FYI: 3rd Cir Holds Bankruptcy Amendments Did Not Overrule "Willfulness" Defense to Automatic Stay Violations

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 attorney's 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 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 attorney's 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 attorney's fees was appropriate.

 

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

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 7th Cir Holds Collecting "Fees on Fees" Did Not Violate the FDCPA

The U.S. Court of Appeals for the Seventh Circuit recently affirmed judgment in a debt collector's favor against claims that its efforts to collect attorneys' fees incurred to collect a debt— including the fees incurred in collecting the attorney's fees — violated the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. ("FDCPA").

 

In so ruling, the Seventh Circuit concluded that dismissal of a related state court action brought by the debt collector to collect attorneys' fees for lack of prosecution did not have preclusive effect, and no FDCPA violation occurred because the plain language of the underlying agreement required the consumer to pay all collection costs including attorney's fee.

 

A copy of the opinion is available at:  Link to Opinion

 

A consumer ("Consumer") incurred medical expenses for treatment provided to her minor children through a hospital system.  The written agreement signed by the Consumer at the time services were rendered (the "Agreement") provided that she agreed to pay the charges the hospital billed to her, along with "costs of collection, including attorney['s] fees and interest," if she failed to timely make payment.  After the consumer defaulted on the debt, the provider hired a company to collect the debt (the "Debt Collector") who filed a collection lawsuit.

 

After initially disputing the debt, the Consumer agreed that she owed the $1,499 in medical charges and paid that amount in full, but refused to pay the Debt Collectors' attorneys' fees.  The Debt Collector offered to accept $375 to resolve the fee dispute, which the Consumer rejected over warnings from the Debt Collector's attorneys' that prolonged litigation over the outstanding fees would result in her being liable for additional legal fees ("fees-on-fees"). 

 

The court in the collection action eventually entered judgment in the Debt Collector's favor, ordering the Consumer to pay the Debt Collector $1,725 for its incurred attorneys' fees.  The Consumer appealed the ruling.  Under then-existing state law, the appeal initiated a de novo proceeding, and the Debt Collector filed a new complaint to recover the fee award.

 

Meanwhile, prior to the small claims judgment, the Consumer separately sued the Debt Collector in federal court alleging that the Debt Collector's attempts to collect attorney's fees and fees-on-fees that were not contractually owed violated the FDCPA's prohibitions against using "any false, deceptive, or misleading representation or means in connection with the collection of any debt" (§1692e) and the use of "unfair or unconscionable means to collect or attempt to collect any debt" (§1692f). 

 

The federal trial court stayed the case to await the outcome of the state proceedings which remained dormant for nearly two years, perhaps due to the small amount at stake, and was eventually dismissed with prejudice for failure to prosecute.

 

After the stay was lifted in the federal case, the parties filed cross-motions for summary judgment.  The Consumer advanced two arguments that would provide a basis for her FDCPA claim: (i) that res judicata effectively bars the Debt Collector from arguing that the Agreement required the Consumer to pay fees-on-fees as a result of the dismissal of the Debt Collector's re-filed state court action, and; (ii) that the costs-of-collection provision in the Agreement did not contractually obligate the Consumer to pay fees-on-fees. 

 

The federal trial court rejected these arguments and entered judgment in the Debt Collector's favor.  The Consumer timely appealed. 

 

On appeal, the Seventh Circuit first reviewed the Consumer's res judicata argument, which is governed by Indiana's preclusion rules under the Full Faith and Credit Act (28 U.S.C. § 1738).  Under Indiana law, res judicata, or claim preclusion "acts as complete bar to subsequent litigation on the same claim between identical parties."  Edwards v. Edwards, 132 N.E.3d 391, 396 (Ind. Ct. App. 2019).  However, claim preclusion applies is invoked defensively "to prevent a plaintiff from asserting a claim that the plaintiff has previously litigated and lost" (Thrasher, Buschmann & Voelkel, P.C. v. Adpoint Inc., 24 N.E.3d 487, 494 (Ind. Ct. App. 2015))—and is not an available remedy for a plaintiff to reassert a claim it has already won.

 

Re-framing the Consumer's argument under issue preclusion, or collateral estoppel, which can be used 'offensively' when the "plaintiff seeks to foreclose the defendant from litigating an issue the defendant ha[d] previously litigated unsuccessfully in an action with another party" (Tofany v. NBS Imaging Sys., Inc., 616 N.E.2d 1034, 1037 (Ind. 1993)) offered no different result. 

 

Primarily, the Indiana Supreme Court has held that a dismissal for failure to prosecute does not have issue-preclusive effect because "no issue was actually litigated." Afolabi, 849 N.E.2d at 1176.  Although this was independently sufficient to defeat the Consumer's claim, the Seventh Circuit also noted that relevant state law also considers certain factors, including the "incentive to litigate the prior action" to consider the fairness of the offensive use of issue preclusion.   Tofany at 1038.  The Seventh Circuit found that this factor also defeated any issue preclusion claim, concluding that the Debt Collector had little incentive to prosecute the dispute over attorney's fees given the small amount of damages at stake.

 

For these reasons, the Seventh Circuit held that the preclusion doctrine does not apply, and the Seventh Circuit rejected the Consumer's res judicata argument.

 

Next, the Seventh Circuit addressed the Consumer's claim that the Agreement did not authorize the Debt Collector to collect fees-on-fees, and the Debt Collector's collection attempts was a false statement in violation of § 1692e and an unfair debt collection practice in violation of § 1692f. 

 

Specifically, in executing the Agreement the Consumer agreed that "[i]n the event I do not pay such charges when due, I agree to pay costs of collection, including attorney['s] fees and interest." The Consumer argued that "costs of collection" should be limited only to the cost of collecting unpaid medical bills and attorneys' fees related to collection of the bills, while the Debt Collector argued for the language to be interpreted more broadly, to include all costs associated with collection, including the cost of collecting attorneys' fees.

 

The Seventh Circuit concluded that the phrase is comprehensive, and that reading "costs of collection" to exclude fees-on-fees would "not fully compensate [the hospital] for enforcing its rights" and run contrary to Indiana law's interpretation of standard fee-shifting provisions.  Walton v. Claybridge Homeowners Ass'n, Inc., 825 N.E.2d 818, 825 (Ind. Ct. App. 2005) (Indiana law recognizes that the "purpose of a fee-shifting provision is to make the prevailing party to a contract whole."). 

 

Because the contractual language permitted the collection of fees-on-fees, the Consumer's collection attempts did not violate the FDCPA.

 

For these reasons, judgment in the Debt Collector's favor was affirmed.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

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