Francisco J. Espinosa was no deadbeat. Yes, he got into financial trouble and had to file for Chapter 13 bankruptcy, but the bankruptcy plan a judge approved for him in 1993 included $13,250 in student loan debt, which he repaid, as promised, in four years. Story over, right?

Not so fast. In 2000, three years after the judge had discharged Espinosa's bankruptcy, United Student Aid Funds, which had guaranteed his federal loans, began intercepting the borrower's income tax payments to try to recover about $4,000 in interest that had remained on Espinosa's original student loan tab. The matter ended up in the federal courts, which in a series of rulings since then have adjudicated the dispute between a major financial institution and a lone borrower over whether the guarantor had signed off on the lower level of repayment.

And Thursday, in language that left little doubt where the judges' sympathies lay, a panel of the U.S. Court of Appeals for the Ninth Circuit sided with Espinosa, ruling that United Student Aid Funds was given sufficient notice of the plan to let Espinosa pay $13,250 instead of $17,832.15, and that, as a result, Espinosa's repayment of the lesser amount should stand.

"It makes a mockery of the English language and common sense to say that Funds wasn't given notice, or was somehow ambushed or taken advantage of," the three-judge panel of the Ninth Circuit said in its written opinion, which overturned a lower court's decision that backed the guarantor.

Under federal law, private student loans may be discharged in bankruptcy (much to the dismay of advocates for college students) only if a debtor shows that repaying the debt would result in "undue hardship." ( Note: This corrects an error in an earlier version of this article.) The law also states that "undue hardship" must be proven in an "adversary proceeding" that can be brought about by the filing of a complaint -- and a court summons -- served on the creditor. Espinosa never filed such a complaint and such a hearing was never held -- and it was on those grounds that the federal district court sided with USA Funds.

The Ninth Circuit acknowledges in its ruling that at least two other federal appeals courts have embraced the argument that USA Funds and the lower court adopted. But the Ninth Circuit panel takes exception, asserting that USA Funds had plenty of opportunity to dispute the reduced payment.

The guarantor was alerted to the fact that Espinosa's proposed bankruptcy plan called for him to repay $13,250, and USA Funds informed the court that he owed it $17,832.15 instead. The trustee in Espinosa's case then sent USA Funds a notice about the difference in the two amounts, alerting it that "your claim will be paid as listed in the plan."

The notice also said: "If an interested party wishes to dispute the above stated treatment of the claim, it is the responsibility of the party to address the dispute. The claim will be treated as indicated above unless the Trustee receives within 30 days from this mailing, a written request for different treatment...." The guarantor never responded, the appeals court notes, and was not heard from again until it took a bite out of Espinosa's income tax refunds three years later.

The court runs through a series of reasons why USA Funds' legal arguments that it did not receive adequate notice and was denied due process do not pass muster, and concludes: "We find it highly unlikely that a creditor whose business it is to administer student loans will be misled by the customary bankruptcy procedures or somehow be bamboozled into giving up its rights by crafty student debtors."