Questioning Willful Violations Of The Automatic Stay: Third Circuit Gives University The Third Degree

• Published date: 07 October 2021
• Subject Matter: Finance and Banking, Insolvency/Bankruptcy/Re-structuring, Debt Capital Markets, Financial Services, Insolvency/Bankruptcy
• Law Firm: Cullen and Dykman
• Author: Mr Michael Traison, Thomas R. Slome and Amanda A. Tersigni

A recent decision by the Court of Appeals for the Third Circuit affirming the decisions of both the bankruptcy and district courts, provides an interesting analysis of "willful" violations of the automatic stay under Section 362 of the Bankruptcy Code. See California Coast Univ. v. Aleckna (In re Aleckna), No. 20-1309 (3d Cir. 2021). Although the context of this case involved a university's conduct relating to an outstanding tuition debt and how that may be a violation of the Section 362 stay, the issues included interpreting the term "willfulness" in a way that would have a much broader reach.

In Aleckna, the court revisited the term willfulness in view of an earlier Third Circuit decision construing the use of that word in the Code to, in effect, create an exception to a violation when a creditor acts in a good faith belief that the stay does not apply to the conduct and there is "persuasive authority" supporting the creditor's belief, even if the authority turns out to be wrong.

The Code provides for an automatic stay which arises upon the filing of a bankruptcy petition. The stay prevents, among other things, creditors from taking actions against the debtor and its property or acts to collect debts. Section 362(k) of the Code offers an injured debtor a source of relief against creditors who violate the stay, permitting a recovery of actual damages, including legal fees, and punitive damages.¹

Aleckna was a former college student with an outstanding balance of approximately $6,300 on her tuition when she filed her Chapter 13 petition. After filing, she requested a copy of her transcript from the university. The university provided her a copy of her transcript but without indicating any graduation date, considering her to have not technically graduated if there was an outstanding balance for tuition.

Because certain types of student loans may be nondischargeable in bankruptcy, the university commenced an adversary proceeding to declare the tuition debt nondischargeable (which it subsequently withdrew presumably because the debt was not a student loan or the type of student loan that fit within the exception to discharge). The debtor filed a counterclaim arguing the university's refusal to provide a completed transcript violated the stay and was "an unlawful attempt to collect on pre-petition debt."

It is worth noting that the university had not invoked any legal process to collect the debt or, apparently, engaged in any affirmative collection efforts...