BANKRUPTCY CORNER
Espinosa is not a Blank Check at Confirmation
JASON S . RIGOLI
In 2010 , the United States Supreme Court issued its opinion in United States Aid Funds , Inc . v . Espinosa , 559 U . S . 260 ( 2010 ), and on its face appears broadly hold that any defect can be cured by confirmation of a plan . However , that is not the case .
Espinosa
In Espinosa , the Debtor filed a chapter 13 bankruptcy and in his plan provided for the payment of principal and discharge of interested of his student loans . The lender in this case received notice of the bankruptcy , the plan , confirmation hearing , and a notice from the Chapter 13 trustee that the amount in plan differed from the amount in the proof of claim it filed and gave the lender 30-days to respond . 559 U . S . at 264-65 . The creditor in Espinosa did nothing . Id . After completing plan payment , the bankruptcy court entered the discharge order , which discharged the student loan debt , despite the Debtor not having filed an adversary proceeding nor the bankruptcy finding that undue hardship existed , both of which are required to discharge student loan debt . Id . at 265-66 , 67 n . 4 . The lender then moved under Fed . R . Civ . P . 60 ( b )( 4 ) to set aside the confirmation order as void . Id . at 266 . The Supreme Court held that discharging the student loan obligations without an undue hardship finding was not a jurisdictional error or a due process violation , which are the only two conditions that would render a final judgment void under Federal Rule 60 ( b )( 4 ). See id . at 271 . The Supreme Court also declined to expand the scope od defects that would support relief under Fed . R . Civ . P . 60 ( b )( 4 ) to include lack of statutory authority . Id . at 273-75 .
Archer-Daniels Midland Co . v . Country Visions Cooperative
The United States District Court for the Eastern District of Wisconsin recently addressed the limits of Espinosa in Archer- Daniels Midland Co . v . Country Visions Cooperative , Case No . 17-0313 , 2021 U . S . Dist . LEXIS 31037 *, 2021 WL 651553 ( E . D . Wis . Feb . 19 , 2021 ).
Factual Background
In Archer-Daniels the creditor had a right of first refusal , or ROFR , to purchase real property owned by the chapter 11 debtor . 2021 U . S . Dist . LEXIS 31037 at * 3 . The creditor had properly filed the ROFR with the land records , which according to the Court would have appeared on a simple title report . Id .
The debtor filed a plan calling for the sale of the property free and clear of all liens , claims and interests . The creditor did not receive written notice of the bankruptcy , the plan , the disclosure statement , the confirmation hearing , or the motion to sell free and clear .
No earlier than one week before the sale and confirmation hearing , the creditor received “ informal ” notice of the sale motion after approval of the disclosure statement , after the creditor ’ s counsel both called and wrote to the debtor ’ s lawyers but received no response . Id . at 5 . The creditor did not appear at the sale and confirmation hearing . Id . at * 6 . The bankruptcy judge , not having been apprised of the ROFR , approved the plan and the sale . Ibid .
About four years later , the purchaser arranged a sale of the property and filed a motion in the bankruptcy court seeking a declaration that the ROFR was ineffective in view of the plan confirmation and the sale free and clear . The bankruptcy court denied the motion to enforce the confirmation order , ruling that the informal , last-minute notice was insufficient to overcome due process violations . Id at * 9-10 . The district court affirmed .
No Protection from Espinosa
The purchaser argued that actual notice of the bankruptcy overcame due process shortcomings . The argument , according to the District Court , “ reflects a fundamental misunderstanding of both the importance of bankruptcy procedure and due process .” 2021 U . S . Dist . LEXIS 31037 at * 11-12 .
On a sale free and clear , Section 363 ( f ) and Bankruptcy Rules 6004 ( c ) and 9014 ( b ) require serving anyone with an interest in the property in the same “ manner provided
PBCBA BAR BULLETIN 8 for service of a summons and complaint .” Id . at * 12 . “ None of these rules was complied with here ,” Judge Ludwig said . Instead , the parties “ utterly disregarded the procedural protections necessary to strip [ the creditor ] of its interest in the . . . Property .” Id . at * 12-13 . The “ procedural lapses ” here were “ immense ,” and “[ t ] he absence of this higher notice was not a trifling error .” Id . at * 14 . The lack of notice resulted in giving the bankruptcy court no personal jurisdiction over the creditor . Id . at * 18 .
Espinosa gave the purchaser no protection . Citing Espinosa , the creditor argued that “ that these procedural failings can be wiped clean because [ the creditor ] received ‘ actual notice ’ of the potential sale .” Id . at 16 . Espinosa was not “ an attempt to bind a party that was not brought within the bankruptcy court ’ s jurisdiction ,” nor did it stand “ for the broad proposition that some informal notice always satisfies due process .” 2021 U . S . Dist . LEXIS 31037 at * 16 ( Emphasis in original ).
The district court went on to state that Espinosa was different “ in several material respects ,” Id . at 17 ; ( i ) The creditor “ was not subject to the bankruptcy court ’ s jurisdiction ,” meaning that the “ resulting order [ was ] not binding against it [,]” Ibid ; ( ii ) the creditor having not been made a party to the bankruptcy case did not have standing to object or appeal , id . at * 18 ; and ( iii ) the “ number and level of procedural violations inflicted ” on the creditor “ dwarfs the procedural deficiency in Espinosa ,” Ibid .
Conclusion
As the district court in Archer-Daniels stated , “ Espinosa . . . did not hold . . . that actual notice is sufficient to satisfy due process in all contexts ” and was not a “ blank check to disregard procedure , especially procedure enacted for the protection of third parties ’ property rights .” Id . at * 19 .
This article submitted by Jason S . Rigoli , Furr and Cohen , P . A ., 2255 Glades Road , Suite 301E , Boca Raton , FL 33431 , jrigoli @ furrcohen . com