In re Hazelton

• Decision Date: 25 September 2020
• Docket Number: Case Number: 16-12372-7
• Citation: 622 B.R. 354
• Parties: IN RE: Richard A. HAZELTON and Kelly J. Hazelton, Debtors.
• Court: U.S. Bankruptcy Court — Western District of Wisconsin

622 B.R. 354

IN RE: Richard A. HAZELTON and Kelly J. Hazelton, Debtors.

Case Number: 16-12372-7

United States Bankruptcy Court, W.D. Wisconsin.

Signed September 25, 2020

Joshua D. Christianson, Christianson & Freund LLC, Eau Claire, WI, for Debtors.

PROCEDURAL HISTORY

Hon. Catherine J. Furay, U.S. Bankruptcy Judge

Kelly Hazelton ("Debtor") and her husband (collectively, "Debtors") filed a joint Chapter 7 petition in July 2016. In October 2016 they received a discharge under 11 U.S.C. § 727. Debtors moved to reopen the bankruptcy case in August 2017. The Court granted the motion to reopen. Debtors then moved for contempt sanctions against the University of Wisconsin-Stout ("UW-Stout").

Debtors alleged UW-Stout's seizure of Debtors' tax refund violated the discharge injunction.¹ UW-Stout opposed the motion for sanctions contending that the debt at issue had not been discharged and the refund seizure was proper. Neither party wanted an evidentiary hearing.² The parties agreed that all needed facts were in the record. The Court took the matter under advisement.³

This Court determined the unpaid tuition was not discharged because it qualified as a "loan" under section 523(a)(8).⁴ Since it was found that the discharge injunction had not been violated, sanctions were not appropriate. Debtors appealed.

On appeal, the District Court found that the unpaid tuition did not qualify as a "loan" under section 523(a)(8). The Court concluded that UW-Stout violated the discharge injunction. The District Court reversed this Court's decision and remanded for further findings on sanctions.⁵ UW-Stout appealed.

The Seventh Circuit determined it did not have jurisdiction because the District Court "decided a subsidiary legal issue and remanded to the Bankruptcy Court for resolution of the sanctions dispute."⁶ The Circuit Court points out "whether sanctions are warranted for violation of the discharge injunction, and if so, in what amount" must still be determined by the Bankruptcy Court.⁷

This Court must now determine what, if any, sanctions are warranted, and, if so, in what amount.

BACKGROUND

Kelly Hazelton enrolled at UW-Stout in 2008. She signed a payment agreement ("Payment Agreement") upon enrollment. The Payment Agreement allowed tuition to be paid on a payment schedule and did not have an expiration date. The Payment Agreement called for full payment of summer term tuition by the end of the first week of the summer term. She withdrew from Stout in 2011. She re-enrolled in 2014 and registered for classes for the summer 2015 term.⁸ Debtor did not make tuition payments, but her course load was seven credits. Those credits were enough to meet the requirements for a degree. She had an outstanding tuition balance due when she completed the credit requirement for a degree. As a result, UW-Stout withheld her degree.

Debtors filed a joint Chapter 7 petition in July 2016. They scheduled the debt to UW-Stout as "student loans."⁹ Debtor made no attempt during the bankruptcy to have UW-Stout release her degree. Debtors received a discharge three months later. UW-Stout received notice of the discharge.¹⁰

At the request of UW-Stout, the Wisconsin Department of Revenue forwarded Debtors' 2016 tax refund in the amount of $1,635.71 to UW-Stout in satisfaction of the Debtor's outstanding tuition balance. Stout issued Debtor's degree some time after.¹¹

A. CORRESPONDENCE BETWEEN DEBTORS AND UW-STOUT ¹²

In a letter dated March 9, 2017, Debtors' attorney reminded UW-Stout about the discharge injunction and notices sent to the University on October 20, 2016.¹³ Debtors demanded return of the tax refund, sanctions, and actual attorneys' fees.¹⁴ Debtors' motion contends that, on March 10, their attorney discussed the matter with UW-Stout's attorney who characterized the debt as a student loan.¹⁵

In a letter dated April 25, 2017, Debtors' attorney references an apparent conversation between Debtors' attorney and UW-Stout, the substance and date of which is not clear from the record. In that letter, Debtors' attorney insisted that Chambers v. Manning¹⁶ and the Payment Agreement support Debtors' position—that the debt was discharged through bankruptcy.¹⁷ Debtors requested return of the tax refund, sanctions, attorneys' fees, and delivery of Debtor's degree.¹⁸ UW-Stout was given until May 8 to comply.¹⁹ Debtors' motion represents that the parties had further discussion on the matter on May 9 and May 16. It appears no resolution was reached. About three months later, the motions to reopen and for sanctions were filed.

Debtors' original motion for sanctions requested: (1) an Order finding UW-Stout in contempt and in willful violation of the discharge injunction; (2) actual damages; (3) costs and attorneys' fees for bringing the motion; (4) punitive damages;²⁰ and (5) other relief as the court deems equitable and appropriate.²¹ The motion did not specify the amount of damages.

On remand, in their supplemental brief Debtors requested: (1) return of the seized tax refund; (2) attorneys' fees for bringing this action; and (3) any other sanctions the court finds appropriate.²² Once again, the parties did not request an evidentiary hearing and agreed that all necessary facts were undisputed and in the record. Although the supplemental brief at least suggests a possible amount of damages in the form of return of the tax refund, the Debtors do not develop the argument. Affording the Debtors the most expansive view of what they have presented, the Court will consider the request for damages a request for return of the actual amount of the tax refund that was seized. Any damage other than that amount is an "underdeveloped and waived" argument. Shipley v. Chi. Bd. of Election Comm'rs , 947 F.3d 1056, 1063 (7th Cir. 2020) ("Arguments that are underdeveloped, cursory, and lack supporting authority are waived.").

LEGAL STANDARDS

A bankruptcy court's order for a discharge places a permanent statutory injunction that prohibits parties from acting to collect a discharged debt. Section 524(a) provides that a discharge:

(1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727 ... of this title, whether or not discharge of such debt is waived;

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

11 U.S.C. § 524(a). "An action to determine whether a particular debt is excepted from a debtor's discharge ... may be instituted either by the debtor or by any creditor." 4 Collier on Bankruptcy ¶ 523.04 (16th ed. Rev. 2020). Debts that fall under 11 U.S.C. § 523 are excepted from discharge. "The legislative history of section 523(a)(8) indicates that the statute was meant to be self-executing ...." United States v. Wood , 925 F.2d 1580, 1583 (7th Cir. 1991) ; see also Rouse v. United States Dep't of Educ. (In re Rouse) , 2002 WL 32001238, at *5 (Bankr. C.D. Ill. July 18, 2002).

"When a party violates a bankruptcy court's order by pursuing a discharged debt, the debtor can ask that the court hold that party in contempt." In re Sterling , 933 F.3d 828, 832 (7th Cir. 2019). A bankruptcy court's power to determine civil contempt is explicitly conferred by Fed. R. Bankr. P. 9020(b) and supported through the court's power under section 105. Cox v. Zale Delaware, Inc. , 239 F.3d 910, 916-17 (7th Cir. 2001). This power is not only statutory but is also inherent. See Backus Elec., Inc. v. Hubbartt (In re Hubbartt) , No. 16-21251, Adv. No. 1-02152, 2020 WL 1845041, at *5 (Bankr. E.D. Wis. Apr. 10, 2020). This allows bankruptcy courts to "enforce [its] orders and ensure judicial proceedings are conducted in an orderly manner." In re Kimball Hill, Inc. , 595 B.R. 84, 100 (Bankr. N.D. Ill. 2019) (quoting Jones v. Lincoln Elec. Co. , 188 F.3d 709, 737 (7th Cir. 1999) ).

The offending party will be held in contempt only for a "willful" violation. Sterling , 933 F.3d at 832. A willful violation requires that an actual violation occurred, and the offending party had "actual knowledge" of the discharge. Randolph v. IMBS, Inc. , 368 F.3d 726, 728 (7th Cir. 2004) ; In re Radcliffe , 563 F.3d 627, 631 (7th Cir. 2006). The moving party has the burden of proving contempt by clear and convincing evidence. Sterling , 933 F.3d at 832 ; see also In re DiBattista , 615 B.R. 31, 39 (S.D.N.Y. 2020). If found in contempt, the moving party may have a right to actual damages, attorneys' fees, and in some cases, punitive damages. In re Hubbartt , 2020 WL 1845041, at *5.

In Taggart , the Supreme Court of the United States held that "a court may hold a creditor in civil contempt for violating a discharge order if there is no fair ground of doubt as to whether the order barred the creditor's conduct," or in other words, when a creditor violates a discharge injunction, they can only be held in contempt if "there is no objectively reasonable basis for concluding that the creditor's conduct might be lawful." Taggart v. Lorenzen , ––– U.S. ––––, 139 S. Ct. 1795, 1799, 204 L.Ed.2d 129 (2019) (emphasis in original). Generally, the standard is objective and the " ‘absence of wilfulness does not relieve from civil contempt.’ " Id. at 1802 (quoting McComb v. Jacksonville Paper Co. , 336 U.S. 187, 191, 69 S.Ct. 497, 93 L.Ed. 599 (1949) ). On the other hand, subjective intent is not always irrelevant. Id.

DISCUSSION

For a court to find a party in contempt and impose sanctions, Debtors must first show, by clear and convincing evidence, that an attempt was made to collect a discharged debt in violation of the discharge injunction. The discharge injunction does not apply to debts that were not discharged. The District Court held that the tuition debt was not a loan under section 523(a)(8). For that...