I’ve been reading many interesting comments online about yesterday’s Supreme Court ruling in Espinosa. Some of my colleagues are suggesting that this is a huge win for consumer debtors. I think Mr. Espinosa is justifiably happy. I’m not sure creditor’s attorneys are happy. I’m think debtor’s attorneys can be happy, sort of. I think Bankruptcy Judges might have something to be concerned with… and if it concerns Bankruptcy Judges, it ought to concern me.
And it does.
What is the case really about?
The big crux in Espinosa is not the debtor’s particular story. It’s not about student loans or how he managed to successfully complete a 5 year chapter 13 plan. It’s all matter of procedure.
The creditor did not timely object to the chapter 13 plan. As I said yesterday, they effectively sat on their hands – or as one of my colleagues accurately stated, “they did not open their mail.” And it is because they did not object to confirmation of the chapter 13 plan that the debt – which would be otherwise nondischargeable but for a finding of undue hardship – is now discharged.
I have some concerns that debtors might think that they too can (to coin a phrase) “pull an Espinosa” and offer a plan that seeks to modify rights that the Bankruptcy Code says cannot be modified, either with, or without a particular finding of undue hardship.
As I mentioned yesterday, the Supreme Court chided the 9th Circuit Court of Appeals for suggesting that in the absence of an objection to confirmation, a debtor’s chapter 13 plan must be confirmed. See Section III, on p. 14 of the decision. “This, we think, was a step too far.”
Bankruptcy courts have an obligation to confirm a plan if it complies with the provisions of the code (see p. 15 and § 1325(a)(1)) not merely in the absence of an objection to confirmation. Judges are not merely “rubber stamps” for plans that contain provisions that do not comply with the code. So, I am not convinced that a debtor may offer to cram down the principal balance on a note secured solely by the debtor’s principal residence in violation of § 1322(b)(2), and expect confirmation in the unlikely event that the creditor is not opening their mail and not timely objecting to confirmation.
In such a situation, I would expect that the court would review the plan and do one of two things (1) deny confirmation because it contains an modification of a claim not permitted by § 1322(b)(2); or (2) review the plan, and either schedule a confirmation hearing (in Massachusetts, we do not have confirmation hearings in the absence of an objection to confirmation), or issue an order to show cause why debtor’s counsel should not be sanctioned for proposing a plan that on its face cannot be confirmed. Here’s why I think the latter may be more likely.
Even though Mr. Espinosa won, it appears that the Court found the whole thing a bit stinky (that’s a legal term, I swear.). In Section IV (p. 16 of the decision), there’s a discussion about United’s concerns that debtors could propose plans with offensive and otherwise prohibited terms with the hopes that the court would “overlook the proposal and the creditor will not object.” My translation: “we – the creditor – still do not want to open our mail and we’re concerned that judges aren’t always going to pay attention… since we – from time to time – do not open our mail.” And they raise a good point: a debtor can file a plan, and upon the filing of an objection to confirmation, merely withdraw it “without penalty”…sort of like taking a mulligan.
While the Court did not find that this justified ruling for United …since it did not bother to open its mail… the Court addressed United’s arguments by expressing its concerns over what it perceived as possible “bad faith litigation tactics.” Check out p. 17 of the decision and the Court’s mention of Supreme Court case of Taylor v. Freeland & Kronz.
The specter of such penalties should deter bad-faith attempts to discharge student loan debt without the undue hardship finding Congress required. And to the extent existing sanctions prove inadequate to this task, Congress may enact additional provisions to address the difficulties United predicts will follow our decision.
I read that as not only including student loan discharges, but anything else in a plan that may run afoul of the code. While the rules do not provide for an attorney to be punished for making a good-faith argument for changing existing law, I do not think Espinosa can be read to give debtor’s attorneys the right to do what the code otherwise prohibits in the absence of a good-faith argument. And Espinosa, in an of itself, does not provide a basis for doing what the law says you cannot do. If anything, it directs creditors to open their mail, and it directs Bankruptcy Judges to do what the law compels them to do.
Plus, the specter of penalties (such as sanctions) aside, I’m not sure we want Congress to “enact additional provisions to address the difficulties” that I think can and should be avoided.
So my two cents: congratulations to Mr. Espinosa and his counsel for a job well done. Creditors need to open their mail. And I’m not convinced anything has really changed in chapter 13 practice.
Then again, maybe I’ll be proven wrong.
United Student Aid Funds, Inc v. Espinosa
Related posts:
- The US Supreme Court Rules in United Student Aid Funds, Inc. v. Espinosa
- Did Congress Pop the Balloon?
- Poster Children for Bankruptcy Reform
- Under Water, Walking Away & My Two Cents
- Mortgage Modification in a Chapter 13 Bankruptcy
Tags: Cram Downs, Creditors Rights, Student Loans, Supreme Court
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