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In re: MARTHA M. BERNAL, Debtor. No. 98-56432 EDUCATIONAL CREDIT BAP No. MANAGEMENT CORPORATION, SC-97-01447-MoRO Appellant, OPINION v. MARTHA M. BERNAL, Appellee.
Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Montali, Russell, Ollason, Bankruptcy Judges, Presiding
Argued and Submitted
March 8, 2000--Pasadena, California
Filed March 28, 2000
Before: Ferdinand F. Fernandez, A. Wallace Tashima and
Barry G. Silverman, Circuit Judges.
Opinion by Judge Fernandez
_________________________________________________________________
COUNSEL
Robert L. Rentto, San Diego, California, for the appellant.
John R. Morris, Higgs, Fletcher & Mack, San Diego, Califor-
nia, for the appellee.
_________________________________________________________________
OPINION
FERNANDEZ, Circuit Judge:
Educational Credit Management Corporation ("ECMC")
appeals from the order of the Bankruptcy Appellate Panel
affirming the bankruptcy court's denial of ECMC's motion to
intervene as a defendant in an adversary proceeding in a
Chapter 7 bankruptcy. The proceeding was brought by the
debtor, Martha Bernal, for the purpose of discharging her stu-
dent loans on the ground of undue hardship. See 11 U.S.C.
S 523(a)(8). We affirm.
BACKGROUND
Between 1982 and 1985, Bernal obtained four separate stu-
dent loans from Citibank which were guaranteed by the Cali-
fornia Student Aid Commission ("CSAC") under the
Guaranteed Student Loan Program (since renamed the Federal
Family Education Loan Program). See 20 U.S.C. SS 1071 to
1087-4. Each loan was for approximately $2,500, with an
interest rate of nine percent per annum.
In 1990, Bernal gave birth to a daughter, who suffers from
a serious illness and requires a great deal of personal care. As
a result, Bernal sought and obtained several deferrals of
repayment. Ultimately, she demanded cancellation of the
notes, and when that was not forthcoming, she filed a Chapter
7 bankruptcy petition followed by an adversary complaint in
which she asked for discharge of the debt. She claimed that
a denial of discharge would "impose an undue hardship on the
debtor and the debtor's dependents." See 11 U.S.C.
S 523(a)(8).
Bernal's bankruptcy petition constituted an event under the
Guaranteed Student Loan Program. That event entitled Citi-
bank to call on the guarantee of CSAC, so on July 15, 1996,
Citibank assigned and delivered the four notes to CSAC. On
August 6, 1996, Bernal filed the adversary complaint against
CSAC, and others, to determine the nondischargeability of her
student loans. A copy of the complaint and an amended sum-
mons were served on CSAC on August 9, 1996. The deadline
for filing an answer or other response was September 9, 1996.
CSAC did not respond to the complaint, and on September
11, 1996, Bernal filed a request for entry of default, which
was duly entered on the same day. Then, on September 17,
1996, CSAC assigned and transferred the four notes to
ECMC. The transfer was accomplished through delivery of
data processing tapes, and the information from the tapes was
then loaded into ECMC's system in a process that took
approximately one month to complete. Thus, ECMC's attor-
neys did not receive the Bernal files until October 23, 1996,
but they filed a purported answer and counterclaim to the
adversary complaint on that same day, even though ECMC
was not a party at that time.
On February 20, 1997, ECMC filed a motion to intervene
in the adversary proceeding and to set aside CSAC's default.
The bankruptcy court denied that motion because, as it
explained, "at the time the complaint was filed -- in fact,
even at the time the default was entered, ECMC was not a
proper party in intervention." ECMC then appealed to the
BAP, but a default judgment was entered by the bankruptcy
court at a later time. The BAP affirmed the denial of interven-
tion. See Educational Credit Management Corp. v. Bernal (In
re Bernal), 223 B.R. 542 (B.A.P. 9th Cir. 1998) (ECMC I).
This appeal followed.
JURISDICTION AND STANDARDS OF REVIEW
The BAP had jurisdiction pursuant to 28 U.S.C. S 158(c),
and we have jurisdiction pursuant to 28 U.S.C. S 158(d).1
"We review decisions of the BAP de novo. " Classic Auto
Refinishing, Inc. v. Marino (In re Marino), 181 F.3d 1142,
1144 (9th Cir. 1999). In other words, "[w]e review the bank-
ruptcy court's decision independently, without deference to
the BAP." Beaupied v. Chang (In re Chang), 163 F.3d 1138,
1140 (9th Cir. 1998), cert. denied _______ U.S. _______, 119 S. Ct.
2029, 143 L. Ed. 2d 1039 (1999). "The bankruptcy court's
conclusions of law are reviewed de novo and its factual find-
ings for clear error." Ardmor Vending Co. v. Kim (In re Kim),
130 F.3d 863, 865 (9th Cir. 1997).
DISCUSSION
As we have already indicated, the BAP affirmed the bank-
ruptcy court's decision that intervention was not appropriate.
In so doing, it concerned itself with whether ECMC met the
elements required of a party which seeks to intervene as of
right. See ECMC I, 223 B.R. at 547-48. It went on to consider
whether it was proper for the bankruptcy court to deny per-
missive intervention. Id. at 548. As we see it, the conclusion
it reached was correct, but for somewhat different reasons.
[1] ECMC's whole quest to obtain intervention2 and joinder3
in the adversary proceeding was misguided. It was neither a
third party which had some interest in property that might
somehow be impaired if it could not intervene, see Fed. R.
Civ. P. 24, nor a party whose interest would somehow be
impaired, if those who were before the court proceeded with-
out it. See Fed. R. Civ. P. 19. As the BAP recognized, to treat
ECMC as falling within either of those categories would pro-
duce great mischief. The BAP reasoned that permitting inter-
vention would:
[open] the floodgates to a possible abuse . . . by
allowing parties to sleep on their rights, neglect their
duties with respect to litigation, and thereafter avoid
the consequences of such conduct by merely assign-
ing the subject matter to a third party after default-
ing. If the third party is allowed to acquire the
subject matter and to intervene after the original
defendant defaults, the third party is less likely to
pursue its remedies against the truly culpable party:
the defaulting assignor. At the same time, the inter-
ests of innocent plaintiffs may be jeopardized. Jus-
tice dictates that the third party be bound by the
representation of the assignor in the litigation
through the time of the assignment.
ECMC I, 223 B.R. at 548.
[2] That reasoning, however, points to the fact that the
whole procedure, including the standards that surrounded it,
was inapposite. This is a classic situation where the rules for
substitution of parties must apply. See Fed. R. Bankr. P.
7025(c); Fed. R. Civ. P. 25(c). Federal Rule of Bankruptcy
Procedure 7025 simply adopts Federal Rule of Civil Proce-
dure 25(c) by reference. The latter reads: "In case of any
transfer of interest, the action may be continued by or against
the original party, unless the court upon motion directs the
person to whom the interest is transferred to be substituted in
the action or joined with the original party." The rule focuses
on what was really going on in this case, and is designed to
cope with that. As the Fifth Circuit has said, "Rule 25(c) is
not designed to create new relationships among parties to a
suit but is designed to allow the action to continue unabated
when an interest in the lawsuit changes hands." Collateral
Control Corp. v. Deal (In re Covington Grain Co., Inc.), 638
F.2d 1362, 1364 (5th Cir. 1981). And a leading treatise has
underscored that by stating:
The most significant feature of Rule 25(c) is that
it does not require that anything be done after an
interest has been transferred. The action may be con-
tinued by or against the original party, and the judg-
ment will be binding on his successor in interest
even though he is not named. An order of joinder is
merely a discretionary determination by the trial
court that the transferee's presence would facilitate
the conduct of the litigation.
7C Charles Alan Wright, et al., Federal Practice and Proce-
dure S 1958 (2d Ed. 1986) (footnote omitted) (hereafter
Wright S 1958).
The rule, therefore, assures that the concerns which trou-
bled the BAP will remain under the firm control of the trial
court because it leaves the substitution decision to that court's
sound discretion. See, e.g., Dodd v. Pioche Mines Consol.,
Inc., 308 F.2d 673, 674 (9th Cir. 1962) (the decision is discre-
tionary); Sun-Maid Raisin Growers v. California Packing
Corp., 273 F.2d 282, 284 (9th Cir. 1959) (same); cf. McComb
v. Row River Lumber Co., 177 F.2d 129, 130 (9th Cir. 1949)
(same at the appellate level). It is not an area where we review
de novo on the theory that a party who seeks substitution can
obtain it as of right. See Donnelly v. Glickman , 159 F.3d 405,
409 (9th Cir. 1998) (denial of intervention as of right
reviewed de novo); UOP v. United States, 99 F.3d 344, 347
(9th Cir. 1996) (mandatory joinder issue reviewed de novo,
although joinder decision generally reviewed for abuse of dis-
cretion).
[3] There is nothing mysterious about what happened in
this case. When litigation was commenced, the notes in ques-
tion were owned by CSAC, and that was even true when the
default was entered. ECMC was not even in the picture as far
as Bernal and the bankruptcy court were concerned. Only at
a later time were the notes, and any possible rights under
them, transferred to ECMC. That was, therefore, the very par-
adigm of an assignment controlled by Rule 25(c), and ECMC
was bound by what had gone on before. To slightly para-
phrase what the Fifth Circuit said over 50 years ago, when it
was faced with a similar attempt to wriggle out of a situation
created by an assignor:
[ECMC] ignores the undisputed fact of record that
[it] was not a party to the original suit, but acquired
whatever rights it may have in the property, if any,
only by virtue of the assignment from [CSAC], and
must therefore stand in [its] shoes with respect to all
phases of the litigation. The fact that [CSAC's ] liti-
gation may have impaired or adversely affected the
rights of [ECMC] under the assignment would not
justify our disturbing all prior orders and decrees
entered in this controversy and unfavorable to
[ECMC] which were binding upon [CSAC] . . .
when made.
Deauville Assoc. v. Murrell, 180 F.2d 275, 277 (5th Cir.
1950).
[4] ECMC, it seems, does not wish to confront the default
by CSAC or attempt to explain that default. At least it has
never attempted to do so in this proceeding. Rather, it has
intoned a monody about how difficult it was for ECMC to
proceed in a timely fashion. That is all well and good, if unim-
pressive.4 Nevertheless, it does not even begin to explain why
CSAC, its predecessor, allowed its default to be taken, and
that is what ECMC would have to do were it allowed to sub-
stitute into this action now that it has been assigned CSAC's
rights. It made no attempt to show that its presence would "fa-
cilitate the conduct of the litigation." WrightS 1958 at 557.
The bankruptcy court did not abuse its discretion.
CONCLUSION
Bernal, a debtor in distress, brought an adversary action to
obtain her discharge. CSAC then gutted its own case by
allowing its default to be taken. We cannot engage in
extispicy to divine just why it did so, and neither it nor ECMC
has chosen to enlighten us. Nor need we scry in an attempt to
discover the hidden answer.
If ECMC could make use of Federal Rules of Civil Proce-
dure 19 and 24, the answer could remain hidden because, as
it sees it, there would be no need to explain the default.
ECMC cannot do that. We hold that the proper procedure was
a motion brought under Federal Rule of Civil Procedure 25(c)
and addressed to the discretion of the bankruptcy court.
ECMC never sought to utilize that procedure, and it failed in
its attempt to ensorcel the bankruptcy court into granting
25(c) -- evading relief. Just as it failed there, it must fail here.
AFFIRMED.
_______________________________________________________________
FOOTNOTES
1 To the extent that we are asked to review the entry of the default itself,
we cannot do so because we do not have jurisdiction. See Stanley v. S.S.
Retail Stores Corp. (In re S.S. Retail Stores Corp.) , 162 F.3d 1230, 1232
(9th Cir. 1998); Hawaii Carpenters' Trust Funds v. Stone, 794 F.2d 508,
512 (9th Cir. 1986).
2 See Fed. R. Bankr. P. 7024; Fed. R. Civ. P. 24.
3 See Fed. R. Bankr. P. 7019; Fed. R. Civ. P. 19.
4 As the bankruptcy court said, if the "student loan business is a large
business . . . well, then, they are going to have to be a little bit better orga-
nized."
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