United States Aid Funds, Inc. v. Espinosa (08-1134), Bloate v. United States (08-728) and Milavetz, Gallop & Milavetz, P.A. v. United States (08-1119)

March 25, 2010 Supreme Court Update

Greetings, Court fans!

The Court ruled Tuesday, in United States Aid Funds, Inc. v. Espinosa (08-1134), that a bankruptcy court's error in confirming a Chapter 13 plan discharging student loan debts without a finding of undue hardship did not render the confirmation order void. This Update will cover that decision, as well as two other decisions (released while I was on vacation – lucky me): Bloate v. United States (08-728), a case addressing the exceptions to the Speedy Trial Act's requirement that cases by tried within 70 days of indictment; and Milavetz, Gallop & Milavetz, P.A. v. United States (08-1119), finding that attorneys are debt relief agencies subject to the requirements of the Bankruptcy Abuse Prevention and Consumer Protection Act.

Let's start with United States Aid Funds, Inc. v. Espinosa. Francisco Espinosa filed for bankruptcy under Chapter 13, which allows a debtor to develop a plan to pay off all or a portion of his debts over a specific period of time approved by the Court. Espinosa's only debts were four student loans and he sought approval for a plan that would allow him to pay only the principal on the loans, with the interest being discharged. Unfortunately for Espinosa, student loans get special treatment under bankruptcy law and may only be discharged upon a showing of "undue hardship." Federal Rule of Bankruptcy Procedure 7001(6) requires that a debtor seeking to discharge student loan debt must initiate an adversary proceeding to determine undue hardship by serving a summons and complaint on his adversary. Espinosa didn't do this, but, luckily for Espinosa, the bankruptcy court approved his plan nonetheless. A few years after Espinosa finished paying the principal, United States Aid Funds ("United") sought to collect the interest. Espinosa objected and asked the bankruptcy court to enforce its discharge order by directing United to stop pursuing the interest. The bankruptcy court did just that, but the district court reversed, finding that the bankruptcy court's prior confirmation order was void in that it violated United's due process rights since United never was sent the summons and complaint required by Rule 7001(6). The Ninth Circuit reversed right back, concluding that the bankruptcy court's order was, at most, a legal error that should have been addressed via a timely appeal by United. The error did not render the 1997 confirmation order void.

In a surprising unanimous affirmance (surprising mostly because we are talking about the Ninth Circuit), the Court agreed . . . mostly. Led by Justice Thomas, the Court explained that the list of infirmities significant enough to "void" a judgment is "exceedingly short; otherwise Rule 60(b)(4)'s exception to finality would swallow the rule." Only two types of deficiencies have been recognized as sufficient: (1) blatant lack of jurisdiction by the court entering the order (an argument even United didn't make); and (2) where the order violates due process. United contended that Espinosa's failure to serve it with a summons and complaint for an adversary proceeding to determine undue hardship violated its due process rights. The Court disagreed. United had actual knowledge of the proposed bankruptcy plan and confirmation order, which was sufficient to satisfy due process. It failed to object to the plan and failed to appeal the confirmation order, which was a final judgment. The Court also rejected United's request that it expand the categories of judgment defects that warrant relief under Rule 60(b)(4) to include instances where the a court "lacked statutory authority" to enter the offending order. The proper way for United to challenge this order was by way of a timely appeal, not a Rule 60(b)(4) challenge six years later. The Ninth Circuit didn't emerge entirely unscathed however. The Court disagreed with its conclusion that a bankruptcy court need not conduct an undue hardship examination where a creditor does not request one, finding this obligation self-executing.

Next, we turn to the Speedy Trial Act, which requires a criminal defendant's trial to commence within 70 days of his indictment or initial appearance, but excludes certain periods of time from this calculation. If I were to ask you whether a defendant could run out the 70 days by asking for repeated extensions, then move to dismiss the charges against him because he wasn't tried in 70 days, and you said "no," eight Courts of Appeals would have agreed with you. But, you would have been wrong, at least under the circumstances presented in Bloate v. United States. One subsection of the Speedy Trial Act automatically excludes from the 70-day calculation "any period of delay resulting from other proceedings concerning the defendant, including but not limited to . . . delay resulting from any pretrial motion, from the filing of the motion through the [disposition of] such motion." Another subsection of the Act permits judges to exclude other delays resulting from a continuance, but only if the judge makes a finding that it is in the best interests of justice to do so. In this case, defendant Bloate requested an extension of time to prepare a pretrial motion, which the court granted without a specific finding that the extension was in the best interests of justice. Bloate ultimately opted not to file the motion. Later, he moved to dismiss the indictment for the Government's failure to comply with the Speedy Trial Act, due to this extension and other delays, most of which he had requested. The district court denied the motion, and Eighth Circuit affirmed. The Court reversed 7-2.

Led once again by Justice Thomas, the Court found that the subsection of the Act dealing with automatic exclusions specifically referenced "delays resulting from any pretrial motion," but only beginning "from the filing of the motion." Thus, Bloate's delay, which was caused by an extension preceding the filing of any motion, was not automatically excluded from the 70-day calculation. Since the subsection specifically addressed delays in connection with pretrial motions, "settled principles of statutory construction" counseled against giving any weight to the subsection's broader "including but not limited to" language. Moreover, the Court reasoned, its interpretation best gave full effect to the Act's other subsection, which permitted judges to exclude unspecified "continuances" upon making appropriate findings. The Court calmed fears that its ruling would result in widespread dismissal of charges against likely criminals, by noting that dismissals for Speedy Trial Act violations can be made without prejudice to the Government bringing new charges. Justice Alito, joined by Justice Breyer – rather unusual bedfellows – dissented. In their view, Bloate's request for an extension was clearly a "proceeding concerning the defendant" and thus automatically excluded from the 70-day calculation. Although that subsection went on to list examples such as delays resulting from pretrial motions, that list was not exhaustive. And, under the same specific-trumps-general principle of statutory interpretation deployed by the majority, the dissent saw no need to look to the Act's general subsection on exclusion for continuances with judicial findings, where the subsection on automatic exclusions specifically applied.

Lastly, in Milavetz, Gallop & Milavetz, P.A. v. United States, a law firm and two of its clients brought suit seeking a declaration that attorneys did not constitute "debt relief agencies" under the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") and that, if they did, certain of BAPCPA's requirements were unconstitutional as applied to them. Specifically, plaintiffs' challenged BAPCPA's provision prohibiting debt relief agencies from advising clients "to incur more debt in contemplation of" filing for bankruptcy. Plaintiffs also challenged BAPCPA's requirements that they state in their advertisements for bankruptcy services that the "services or benefits are with respect to bankruptcy relief" and include the following statement (or one similar): "We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code." The district court agreed with plaintiffs in all respects. The Eighth Circuit, by contrast, found that Milavetz clearly qualified as a debt relief agency under BAPCPA. It also upheld BAPCPA's disclosure requirements, finding them reasonably related to the legitimate goal of preventing consumer deception. But the Eight Circuit agreed with the district court that BAPCPA's provision preventing debt relief agencies from advising clients to take on more debt was unconstitutional as applied to attorneys.

Led by Justice Sotomayor, the Court affirmed in part and reversed in part. The Court agreed that Milavetz clearly qualified as a debt relief agency, defined as "any person who provides any bankruptcy assistance to any assisted person" in return for payment. Bankruptcy assistance specifically includes services often performed by attorneys, including the "provi[sion] of legal representation with respect to a case or proceeding," something that can be performed only by attorneys – so debt relief agency simply could not be reasonably read to exclude attorneys. Turning to the constitutional challenges, the Court agreed with the Eight Circuit that the disclosure requirements survived intermediate scrutiny in that they directly advanced a substantial government interest (i.e., preventing consumer deception that could occur if consumers don't realize the help being offered involved filing for bankruptcy) and were no more extensive then necessary to serve that purpose (i.e., BAPCPA's disclosure requirements simply made consumers aware that the help involves a bankruptcy filing). The Court reversed the Eight Circuit, however, with respect to BAPCPA's prohibition on advising clients to incur more debt in contemplation of bankruptcy. While the Eight Circuit had construed the term broadly to prohibit advice relating to the incurring of any additional debt while bankruptcy was a possibility (even debt that might help avoid bankruptcy), the Court construed it narrowly to apply only to advice encouraging or instructing a consumer to incur debt for the purpose of having it discharged through bankruptcy. So construed, the law only prohibited advice to undertake actions to abuse the bankruptcy system and was not impermissibly vague such that it would chill protected speech.

Justice Thomas wrote separately to note his serious issues with applying intermediate scrutiny to disclosure requirements like those presented here. However, since no party raised that issue, he applied that test and found that the disclosure requirements would pass muster with respect to at least some inherently deceptive advertisements – those that promise to "wipe out" debts without mentioning bankruptcy as the means for accomplishing that goal. Justice Scalia also did not join one footnote of the majority's opinion, which relied on legislative history. (It is a pretty funny opinion. If you need some quotes on the improper use of legislative history, you might want to read it.)

The Court has also granted cert in a number of cases, but I'll bring you the cert grants and other orders separately to keep this short. Look for another Update in your inboxes shortly.


From the Appellate and Complex Legal Issues Practice Group at Wiggin and Dana
For more information, contact Kim Rinehart or any other member of the Practice Group at 203-498-4400