National Collegiate v. Smock (CA1 11/29/16)

You don’t often see the appeal happen before the trial.

Debtors tried to get out of a student loan by filing Chapter 7 and not telling the bankruptcy court that the debt was a student loan. Creditor got notice of the bankruptcy but did not respond. It then sued Debtors on the debt, lost in compulsory arbitration, and appealed.

The trial court then did something that even the Court of Appeals doesn’t understand. When the time came for trial it didn’t hold one. It took no evidence and had no motions before it. It seems instead to have talked to the lawyers, as a result of which it ruled that the bankruptcy discharge was binding because Creditor had notice of it. The court gave judgment for Debtors. Perhaps that sort of thing goes on in Family Court but, as the opinion points out, “there is no evidentiary basis for any (emphasis in original) of the trial court’s findings or conclusions.” “Because the record is devoid of competent evidence supporting the judgment, we conclude the trial court erred in finding in favor of the Smocks.”

That could dispose of the appeal but the court goes on to answer the substantive question presented since it “will undoubtedly arise again.”  The trial court relied on a U.S. Supreme Court case (Espinoza 2010). But that case involved a Chapter 13, so the “notice” it referred to was the reorganization plan. Under Chapter 7 the “notice” Creditor got included the advice not to file a Notice of Claim. Therefore Espinoza doesn’t apply and “without [an] adversary proceeding and finding of undue hardship [both required by statute to discharge a student loan, neither of which happened here], the debt was not discharged.”

Remanded to “first take evidence to establish whether the debt is in fact a student loan.” If not, its “judgment was proper”; if so, “the judgment was not proper and this case may proceed.” The court evidently thinks detailed instructions necessary in light of the “proceedings” below. But it also adds that if Debtors “believe the debt was discharged, they may enforce the discharge by filing an action in Bankruptcy Court.” The court says this twice during the opinion. Giving a party legal advice is itself unusual but may reflect some felt need to pay obeisance to the Bankruptcy Court, which can be prickly about its jurisdiction.

(Opinion: National Collegiate Student Loan Trust v. Smock)