Summary
concluding that denial of transcript to chapter 13 debtor because of outstanding student loans was a violation of the automatic stay
Summary of this case from In re Mu'minOpinion
Case No. 04-40178-H2-13.
April 27, 2005
FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER CONCERNING DENIAL OF TRANSCRIPT AS VIOLATION OF § 362 AUTOMATIC STAY
When the Debtor tried to apply for admission to graduate school, the State University of New York ("SUNY") denied her request for a transcript of her undergraduate work. SUNY refused to provide the transcript because the Debtor had defaulted on undergraduate student loans. For reasons set forth below, and by order providing for the adjudication of remaining issues, the Court concludes that SUNY's denial of the transcript is a violation of the bankruptcy automatic stay.
FACTS
The parties have stipulated to the facts (docket # 30).
The Debtor attended a unit of SUNY over 25 years ago with financial assistance through student loans from SUNY National Direct Student Loans. The Debtor did not repay the loans and SUNY obtained judgments against the Debtor which, with interest and after application of all payments, currently total almost $12,000.
The Debtor filed a chapter 13 bankruptcy case in 2000, in which SUNY filed a proof of claim and was paid $354.05. The Debtor obtained a discharge of other debt, but the debt to SUNY was not discharged.
The Debtor filed her current chapter 13 bankruptcy case on July 19, 2004, and SUNY again filed a proof of claim. Then the Debtor sought a transcript from SUNY to attend graduate school. SUNY refused to create a transcript from its records because New York State regulations prohibit SUNY from giving academic credit or official recognition of the Debtor's prior academic work until the student loans are repaid. If the Debtor were not in default on the student loans, SUNY would provide the transcript. The Debtor cannot be admitted to graduate school without the transcript.
The Debtor has never sought a determination that her debt to SUNY is dischargeable. The Debtor never attempted to obtain a copy of her transcript prior to filing her current bankruptcy case.
The stipulation of fact reads as follows: "At present, debtor has not sought to discharge her student loans based on hardship, and the loans are non-dischargeable pursuant to 11 U.S.C. § 523(a)(8)." It is not clear whether this means that the parties stipulated that the loan is not dischargeable on account of "undue hardship" or whether it is simply not dischargeable "at present" because the Debtor has not sought a ruling on that issue. It is not necessary to resolve that ambiguity for present purposes.
CONCLUSIONS OF LAW
The automatic stay applies to withholding transcripts
In summary, the analysis is very simple. Bankruptcy Code § 362(a)(6) provides that ". . . a petition . . . operates as a stay, applicable to all entities, of . . . any act to collect . . . or recover a claim against the debtor that arose before the commencement of the case . . ." SUNY's refusal to provide a transcript unless the debtor pays the student loan is clearly an act to collect or to recover a prepetition claim against the debtor. Therefore, unless one of the exceptions in § 362(b) applies, or unless the bankruptcy court grants relief under § 362(d), it is improper to withhold the transcript on account of non-payment of a prepetition debt. SUNY has pointed to no exception under § 362(b) and SUNY has not asked for relief from the stay. Therefore, SUNY's continuing refusal to provide the transcript is a violation of the automatic stay.
"The term `act' is broadly construed to include the failure to stop actions." Collier on Bankruptcy 15th Ed ¶ 362.03[8][a].
The Vast Majority of Reported Decisions Reach This Result
The vast majority of courts that have addressed the issue have reached this result. The list, as of 1992, is given in In re Merchant, 958 F.2d 738 (6th Cir. 1992). That opinion is persuasive both as to the result and in its reasoning. Since there is no authority in the Fifth Circuit, this Court adopts the Merchant analysis as the basis for the opinion here.
The Minority View
SUNY cites In re Billingsley 276 B.R. 48 (Bankr. N.J. 2002) for the proposition that § 362 does not prohibit SUNY from refusing to provide a transcript. While the Court agrees that Billingsley so holds, the Billingsley court reached that conclusion only because it believed that it was compelled to do so by Third Circuit and Supreme Court authority. Those decisions do not appear to require the result that Billinglsey reached.
In Billingsley, the debtor filed a chapter 7 case in which the Court determined that the student loan was not dischargeable. The debtor then filed a chapter 13 case that was dismissed prior to entry of a discharge. The debtor then requested a transcript; the university denied the request because the student loan was in default. Eight days later the Debtor filed a third bankruptcy case (the second one under chapter 13) and filed a motion "on short notice" to require the university to provide a transcript.
The decision in Billingsley relies on Johnson v. Edinboro State College 728 F.2d 163 (3rd Cir. 1984) which interpreted § 525, not § 362, of the Bankruptcy Code. Although the Edinboro decision says that the Bankruptcy Code does not ". . . nullify Edinboro State's policy of withholding transcripts from those students who have made no payments . . ." the decision clearly distinguishes cases in which the Debtor has paid the debt (or such part of the debt that is not dischargeable) in a good faith chapter 13 plan. The decision clearly limits the rule to situations in which the debtor has ". . . not approached the college to arrange a more flexible repayment schedule . . ." Edinboro stands for the proposition that the non-discrimination provisions of § 525 of the Bankruptcy Code do not prohibit a university from denying a transcript to a debtor who files under chapter 7 of the Bankruptcy Code instead of attempting in good faith to propose a chapter 13 repayment plan, whose debt is determined by the bankruptcy court to be non-dischargeable, and who has not made any approach to the college to arrange a more flexible repayment plan. Edinboro does not stand for the proposition that an attempt to recover a debt during a chapter 13 case is not a violation of § 362 of the Bankruptcy Code. Billingsley also relies on In re Stumpf 516 U.S. 16 (1995). In that case, the Supreme Court held that a bank did not violate the automatic stay by placing a temporary administrative hold on a bank account while it sought relief from the automatic stay to exercise its right of offset. But Stumpf clearly states that a critical factor in that decision was that the administrative hold was not intended to be permanent, but was only intended to continue so long as it was necessary to ask the bankruptcy court for relief from the stay. Billingsley ignores the Stumpf requirement that the creditor must promptly file a motion for relief from the stay.
Edinboro at 163.
"We do not read cases like In the Matter of Heath, 3 B.R. 351 (Bkrtcy.N.D.Ill. 1980), and In re Ware, 9 B.R. 24 (Bkrtcy.W.D.Mo. 1981), as contradicting the proposition that a Chapter 7 debtor cannot seek relief under § 525 when his college withholds a transcript to seek repayment of a non-discharged, overdue loan. In each of those cases, the debtor had filed a composition plan which had been approved by the bankruptcy court under Chapter 13. Under such a plan, the debtor develops a schedule of payments as part of a good-faith effort to reimburse creditors to the best of the debtor's ability. The provisions of a confirmed plan bind the debtor and each creditor, and, after completion by the debtor of all payments under the plan, the bankruptcy court normally discharges all debts provided by the plan or disallowed under the Bankruptcy Code. 11 U.S.C. §§ 1327-28 (Supp. V 1981). Between approval of the plan by the bankruptcy court and confirmation, the debtors in Heath and Ware were denied a copy of their transcripts by their universities. In each instance, the bankruptcy court held after the Chapter 13 plan had been performed and confirmed that the schools could not withhold a transcript as a means of forcing collection of a debt scheduled for discharge under § 1328." Id at 166.
Id.
The Court recognizes that the law has changed since Edinboro was decided, but Edinboro decided a case under § 525, not under § 1328.
The official syllabus reads: "Petitioner's refusal to pay its debt to respondent upon the latter's demand was not a setoff within the meaning of § 362(a)(7), and hence did not violate the automatic stay. Petitioner refused to pay, not permanently and absolutely, but merely temporarily while it sought relief under § 362(d) from the automatic stay." Justice Scalia's opinion indicates that the administrative hold was necessary to preserve the right to seek court authority for setoff. Inability to effect the hold resulted in loss of the right of setoff.
Finally, Billingsley concludes that collection of a non-dischargeable debt is not stayed by § 362. That conclusion is simply not warranted. First, that is not how the Bankruptcy Code is written. Section 362 defines what is, and what is not, stayed by the filing of a bankruptcy case. As Merchant points out, § 362 does not simply exclude all non-dischargeable debts. Second, that is not how the Bankruptcy Code was intended to work. Section 362 was intended to give a temporary respite, so that the trustee or debtor could collect and liquidate the estate to repay creditors according to statutory priorities, free from creditor collection actions. Creditors whose debts are discharged must discontinue collection actions. Creditors whose debts are not discharged may continue collection actions, but only after the § 362 stay terminates. If non-dischargeable debts were not stayed, then creditors with non-dischargeable debts would wreck the liquidation of assets and process of orderly payment of the estate's debts according to the statutory priorities.
For example, certain tax debts are not dischargeable, but they are subject to the § 362 stay.
The § 362 stay terminates with respect to collection from the debtor when a discharge is entered, § 362(c)(2)(C), or when the case is dismissed or closed, § 362(c)(2)(A) and (B), or when the Court grants relief from the stay.
For these reasons, the Court concludes that Merchant and the majority of courts have it right, and the Court declines to follow Billingsley. Recognition of SUNY's Valid Concerns
SUNY argues that the Debtor should not be permitted to abuse the § 362 stay by using it to obtain a transcript without paying a debt that is non-dischargeable. Put in other words, the Debtor should not be able to use § 362 to make an "end run" around New York law requiring payment of student loans as a condition of getting transcripts, and the Debtor should not be able to use § 362 to make and run around the Bankruptcy Code denial of discharge of student loans. Since the Debtor has not paid the debt in 25 years, through 2 bankruptcy cases, that argument is not unreasonable.
In response, the Debtor argues that attending graduate school will let the Debtor earn $3,000 more per month than the Debtor currently earns. In essence, the Debtor argues that New York should not hold a debtor's future, and that of her family, hostage to payment of a debt that the Debtor cannot pay unless she goes to graduate school.
Bankruptcy Code § 362(d) provides that on request of a party in interest, and after notice and a hearing, the court shall grant relief from the stay for "cause". With respect to that decision, the burden of proof is on the Debtor. Although the Bankruptcy Code does not define "cause," it occurs to the Court that "cause" in this fact situation would include the following:
Bankruptcy Code § 362(g), except the issue of equity in property, which does not appear to be relevant here.
1. Whether the Debtor is abusing the privilege of the § 362 stay;
2. Whether the Debtor has, or has not, made a continuing good faith effort to repay the SUNY debt since its inception;
3. Whether the Debtor's financial circumstances permit, or do not permit, larger payments to SUNY to protect SUNY adequately against the loss of its leverage;
4. Whether the Debtor is likely to complete graduate school and increase her earning potential, thereby improving SUNY's ability to collect its non-dischargeable debt as well as the long term best interests of the Debtor, her family, and society in general.
The stipulated facts do not establish whether the Debtor can pay the SUNY debt (or a major part of it) in this chapter 13 case, and do not establish whether the Debtor has made a good faith effort (through the chapter 13 plan) to pay as much of the SUNY debt as she can.
SUNY's position (that the 362 stay does not apply to student loans) is a good example of how hard facts can make bad law. If the Debtor were able to pay this non-dischargeable debt and simply used bankruptcy as a litigation tactic to avoid the consequences of non-payment, then denial of § 362 benefits might be appropriate. On the other hand, if the Debtor were able to pay the debt only by obtaining a graduate degree and if it were clear that she was better able to pay the debt (which, after all, remains non-dischargeable) if she obtains the advanced degree, then the benefits of the stay might be conditioned on payment of the maximum amount possible currently combined with other protection for the lender. SUNY does not have the right to make the decision on its own. As Stumpf suggests, SUNY can impose a temporary hold but only long enough to seek relief from the stay, to let the Court decide.
FURTHER PROCEEDINGS
When the Debtor filed this bankruptcy case and requested a transcript, SUNY asked for citation of applicable authority in this circuit and district. There was none. SUNY then postured the issue professionally and correctly.
Since there was no binding authority, the Court will provide for further disposition of this matter as follows, and IT IS ORDERED THAT:
1. SUNY must either provide the transcript before May 10, 2005, or must, before that date, file a motion for relief from the automatic stay.
2. If SUNY files a motion for relief from the automatic stay, SUNY must give notice to the Debtor and to the chapter 13 trustee that the Court will conduct a scheduling conference (Rule 7016 conference) on the motion on May 16, 2005, and a final hearing on the motion on June 6, 2005, at 2:00 p.m.
3. SUNY may appear at the scheduling conference by telephone conference call. Proper arrangements should be made with Ms. Carter, courtroom deputy for division H-2.
4. If SUNY does not timely provide the transcript and does not timely file a motion for relief from the stay, the Court will use the May 16 scheduling conference to address remaining issues in this contested matter, including trial of damages.