By Kristina Feher, Esq. Feher Law, P.L.L.C.
On Nov. 15, 2021, the Eleventh Circuit held that the failure to give notice of non-debtor, third-party releases, as required by Bankruptcy Rule 2002(c)(3), is not fatal when the same information was contained in the plan and disclosure statement sent to the creditor who sought to sue third parties. In Jackson v. Le Ctr. on Fourth, LLC (In re Le Ctr. on Fourth, LLC), No. 20-12785, 2021 U.S. App. LEXIS 33845 (11th Cir. Nov. 15, 2021), the Eleventh Circuit in its decision now expands United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010). In Espinosa, the United State Supreme Court held that Espinosa’s failure to serve United Student Aid Funds with an adversary proceeding to discharge student loans was not a basis upon which to declare the judgment void. In Le Ctr. on Fourth, LLC, the Eleventh Circuit expands Espinosa to include that service of a Chapter 11 Plan with releases for non-debtors is actual notice even though the debtor did not specifically comply with the procedural requirements of Rule 2002(c)(3). Because the creditors received actual notice of the same information in a different form, the Eleventh Circuit held the Jacksons received actual notice of the information that Bankruptcy Rule 2002(c)(3) required Le Centre to provide. The expansion of Espinosa includes that actual notice is sufficient to satisfy due process, even where a debtor violates procedural requirements for supplying notice prescribed by the Bankruptcy Rules.
Espinosa
In Espinosa, the United States Supreme Court considered whether an order that confirms the discharge of a student loan debt in the absence of an undue hardship finding or an adversary proceeding, or both, is a void judgment under Federal Rule of Civil Procedure 60(b)(4). In his Chapter 13 case, Respondent Espinosa’s plan proposed repaying the principal on his student loan debt and discharging the interest once the principal was repaid. He did not initiate the required adversary proceeding. The student loan creditor, petitioner United, received notice of the plan from the Bankruptcy Court and did not object to the plan or to Espinosa’s failure to initiate the required proceeding. The Bankruptcy Court confirmed the plan without holding such a proceeding or making a finding of undue hardship. Once Espinosa paid his student loan principal, the court discharged the interest.
A few years later, the Department of Education sought to collect that interest. United filed a motion under Federal Rule of Civil Procedure 60(b)(4), seeking to set aside the confirmation order as void. United argued that the plan provision authorizing discharge of Espinosa’s student loan interest was inconsistent with the Code and the Bankruptcy Rules. United also argued that their due process rights were violated when Espinosa failed to serve it with the required summons and complaint in an adversary proceeding. The Ninth Circuit concluded that by confirming Espinosa’s plan without first finding undue hardship in an adversary proceeding, the Bankruptcy Court at most committed a legal error that United might have successfully appealed. However, the Ninth Circuit held that such error was no basis for setting aside the order as void under Rule 60(b)(4). The Ninth Circuit also held that Espinosa’s failure to serve United was not a basis upon which to declare the judgment void because United received actual notice of the plan and failed to object. The United States Supreme Court affirmed the Ninth Circuit’s decision.
Expanding Espinosa
In the case of In re Le Ctr. on Fourth, LLC, the creditors argued that they did not receive notice reasonably calculated to inform them of the third-party releases in the bankruptcy plan, which violated their due process rights. Willie Jackson was traveling in his wheelchair when he was hit by a hotel valet driver and suffered severe injuries. Mr. Jackson and his wife sued the valet company. The owner of the hotel, Le Centre on Fourth, LLC, filed a Chapter 11 petition. The Jacksons obtained a modification of the automatic stay to continue the lawsuit in state court against the hotel owner to recover from insurance. In addition to the valet company, the state court action also included non-debtors that operated and managed the hotel.
The Chapter 11 disclosure statement explained that Le Centre’s Chapter 11 plan included the release not only of Le Centre, but also of related non-debtor parties. The debtor sent out the Chapter 11 plan, the disclosure statement, and notice of the confirmation hearing to all creditors, including the Jacksons. The disclosure statement included a four-page disclaimer. The bankruptcy court entered a confirmation order approving the Chapter 11 plan. The debtor then moved in state court, along with the now-released non-debtor entities to dismiss the state court action. The debtor argued that the confirmation order barred the Jacksons claims against them. The Jacksons asked the bankruptcy court to allow him to proceed against the entities’ insurers in state court. The bankruptcy court denied the request and the district court affirmed.
The Jacksons appealed to the Eleventh Circuit on the basis that Le Centre’s Chapter 11 plan did not satisfy due process. The Jacksons also argued that the district court erred by upholding the bankruptcy court’s interpretation of the confirmation order barring their nominal claims. The Eleventh Circuit affirmed and agreed that the Jacksons received sufficient notice to satisfy due process. The Eleventh Circuit also concluded the there was no abuse of discretion by the bankruptcy court in ruling that the Jacksons could not pursue their nominal claims.
The Eleventh Circuit noted that the procedural notice requirements of the Bankruptcy Rules in this case mirrored the notice requirements of Espinosa. Here, the Jacksons’ argument turned on whether due process required that the Jacksons receive notice in compliance with the procedural requirements of Rule 2002(c)(3) even though they received actual notice of the same information in a different form. The Jacksons received actual notice of the bankruptcy plan and the disclosure statement which outlined the third-party releases.
The Jacksons failed to object in the bankruptcy court for failure to comply with Rule 2002(c)(3). The Eleventh Circuit held the Jacksons received actual notice of the information that Bankruptcy Rule 2002(c)(3) required Le Centre to provide. The Supreme Court determined in Espinosa that actual notice is sufficient to satisfy due process, even where a debtor violates procedural requirements for supplying notice prescribed by the Bankruptcy Rules. The Eleventh Circuit here found that the District Court did not err in determining that the Jacksons suffered no due process violation.
Conclusion
Failure to give notice of non-debtor, third-party releases, as required by Bankruptcy Rule 2002(c)(3), is not fatal when the same information was contained in the plan and disclosure statement sent to the creditor who sought to sue third parties. Service of a Chapter 11 Plan with releases for non-debtors is actual notice even though the debtor did not specifically comply with the procedural requirements of Rule 2002(c)(3). The creditors received actual notice of the same information in a different form by receipt of the Chapter 11 Plan and Disclosure Statement. A failure to serve creditors in the manners required by Bankruptcy Court Rules is not a failure of actual notice upon which to set aside a confirmation order.