Lawyers representing a student-loan guarantor and the federal government came under hard questioning Tuesday from U.S. Supreme Court justices in a case that centers on discharging student debt in bankruptcy.
In the case, the guarantor, United Student Aid Funds Inc., is asking the Supreme Court to overturn a decision of the U.S. Court of Appeals for the Ninth Circuit. That court upheld a bankruptcy judge’s ruling that the borrower in the case, Francisco J. Espinosa, could dismiss a portion of his student loans without initiating a separate court proceeding to show that repaying the loan in full would cause him an “undue hardship,” as required by the federal bankruptcy code.
Mr. Espinosa filed bankruptcy under Chapter 13 in 1992, and a bankruptcy judge approved his proposal to repay $13,250 in federally guaranteed student loans over five years. That amount, which Mr. Espinosa went on to repay, was about $4,000 less than the full balance he owed, counting interest.
A bankruptcy judge issued a final order releasing Mr. Espinosa from bankruptcy in 1997, but three years later, United Student Aid Funds sought to recover the balance of the loan from Mr. Espinosa.
While lower courts split on whether Mr. Espinosa should have to repay the remainder of his loan, the federal appeals court ruled the lender had missed its opportunity to object to the plan and that the bankruptcy judge’s order, though flawed, was final.
‘Can It Be Undone?’
Madeleine C. Wanslee, a lawyer representing United Student Aid Funds, argued before the Supreme Court on Monday that the bankruptcy judge’s order was not valid because the court had not followed the law by determining whether repaying the debt in full would cause Mr. Espinosa undue hardship.
But before she had finished five sentences, Justice Antonin Scalia interrupted: “It’s clear that the bankruptcy court should not have done what it did here. The only issue is, it having made that mistake … can it be undone in the manner that’s sought here?”
Justice Stephen G. Breyer conceded that the bankruptcy judge did, in fact, violate the law, but said that was probably not a big enough error to revisit the decision more than a decade after it was issued. “What is the strongest case where you can find any court that said a matter is void … so you can attack it 90 years later,” he asked, “just because a lower court that made the error didn’t apply a clear statute?”
Ms. Wanslee responded to the justices that the order should be void because it violated the law’s clear intent. “We are talking about a statutory right here, and the fact that Congress has specifically provided that certain categories of debts, for very important public-policy reasons, are carved out from discharge,” she said.
Toby J. Heytens, assistant to the solicitor general in the U.S. Department of Justice, said that agreeing with the Ninth Circuit’s ruling would force lenders to respond to hundreds of thousands of bankruptcy filings every year to make sure that the rules for undue hardship were being followed.
Justice Scalia countered that Mr. Heytens’s argument made the unlikely assumption that every bankruptcy court in the nation would make the same mistake. “Don’t bankruptcy courts read the law?” he asked.
Mr. Heytens responded that the nation’s bankruptcy judges are already overwhelmed with the number of filings and couldn’t be expected to police every single Chapter 13 plan: “It’s just not realistic.”
Shifting the Burden
But Justice Scalia and his colleagues also questioned Mr. Espinosa’s lawyer about the practical effects of following the Ninth Circuit’s ruling, which conflicts with decisions in five other federal appellate courts. “Do you acknowledge that what the bankruptcy court did was wrong?” he asked Michael J. Meehan, the lawyer arguing on behalf of Mr. Espinosa.
Mr. Meehan agreed, in part, with Justice Scalia, but said the lender in this case had erred by not objecting earlier to the repayment plan. In addition, he said, under the right circumstances, parties in a bankruptcy proceeding should be free to negotiate a settlement even without going through the extra court proceeding to determine undue hardship. “In litigation, in general, the parties are free to … decide not to litigate an element of the claim. If they, in fact, do that, most judges would say that’s fine,” he said.
Justice Ruth Bader Ginsburg, however, said that Mr. Meehan’s argument shifted the burden that Congress had placed on borrowers to a burden for lenders. “Your reading is, even if the debtor is silent, totally silent, says nothing about hardship, unless the creditor objects, then the discharge will be proper; the plan can be confirmed,” she said. “So, you are taking a burden that Congress has put on the debtor and switching it to the creditor?”
Narrow Ruling Expected
The Supreme Court is likely to issue its ruling on discharging student loans by the end of its term in June. The effect of that ruling is expected to be narrow, according to legal and higher-education experts.
Rafael I. Pardo, an associate professor at Seattle University School of Law, said the justices may end up making some recommendations on how courts and litigants ought to approach these issues, but their ruling will probably be tailored to the particular circumstances presented by Mr. Espinosa’s case.
The justices’ main concerns, he said, seemed to center on whether the courts or the creditors should be responsible for ensuring that this kind of error isn’t made in the future, and how to handle such problems in the future.