The Third Circuit handed down an opinion containing several holdings that close the door on defenses a creditor could make after being charged with a willful violation of the automatic stay:
- The Third Circuit’s University Medical decision in 1992 did not create a general good faith defense to an automatic stay violation;
- Willfulness and good faith are separate and distinct issues when it comes to automatic stay violations;
- The lack of authority on the precise facts of an alleged stay violation does not create a defense in itself; and
- The appeals court cast doubt on lower courts’ decisions in the Third Circuit finding no stay violation from an educational institution’s refusal to turn over a transcript if the underlying debt to the school is nondischargeable.
Contempt for Withholding a Transcript
When the debtor filed her chapter 13 petition, she owed about $6,000 to a college. After filing, she requested that the college send her a transcript. The college sent a transcript, but it did not show that she had graduated.
When challenged about the accuracy of the transcript, the college said it had put a “financial hold” on a complete transcript because she owed the school $6,000.
The college filed an adversary proceeding seeking a declaration that the debt was a nondischargeable student loan. Counterclaiming, the debtor alleged that withholding an accurate transcript was a willful violation of the automatic stay under Section 362(k).
Later, the college withdrew the nondischargeability claim with prejudice, establishing that the debt was dischargeable.
The bankruptcy court held a trial and ruled that the school had violated the automatic stay by withholding a complete transcript. Finding the violation to be willful, the bankruptcy judge entered judgment in favor of the debtor, awarding about $200 in actual damages plus attorneys’ fees to be determined later. The bankruptcy court denied a request for punitive and emotional distress damages.
The district court affirmed, and so did the Third Circuit in a September 9 opinion by Circuit Judge Julio M. Fuentes.
The Amendment to Section 362(k)
The college conceded that it violated the automatic stay but argued that the violation was not willful. Section 362(k)(1) provides that “an individual injured by any willful violation of a stay provided by this section [362] shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.”
In large part, the college argued that its actions were not willful under In re University Medical Center, 973 F.2d 1065 (3d Cir. 1992). Much of Judge Fuentes’ opinion was spent in explaining what University Medical did or did not hold and why it was not legislatively overruled by the amendment of Section 362(k) in 2005.
Before the so-called BAPCPA amendments in 2005, Section 362(k) said nothing about good faith. The amendment added subsection (2), which says:
If such violation is based on an action taken by an entity in the good faith belief that [the stay automatically terminated for the debtor’s failure to file a statement of intention], the recovery under paragraph (1) of this subsection against such entity shall be limited to actual damages.
University Medical Wasn’t Legislatively Overruled
The defendant in University Medical argued that its actions were not willful, thus providing insulation from damages and attorneys’ fees. At the time the opinion was written in 1992, Section 362(k) did not say whether good faith was a defense. Then, the statute only addressed a “willful violation” of the stay.
However, the Third Circuit had ruled two years before University Medical that a defendant’s good faith belief that its actions did not violate the stay did not, by itself, “establish a defense to willfulness,” Judge Fuentes said. See In re Atlantic Business & Community Corp., 901 F.2d 325, 329 (3d Cir. 1990). The appeals court said there was ample evidence that the defendant acted intentionally and with knowledge of the stay, despite the defendant’s claim that its actions were in good faith.
In University Medical, Judge Fuentes said, the defendant did more than claim good faith. The defendant presented “persuasive authority” to show that a stay violation was “uncertain.”
According to Judge Fuentes, the Third Circuit held in University Medical that good faith by itself was “insufficient” but that “persuasive authority negated any finding of willfulness” and obviated liability for damages.
Several bankruptcy courts concluded that University Medical was legislatively overruled because the amendment to Section 362(k) installed a good faith defense that was narrower than the 1992 decision. Judge Fuentes disagreed.
Judge Fuentes agreed with recently retired Bankruptcy Judge S. Martin Teel, Jr., who read University Medical to mean that good faith is not a defense to willfulness. Rather, willfulness is separate and distinct from good faith.
Judge Teel explained:
[W]hen the law is sufficiently unsettled, willful violation of the statutory command is absent, and damages are not recoverable, because the offending party has not acted in violation of a command of which it had fair notice.
In re Stancil, 487 B.R. 331, 343-44 (Bankr. D.D.C. 2013).
Judge Fuentes cited the First Circuit for also interpreting University Medical to mean that a good faith belief that one’s actions do not violate the stay is not determinative of willfulness. IRS v. Murphy, 892 F.3d 29, 37-38 (1st Cir. 2018).
Judge Fuentes read University Medical as not creating a good faith defense, like the limited good faith defense created in 2005 for situations where there was an automatic termination of the stay for failure to file a statement of intention.
On the bottom line, Judge Fuentes concluded that University Medical remains good law. The 1992 opinion, he said, makes a willfulness defense “separate and distinct from one of good faith alone.”
The College Had No Authority on Its Side
Unlike the defendant in University Medical, the college-appellant had no “persuasive authority” to support the notion that withholding a transcript did not violate the stay, Judge Fuentes said. The college, he said, “predominantly relies on the absence of case law addressing these precise facts.”
Judge Fuentes held:
[A] lack of case law to the contrary does not render the law sufficiently unsettled under University Medical. Rather, the defendant must point to authority that reasonably supports its belief that its actions were in accordance with the stay.
The college cited two bankruptcy court decisions in the Third Circuit for the idea that withholding a transcript is no stay violation. Judge Fuentes distinguished both.
In both cases, the bankruptcy courts found no stay violation for withholding a transcript when the underlying debt to the school was nondischargeable. In the case on appeal, the college had withdrawn its complaint and conceded that the debt was dischargeable.
Judge Fuentes cited three other circuits and “many other federal courts” for holding that withholding a transcript is a stay violation, even when the debt is nondischargeable.
Because the college failed to show that the law was “sufficiently unsettled within the meaning of University Medical,” Judge Fuentes upheld the district court for finding a willful stay violation.
There Was Sufficient Injury
The college claimed there was not a sufficiently meaningful injury to justify a stay violation.
The bankruptcy court had awarded the debtor about $200 in lost wages for time spent in court to attend trial. The college, Judge Fuentes said, cited “no authority for its position that a debtor’s lost wages from attending trial, even if a modest amount, is not a legitimate financial harm.” Likewise, he saw no “compelling explanation” for the idea that “attorneys’ fees do not constitute a financial injury on their own.”
Judge Fuentes found other “cognizable injury” under Section 362 arising from the debtor’s failure to receive a complete transcript.
Judge Fuentes affirmed the district court.
Observations
In Taggart v. Lorenzen, 139 S. Ct. 1795 (2019), the Supreme Court rejected a strict liability standard for violation of the discharge injunction. Instead, the Court held that there can be no sanctions for civil contempt of the discharge injunction if there was an “objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.” Id. at 1801. To read ABI’s discussion of Taggart, click here.
In a footnote, Judge Fuentes seemed to say there was no reason to discuss Taggart because the court was not imposing a strict liability standard.
Increasingly, courts are saying that Taggart also applies to alleged violations of the automatic stay.
This writer submits that Taggart was worthy of discussion to determine whether the college in the Third Circuit case had an “objectively reasonable basis” for believing that withholding a transcript was no stay violation.
Did Judge Fuentes satisfy the Taggart standard by finding no “persuasive authority” to support the college’s argument? Is no “persuasive authority” equivalent to no “objectively reasonable basis?” Were two distinguishable cases in bankruptcy court sufficient to give the college a defense under Taggart?
The Third Circuit handed down an opinion containing several holdings that close the door on defenses a creditor could make after being charged with a willful violation of the automatic stay:
- The Third Circuit’s University Medical decision in 1992 did not create a general good faith defense to an automatic stay violation;
- Willfulness and good faith are separate and distinct issues when it comes to automatic stay violations;
- The lack of authority on the precise facts of an alleged stay violation does not create a defense in itself; and
- The appeals court cast doubt on lower courts’ decisions in the Third Circuit finding no stay violation from an educational institution’s refusal to turn over a transcript if the underlying debt to the school is nondischargeable.