Bankruptcy and Restructuring Blog

In In re Ruehle, 412 F.3d 679 (6th Cir. 2005), the Court of Appeals for the Sixth Circuit joined a growing number of courts in rejecting the practice of "discharge by declaration." The debtor in Ruehle had included provisions in her Chapter 13 plan purporting to discharge her student loan debt without an adversary proceeding and stating that excluding the loan from discharge would impose an undue hardship on her, a process known as "discharge by declaration." On appeal, the debtor argued that the need for finality trumps the creditor's due process rights, citing as support two cases from the Ninth and Tenth Circuits.

In Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee), 193 F.3d 1083 (9th Cir. 1999), the Ninth Circuit had held that a confirmed plan was res judicata as to all issues that could have or should have been litigated at the confirmation hearing" and that "a creditor [who] fails to protect its interests by timely objecting to a plan or appealing the confirmation order, . . . 'cannot later complain about a certain provision contained in the confirmed plan, even if such a provision is inconsistent with the Code.'" Id. at 1086-87. And in Andersen v. UNIPAC-NEBHELP (In re Andersen), 179 F.3d 1253 (10th Cir. 1999) the Tenth Circuit assumed that due process had been met where the creditor had actual notice of the proposed discharge provision in the debtor's plan (having filed an untimely object to that provision). In its opinion, the Tenth Circuit stressed the importance of a creditor's obligation to protect its own interests and not "simply sit on its rights." Id. At 1257.

However, the Sixth Circuit noted subsequent cases uniformly criticizing Andersen and Pardee for failing to recognize the due process issue underlying the Bankrutpcy Rule's requirements of notice and an adversary proceeding. Foremost among these cases is Banks v. Sallie Mae Servicing Corp. (In re Banks), 299 F.3d 296 (4th Cir. 2002). The Seventh Circuit has adopted Banks's holding that "where the Bankruptcy Code and Bankruptcy Rules require a heightened degree of notice, due process entitles a party to receive such notice before an order binding the party will be afforded preclusive effect." Hanson v. Educ. Credit Mgmt. Corp. (In re Hanson), 397 F.3d 482, 487 (7th Cir. 2005). Even the Ninth and Tenth Circuits appear to have backed away from their prior holdings in Pardee and Andersen. See Educ. Credit Mgmt. Corp. v. Repp (In re Repp), 307 B.R. 144, 149 n. 4 (B.A.P. 9th Cir. 2004) (noting that the Pardee majority ignored the due process issue, and explicitly adopting Banks as representative of an "emerging consensus"); Poland v. Educational Credit Management Corporation (In re Poland), 382 F.3d 1185, 1189 n. 2 (10th Cir. 2004) (stating that its previous holding in Andersen "was wrongly decided"). The Sixth Circuit, recognizing this growing consensus, likewise held that "discharge by declaration" is impermissible and affirmed the lower court orders vacating the debtor's discharge.

Written by: Mette Kurth