Student-Loan Borrower Wins in Supreme Court

(CN) - The Supreme Court on Tuesday rejected a student-loan company's bid to collect interest on a man's loans, even though the bankruptcy court erroneously discharged the interest without requiring the borrower to show "undue hardship."

Student loans typically aren't dischargeable in bankruptcy, unless the borrower can show that paying them back would cause "undue hardship" on him or his dependents. To prove undue hardship, the borrower has to initiate an adversary proceeding, which Francisco Espinosa failed to do.

Nonetheless, the bankruptcy court allowed Espinosa to pay back the $13,000 principal, discharging about $5,000 in interest. Espinosa paid off his student loan in 1997.

Three years later, the U.S. Department of Education tried to collect the unpaid interest. Espinosa asked the bankruptcy court to enforce its 1997 discharge order, and the court complied by ordering the DOE to stop trying to collect interest.

The district court reversed on appeal, but the 9th Circuit ruled for Espinosa, saying the lender had missed its chance to appeal the clerical error.

The 9th Circuit acknowledged that Espinosa should have served United with a summons and complaint, as United argued before the Supreme Court, but said the lender knew about Espinosa's repayment plan and failed to object.

The justices unanimously agreed.

"The Bankruptcy Court's order confirming Espinosa's proposed plan was a final judgment, from which United did not appeal," Justice Clarence Thomas wrote.

Judgments are only void in the "rare" circumstances of a jurisdictional error or a violation of due process, the court ruled. "The error United alleges falls in neither category."

Espinosa's failure to serve United with a summons and complaint violated procedural rules, but "did not amount to a violation of United's constitutional right to due process," Thomas wrote.

"[T]he bankruptcy court's failure to find undue hardship before confirming Espinosa's plan was a legal error," Thomas wrote. "But the order remains enforceable and binding on United because United had notice of the error and failed to object or timely appeal."

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