On March 23, 2010, the United States Supreme Court issued its unanimous opinion affirming the Ninth Circuit’s finding for the debtor in the case of United Student Aid Funds, Inc. v. Espinosa, 559 U.S. ___ (2010).

In that case Espinosa, a chapter 13 debtor, sought to discharge the accrued interest on his student loan while paying the principle through the plan. He did not initiate an adversary proceeding to determine undue hardship, but included the student loan in his plan. Although the student loan creditor received actual notice of the plan, it did not object to the partial payment. The bankruptcy court confirmed the plan, the debtor complied with it, and the debtor was discharged in 1997. Several years later, USAF attempted to collect the unpaid interest on the loan. Espinosa sought to have the bankruptcy court enforce the discharge and USAF counterclaimed with a motion to void confirmation of the plan under Fed. R. Civ. P. 60(b)(4).

The Supreme Court found that Rule 60(b) relieves a party of a final judgment only in the rare circumstance that the “judgment is premised either on a certain type of jurisdictional error or on a violation of due process that deprives a party of notice or the opportunity to be heard.” The Court began its analysis with the finding that the statutory requirements of undue hardship and the initiation of an adversary proceeding are not jurisdictional. The issue then, was whether USAF received adequate notice to satisfy due process. The Court found that the existence of actual notice, albeit not the type of notice proscribed by the bankruptcy rules, was sufficient to satisfy due process.

The Court addressed USAF and the Amicus, U.S. government’s, argument that the bankruptcy court’s order is void because it went beyond the court’s power. Although the Court found the failure to comply with §§ 523(a)(8) and 1328(a) before confirming the plan was “legal error,” that error did not rise to the level necessary to void a final judgment. This was especially so as the creditor had actual notice and was not permitted to “sleep on its rights.”

The Court disagreed with the aspect of the Ninth Circuit’s decision, however, insofar as it held that a bankruptcy court could confirm a plan which would discharge a student loan without an adversary proceeding so long as the creditor did not object.