Third Circuit Reexamines Defense to Stay Violation

Posted by NCBRC - September 20, 2021

The Third Circuit’s 1992 precedent establishing that a creditor’s reliance on persuasive legal authority may be a defense to the “willfulness” element of a stay violation is still good law but does not apply to a creditor who argued unsettled law but did not rely on any compelling legal authority to justify its conduct. California Coast Univ. v. Aleckna, No. 20-1309 (3rd Cir. Sept. 9, 2021).

When the debtor completed the course work necessary for graduation from California Coast University, she still owed $6,300 in tuition. She filed for bankruptcy and then requested her certified transcript from CCU. CCU, aware of her bankruptcy filing, ceased its collection efforts and eventually gave her an uncertified copy of her transcript with no graduation date listed on it. CCU maintained that the incomplete transcript was part of its policy that students who owe tuition at the completion of their studies have not technically graduated. CCU conceded that the tuition debt was dischargeable.

The debtor filed a counterclaim against CCU in the bankruptcy court alleging violation of the automatic stay. The bankruptcy court found CCU’s failure to supply a complete transcript was tantamount to supplying no transcript at all in violation of the automatic stay. It awarded the debtor actual damages of $230.16 for lost wages due to time off to attend the stay violation hearing, and attorney’s fees in the amount of $100,000 representing fees associated with getting the transcript in the first place and then litigating the stay violation. The district court affirmed.

On appeal, CCU argued that it did not “willfully” violate the stay because the law as to its obligation to supply a certified, complete transcript was unsettled. CCU relied specifically on In re University Medical Center, 973 F.2d 1065 (3d Cir. 1992) (UMC), where the creditor cited persuasive legal authority to support its belief that its actions did not violate the stay. While good faith is generally not a defense to stay violation, the UMC court found the creditor’s reliance on established law to justify its conduct was a defense to the “willfulness” element of a stay violation.

University Medical Center dealt with an earlier version of section 362 which provided that: “[a]n 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.” In 2005, the statute was amended to add section 362(k)(2) which codified a good faith exception to liability for stay violations where the creditor’s action was taken in the belief that the stay had expired under section 362(h). Some courts, like In re Mu’min, 374 B.R. 149, 168 (Bankr. E.D. Pa. 2007), interpret UMC to state a broad good faith exception to the automatic stay and find, therefore, that the case was statutorily overruled by section 362(k)(2).

For that reason, the circuit court here began with a discussion of whether University Medical Center remains good law. Concluding that it does, the court found that the case made a subtle but important distinction between “willfulness” as an essential element of a stay violation, and “good faith” as a defense to liability once the elements of a violation are established. Acknowledging that the creditor’s mere good faith belief that its actions do not violate the stay is insufficient, the UMC court was persuaded that the creditor’s reliance on “persuasive legal authority” prevented a finding of willfulness.

Having found that the case did not rely on a good faith defense, the court turned to whether the holding in UMC supported CCU’s argument that its conduct likewise did not violate the stay. The court differentiated between the creditor in UMC, which had relied on persuasive legal authority supporting its conduct, and CCU which argued that the law was merely uncertain as to its obligation to provide a certified, complete, transcript. Notably, CCU did not cite any legal authority supporting its position or claim to have actually relied on any such authority.

The court went on to distinguish cases where universities were found to be justified in withholding a student’s transcripts as involving indisputably nondischargeable student loan debt. The court found that to the extent those cases, which it characterized as “outliers,” were still relevant, they did not create the type of compelling legal authority which was dispositive in the UMC case.

Finally, the court rejected CCU’s argument that there was no cognizable injury supporting a finding of stay violation because the debtor could not show that the incomplete transcript caused her to suffer loss of future opportunities. The court found that the debtor’s lost wages, though not extensive, in addition to the attorney’s fees she paid in connection with the stay violation, constituted “injury” within the meaning of section 362(k). In addition to monetary damages, the debtor also sought a certified copy of her transcript and her diploma. The court observed that the automatic stay is intended to protect “both financial and non-financial interests.”

The court affirmed.

Aleckna 3rd Cir Sept 2021


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