Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_08-cv-01672/USCOURTS-azd-2_08-cv-01672-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

In re Joann Lynn Corbett,

Debtor _________________________________

Educational Credit Management

Corporation, 

Appellant, 

vs.

Joann Lynn Corbett, 

Appellee. 

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No. CV-08-1672 -PHX-DGC

BK No. 4:02-bk-06249 EWH

Adversary Proceeding No. 07-00003

Chapter 7

ORDER

This appeal concerns the efforts of Appellee Joann Lynn Corbett to discharge her

obligations under six student loans. Appellee filed for bankruptcy in 2003 and brought an

adversary proceeding against Sallie Mae Servicing Corporation (“SMS”) seeking to

discharge her loan obligations (the “2003 action”). SMS had been the entity seeking to

collect Appellee’s student loans. SMS failed to answer the adversary complaint, and

Appellee obtained a default judgment. When SMS later took steps to collect the loans,

purportedly on behalf of a different owner of the loans, Appellee reopened her bankruptcy

case and filed a second adversary action seeking to hold SMS in violation of the earlier

default judgment. Appellant Educational Credit Management Corporation (“ECMC”)

intervened in the second adversary action and argued that it was the true owner of the loans,

that SMS had never owned the loans, and that the default judgment against SMS in the 2003

Case 2:08-cv-01672-DGC Document 14 Filed 03/16/09 Page 1 of 9
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1

The request for oral argument is denied. Because the parties have fully briefed the

issues, oral argument will not aid the Court’s decision or result in unfair prejudice to the

parties. See Lake at Las Vegas Investors Group, Inc. v. Pac. Dev. Malibu Corp., 933 F.2d

724, 729 (9th Cir. 1991); Partridge v. Reich, 141 F.3d 920, 926 (9th Cir. 1998).

2

It does not appear that ECMC intervened in the 2003 action.

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action therefore was not binding on ECMC and did not prohibit ongoing collection efforts.

The Bankruptcy Court held that ECMC was bound by the default judgment. ECMC appeals

that decision. For the reasons that follow, the Court will reverse and remand.1

I.

The Bankruptcy Court’s order contains a complete and accurate description of the

undisputed facts. See Appellant’s Excerpts of Record (“EOR”) at 128-148 (hereinafter

“Order”). The Court will not recount those facts here. For purposes of this appeal, it is

significant that Appellee does not dispute the following: (1) the 2003 action was filed only

against SMS; (2) SMS was the servicer for Appellee’s student loans, but not the owner or

guarantor of the loans; (3) ECMC now owns the loans, and its predecessor owners were not

parties to the 2003 action; and (4) ECMC is an entity separate and distinct from SMS. 

Before addressing the relevant law, the Court notes that it fully understands why

considerations of equity and judicial economy argue in favor of holding ECMC bound by the

default judgment against SMS. Although ECMC was not named as a defendant in the 2003

action, it had notice of the action and its current counsel filed a notice of appearance in the

action on the day the default judgment was entered in the docket.2

 Within days of the default

judgment, ECMC’s counsel contacted Appellee’s counsel and suggested that the default

judgment did not apply to ECMC because it was not a party to the action and SMS was not

the owner or guarantor of the loans. EOR 87. ECMC’s counsel stated that efforts to collect

the loans would continue, and that if Appellee wished to bind the owner and guarantor of the

loans, she should file another complaint or vacate the default judgment and amend the

existing complaint. Id. There is no evidence that ECMC had communicated any of this

information to Appellee before the default judgment was entered. Some years later, SMS

Case 2:08-cv-01672-DGC Document 14 Filed 03/16/09 Page 2 of 9
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renewed its efforts to collect the loans and Appellee filed the second adversary action.

ECMC intervened in the action, but failed to file a motion for summary judgment by the

Bankruptcy Court’s deadline. Order at 6. Instead, ECMC filed a motion for summary

judgment on the day before trial and, on the morning of trial, filed a motion to continue the

trial. Id. In a display of considerable judicial patience, the Bankruptcy Court considered the

motion and received additional briefing. When the Bankruptcy Court allowed the parties to

file supplemental briefs and asked them to submit a statement of stipulated facts, ECMC did

not file a brief and failed to participate in preparing the statement of facts. Id. 

This history suggests that ECMC has been slow to exercise its rights and cooperate

in judicial proceedings. One is tempted to conclude that ECMC deliberately failed to

disclose its existence, sat on its rights, and only reluctantly participated in the second

adversary action. Even if all this is true, however, ECMC can be bound by the default

judgment against SMS only in accordance with the law.

II.

The Supreme Court has “often repeated the general rule that ‘one is not bound by a

judgment in personam in a litigation in which he is not designated as a party or to which he

has not been made a party by service of process.’” Taylor v. Sturgell, ___ U.S. ___, 128

S.Ct. 2161, 2171 (2008) (quoting Hansberry v. Lee, 311 U.S. 32, 40 (1940)). An exception

to this general rule exists if the person is in privity with a party to the litigation. See Leon

v. IDX Sys. Corp., 464 F.3d 951, 962 (9th Cir. 2006). Federal courts have deemed several

relationships sufficiently close to justify a finding of privity. These include a nonparty who

has succeeded to a party’s interest in property that was the subject of litigation, a nonparty

who controlled the original suit, and a nonparty whose interests were represented adequately

by a party in the original suit. See In re Schimmels, 127 F.3d 875, 881 (9th Cir. 1997). The

Bankruptcy Court and Appellee agree that ECMC was not a party to the 2003 action.

Significantly, however, the Bankruptcy Court never considered whether ECMC is in privity

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3

The Supreme Court’s decision in Taylor recognizes six general categories of

exceptions to the general rule that nonparties are not bound by litigation. 128 S.Ct. at 2172-

73. It appears that the exceptions most relevant to this case (Taylor’s second, third, and

fourth exceptions) can generally be described as the privity exceptions discussed above.

Taylor’s fifth exception, for statutory schemes such as bankruptcy, does not appear to apply

here. The Bankruptcy Court did not base its decision, and Appellee does not base her

arguments in this Court, on the proposition that bankruptcy law somehow forecloses

ECMC’s challenge to the default judgment. But see footnote 10, infra. On remand, the

Bankruptcy Court is of course free to consider all of the Taylor exceptions. 

4

Exceptions to this rule may apply if the nonparty actually participated in the litigation

giving rise to the judgment or if equities favor allowing a Rule 60(b) challenge. Citibank

Int’l, 809 F.2d at 1441.

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with SMS and therefore bound by the action.3

 

As noted above, ECMC filed a late motion for summary judgment after intervening

in the second adversary action. The motion asked the Bankruptcy Court to hold that ECMC

was not bound by the 2003 default judgment. Although the motion did not mention

Rule 60(b) of the Federal Rules of Civil Procedure, the Bankruptcy Court concluded that the

motion must be construed as a challenge to the default judgment under that rule. Order at

8. This was a significant conclusion, for parties seeking to set aside a judgment under

Rule 60(b) face substantial limitations. As will be seen below, those limitations led directly

to the Bankruptcy Court’s conclusion that ECMC is bound by the 2003 default judgment.

By its own terms, Rule 60(b) applies to “a party” subject to a final judgment. The

Ninth Circuit has held that nonparties generally cannot seek relief from a judgment under

Rule 60(b) because they are not parties within the meaning of the rule. See Citibank Int’l v.

Collier-Traino, Inc., 809 F.2d 1438, 1440-41 (9th Cir. 1986); see also Ericsson Inc. v.

InterDigital Comms. Corp., 418 F.3d 1217, 1224 (Fed. Cir. 2005) (“The plain language of

Rule 60(b) only allows relief to be given to ‘a party’ to the litigation.”) (citing cases);

Popovich v. United States, 661 F. Supp. 944, 951 (C.D. Cal. 1987) (“Courts have been quite

strict in construing Rule 60(b) and have limited relief under it to those who are

unquestionably parties.”).4

 If nonparties are not permitted to use Rule 60(b) to attack a final

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5

The parties have not addressed, and the Court therefore will not decide, whether

Rule 60(b) applies to persons in privity with a party to the judgment. This may be a matter

for consideration on remand.

6

This argument was perhaps unnecessary. If ECMC was not in privity with SMS, it

does not matter whether SMS was properly served.

7

 The Bankruptcy Court relied on SEC v. Internet Solutions for Business Inc., 509 F.3d

1161 (9th Cir. 2007), for the proposition that “a defendant moving to vacate a default

judgment based on improper service of process, where the defendant had actual notice of the

original proceeding but delayed in bringing the motion until after entry of default, bears the

burden of proving that service did not occur.” Id. at 1165; see Order at 10. This rule, by its

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judgment, logic dictates that they are not bound by the rule’s limitations when arguing that

a judgment does not apply to them. Thus, in arguing that the 2003 action’s default judgment

does not apply to it, ECMC can be limited to the standards of Rule 60(b) only if ECMC was

a party to the 2003 action or, perhaps, if it was in privity with SMS.5

 As noted above, ECMC

and its predecessors in interest were not parties to the 2003 action, and the Bankruptcy Court

did not consider whether ECMC was in privity with SMS.

In seeking to show that it was not bound by the 2003 default judgment, ECMC argued

that SMS was never properly served with process.6

 The Bankruptcy Court agreed, holding

that the summons and complaint in the 2003 action were not properly served on SMS. Order

at 10-12. Invoking a limitation of Rule 60(b), however, the Bankruptcy Court concluded that

this was not a sufficient basis for setting aside the default judgment: “[m]erely erroneous

procedure in notice is not sufficient for Rule 60(b)(4) relief from judgment unless the

circumstances cross over the line from mere error to error that violates the due process clause

of the Fifth Amendment.” Order at 12. Because the Bankruptcy Court found that SMS had

received sufficient notice to satisfy due process, it held that the default judgment should not

be set aside under Rule 60(b)(4), the defective service on SMS notwithstanding. This

decision turned on the application of Rule 60(b)(4). As noted, that rule applies only to

parties and could not be invoked to conclude that ECMC, a nonparty, received sufficient

notice and therefore was bound by the default judgment.7

 

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28 terms, applies to a “defendant” to the prior proceeding. ECMC was not a defendant in the

2003 action.

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Merely holding that SMS received sufficient notice would not, of course, lead to the

conclusion that ECMC was bound by the default judgment, but the Bankruptcy Court

transformed the inquiry about SMS’s notice into a discussion of whether ECMC received due

process notice. See Order at 14. It is important to remember, however, that notice to ECMC

is not relevant if ECMC was not a party. If SMS received due process notice, and ECMC

was in privity with SMS, then due process notice to SMS binds ECMC. But if ECMC is not

in privity with SMS for purposes of the 2003 action, the mere fact that ECMC received due

process notice does not bind it. Nonparties to lawsuits are not bound merely by notice of the

lawsuits. As Taylor makes clear, there must be some additional relationship to the parties

or the lawsuit. 128 S.Ct. at 2171-74.

After considering the question of due process notice to SMS and (erroneously) to

ECMC, the Bankruptcy Court turned to the key question – whether the default judgment

against SMS was binding on the owners and guarantors of the loans. Order at 14-16. In

resolving this question, however, the Bankruptcy Court again relied on the fact that ECMC

received notice of the 2003 action, and held that the default judgment therefore was not void

under Rule 60(b)(4). Order at 17. This was error because Rule 60(b)(4) does not apply to

nonparties, the Bankruptcy Court did not determine whether ECMC was in privity with SMS

(or otherwise bound under one of the Taylor exceptions), and mere notice to ECMC as a

nonparty is not enough.

In the process of reaching its conclusion, the Bankruptcy Court focused on the fact

that Appellee did not know the identities of the owners and guarantors of her loans. The

Bankruptcy Court seemed to conclude that because the owners and guarantors of the loans

did not make themselves known to Appellee, they were bound by the judgment against SMS:

“Absent any statutory or specific regulatory authority which places a duty on student loan

borrowers to know the identity of the real owners of their loans and the existence and identity

of any guarantors, or absent any facts which would have put the Appellee on inquiry notice

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8

 The Restatement section contains this helpful illustration: “D borrows $10,000 from

C. D’s obligation is guaranteed by S. D defaults owing the full $10,000. D, who has no

assets, files a bankruptcy petition and is discharged from all obligations to C. Later, S pays

C the $10,000. S is not entitled to reimbursement from D.” Restatement § 24(1)(a) cmt. a

(1996) (emphasis added). The question in this case, of course, is whether D was “discharged

from all obligations to C” by the 2003 action to which C (ECMC) was not a party.

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prior to the entry of the Default Judgment, there is no basis to impose such a duty on the

Appellee.” Order at 16. The Bankruptcy Court then held that the due process service on

SMS “was reasonably calculated to give notice to the entities with an interest in the Loans.”

Id. Again, the focus was on notice to ECMC, not on whether it was a party or in privity with

a party.

The Bankruptcy Court did not cite any authority for the legal proposition that

unknown owners and guarantors of student loans are bound by lawsuits against their

servicers. This would seem to be a kind of legal privity – a legal requirement that owners

and guarantors either make their existence known to borrowers or live with the consequences

of judgments against their servicers. Such a rule would relieve borrowers of the obligation

to search out the identity of the owners and guarantors of their loans before filing lawsuits,

a search that ECMC asserts would have been very easy in this case. See EOR 101. If such

a rule of law is to be applied in this case, it must be clearly established by citation to relevant

authority.

Appellee argues that the relevant authority is supplied by Section 24(1)(a) of the

Restatement (Third) of Suretyship and Guaranty, a section also cited by the Bankruptcy

Court. See Dkt. #11 at 15-16; Order at 19-20. But this section merely provides that if a

bankruptcy debtor obtains a discharge of a debt, the debtor is not later liable to the guarantor

of the debt. The question in this case is whether the debtor obtained a discharge of her debt.

If she did not – if the debt was not discharged because the debtor failed to name the owner

of the loans in the 2003 action – Section 24(1)(a) does not apply.8

Appellee also cites the following language from a Maryland bankruptcy court:

“A debtor may schedule a debt in the name of the original creditor of an assigned debt unless

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9

 It appears that ECMC has given inconsistent accounts of who serviced, owned, and

guaranteed the loans at various times. Compare Declaration of Brent Smith (EOR 97-102)

with ECMC’s Motion to Dismiss (Dkt. #12-6 at 3-5).

10 ECMC asserted in its motion to dismiss the second adversary action that SMS filed

a proof of claim on behalf of ECMC in Appellee’s 2003 bankruptcy. Dkt. #12-6 at 4. If this

is true, it may bear on the question of whether SMS was representing ECMC’s interests in

the bankruptcy and was in privity with ECMC for purposes of the adversary proceeding. In

addition, if the student loans were scheduled and dismissed in the bankruptcy, and if ECMC

had due process notice of this fact, the discharge may apply to ECMC. See Espinosa v.

United Student Aid Funds, Inc., 553 F.3d 1193 (9th Cir. 2008).

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the debtor has actual knowledge of the assignment, and the assignee of a debt has the burden

to show debtor had actual knowledge of an assignment in order to except the debt from

discharge where the assignee was not scheduled.” In re Brantley, 116 B.R. 443, 446 (Bankr.

D. Md. 1990). This quotation is inapposite, however, because Appellee does not contend

that SMS was the owner of the loans and ECMC the assignee. Appellee does not dispute that

SMS merely serviced the loans – that it did not originate, own, or guaranty the loans. Had

Appellee named the owner of the loans in the 2003 action, this statement suggests that she

would not have been required to name an unknown assignee of the owner. Federal Rule of

Civil Procedure 25 works much the same. But Appellee did not name any owner or

guarantor of the loans in the 2003 action. Appellee’s legal authorities, therefore, do not

support the Bankruptcy Court’s ruling.

III.

On remand, the Bankruptcy Court should consider whether ECMC was in privity with

SMS for purposes of the 2003 action. Additional evidence may be required to make this

decision.9

 If Appellee relies on the concept of legal privity mentioned above, the Bankruptcy

Court should confirm that such legal privity is recognized in the law. The Bankruptcy Court

is of course free to take any and all actions consistent with this opinion.10

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IT IS ORDERED that the Bankruptcy Court’s Order is reversed and remanded for

proceedings consistent with this order.

DATED this 16th day of March, 2009.

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