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40 Legal Industry Update National Focus NATIONAL RETHINKING ESPINOSA AS A SWORD AGAINST DECEITFUL DEBTORS By Sarah Willms and Dan Wolters, Manley Deas Kochalski LLC e Supreme Court of the United States recently decided the issue of whether a debtor could discharge student loan debt through a confirmed bankruptcy plan without showing undue hardship when the U.S. Bankruptcy Code says that hardship is required for that discharge. e court's holding in United Student Aid Funds Inc. v. Espinosa stated that a confirmed plan is a final order that binds all creditors and debtor(s) to the terms therein—even when the terms conflict with the Bankruptcy Code—so long as the creditor was notified of the plan terms and given the opportunity to object. e court's holding in Espinosa made it clear that creditors must object to confirmation to protect their rights. As a result, Espinosa necessarily implies that when faced with ambiguous or questionable plan terms, creditors must raise objections to preserve their lien rights. Otherwise, they're bound by the plan terms unless the debtors fail to provide the proper notice to the creditors. Despite the result in Espinosa, the court's holding presents creditors with the option to use the case to their benefit. First, a confirmed plan binds both debtors and creditors alike. If a debtor fails to comply with plan terms (e.g., maintaining insurance on a residence or vehicle), the creditor can move for relief from the automatic stay or move to dismiss the case. Second, creditors can use Espinosa as an even bigger sword against unscrupulous debtors and their counsel who attempt to hide plan provisions that are contrary to the Bankruptcy Code. Specifically, the Espinosa court cautioned debtors against including provisions that are contrary to the code and stated that doing so could result in a decision that the plan was filed in bad faith. It might also result in sanctions. e court went so far as to state that it was incumbent upon the bankruptcy court and trustee to police plan terms for compliance with the code. Since Espinosa was decided, there have been no reported decisions where a creditor has used the court's warnings against debtors and their attorneys for engaging in bad faith behavior, but various courts have relied on Espinosa for this purpose. In the Western District of Arkansas, the bankruptcy court cited Espinosa to support a ruling suspending the debtor's counsel from practicing law in that state's bankruptcy courts for six months. Counsel had submitted a plan that contained "intentionally misleading language for the improper purpose of obtaining confirmation of the debtor's plan." According to the bankruptcy court, the plan misrepresented post-petition domestic support obligation payments. Even though the Arkansas court reviewed a different subject matter—domestic support instead of student loans—the court saw Espinosa as controlling. e opinion strongly suggests that bankruptcy courts have legal support to impose similar sanctions should a plan contain language that seeks to alter the bar date, or to even improperly cram down a mortgage or 910 car claim. Elsewhere, bankruptcy courts have used Espinosa to put the debtor's counsel on notice regarding the consequences of attempting to place student loan discharge provisions in plans. For example, the Bankruptcy Court of the Southern District of Ohio stated that it would "consider the imposition of sanctions under Bankruptcy Rule 9011" for any plan that seeks to discharge student loan debt. Similarly, the Southern District of Indiana used Espinosa to warn the consumer bar that, should members propose a plan containing language contrary to the Bankruptcy Code, "they could, and probably should, be looking down the barrel of a Rule 9011 motion for sanctions." e cases above highlight that courts aren't afraid to impose sanctions against debtors for including provisions in their plans that are contrary to what's allowed by the Bankruptcy Code. Because bankruptcy courts are willing to apply Espinosa's broad statement on sanctionable conduct, creditors should consider requesting appropriate sanctions if debtors or their counsel deliberately seek to alter a creditor's rights contrary to the express language of the Bankruptcy Code.

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