WASHINGTON (CN) – The Supreme Court Tuesday heard the case of a man who got lucky in getting part of his student loans forgiven after a clerical mistake in a lower court. The question now turns on finality, whether the creditors are too late in chasing their lost funds.
“The district court judge, the Bankruptcy Court judge, got it wrong, legal error,” Justice Sonia Sotomayor said, but added, “How does that give you a right to undo that judgment seven years later?”
Student loans are typically exempted from being cleared upon bankruptcy, unless the debtor can show a case of “undue hardship.” But a clerical mistake made it so Francisco Espinosa never had to prove undue hardship when he filed, and he never had to hold the necessary proceeding with his creditor.
In defending Espinosa, Michael Meehan of Munger Chadwick said that even if the procedure in dismissing Espinosa’s debt was not properly followed, the company was still sent notice of Espinosa’s payment plan and missed its opportunity to object. He argued that the decision was therefore not void.
The credit company, United Student Aid Funds, argued that standard procedure was not followed, voiding the decision of the bankruptcy court to discharge part of Espinosa’s student debt, and thus allowing the company to come back and challenge it.
Justice Ruth Bader Ginsberg, Justice Stephen Breyer and Sotomayor seemed to share skepticism of the company’s argument. Sotomayor said that a decision is usually void only if the court acts out of jurisdiction, and she maintained that the bankruptcy court did have jurisdiction in this case, even if it may have made “a mere error.”
“Why does something that’s in error become a void judgment?” Sotomayor asked.
When Assistant Solicitor General Toby Heytens stepped to the podium to defend the credit company and argue that the decision to clear Espinosa’s remaining debt was void, Breyer seemed to jump on him.
Breyer said that if the government’s argument were upheld, creditors would be able to challenge bankruptcy rulings 10 years after the fact. “That would be quite extraordinary,” he said.
In turning to Meehan’s arguments defending the finality of the dismissed debt, Justice Anthony Kennedy undercut his argument that the credit company was fully notified of the provisions in Espinosa’s payment plan. “I’m not sure there was a proper notice,” he said.
Ginsburg said the bankruptcy code insists that the debtor prove his hardship if he seeks to dismiss special debts like student loans. “So you are taking a burden that Congress has put on the debtor and switching it to the creditor?”
United Student Aid Funds didn’t object to the new plan to pay about $13,000 of the remaining $18,000 debt upon receiving an uncustomary letter by mail, but continued their collection efforts after Espinosa had paid what was left of his debt.
When the issue was brought before bankruptcy court, it ruled in Espinosa’s favor. But the 9th Circuit reversed that, ruling in Espinosa’s favor.
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