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SCOTUS rules against student-loan company

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The Supreme Court of the United States clarified March 23 the discharge of federal student-loan debt in bankruptcy involving an Indianapolis-based education loan guarantor.

In United Student Aid Funds, Inc. v. Francisco J. Espinosa, No. 08-1134, the SCOTUS unanimously ruled against United Student Aid Funds' attempt to collect interest from federally guaranteed student loans discharged in Bankruptcy Court. Francisco J. Espinosa had four student loans and claimed those as his only debt when he filed for Chapter 13 bankruptcy. The Bankruptcy Court accepted his plan to repay only the principal owed, without making an undue hardship finding or having an adversary proceeding as required by Bankruptcy Code.

USA Funds received notice of the plan from the court clerk but didn't object to or appeal once it was approved. Espinosa paid off the principal per the terms of the plan, and the interest was discharged. Three years later, USA Funds attempted to collect the unpaid interest. Espinosa reopened his case asking for an order to prohibit collection of his discharged debts. USA Funds filed a cross-motion under Federal Rule Civil 60(b)(4) to set aside the order confirming the plan. The 9th Circuit Court of Appeals affirmed the Bankruptcy Court. The 9th Circuit found the Bankruptcy Court committed a legal error by not finding undue hardship in an adversary proceeding, but that didn't justify setting aside the confirmation order under Rule 60(b). This was in contrast with rulings in the 2nd and 10th Circuit Courts.

The SCOTUS granted transfer to decide whether an order that confirms the discharge of a student-loan debt without an undue hardship finding or adversary proceedings, or both, is a void judgment under Rule 60(b)(4).

USA Funds claimed it's entitled to relief because it didn't receive adequate notice of the proposed discharge of the loans. But the company received actual notice of the filing and contents of Espinosa's plan, even if Espinosa didn't serve the company with a summons and complaint, wrote Justice Clarence Thomas.

USA Funds argued that an order confirming a plan to discharge student-loan debt without an undue hardship finding is beyond the court's authority and therefore void. The justices weren't persuaded that not finding undue hardship in accordance with federal statute is on par with the jurisdictional and notice failings that define void judgments that qualify for relief under Rule 60(b)(4).

The Bankruptcy Court did commit a legal error by not finding undue hardship before confirming Espinosa's plan, but the order is still enforceable and binding because USA Funds had notice of the error and didn't timely object or appeal, the justices held.

The justices ruled the 9th Circuit went too far in holding Bankruptcy courts must confirm a plan proposing the discharge of student-loan debt without a determination of undue hardship in an adversary proceeding unless the creditor timely raises a specific objection. Discharging student-loan debt under Chapter 13 without determining undue hardship violates Bankruptcy Code. Courts must make an independent determination before a plan is confirmed, even if the creditor fails to object, or the debtor and creditor agree that there is an undue hardship, wrote the justice.

USA Funds said in a statement that the ruling provides the clarification the company has been seeking, given the disagreement among courts on the issue. USA Funds also said the ruling protects taxpayers by requiring the showing of undue hardship before discharging student-loan debt and puts Bankruptcy courts on notice regarding the law's requirements for discharge.

"Importantly, the opinion also includes strong language that puts debtors and their attorneys on notice that they will face penalties if they propose bankruptcy plans that attempt to skirt the undue hardship requirement of the federal statute," said the company.

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  1. This sure is not what most who value good governance consider the Rule of Law to entail: "In a letter dated March 2, which Brizzi forwarded to IBJ, the commission dismissed the grievance “on grounds that there is not reasonable cause to believe that you are guilty of misconduct.”" Yet two month later reasonable cause does exist? (Or is the commission forging ahead, the need for reasonable belief be damned? -- A seeming violation of the Rules of Profession Ethics on the part of the commission) Could the rule of law theory cause one to believe that an explanation is in order? Could it be that Hoosier attorneys live under Imperial Law (which is also a t-word that rhymes with infamy) in which the Platonic guardians can do no wrong and never owe the plebeian class any explanation for their powerful actions. (Might makes it right?) Could this be a case of politics directing the commission, as celebrated IU Mauer Professor (the late) Patrick Baude warned was happening 20 years ago in his controversial (whisteblowing) ethics lecture on a quite similar topic: http://www.repository.law.indiana.edu/cgi/viewcontent.cgi?article=1498&context=ilj

  2. I have a case presently pending cert review before the SCOTUS that reveals just how Indiana regulates the bar. I have been denied licensure for life for holding the wrong views and questioning the grand inquisitors as to their duties as to state and federal constitutional due process. True story: https://www.scribd.com/doc/299040839/2016Petitionforcert-to-SCOTUS Shorter, Amici brief serving to frame issue as misuse of govt licensure: https://www.scribd.com/doc/312841269/Thomas-More-Society-Amicus-Brown-v-Ind-Bd-of-Law-Examiners

  3. Here's an idea...how about we MORE heavily regulate the law schools to reduce the surplus of graduates, driving starting salaries up for those new grads, so that we can all pay our insane amount of student loans off in a reasonable amount of time and then be able to afford to do pro bono & low-fee work? I've got friends in other industries, radiology for example, and their schools accept a very limited number of students so there will never be a glut of new grads and everyone's pay stays high. For example, my radiologist friend's school accepted just six new students per year.

  4. I totally agree with John Smith.

  5. An idea that would harm the public good which is protected by licensing. Might as well abolish doctor and health care professions licensing too. Ridiculous. Unrealistic. Would open the floodgates of mischief and abuse. Even veteranarians are licensed. How has deregulation served the public good in banking, for example? Enough ideology already!

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