Nichols v. Align Western States Learning Corp. (In re Nichols)

Nichols v. Align Western States Learning Corp. (In re Nichols), BAP No. AZ-12-1305 (9th Cir. BAP July 9, 2013)
(1) Debtors' due process rights were not violated by the bankruptcy court's prove-up procedure and subsequent oral ruling. (2) Bankruptcy court did not err in finding that a student loan debt was nondischargeable under Brunner.
Procedural context:
After a prove-up hearing, the bankruptcy court made oral findings of fact and conclusions of law. The bankruptcy court found the student loan debt at issue to be nondischargeable. The 9th Circuit BAP affirmed the bankruptcy court and found that the hearing and oral ruling did not violate the appellant’s due process rights.
Debtors filed an adversary proceeding seeking to discharge student loan debts under §523(a)(8). The clerk entered an entry of default. Subsequently, the creditor moved to set aside the default. In lieu of deciding the motion to set aside the entry of default, the court scheduled a prove-up hearing to determine if the debtors could provide a prima facia case for nondischargeability. Both debtors testified at the evidentiary hearing. Neither debtor was certified as mentally or physically disabled, although both suffered from several ailments. Further, the wife continued to work full time as a flight attendant. The debtor made closing arguments, whereas the creditor did not. The court made oral findings of facts and conclusions of law to an empty courtroom. This oral record was recorded and placed on a compact disc. In the oral record, the bankruptcy court found that the debtors did not meet the Brunner test and specifically did not satisfy the second or third prong. First, the court found that the husband was able to obtain work other than physical labor. Further, there was no evidence showing that the debtors had made good faith efforts to repay the loans. The debtors appealed the finding of nondischargeability and questioned the constitutionality of the court’s oral record. The BAP found that the bankruptcy court did not err in its finding of nondischargeability. The BAP found that although unorthodox, the bankruptcy court did not violate the debtors’ due process rights. In analyzing the prove-up hearing, the BAP considered that the debtors were provided a full opportunity to present evidence at the hearing. Further, the creditor was not permitted to present a defense by way of argument or by soliciting testimony from expert witnesses, so the debtors were actually given more leniency than at a trial. The BAP also determined that the reference to the compact disc did not violate Bankruptcy Rule 7052 because the disc served the same purpose by “ensur[ing] accurate fact finding and provide[d] a basis for judicial review, fulfilling the purposes of a written record.”
Jury, Taylor and Ahart

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