3rd cir. Holds bankruptcy changes did not nullify ‘will’ defense against automatic stay violations


The United States Court of Appeals for the Third Circuit recently upheld lower court rulings that a bankrupt debtor was entitled to receive damages and attorney fees for a breach by a creditor of the automatic suspension of bankruptcy.

In that decision, the Court held that:

  1. The 2005 amendments to the Bankruptcy Code providing that a person who commits a willful violation of the automatic stay is liable for damages and attorney fees unless “such violation is based on an action taken by an entity in the belief in good faith “that the stay terminated because the debtor failed to file a notice of intention in a timely manner, did not legally override the more general defense of” will “” which is distinct from that of good faith single ” ; and
  2. The creditor in this case has failed to demonstrate that the law governing the alleged violation was not “sufficiently uncertain” to preclude a finding of a willful violation of the automatic stay.

A copy of the notice in California Coast Univ. vs. Aleckna is available on: Link to Opinion.

When a student filed for Chapter 13 bankruptcy, she still owed her college tuition. The filing of his bankruptcy petition imposed an “automatic stay” of all collection actions against him. While her file was pending, the student, who had completed her classes, asked the university for a copy of her transcript. The university only provided him with an incomplete transcript that did not include his graduation date, explaining that a “financial hold” had been placed in his account.

The university then filed an action in bankruptcy court for an order declaring the student’s debt an unreliable educational loan. The student counterclaimed in bankruptcy court, arguing that the university violated the automatic suspension by refusing to provide her with a complete certified transcript.

The bankruptcy court ruled in favor of the student, concluding that she was entitled to receive her full transcript, as well as damages and attorney fees, because the university’s violation was “willful.” “. The university appealed to the district court, but the district court upheld the bankruptcy court’s decision. The university then appealed in due course to the third circuit.

On appeal, the university did not argue that his conduct did not violate the automatic suspension; rather, he argued that he had not done so voluntarily and that the district court had erred in asserting the award of damages and fees.

Specifically, the university cited In re University Medical Center, 973 F.2d 1065 (3d Cir. 1992), in which the Third Circuit ruled that a defendant does not “willfully” violate an automatic stay if the law governing the alleged violation was “sufficiently uncertain”. The university argued that at the time of its violation, the law could require it to provide a transcript, but did not explicitly require it to provide the student with a complete transcript including a date of graduation. diploma.

Therefore, in this appeal, the Third Circuit had to first decide whether its decision in Medical university had been rejected by law.

The Court noted that Article 362 was amended following Medical university and now provides that a person who commits an intentional violation is liable for damages and attorney fees unless “such violation is based on an action taken by an entity in a good faith belief” that the suspension has ended due to the debtor’s failure to file a timely statement of the debtor’s intentions with respect to retention or surrender, exemptions, intent to redeem or intent to reaffirm. 11 USC § 362 (k).

The Third Circuit also pointed out that since Section 362 (k) can now be read to establish a good faith defense that is narrower than that set out in Medical university, several Third Circuit bankruptcy courts had already concluded that the case had been dismissed by law.

In the present case, however, the district court concluded that Medical university did not create the type of “good faith” defense contemplated by Section 362 (k). On the contrary, the district court held that Medical university simply provides a mechanism for defendants to challenge a finding of “will”, and Section 362 (k) does not address this particular element.

Thus, the district court concluded that University medicineI remain a good law, but I ultimately determined that the university had failed to establish a defense in this case anyway.

The third circuit agreed with the district court and held that the Medical university The ruling did not intend to create a “good faith” exception like the one later established in Section 362 (k). Despite some overlap, the Court read Medical university as establishing a defense of “will” distinct and distinct from that based solely on good faith.

The Third Circuit also concluded that the university had failed to demonstrate that the law regarding the transcript issue was sufficiently unstable within the meaning of Medical university. Instead, the university relied primarily on the lack of case law dealing with the specific facts of this case.

Indeed, the Court found no authority dealing with the specific issue of whether a college violated the stay by refusing to provide a transcript that affirmatively includes a date of graduation. The Court concluded that the absence of contrary case law does not make the law sufficiently unstable under Medical university.

However, the university also cited two cases of bankruptcy, About Billingsley, 276 BR 48 (Bankr. DNJ 2002), and In Najafi, 154 BR 185 (Bankr. ED Pa. 1993), which held that a college does not violate automatic suspension by refusing to give a student debtor any transcript – complete or not. The university argued that these cases led it to reasonably believe its actions were admissible.

However, the Third Circuit ruled that these bankruptcy cases differed from the present one because the courts in those cases considered the loans to be non-dischargeable student loans, which was not true here.

Thus, the Third Circuit found that the university had failed to demonstrate that the law was sufficiently unstable under Medical university and agreed with the district court that the university’s violation of the suspension was intentional.

The university’s final argument was that the district court erred in awarding damages and attorney fees because there had been no affirmative prejudice in this case. Section 362 (k) (1) provides that “a person aggrieved by any willful violation of a stay[shallrecoveractualdamagesincludingattorneyfeesandinappropriatecircumstancesmayrecoverdamages[doitrecouvrerlesdommagesréelsycomprislesfraisethonorairesd’avocatetdansdescirconstancesappropriéespeutrecouvrerdesdommages-intérêtspunitifs

However, the Third Circuit found that the injuries for which the student had been compensated through the District Court award were recognizable under section 362. In the District Court, the student received: ( 1) $ 230.16 for the time she left her job to attend the trial; (2) his litigation attorney fees; (3) three copies of their certified transcript containing a date of graduation; (4) a diploma; and (5) the pre-litigation attorney fees that she incurred in attempting to obtain her complete transcript.

Thus, although the financial damage suffered by the student was undoubtedly minimal, the Third Circuit considered that his inability to receive a complete transcript without intervention of the court constituted a recognizable damage under § 362. In addition, the The university did not provide a convincing explanation as to why the attorney’s fees did not in themselves constitute financial harm.

Therefore, the Third Circuit held that the district court did not err in concluding that the student was injured by the violation of the university and that the award of damages and fees of avocado was appropriate.

Accordingly, the Third Circuit upheld the order of the district court.

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