Attacking Confirmation Orders Post-Espinosa

Hope was extinguished for creditors who would seek to overturn illegal provisions in confirmed Chapter 13 plans by the Supreme Court’s recent decision in Espinosa.[1] There, the Court upheld an order confirming a plan that stated all student loans would be discharged upon the debtor’s Chapter 13 discharge even though the provision was illegal – student loans are nondischargeable under bankruptcy law.

The best defense to illegal provisions is to timely review and object to Chapter 13 plans so that creditors do not lose rights upon confirmation that they would otherwise enjoy under the Bankruptcy Code. Confirmation orders may still be revoked for fraud under the Bankruptcy Code.[2]  However, such cases are extremely rare.  It is important to know that inserting illegal provisions in plans is not considered fraud under the law, so creditors cannot rely on this Code section as grounds to undo confirmation orders.

But if a plan is confirmed with an illegal provision, Espinosa does not entirely shut the door on challenging the confirmation order.  That case honored the importance of the finality of orders more than the undoing of illegal provisions in Chapter 13 plans. However, a fundamental underpinning of the decision was the fact that the creditor did have notice of the bankruptcy and plan in time to object, but failed to do so.

If a creditor’s due process rights are violated, the confirmation order is void, at least as to that creditor’s treatment.[3] Due process requires that the creditor get notice in time to object.  If a creditor is omitted from the service list, or an obsolete or incorrect address is scheduled so that the creditor does not receive actual notice of the bankruptcy in time to object to confirmation, then it has a due process argument to challenge the confirmation order. 

Many districts now have model plans that debtors are required to use, but allow special provisions or additional treatment than what the model plan provides. Often, these model plans incorporate the Bankruptcy Code’s requirements for confirmation.  An example is the lien retention provision – a creditor has the right to retain its lien until the earlier of a Chapter 13 discharge or payment in full under non-bankruptcy law.[4]  The Erdmann court found that when a debtor tried to override this provision in a model plan, by inserting a special provision that a creditor’s lien was void upon confirmation, the attempt failed, and the model plan language and the Bankruptcy Code prevailed.[5]  Accordingly, the lien was not avoided at confirmation as the plan had provided. While it is important to note that in the Erdmann case, the creditor did not receive notice of the plan in time to object, rendering the confirmation order void as to that creditor’s treatment, this argument may be successful on its own.   If a special plan provision conflicts with model plan language that echoes the Bankruptcy Code, the model plan language should prevail.

Prompt and diligent review of Chapter 13 plans is the best and most dependable protection against any negative plan treatment.  However, if a plan is confirmed with an illegal provision, your bankruptcy attorney may be able to mount a challenge to the order if the facts are favorable, even after the Espinosa decision.

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