The Supreme Court's Holding in United Student Aid Funds, Inc. v. Espinosa

The Supreme Court's Holding in United Student Aid Funds, Inc. v. Espinosa

Parties challenging a bankruptcy court's final order almost always must take a direct appeal or be forever barred from collateral attack, even when the order contains a clear legal error. Further, when a statute permits a court to act only if certain findings are made or conditions exist, the court must make an independent determination of the finding or condition, even if no party objects (with few exceptions).

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The Lessons to be Learned:

First, we learn the same lesson as in Travelers Indemnity Co. v. Bailey, 129 S. Ct. 2195, 2009 U.S. LEXIS 4537 (2009) [enhanced version available to lexis.com subscribers] [unenhanced version available to non-subscribers on lexisONE Free Case law]: Parties challenging a bankruptcy court's final order almost always must take a direct appeal or be forever barred from collateral attack, even when the order contains a clear legal error. Second, when a statute permits a court to act only if certain findings are made or conditions exist, the court must make an independent determination of the finding or condition, even if no party objects (unless, perhaps, the parties jointly waive the findings or conditions).

Legal Background:

A chapter 13 debtor may obtain a discharge of student loan debt under Bankruptcy Code § 1328(a)(2) & (c)(2) only when the bankruptcy court finds that failure to do so would impose an "undue hardship" on the debtor or his dependents in accordance with Bankruptcy Code § 523(a)(8). Federal Rule of Bankruptcy Procedure 7001(6) requires an adversary proceeding, initiated by a properly served summons and complaint, to make such a dischargeability determination.

Additionally, Federal Rule of Civil Procedure Rule 60(b)(4) allows a court to relieve a party from a final judgment when the judgment is "void." The Supreme Court has traditionally held that Rule 60(b)(4)'s relief applies in exceptional cases only when a judgment is premised either on (1) a certain type of jurisdictional error when the court lacks even an arguable basis for jurisdiction; or (2) a violation of due process that deprives a party of notice or the opportunity to be heard.

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