Educational Credit Management Corp. v. Gardner

Citations: 287 B.R. 822; 2002 U.S. Dist. LEXIS 25088Docket: Bankruptcy No. 00-42099-13; Adversary No. 01-4036-SAC

Court: District Court, D. Kansas; October 29, 2002; Federal District Court

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Educational Credit Management Corporation (ECMC) appeals a bankruptcy court order related to three cases: In re Leana Rachele Wright and Daniel Ray Wright, In re Gary Darnell Green, and In re Deanna Kathleen Gardner. The bankruptcy court sustained ECMC's objection to the debtors' requests for an undue hardship discharge of student loans through chapter 13 plan confirmation but denied ECMC's request to establish a per se rule for sanctions against such filings. ECMC contends the court erred by not imposing a sanction for including discharge language in the chapter 13 plans. The appeals involve the same legal issues, with facts not affecting the legal determinations. The bankruptcy court clarified that ECMC sought a declaratory judgment rather than sanctions in these cases.

The court reviews findings of fact for clear error and legal conclusions de novo. As the bankruptcy court's order lacks factual findings, the court will assess the conclusion that the discharge plan provision is not per se sanctionable. Relevant law states that student loans are generally non-dischargeable under 11 U.S.C. 523(a)(8) unless the debtor proves undue hardship, a burden they must meet by a preponderance of the evidence. Additionally, a previous Tenth Circuit ruling determined that a confirmed chapter 13 plan discharging an educational loan can establish res judicata on the issue of undue hardship in subsequent cases, emphasizing the creditor's responsibility to protect its interests.

The Tenth Circuit addressed the legitimacy of a bankruptcy plan that included a provision for discharging an education loan without an adversary proceeding. ECMC argued that Andersen, the debtor, should have initiated an adversary proceeding to demonstrate undue hardship, which was necessary for discharging the loans. The court, however, emphasized that while the burden of proof rested on Andersen, HEAF, the creditor, failed to challenge the plan or the bankruptcy court's interim rulings effectively. The court highlighted the creditor's responsibility to protect its interests, noting that a lack of timely objection weakened its position. It cited the importance of finality in confirmed Chapter 13 plans, affirming that the obligation to object lay with HEAF rather than the bankruptcy court or trustee.

The bankruptcy court, disagreeing with earlier cases (Hensley and Evans), stated that determining undue hardship could occur either through an adversary proceeding or as a contested matter. The court expressed skepticism regarding ECMC's assumption that debtors would include unfounded discharge provisions in their plans. Instead, it concluded that debtors and their counsel were certifying the validity of the included provisions based on reasonable inquiry, as per Federal Rules of Bankruptcy Procedure.

The bankruptcy court ruled that it is improper and subject to sanctions for debtors’ counsel to include plan provisions aimed at trapping student loan creditors without a reasonable basis. An undue hardship determination is typically premature during plan confirmation and should only be considered when the plan is completed and the debtor is eligible for discharge, as relevant information may not be available until then. Exceptions can exist in cases of unique circumstances, such as permanent disabilities, allowing for a hardship determination closer to confirmation. Consequently, the court found that including such provisions implies an assertion of undue hardship based on future circumstances rather than the present.

The court sustained ECMC’s objections to the plan provisions but declined to impose a blanket rule mandating sanctions for such inclusions in future Chapter 13 plans, opting instead for a case-by-case analysis. Both this court and the bankruptcy court emphasized that plans containing these provisions should only be filed with a good faith basis. The ruling aligns with the decision in In re Wright, which condemned similar practices while allowing for individual circumstances to be considered. Therefore, the bankruptcy court's order from February 22, 2001, was affirmed, maintaining that creditors should have the opportunity to review and object to vague or ambiguous plan terms. In the separate case of In re Gary Darnell Green, ECMC's supplementary brief did not introduce new arguments or facts.