United Student Aid Funds, Inc. v. Espinosa - 559 U.S. 260, 130 S. Ct. 1367 (2010)

Rule:

A judgment is not void simply because it is or may have been erroneous. Similarly, a motion under Fed. R. Civ. P. 60(b)(4) is not a substitute for a timely appeal. Instead, Rule 60(b)(4) applies only in the rare instance where a judgment is premised either on a certain type of jurisdictional error or on a violation of due process that deprives a party of notice or the opportunity to be heard.

Facts:

A plan proposed under Bankruptcy Code (Code) Chapter 13 becomes effective upon confirmation, see 11 U.S.C. §§ 1324, 1325, and will result in a discharge of the debts listed in the plan if the debtor completes the payments the plan requires, see § 1328(a). A debtor may obtain a discharge of government-sponsored student loan debts only if failure to discharge that debt would impose an “undue hardship” on the debtor and his dependents. §§ 523(a)(8); 1328. Bankruptcy courts must make this undue hardship determination in an adversary proceeding, which the party seeking the determination must initiate by serving a summons and complaint on his adversary, see Rules 7003, 7004, 7008. Respondent Espinosa's plan proposed repaying the principal on his student loan debt and discharging the interest once the principal was repaid, but he did not initiate the required adversary proceeding. The student loan creditor, petitioner United, received notice of the plan from the Bankruptcy Court and did not object to the plan or to Espinosa's failure to initiate the required proceeding. The Bankruptcy Court confirmed the plan without holding such a proceeding or making a finding of undue hardship. Once Espinosa paid his student loan principal, the court discharged the interest. A few years later, the Department of Education sought to collect that interest. In response, Espinosa asked the court to enforce the confirmation order by directing the Department and United to cease any collection efforts. United opposed the motion and filed a cross-motion under Federal Rule of Civil Procedure 60(b)(4), seeking to set aside as void the confirmation order because the plan provision authorizing discharge of Espinosa's student loan interest was inconsistent with the Code and the Bankruptcy Rules, and because United's due process rights were violated when Espinosa failed to serve it with the required summons and complaint. Rejecting those arguments, the Bankruptcy Court granted Espinosa's motion in relevant part and denied the cross-motion. The District Court reversed, holding that United was denied due process when the confirmation order was issued without the required service. The Ninth Circuit ultimately reversed. It concluded that by confirming Espinosa's plan without first finding undue hardship in an adversary proceeding, the Bankruptcy Court at most committed a legal error that United might have successfully appealed, but that such error was no basis for setting aside the order as void under Rule 60(b)(4). It also held that Espinosa's failure to serve United was not a basis upon which to declare the judgment void because United received actual notice of the plan and failed to object.

Issue:

Was the Bankruptcy Court's order confirming Chapter 13 debtor's plan void under Fed. R. Civ. P. 60(b)(4) for failure to meet 11 U.S.C.S. § 523(a)(8) requirement that undue hardship supporting discharge of student-loan interest be found in adversary proceeding?

Answer:

No.

Conclusion:

The court held that  Rule 60(b)(4) applied only where a judgment was premised on certain jurisdictional errors or due process violations depriving notice or opportunity to be heard. The Bankruptcy Court's (BC) error was not jurisdictional. The failure to serve a summons violated Fed. R. Bankr. P. 7004(b)(3)'s procedural rights; it was not a violation of a constitutional right to due process. The creditor received actual notice of the filing and contents of the plan, satisfying due process. A failure to find undue hardship under § 523(a)(8) was not a jurisdictional or notice failing that defined void judgments under Rule 60(b)(4). Given the clear and self-executing requirement for an undue hardship determination, the failure to find undue hardship before confirming the plan was a legal error. But the order remained enforceable and binding because the creditor had notice of the error and failed to object or appeal. The creditor's proof of claim for the student loan submitted it to the BC's jurisdiction on that claim. But, an assertion that bankruptcy courts were not obliged to direct a debtor to conform his plan to the requirements of 11 U.S.C.S. §§ 523(a)(8), 1328(a)(2), went too far.