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Lack of undue hardship determination no ground for relief for student loan creditors

Below, Stanford Law School’s Bryan Henderson recaps yesterday’s opinion in United Student Aid Funds v. Espinosa (08-1134).  Check the United Student Aid Funds SCOTUSwiki page for additional information.

On March 23, 2010, in an opinion by Justice Thomas, the Court unanimously held that although a bankruptcy court is required to make an undue hardship determination before discharging student debt, the court’s failure to do so is not a jurisdictional ground sufficient to reopen a final judgment as void under Federal Rule of Civil Procedure 60(b)(4).  Likewise, the Court held that there is no due process ground to reopen a judgment when a creditor receives actual notice of  the discharge proceedings, even if the student debtor fails to adhere to the bankruptcy rules requiring service of a summons and complaint on the creditor.  [You can read my preview of the case and recap of oral argument here and here.]

The Court found that neither of the two traditional grounds for reopening a judgment as void under Rule 60(b)(4) – a certain type of jurisdictional error or violation of due process – were present.  Though relying on the fact that no party raised the jurisdictional question below, the court noted that a jurisdictional challenge would in any event fail because Section 523(a)(8)’s requirement that a bankruptcy court make an undue hardship finding is a precondition to obtaining a discharge order, not a limit on the court’s jurisdiction.  Moreover, there was no due process violation because the creditor’s receipt of actual notice in this case “more that satisfied” its due process rights under Mullane v. Central Hanover Bank & Trust Co.

Emphasizing the importance of finality, the Court rejected the creditor’s request – supported by the United States as amicus – to expand the narrow grounds for relief under Rule 60(b)(4) to include a court’s lack of statutory authority to confirm a bankruptcy plan absent an undue hardship finding.  The Court reasoned that its characterization of Section 523(a)(8)’s undue hardship requirement as “self-executing” in Tennessee Student Assistance Corporation v. Hood meant only that the bankruptcy court must make an undue hardship finding even if the creditor does not request one, not that its failure to make such a finding renders a subsequent confirmation order void for purposes of Rule 60(b)(4).  Such a failure, the Court reasoned, was not “on par” with the jurisdictional and notice failings that normally define void judgments and can be addressed by filing a timely appeal.

Notably, the Court strictly limited its holding to the student loan context, avoiding the thorny related questions concerning other types of nondischargable debt stemming from specified tax debts, domestic support obligations, and DWI-related debt.  The Court did note, however, a statutory difference between student debt and these other forms of debt:  the former is sometimes dischargeable (upon a finding of undue hardship), while the latter is not dischargeable under any circumstances.

The Court appeared mindful of the practical consequences that – according to creditors and amici  –would follow from allowing “discharge by declaration,” but it reasoned that other mechanisms would prevent debtors’ abuse of the system.  First, the Court noted that bankruptcy courts have an obligation to make an independent determination of undue hardship regardless of whether the creditor objects or the parties stipulate to the hardship, explicitly rejecting the Ninth Circuit’s holding to the contrary.  Second, the Court reasoned that debtors and attorneys face penalties for improper litigation conduct.  Finally, the Court emphasized that Congress could enact new provisions to meet any other practical difficulties that may ensue.