plan or disallowed under section 502 of this title, except any debt — ... (2) of the kind specified in paragraph ... (8), ... of section 523(a) of this title.”
Section 523(a)(8) provides that the discharge under chapters 7, 11, and 12 excludes:
any debt ... (8) for an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution, or for an obligation to repay funds received аs an educational benefit, scholarship, or stipend, unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents.
.
(a) Summons; Service; Proof of Service.
.
(b) Service by First Class Mail. Except as provided in subdivision (h) [service on insured depository institutions], in addition to the methods of service authorized by
(3) Upon a domestic or foreign corporation or upon a partnership or other unincorporated association, by mailing a copy of the summons and complaint to the attention of an officer, a managing or general
.
(a) When Presented. If a complaint is duly served, the defendant shall serve an answer within 30 days after the issuance of the summons [which expires 10 days after issuance], except when a different time is prescribed by the court.... [other times/pleadings omitted] ... The service of a motion permitted under this rule [i.e. F.R.Civ.P. 12 motions] alters these periods of time as follows, unless a different time is fixed by order of the court: (1), if the court denies the motion or postpones its disposition until the trial on the merits, the responsive pleading shall be served within 10 days after notice of the court's action; (2) if the court grants a motion for a more definite statement, the responsive pleading shall be served within 10 days after the service of a more definite statement.
. Judge Rossmeissl has published a decision enforcing similar plan provisions on the authority of Pardee, but announcing that he was persuaded by, and would thenceforth follow, Judge Haines’ Webber decision with respect to plan confirmation:
Patton v. U.S. Dept. of Educ. (In re Patton),
. This rule provides:
The following are adversary proceedings:
(7) a proceeding to obtain an injunction or other equitable relief, exceрt when a chapter 9, chapter 11, chapter 12, or chapter 13 plan provides for the relief;
(8) a proceeding to subordinate any allowed claim or interest, except when a chapter 9, chapter 11, chapter 12, or chapter 13 plan provides for subordination;
Dissenting Opinion
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.’ ”
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 cоurt 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.
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.”
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.”
The facts here are dramatically different. ECMC received actual notice of the plan hearing and a coрy of the plan with the twenty-five days notice provided for in
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.”
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
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,
Accordingly, for all the above reasons, I respectfully dissent and would affirm the bankruptcy court.