NYT: Bankruptcy Ruling in Student Loan Case

By ADAM LIPTAK

WASHINGTON — The Supreme Court on Tuesday made it easier for people who say they cannot repay their student loans to receive bankruptcy protection. But the case arose in an unusual way, and the ruling is unlikely to have a broad impact.

The case involved Francisco J. Espinosa, an airline ramp agent who took out four student loans in 1988 and 1989 for a total of $13,250 to attend a trade school in Arizona. Four years later, he filed for protection under the bankruptcy laws, proposing to repay the principal over five years without interest.

Neither Mr. Espinosa nor the judge who approved his proposal followed the procedures contemplated by the law. Chapter 13 of the Bankruptcy Code allows student loans like Mr. Espinosa’s to be discharged only if a bankruptcy judge finds that repayment would impose an “undue hardship.” But the judge in his case made no such finding.

Nor did Mr. Espinosa notify his lender in the way required by law, which calls for the service of a summons and complaint like those in a civil lawsuit.

But the lender did receive notices from the court about Mr. Espinosa’s proposal and the court’s approval of it. Although the loan was the only debt Mr. Espinosa listed in his proposal, the lender did not object or appeal.

Mr. Espinosa finished paying the principal back in 1997, and the bankruptcy court then discharged the interest he would have owed. Years later, the lender tried to re-open the case.

The Supreme Court’s decision on Tuesday rejected positions advanced by the federal government, more than 30 states and the student loan industry. The lender in Mr. Espinosa’s case, United Student Aid Funds, warned in a brief that a decision in his favor would “open the floodgates” to allowing others to avoid paying their debts, including “taxes, domestic support obligations, drunk driving personal injury and death liabilities, and criminal fines and restitution.”

But the court, in a unanimous decision by Justice Clarence Thomas, resolved the case on a narrow ground. It was undisputed, Justice Thomas wrote, that there had been legal misfires along the way in Mr. Espinosa’s case. The issue before the court, he said, was whether the lender had waited too long to object to them.

“The bankruptcy court’s failure to find undue hardship before confirming Espinosa’s plan was a legal error,” Justice Thomas wrote in the case, United Student Aid Funds v. Espinosa, No. 08-1134. “But the order remains enforceable and binding on United because United had notice of the error and failed to object or timely appeal.”

The rules allowing cases to be re-opened in extraordinary circumstances did not apply here, Justice Thomas wrote, as they do not “provide a license for litigants to sleep on their rights.”

Copyright 2010 The New York Times Company. All rights reserved.

Business bankruptcies and the WARN Act

Despite some mildly positive jobs numbers for January, we're still getting calls from many business owners who are considering bankruptcy here at Shenwick & Associates. In the past, we've discussed closing down a business. But there's another consideration larger companies need to take into account-the WARN (Worker Adjustment and Retraining) Act, which imposes obligations upon certain employers to provide terminated employees with a minimum of 60 days prior notice of facilities closings and layoffs under certain circumstances.

Only employers that have 100 or more employees are covered under the WARN Act. One of those businesses covered by the WARN Act was electronics superstore chain Circuit City, which filed for Chapter 11 bankruptcy on November 10, 2008, eight days after announcing a mass layoff. The employees were actually terminated on December 31, 2008, after the chain finished their going out of business sales.

One of the terminated employees filed a class action adversary proceeding (bankruptcy litigation) against the Debtor, claiming that a WARN Act claim arose on the date of termination, which would be a post-petition claim. However, the debtor asserted that a WARN Act claim arises on the date that an employer fails to give the required statutory notice of a covered employee's pending termination, which in this case would be a pre-petition claim.

The U.S. Bankruptcy Court for the Eastern District of Virginia agreed with the debtor, dismissing the adversary proceeding and holding that under the "conduct test," the claim arose when the debtor ordered the mass layoff. Therefore, the appropriate venue for the terminated workers' claims would be through the filing of claims in the bankruptcy case, not in an adversary proceeding.

For more information about the WARN Act and business bankruptcy questions, please contact Jim Shenwick.