Brown v. Pennsylvania State Employees Credit Union, 87-5872

Citation851 F.2d 81
Decision Date27 June 1988
Docket NumberNo. 87-5872,87-5872
Parties, Bankr. L. Rep. P 72,383 In re Delores C. BROWN, Debtor, v. PENNSYLVANIA STATE EMPLOYEES CREDIT UNION.
CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)

James H. Turner (argued), Turner & O'Connell, Harrisburg, Pa., for appellant.

Valerie A. Potteiger (argued), Anthony DiSanto, Kleiman & DiSanto, Harrisburg, Pa., for appellee.

Before STAPLETON, GREENBERG and HUNTER, Circuit Judges.

OPINION OF THE COURT

HUNTER, JAMES III, Circuit Judge:

The Pennsylvania State Employees Credit Union ("PSECU") appeals a damage award imposed for violations of the bankruptcy code. Appellee Delores Brown is a debtor seeking the protection of the bankruptcy laws; appellant PSECU, her employee credit union, is one of her creditors. PSECU sent a letter to Brown stating that it will bar her from membership unless she reaffirms, with court approval, her outstanding debt. Brown contends that the letter was an improper attempt to collect a dischargeable debt, in violation of 11 U.S.C. Sec. 362(a)(6) and Sec. 524(a). The district court, which had jurisdiction under 28 U.S.C. Sec. 158(a) on appeal from the bankruptcy court, agreed. We have jurisdiction under 28 U.S.C. Sec. 158(d). Because we find that the bankruptcy laws do not require PSECU to provide services to Brown, we will reverse the decision of the district court.

I.

The essential facts are not in dispute. On May 1, 1984, Delores Brown filed a voluntary petition for bankruptcy under Chapter 7 of the bankruptcy code. On May 3, Brown's attorney wrote to PSECU informing the credit union that a petition had been filed on behalf of his client, so that "all collection efforts ... should cease immediately." On June 5, 1984, PSECU sent a letter directly to Brown. Her attorney was not provided with a copy. That letter, on which the dispute centers, read in part:

It is the Credit Union's policy to deny future services to members when any portion of the debt is discharged in bankruptcy. However, if the obligation is reaffirmed with court approval, you would remain eligible for services as though the bankruptcy had not occurred.

Brown filed a complaint with the bankruptcy court on July 31, 1984. She alleged that the letter violates the automatic stay provision of the bankruptcy code, 11 U.S.C. Sec. 362(a)(6), the injunction against attempts to collect dischargeable debts, 11 U.S.C. Sec. 524(a)(2), and the provision against discrimination on account of bankruptcy filing 11 U.S.C. Sec. 525. 1

The bankruptcy court conducted a brief hearing, receiving the testimony of Brown and an officer of the credit union. The hearing established the following facts. PSECU had provided an unsecured loan of $5,000 to Brown, most of which remained unpaid at the time of the petition. PSECU also provided Brown non-credit services. Brown maintained a "share draft account" with the union, which she operated as her checking account. Her earnings were deposited directly into the account, and the credit union paid the premiums on Brown's life insurance directly out of that account. The credit union also provides other credit-related services, such as secured motor vehicle loans and mortgages, and student loans. In addition, the credit union may act as a surety for checks up to $200.

According to the testimony, PSECU bases a credit decision on flexible criteria, such as the character history of the applicant, rather than relying solely on credit history. However, its bylaws bar all debtors who have caused the credit union financial loss. While Brown does not dispute that both bankrupts and nonbankrupts who fail to repay loans suffer the same penalty, she did testify that she was unaware of this penalty. The testimony also established that the credit union is not difficult for state employees to join, requiring only a 25-cent fee and the purchase of a $5 share. With the exception of the rule barring those who have caused it a loss, the credit union does not examine the credit history of its members.

The bankruptcy court found only a technical violation of the bankruptcy laws. It first held that Sec. 525 of the Act, which bars discrimination by government or its agencies, did not apply. Although PSECU is comprised of present and former government employees (and their families), the bankruptcy court found this fact insufficient to transform PSECU into a governmental body. The court next considered the credit union's policy of denying services to those who discharge in bankruptcy an obligation to the credit union. It found the policy was not an attempt to collect the debt, noting that the policy applies equally to nonbankrupts. The bankruptcy court held that "there is nothing in the code which requires a creditor to continue to deal with a debtor." Because the credit union "cannot be ordered to provide services to a debtor," its policy did not violate the law. Because the policy itself did not violate the law, the court found that PSECU may inform Brown of its policy.

Although the bankruptcy court found that PSECU, in contacting Brown, did not act with the purpose of recovering its claim, it disapproved the manner in which PSECU acted. It found that, by mailing the letter directly to Brown, the credit union violated 11 U.S.C. Sec. 362(b)--the "automatic stay", which bars collection efforts once a petition is filed. PSECU interfered with the "breathing spell" from creditors contemplated in the section by dealing directly with Brown, instead of mailing the letter to her attorney. Because the error was "technical and clearly unintended," the bankruptcy court did not assess damages. 2

Both parties appealed to the district court, which reversed the decision of the bankruptcy court. Quoting the legislative history of Sec. 362, the district court stated that the automatic stay "stops all collection efforts," (court's emphasis) and "prevent[s] creditors from attempting in any way to collect a prepetition debt." The court found that, although it could not require PSECU to extend credit, the denial of all future services amounted to an attempt by the credit union to collect the prepetition debt. That nonbankrupt debtors suffer the same denial the district court found unpersuasive: Congress intended those who file a bankruptcy petition to receive the benefit of certain protections, including the injunction against collections, and the benefit of a "fresh start" upon discharge. The district court found PSECU's actions "more than mere technical violations", but found no evidence of "any willful or outrageous conduct sufficient to warrant punitive damages." The district court "reversed in part" and remanded to the bankruptcy court for "a determination of the appropriate form of sanctions." 3

PSECU appealed to this court, which dismissed for want of jurisdiction because damages had not yet been assessed. Brown v. PSECU, 803 F.2d 120, 122-23 (3d Cir.1986). The bankruptcy court then entered a second order assessing damages. Though it agreed with the district court that PSECU's actions did not warrant punitive damages, it did find the credit union's actions willful. The bankruptcy court therefore ordered Brown reinstated and ordered PSECU to pay $4,174.83 "for attorney's fees and costs." The district court affirmed the order of the bankruptcy court on November 30, 1987. PSECU filed a notice of appeal on December 7, 1987. The district court's second order meets the "traditional finality requirements", 803 F.2d at 123, so that this court has subject matter jurisdiction over the appeal.

II.

Because in bankruptcy cases the district court sits as an appellate court, our review of the district court's decision is plenary. Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101-02 (3d Cir.1981). This court exercises the same review over the district court's decision that the district court may exercise. The findings of fact by the bankruptcy court are reviewable only for clear error. Bankruptcy Rule 8013; In re Morrissey, 717 F.2d 100, 104 (3d Cir.1983). Legal questions are, of course, subject to plenary review.

A.

Section 362 of the bankruptcy code provides that, upon the filing of a petition in bankruptcy, a creditor must stay "any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case...." 11 U.S.C. Sec. 362(a)(6). The stay, which operates as an injunction, remains in effect until the discharge is granted. 11 U.S.C. Sec. 362(c)(2)(C). Section 524 of the bankruptcy code provides the effects of a discharge in bankruptcy. Among other effects, the discharge

operates as an injunction against the commencement or continuation of an action, the employment of process, or any act, to collect, recover or offset any such debt as a personal liability of the debtor, or from property of the debtor, whether or not discharge of such debt is waived.

11 U.S.C. Sec. 524(a)(2). 4

Brown argues that, by refusing its services, PSECU attempted either to collect on its loan or to coerce Brown into reaffirming the obligation. In its original order, the bankruptcy court found that PSECU did not act with the purpose of collecting the debt. 5 This finding is not clearly erroneous. The letter is mildly worded, and speaks of reaffirmation, which requires a formal agreement before the bankruptcy court. 6 The bankruptcy court found that sending the letter directly to Brown was a "clearly unintended" violation of her relationship with her attorney and that its purpose was not to collect the debt. The bankruptcy court evidently credited the testimony of a PSECU official that the credit union generally sends these letters directly to debtors because most recipients are unrepresented. The bankruptcy court's factual finding on this issue also must be upheld.

The bankruptcy court's original factual findings are fully supported. Nothing in this record indicates that the manner in which PSECU acted was...

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