Contributing Editor: Andrew Page, Maslon LLP
In Stewart v. U.S. Department of Education (In re Stewart), No. 22-AP-04053, 2023 WL 4276909 (Bankr. D. Minn. June 29, 2023), Judge Kesha Tanabe used two adversary parties’ procedural blunder as an opportunity to issue written guidance on settlements, undue hardship, and voluntary dismissal.
Maureen Leah Stewart (“Stewart” or the “Debtor”) and the U.S. Department of Education jointly filed a document captioned “Stipulation for Discharge of Plaintiff’s United States Department of Education Loans and to Dismiss Adversary Proceeding with Prejudice” (the “Stipulation”) along with a proposed order (the “Proposed Order”). (Dkt. No. 13). The Stipulation purported to stipulate that Stewart’s student loans were dischargeable as an “undue hardship” under 11 U.S.C. § 523(a)(8) and that the parties jointly wished to dismiss the adversary proceeding with prejudice. The Proposed Order, if entered, would have approved the “undue hardship” determination and dismissed the case. Although the parties likely had good intentions, the Stipulation could not be approved and the Proposed Order could not be entered. To start, the court could not enter the Proposed Order without a motion requesting entry of that order. Fed. R. Civ. P. 7(b)(1)(B) (made applicable by Fed. R. Bankr. P. 7007). But, more importantly, the Stipulation conflated distinct procedures under the Federal Rules of Bankruptcy Procedure. Rather than deny the parties implicit request for relief in an oral ruling, Judge Tanabe used the opportunity to present written guidance for the parties’ counsel and for the bankruptcy bar more broadly.
Without substantively addressing the content of the Stipulation and Proposed Order, Judge Tanabe explained each avenue that could have been taken “to the extent the parties [were] seeking” various outcomes. First, to the extent the parties were seeking an order approving the terms of the Stipulation, they needed to file a motion pursuant to Fed. R. Bankr. P. 9019. Second, to the extent the parties were seeking a judicial determination that the Debtor satisfied the criteria for discharge due to “undue hardship” under 11 U.S.C. § 523(a)(8), they needed to file a stipulation of facts and an accompanying motion for summary judgment pursuant to Fed. R. Bankr. P. 7056. Finally, to the extent the parties were seeking to stipulate to voluntary dismissal of the adversary proceeding, they did not need to file—and, in fact, should not have filed—the Proposed Order. Since the U.S. Department of Education had not yet filed an answer, Stewart was entitled to dismiss the adversary proceeding without a court order under Fed. R. Civ. P. 41(a) (made applicable by Fed. R. Bankr. P. 7041). If the Stipulation was indeed a Rule 41(a) stipulation, entry of the Proposed Order would constitute an abuse of discretion by the court since a Rule 41(a) stipulation dismisses an action upon its filing and deprives the court of authority to enter further orders.
Overall, Judge Tanabe noted, the Federal Rules of Bankruptcy Procedure do not provide a mechanism whereby parties may direct the court to adopt the parties’ determination that a debt satisfies the criteria for “undue hardship” discharge using a Rule 41(a) stipulation. The parties could, however, consent to entry of a judgment stating that the debt is dischargeable as “undue hardship” although the consent judgment would not be a judicial determination of “undue hardship” under § 523(a)(8). Rather, it would be a judicial determination of the parties’ consent to deem the debts dischargeable. To the extent that was the parties’ intention—and it probably was—Judge Tanabe directed them to revise the Stipulation and submit a consent judgment in lieu of the Proposed Order.
Judge Tanabe’s order has since been picked up by both Lexis and Westlaw, expanding its reach and relevance. In light of the U.S. Supreme Court’s decision in Biden v. Nebraska, 143 S. Ct. 2355 (2023), student loan hardship discharge will continue to play a role in consumer bankruptcy cases and Stewart v. U.S. Department of Education will prove to be a useful cite. Practitioners representing consumer debtors and government agencies would be wise to use Judge Tanabe’s guidance to avoid turning a consensual agreement into a procedural mess.
To read Judge Tanabe’s full decision, click here.
C.J. Harayda, Stinson LLP
David M. Tanabe, Winthrop & Weinstine, P.A.