Even if the bankruptcy court’s order was final and appealable, the order of the district court deciding an appeal isn’t necessarily a final order conferring the right of appeal to the court of appeals, according to the Seventh Circuit.
Of perhaps more significance, the case demonstrates the need for Congress to create remedies for debtors whose discharges are violated.
The Finality Issue
The appeal to the Seventh Circuit involved a knotty question about the type of debt qualifying as a student loan that is immune from discharge absent proof of “undue hardship” under Section 523(a)(8). Unfortunately, we won’t have an answer from the Seventh Circuit for another year or two.
Before bankruptcy, the debtor had attended a state university under a program permitting her to defer payment of tuition with interest. She completed her course of study but did not receive a degree because she had not paid tuition.
After receiving her chapter 7 discharge, the university paid itself the tuition by intercepting a tax refund. The university then conferred the degree.
The debtor reopened her bankruptcy case and filed a motion for sanctions, alleging that the university had violated the discharge injunction. The bankruptcy court concluded that the debt was a nondischargeable student loan and denied the motion for sanctions because the university was entitled to collect the debt.
Based on Seventh Circuit authority, the district court reversed and ruled that the debt was discharged. The district court remanded for the bankruptcy court to rule on the amount and propriety of sanctions, if any.
The Appeal Is Dismissed
The university appealed, but the Seventh Circuit dismissed the appeal in an opinion on March 16 by Circuit Judge Diane S. Sykes. In sum, the appeals court teaches us that the order of the district court measures finality and the right to appeal, not the order of the bankruptcy court.
For Judge Sykes, the governing authority was Bullard v. Blue Hills Bank, 575 U.S. 496 (2015), where the Supreme Court held that denial of confirmation of a chapter 13 plan is not a final, appealable order. Bullard says that bankruptcy court orders are final when they “definitively dispose of discrete disputes within the overarching bankruptcy case.”
In the case on appeal, the district court had appellate jurisdiction under 28 U.S.C. § 158(a)(1), because the bankruptcy court’s order finally disposed of the contempt motion, leaving nothing more for the bankruptcy court to do.
Judge Sykes said that the circuit court’s appellate jurisdiction under 28 U.S.C. § 158(d)(1) “is another matter.”
The district judge “did not finally resolve the sanctions dispute,” Judge Sykes said. Instead, she said the district judge identified a sanctions dispute “and remanded to the bankruptcy court to determine whether sanctions are warranted. His order resolved a discrete issue; it did not resolve the sanctions dispute.”
Judge Sykes elucidated. Deciding that the debt did not survive discharge wasn’t the end of the saga. The university may have violated the discharge injunction in a technical sense, but contempt and sanctions aren’t the inevitable result.
In Taggart v. Lorenzen, 139 S. Ct. 1795 (June 3, 2019), the Supreme Court held that a creditor cannot be in contempt of the discharge injunction if there was “an objectively reasonable basis for concluding that the creditor’s conduct might be lawful.” Id. at 1801. To read ABI’s report on Taggart, click here.
Consequently, the bankruptcy judge will be charged on remand with deciding whether the university “had an objectively reasonable basis to conclude that its conduct was lawful under the discharge order.”
Judge Sykes dismissed the appeal, saying there was no appellate jurisdiction because “the district judge’s order resolving the issue of dischargeability doesn’t finally resolve the sanctions dispute.”
Curiously, Judge Sykes did not cite Ritzen Group Inc. v. Jackson Masonry LLC, 140 S. Ct. 582, 205 L. Ed. 2d 419 (Sup. Ct. Jan. 14, 2020). Two months ago, the Supreme Court held that an order denying a motion to modify the automatic stay is a final, appealable order “when the bankruptcy court unreservedly grants or denies relief.” Ritzen may provide a better explanation of finality in the bankruptcy context than does Bullard. To read ABI’s discussion of Ritzen, click here.
Prediction and ABI Commission Recommendation
Applying Taggart, the bankruptcy court on remand will likely deny the motion for sanctions even if there was a technical violation of the discharge injunction. Given how the bankruptcy court and the district court disagreed about the discharge of the debt, the university assuredly had an objectively reasonable basis for believing that its actions were lawful.
This case and its likely outcome on remand highlight the diminished protection afforded by discharge after Taggart. The debtor may gain the return of her tax refund, but it may turn out that the cost in counsel fees was more than the tax refund. In future cases, debtors in similar circumstances may be unable to afford to enforce the discharge.
In its final report, the ABI Commission on Consumer Bankruptcy recommended that Congress create remedies for violations of the discharge injunction.
The ABI commission recommended “an amendment to Section 524 to create a private right of action for violations of the discharge injunction. The amendment should parallel Section 362(k) in terms of the creditor’s conduct required for a violation and the remedies available. Although contempt is currently available to remedy discharge violations, contempt might impose a higher evidentiary burden to prove the knowledge needed for a violation. A private right of action would give debtors a greater ability to protect the discharge than the Bankruptcy Code gives them.”
To read the ABI commission report, click here.
Even if the bankruptcy court’s order was final and appealable, the order of the district court deciding an appeal isn’t necessarily a final order conferring the right of appeal to the court of appeals, according to the Seventh Circuit.
Of perhaps more significance, the case demonstrates the need for Congress to create remedies for debtors whose discharges are violated.
The Finality Issue
The appeal to the Seventh Circuit involved a knotty question about the type of debt qualifying as a student loan that is immune from discharge absent proof of “undue hardship” under Section 523(a)(8). Unfortunately, we won’t have an answer from the Seventh Circuit for another year or two.
Before bankruptcy, the debtor had attended a state university under a program permitting her to defer payment of tuition with interest. She completed her course of study but did not receive a degree because she had not paid tuition.
After receiving her chapter 7 discharge, the university paid itself the tuition by intercepting a tax refund. The university then conferred the degree.
The debtor reopened her bankruptcy case and filed a motion for sanctions, alleging that the university had violated the discharge injunction. The bankruptcy court concluded that the debt was a nondischargeable student loan and denied the motion for sanctions because the university was entitled to collect the debt.
Based on Seventh Circuit authority, the district court reversed and ruled that the debt was discharged. The district court remanded for the bankruptcy court to rule on the amount and propriety of sanctions, if any.
The Appeal Is Dismissed
The university appealed, but the Seventh Circuit dismissed the appeal in an opinion on March 16 by Circuit Judge Diane S. Sykes. In sum, the appeals court teaches us that the order of the district court measures finality and the right to appeal, not the order of the bankruptcy court.
For Judge Sykes, the governing authority was Bullard v. Blue Hills Bank, 575 U.S. 496 (2015), where the Supreme Court held that denial of confirmation of a chapter 13 plan is not a final, appealable order. Bullard says that bankruptcy court orders are final when they “definitively dispose of discrete disputes within the overarching bankruptcy case.”
In the case on appeal, the district court had appellate jurisdiction under 28 U.S.C. § 158(a)(1), because the bankruptcy court’s order finally disposed of the contempt motion, leaving nothing more for the bankruptcy court to do.
Judge Sykes said that the circuit court’s appellate jurisdiction under 28 U.S.C. § 158(d)(1) “is another matter.”