Cengage Advantage Books: Fundamentals of Business Law 9th Edition by Roger LeRoy Miller

Exercise 27

United Student Aid Funds, Inc. v. Espinosa
Supreme Court of the United States, ___ U.S. ___, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010).
www.supremecourt.gov
FACTS Francisco Espinosa filed a petition for an individual repayment plan under Chapter 13 of the Bankruptcy Code. The plan proposed that Espinosa would repay only the principal of his student loan debt and that the interest on the loan would be discharged once the principal was repaid. Under Chapter 13, a student loan cannot be discharged unless the bankruptcy court finds that payment of the debt would constitute an undue hardship for the debtor. Notwithstanding this requirement, no undue hardship hearing was requested by the debtor, by the court, or by the creditor, United Student Aid Funds (United). The creditor received notice of the plan but did not object to it-nor did the creditor file an appeal after the bankruptcy court subsequently confirmed the plan. Years later, however, United filed a motion under Federal Rule of Civil Procedure 60(b)(4) asking the bankruptcy court to rule that its order confirming the plan was void because the order was issued in violation of the laws and rules governing bankruptcy. The court denied United's petition and ordered the creditor to cease its collection efforts. The creditor appealed to the U.S. District Court for the District of Arizona, and the district court reversed the bankruptcy court's ruling. On further appeal, the U.S. Court of Appeals for the Ninth Circuit reversed the district court's judgment. United appealed to the United States Supreme Court.
ISSUE If a bankruptcy court committed a legal error by confirming a debtor's repayment plan to discharge student loan debt without the required finding of undue hardship, but the creditor did not object, is the court's judgment void?
DECISION No. The United States Supreme Court affirmed the judgment of the U.S. Court of Appeals for the Ninth Circuit. The bankruptcy court's order confirming Espinosa's Chapter 13 repayment plan was not void, and the student loan debt was thus discharged.
REASON The United States Supreme Court pointed out that the Bankruptcy Court's order confirming Espinosa's proposed plan was a final judgment from which United did not appeal. Federal Rule of Civil Procedure 60(b)(4) does authorize the court to relieve a party from a final judgment if that judgment is void, but a judgment is not void simply because it is or may have been erroneous. Moreover, a motion under this rule is not a substitute for a timely appeal. "The Bankruptcy Court's failure to find undue hardship before confirming Espinosa's plan was a legal error. But the order remains enforceable and binding on United because United had notice of the error and failed to object or timely appeal."
FOR CRITICAL ANALYSIS-Ethical Consideration At one point, United argued that if the Court failed to declare the bankruptcy court's order void, it would encourage dishonest debtors to abuse the Chapter 13 process. How might such abuse occur, and should the possibility of such abuse affect the Court's decision?