The U.S. Court of Appeals for the Third Circuit recently affirmed lower court rulings that a bankrupt debtor was entitled to receive damages and attorneys’ fees for a creditor’s violation of the automatic stay in bankruptcy.

In so ruling, the Court held that:

  1. The 2005 amendments to the Bankruptcy Code providing that an individual who commits a willful violation of the automatic stay is liable for damages and attorneys’ fees unless “such violation is based on an action taken by an entity in the good faith belief” that the stay had terminated due to the debtor’s failure to file a timely notice of intention, did not legislatively overrule the more general “willfulness” defense “that is separate and distinct from one of good faith alone”; and
  2. The creditor here failed to show that the law governing the alleged violation was not “sufficiently uncertain” to prevent a finding of a willful violation of the automatic stay.

A copy of the opinion in California Coast Univ. v. Aleckna is available at: Link to Opinion.

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

The university then filed an action in the bankruptcy court seeking an order declaring that the student’s debt was a non-dischargeable educational loan. The student filed a counterclaim in bankruptcy court arguing that the university violated the automatic stay by refusing to provide her with a complete certified transcript.

The bankruptcy court found in the student’s favor, concluding that she was entitled to receive her complete transcript, plus damages and attorneys’ fees because the university’s violation was “willful.” The university appealed to the district court, but the district court affirmed the bankruptcy court’s decision. The university then timely appealed to the Third Circuit.

On appeal, the university did not argue that its conduct did not violate the automatic stay; rather, it maintained that it did not do so willfully and that the district court erred in affirming the award of damages and fees.

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

Therefore, in this appeal, the Third Circuit first had to decide whether its ruling in University Medical had been legislatively overruled.

The Court noted that Section 362 was amended subsequent to University Medical and now provides that an individual who commits a willful violation is liable for damages and attorneys’ fees unless “such violation is based on an action taken by an entity in the good faith belief” that the stay had terminated 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 U.S.C. § 362(k).

The Third Circuit also pointed out that because Section 362(k) can now be read to establish a good-faith defense that is narrower than the one articulated in University Medical, several bankruptcy courts in the Third Circuit had already concluded that the case had been statutorily overruled.

In the present case, however, the district court concluded that University Medical did not create the sort of “good faith” defense contemplated by Section 362(k). Rather, the district court found that University Medical merely provides a mechanism for defendants to challenge a finding of “willfulness,” and Section 362(k) does not deal with that particular element.

Thus, the district court concluded that University Medical remains good law, but ultimately determined that the university failed to establish a defense under that case regardless.

The Third Circuit agreed with the district court and held that the University Medical decision did not intend to create a “good faith” exception like the one later established in Section 362(k). Despite some overlap, the Court read University Medical as establishing a “willfulness” defense that is separate and distinct from one of good faith alone.

The Third Circuit also concluded that the university failed to show that the law regarding the transcript issue was sufficiently unsettled within the meaning of University Medical. Instead, the university predominantly relied on the absence of case law addressing the precise facts in this case.

Indeed, the Court found no authority that addressed the specific issue of whether a college violates the stay by refusing to provide a transcript that affirmatively includes a graduation date. The Court concluded that a lack of case law to the contrary does not render the law sufficiently unsettled under University Medical.

However, the university also cited two bankruptcy cases, In re Billingsley, 276 B.R. 48 (Bankr. D.N.J. 2002), and In re Najafi, 154 B.R. 185 (Bankr. E.D. Pa. 1993), that held that a college does not violate the automatic stay by refusing to give a student-debtor any transcript — complete or not. The university argued that these cases led it to reasonably believe that its actions were permissible.

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

Thus, the Third Circuit held that the university did not show that the law was sufficiently unsettled pursuant to University Medical and agreed with the district court that the university’s violation of the stay was willful.

The university’s final argument was that the district court erred in awarding damages and attorneys’ fees because there was no affirmative injury in this case. Section 362(k)(1) provides that “an individual injured by any willful violation of a stay . . . shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.”

However, the Third Circuit concluded that the injuries the student was compensated for through the district court’s award were cognizable under Section 362. In the district court, the student was awarded: (1) $230.16 for the time she took off from work to attend trial; (2) her litigation attorneys’ fees; (3) three copies of her certified transcript containing a graduation date; (4) a diploma; and (5) the prelitigation attorneys’ fees she incurred while attempting to obtain her complete transcript.

Thus, even if the financial harm to the student was arguably small, the Third Circuit held that her failure to receive a complete transcript without court intervention constituted a cognizable injury under § 362. Furthermore, the university did not provide a compelling explanation as to why the attorneys’ fees did not constitute a financial injury on their own.

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

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