# Richard A Hazelton and Kelly J Hazelton

> United States Bankruptcy Court, W.D. Wisconsin · September 25, 2020

URL: https://www.frixlaw.com/law-library/cases/10463401

## Case

- **Court:** United States Bankruptcy Court, W.D. Wisconsin
- **Decided:** September 25, 2020
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10463401

## How later opinions describe it (automated extraction)

- discussing debtor’s remedy options when alleged violating creditor was the IRS

## Opinion text

UNITED STATES BANKRUPTCY COURT
WESTERN DISTRICT OF WISCONSIN
______________________________________________________________________________
In re: Case Number: 16-12372-7
RICHARD A. HAZELTON
and KELLY J. HAZELTON,

Debtors.

PROCEDURAL HISTORY

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

1 Debtors’ Mot. for Sanctions, ECF No. 31.

2 One is not required. See Roth v. Nationstar Mortg., LLC (In re Roth), 935 F.3d 1270,
1278 (11th Cir. 2019) (“In civil contempt proceedings, ‘when there are no disputed
factual matters that require an evidentiary hearing, the court might properly dispense
with the hearing prior to finding the defendant in contempt and sanctioning him.’”)
(internal citations omitted).
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

3 In re Hazelton, 582 B.R. 223, 224 (Bankr. W.D. Wis. 2018), rev’d sub nom. Hazelton
v. UW-Stout, No. 18-cv-159, 2019 WL 413567 (W.D. Wis. Feb. 1, 2019).

4 In re Hazelton at 227.

5 Hazelton v. UW-Stout, 2019 WL 413567, at *3.

6 Hazelton v. Bd. of Regents, 952 F.3d 914, 916 (7th Cir. 2020).

7 Id. at 918.
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

8 In evaluating whether the Payment Agreement qualified as a “prior or
contemporaneous agreement to pay tuition at a later date in exchange for an extension
of credit,” the District Court, for its opinion, assumed the Payment Agreement was still
in effect when Debtor re-enrolled.

9 ECF. No. 13, Sch. E/F. The Schedule said, “Last Active 05/16.”

10 Certificate of Mailing, ECF No. 23.
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-STOUT12
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

11 The record does not reflect exactly when this occurred. But in Debtors’ original
motion for sanctions filed September 26, 2017, Debtors represent that the degree had
not yet been delivered. ECF No. 31, ¶ 21. At no point during the bankruptcy did
Debtor seek to establish the debt as an undue hardship and no allegation of a
violation of the discharge order was made before March 2017. On remand, however,
the request for issuance of the degree was eliminated leading the Court to conclude
that at some point the degree was issued to Debtor.

12 This decision details the correspondence because part of Debtors’ argument is that
through these communications UW-Stout had notice that their position on the
characterization of the debt was “objectively unreasonable.”

13 ECF No. 31, Exh. C.

14 Id. The requested amounts were redacted in the letter submitted to the Court.
Debtor’s degree was not mentioned in this letter.

15 Id., ¶ 18.
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.

16 In re Chambers, 348 F.3d 650 (7th Cir. 2003).

17 ECF No. 31, Exh. D.

18 Id. Again, the amounts were redacted in the letter submitted to this Court.

19 Id.

20 Debtors allege punitive damages are warranted here because “UW-Stout is a
sophisticated creditor, regularly engaged in collection of tuition and handling of
student loans. Further, they have had the benefit of the advice of counsel but have
persisted in their continued violations of the discharge injunction despite repeated
warnings and demands.” ECF No. 31, ¶ 22.

21 In the motion, paragraph 21 states that “[a]s of the date of this motion, Movant’s
seized tax refund has not been repaid to Movant and Kelly J. Hazelton’s degree has not
been delivered.” But in the relief requested in paragraphs A-E, the degree is not
mentioned. ECF No. 31.
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

22 ECF No. 62, p. 4.
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,
139 S. Ct. 1795, 1799 (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
(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 reason, it was not excluded from the discharge. Hazelton v. UW-Stout,
No. 18cv159, 2019 WL 413567, at *3 (W.D. Wis. Feb. 1, 2019). As a result, the

discharge injunction was violated.
On remand the question is whether there was an objectively reasonable
basis for concluding that the creditor’s conduct might be lawful under the
injunction. If it is determined that there was no fair ground of doubt that the
order barred the creditor’s conduct, the appropriate sanctions must also be
determined.
A. DEBTORS CONTEND NO FAIR GROUND OF DOUBT EXISTS
Debtors argue that no fair ground of doubt exists and UW-Stout’s

conduct violated the discharge order and no objectively reasonable basis to
conclude otherwise exists. They contend, since the District Court’s ruling,
“there can be no fair room for doubt that the tax refund’s seizure was a
violation of the discharge injunction.”23 Debtors conclude since UW-Stout still
has not returned the tax refund, sanctions are appropriate.
Debtors assert the Payment Agreement UW-Stout materially relies on
“does not agree to pay the debt for a summer session at a later time.”24 They
suggest there are errors in UW-Stout’s arguments. They point to phone calls

23 ECF No. 60, at 2.

24 Id. at 1-2.
with unspecified content and to a letter dated April 25, 2017, where Debtors’
attorney asserted the debt was not a student loan based on his view of the
Chambers decision.25 UW-Stout and Debtors were all aware of the case law and
Plan Agreement. In applying the law to the facts, the parties did not reach the

same conclusion. This difference in opinion appears to be the “errors” Debtors
suggest exist.26
In other words, Debtors contend that since UW-Stout knew about
Chambers, the language in the Payment Agreement, and Debtors’
interpretation of both. Thus, they say UW-Stout should have known their
position was objectively unreasonable even before the bankruptcy case was
reopened. From this, Debtors conclude UW-Stout must have known that their
position on the matter was objectively unreasonable. Debtors point to the fact

that the view they expressed to UW-Stout before reopening the case was the
same view the District Court took as evidence that UW-Stout was objectively
unreasonable. What this argument appears to boil down to is: objective
unreasonableness is evidenced by the Debtors’ win in District Court. Taken
together, Debtors contend no fair ground of doubt exists that UW-Stout’s
conduct was barred by the discharge injunction.

25 ECF No. 31, Exh. D.

26 Id. at 2
B. UW-STOUT CONTENDS THE DEBT WAS NOT DISCHARGED AND THERE IS A FAIR
GROUND OF DOUBT THAT THEIR CONDUCT WAS NOT BARRED BY THE
INJUNCTION

UW-Stout maintains the debt falls within the student loan exception to
discharge under section 523(a)(8).27 But on remand their response is limited to
addressing the sanctions issue. UW-Stout relied on the following sources in
concluding that the tuition debt had not been discharged:
1. Debtors’ own bankruptcy filings calling the debt a student loan;
2. The plain language of the Bankruptcy Code;
3. The plain language of the Payment Agreement; and
4. The enactment of BACPA after the Chambers ruling.28
UW-Stout contends that the above listed sources illustrate that there was fair
ground of doubt that their conduct might be lawful. UW-Stout argues its
position is not de facto unreasonable because of their loss in District Court. It
also argues that:
[W]hile the Debtors accurately state the rule in Taggart, they fail to
apply it beyond stating in conclusory fashion that the Board’s
position was objectively unreasonable. Nor do the Debtors cite to
any legal authority to support their arguments. For these reasons,
the Debtors’ arguments in favor of sanctions are underdeveloped
and waived.29

27 They preserved the issue for appeal. ECF No. 61, p. 7 n.2.

28 On appeal UW-Stout also argued the Payment Agreement was an extension of credit
and therefore met the requirements of a “loan” under Chambers.

29 ECF No. 61, p. 10.
C. BANKRUPTCY COURT’S AND DISTRICT COURT’S FINDINGS
In determining whether the debt fell under the exception to discharge in
section 523(a)(8), this Court looked at the definition of “loan” under Internal
Revenue Code § 221(d)(1). This Court found that a loan does not “require an

actual exchange of funds between lender and borrower.” At least two decisions
supported this conclusion.30 This Court also observed that the Payment
Agreement contained credit term language such as “[c]redit will not be
extended under this agreement unless the Marital Property Act section is
completed for all married students” and “A FINANCE CHARGE will be assessed
at a monthly periodic rate of 1.5% . . . .” Applying those facts this Court
determined that the plain reading of the Payment Agreement makes clear the
parties intended the transaction to be a loan. This Court concluded the debt

had not been discharged.
The District Court disagreed. In determining whether the debt had been
discharged, the District Court relied on Chambers in its analysis. The court
held that the debt was not a “loan” and therefore the debt did not qualify under
the section 523(a)(8) exception to discharge.
The court in Chambers held that “nonpayment of tuition qualifies as a
loan under § 523(a)(8) in two classes of cases: where funds have changed
hands, or where there is an agreement whereby the college extends credit . . . .

30 See Gakinya v. Columbia College (In re Gakinya), 364 B.R. 366 (Bankr. W.D. Mo.
2007); Johnson v. Missouri Baptist College (In re Johnson), 218 B.R. 449 (B.A.P. 8th
Cir. 1998). Chambers also recognizes that an actual exchange of funds is not required
to meet the definition of a loan. In re Chambers, 348 F.3d 650.
This existence of a separate agreement acknowledging the transfer and
delaying the obligation for repayment distinguishes a loan from a mere unpaid
debt.” Hazelton v. UW-Stout, 2019 WL 413567, at *2 (quoting In re Chambers,
348 F.3d 650, 657 (7th Cir. 2003)) (internal citations omitted). “The Chambers

court concluded that the student's debt in that case did not satisfy this
definition . . . . Rather, the student ‘incurred a debt on an open student
account, attended classes in spite of the debt and failed to pay her bill.’” Id.
(quoting In re Chambers, 348 F.3d at 657). The District Court found the
Hazelton facts indistinguishable from Chambers. No funds exchanged hands
and the District Court did not find the Payment Agreement to be an extension
of credit “at least to the summer tuition.” In other words, no money exchanged
hands nor was there a prior contemporaneous agreement, so the debt was not

a loan under section 523(a)(8).
On appeal, the Seventh Circuit found it did not have jurisdiction yet
because “the district judge’s order resolving the issue of dischargeability
doesn’t finally resolve the sanctions dispute.” Hazelton v. Bd. of Regents, 952
F.3d at 918.
D. FAIR GROUND OF DOUBT EXISTED BEFORE THE DISTRICT COURT’S RULING
i. The parties’ conduct before the seizure of the tax refund indicated
that they thought the unpaid tuition was not discharged.

Debtor eventually completed her degree in 2015 but did not pay her
tuition bill. Her degree was withheld because of the unpaid tuition. Debtors’
own schedules reflect UW-Stout’s debt as a student loan. Debtors took no
action during the bankruptcy to declare the loan dischargeable. Debtors took
no action to have UW-Stout release the degree. Debtors did not try to assert
UW-Stout violated the discharge injunction until the tax refund seizure despite
UW-Stout continuing to withhold Debtor’s degree. Debtors went nearly five

months without raising the issue of UW-Stout’s alleged violation.
ii. UW-Stout’s refusal to return the seized funds when Debtors told
them to does not show objective unreasonableness.

Debtors' argument that UW-Stout’s awareness of Chambers and the
Payment Agreement evidences UW-Stout’s knowledge of their objective
unreasonableness is not compelling. UW-Stout articulated plausible, legally
grounded reasons why the circumstances were different than Chambers.
Although they ultimately lost the issue on appeal, in general, losing on an issue
in court does not render the losing party’s position “objectively unreasonable.”
See Maxwood Music Ltd. v. Malakian, 722 F. Supp. 2d 437, 439 (S.D.N.Y.
2010); see also Kirtsaeng v. John Wiley & Sons, Inc., 136 S. Ct. 1979, 1988
(2016) (“Courts every day see reasonable defenses that ultimately fail (just as
they see reasonable claims that come to nothing.)”). The very things Debtors
identify to show “objective unreasonableness”31 are what UW-Stout argues
support its position. Both parties rely on the same evidence to support their

31 The Payment Agreement, the holding in Chambers, and UW-Stout’s knowledge of
both.
position. What Debtors suggest is evidence of “objective unreasonableness”
appears to be a matter of reasonable minds coming to different conclusions.
On appeal, UW-Stout also argued that the Payment Agreement was an
extension of credit and met the Chambers definition of a loan. That conclusion

was the subject of the appeals. It would therefore be difficult to conclude UW-
Stout’s belief that the debt had not been discharged in this case was objectively
unreasonable.
E. FAIR GROUND OF DOUBT EXISTED AFTER THE DISTRICT COURT’S RULING
Debtors argue that any fair ground of doubt that may have existed
disappeared upon the District Court’s ruling. Debtors contend UW-Stout
should have returned the tax refund or obtained a stay pending appeal. This
argument is not compelling and ignores the way the court system functions.

The District Court, although ruling that the discharge injunction was
violated, did not order UW-Stout to return the seized tax refund to Debtors.
The matter was remanded to this Court to determine what, if any, sanctions
are appropriate. UW-Stout, in briefing the argument on remand, reserved their
right to appeal the dischargeability issue. So even though the District Court
ruled the discharge injunction had been violated, UW-Stout is not “on notice”
since the matter is still working its way through the courts. The appeal to the
Seventh Circuit was dismissed for lack of jurisdiction because the District

Court “resolved a discrete issue; it did not resolve the sanctions dispute.” For
that reason, the District Court’s order was not an appealable final decision.
This leaves the “parties rights and obligations” unsettled.
Section 524 includes no private right of action to pursue violations of the
discharge injunction. See Cox v. Zale Delaware, Inc., 239 F.3d 910 (7th Cir.
2001). See also Kovacs v. United States, 614 F.3d 666 (7th Cir. 2010)
(discussing debtor’s remedy options when alleged violating creditor was the

IRS). Section 524 explains the effect of discharge but does not include a remedy
for violations. Other sections of the Code contain specific remedy provisions,
like section 362 which provides for a remedy of automatic stay violations.
Therefore, damages from the violation of a discharge injunction are only
recoverable if civil contempt standards are met. This includes the sanctions
analysis under Taggart. There is no exception in the Code to the requirements
of Taggart.
Under Taggart, imposition of sanctions requires more than a willful

violation. This means that recovery of damages is not automatic upon a finding
that the discharge injunction has been willfully violated. As a result, Debtors
are not entitled to a return of their tax refund solely based upon a finding that
the discharge injunction was violated.
In re Shuey illustrates this point. See In re Shuey, 606 B.R. 760 (Bankr.
N.D. Ill. 2019). On remand from the district court, the bankruptcy court was
tasked with determining the debtor’s motion to reopen and impose sanctions.
Creditor successfully caught money in the garnishment of debtor’s wages for a

period of time. The bankruptcy court considered Taggart in evaluating the
debtor’s request for sanctions:
The Supreme Court has recently written that a court should only,
“impose civil contempt where there is no objectively reasonable
basis for concluding that the creditor's conduct might be lawful
under the discharge order.” Taggart v. Lorenzen, __ U.S. __, 139 S.
Ct. 1795, 1801, 204 L. Ed. 2d 129 (2019). This stems from the
tradition of cases outside the bankruptcy context, wherein the
Supreme Court has stated that civil contempt should not be the
remedy “where there is [a] fair ground of doubt as to the
wrongfulness of the defendant's conduct.” California Artificial Stone
Paving Co. v. Molitor, 113 U.S. 609, 618, 5 S. Ct. 618, 28 L. Ed.
1106 (1885). In Longshoremen v. Philadelphia Marine Trade Assn.,
389 U.S. 64, 76, 88 S. Ct. 201, 19 L. Ed. 2d 236 (1967), for
instance, the Supreme Court explained that civil contempt is not
appropriate unless, “those who must obey” an order “will know
what the court intends to require and what it means to forbid.”

Id. at 770.
The bankruptcy court concluded the creditor had an “objectively
reasonable basis for believing that his conduct did not violate the discharge
injunction.” Id. at 771. The creditor was stayed as to future actions. Still, the
court declined to “impose any sanctions upon him for past events.” Id. In
declining to impose sanctions, the money caught by the garnishment was not
returned to the debtor. In other words, after Taggart a finding that the
discharge injunction was violated does not ipso facto lead to an award of
sanctions.
While this Court acknowledges, under the guidance in the District Court
Opinion and Order, that there was error in our initial analysis of the
relationship between the parties, several thoughtful arguments have been
made by UW-Stout as to the reasons it should be able to collect from Debtors.
This Court concludes that UW-Stout had an objectively reasonable basis for
believing their conduct did not violate the discharge injunction. Thus, under
Taggart, sanctions are not appropriate. The request is denied.
F. ATTORNEYS’ FEES ARE NOT APPROPRIATE
Debtors request an award of attorneys’ fees and costs. The Court will

address that request in the interest of completeness. Even if sanctions were
appropriate here, awarding attorneys’ fees still would not be.
The “basic point of reference when considering the award of attorney’s
fees is the bedrock principle known as the American Rule: Each litigant pays
his own attorney’s fees, win or lose, unless a statute or contract provides
otherwise.” Baker Botts L.L.P. v. ASARCO LLC, 576 U.S. 121, 126 (2015)
(quoting Hardt v. Reliance Standard Life Ins. Co., 560 U.S. 242, 252-253
(2010)). “However, a court may assess attorneys’ fees for the willful

disobedience of a court order or if the losing party has acted in bad faith,
vexatiously, wantonly or for oppressive reasons.” Atkins v. United States (In re
Atkins), 279 B.R. 639, 651 (Bankr. N.D.N.Y. 2002). Courts agree that as part of
a finding of contempt for willful violations of the discharge injunction,
reasonable attorney’s fees and costs may be awarded. Zale, 239 F.3d at 916.
Awarding costs and fees is not mandatory and such an award is at the court’s
discretion. Tranzact Techs., Inc. v. 1Source Worldsite, 406 F.3d 851, 855 (7th
Cir. 2005).

Our legal system is designed to afford a process where disagreement is
litigated, possibly appealed, and determined. As shown by this case, parties
may win in one court and lose in another. That is the reason that, absent
willful disobedience, bad faith, or some other improper reasons, attorneys’ fees
are not awarded. There was a reasonable basis for disagreement. There is no
evidence of bad faith by UW-Stout. No attorneys’ fees are appropriate here and
the request for fees is denied.

G. PUNITIVE DAMAGES
Similarly, even if sanctions were appropriate under the circumstances,
punitive damages cannot be awarded. Debtors did not develop any argument
for punitive damages. Additionally, “[a]lthough punitive damages have been
awarded at times for discharge injunction violations, such damages generally
are only appropriate when a creditor engages in ‘egregious or vindictive
conduct,’ more akin to ‘conduct beyond willfulness or deliberation and more
closely resembling a specific intent to violate the discharge injunction.’” In re

Gecy, 510 B.R. 510, 525 (Bankr. S.D.S.C. 2014) (quoting Cherry v. Arendall (In
re Cherry), 247 B.R. 176, 190 (Bankr. E.D. Va. 2000)). Such conduct does not
appear here. Even if it did, the creditor is an arm of the State.
Sovereign immunity is afforded to “arms of the State” which include State
institutions of higher learning. Central Va. Cmty. Coll. v. Katz, 546 U.S. 356,
360 (2006). That immunity can be abrogated by specific acts of Congress. Id. at
359. 11 U.S.C. § 106 abrogates sovereign immunity.32
11 U.S.C. § 106 (a), in part states:

32 Reliance on this section may not be necessary because, in Tenn. Student Assistance
Corp. v. Hood, 541 U.S. 440, 448 (2004), the Supreme Court held that States are
generally "bound by a bankruptcy court’s discharge order no less than other
creditors.”
(a) Notwithstanding an assertion of sovereign immunity, sovereign
immunity is abrogated as to a governmental unit to the extent
set forth in this section with respect to the following:

(1) Sections 105, 106, . . . 523 . . . of this title . . . .

(3) The court may issue against a governmental unit an
order, process, or judgment under such sections or
the Federal Rules of Bankruptcy Procedure, including
an order or judgment awarding a money recovery,
but not including an award of punitive damages.
Such order or judgment for costs or fees under this
title or the Federal Rules of Bankruptcy Procedure
against any governmental unit shall be consistent
with the provisions and limitations of section
2412(d)(2)(A) of title 28.

(emphasis added).

Under section 106, States are bound to a bankruptcy court’s discharge
injunction and “[i]njunctive relief, damages, and attorneys’ fees are ancillary to
the proceeding because those remedies serve as mechanisms for enforcement
of the discharge.” In re Muhammad, 586 B.R. 753, 760 (Bankr. W.D. Wis. 2018)
(citing Slayton v. White (In re Slayton), 409 B.R. 897, 903 (Bankr. N.D. Ill.
2009)). But punitive damages are not allowed under the Code. As a result, to
the extent that Debtors seek punitive damages, the request must also be
denied.
CONCLUSION
For these reasons, to the extent that the Debtors’ motion seeks to impose
sanctions or hold UW-Stout in civil contempt for prior violations of the
discharge injunction, the motion is denied.
This decision shall constitute findings of fact and conclusions of law
pursuant to Bankruptcy Rule 7052 and Rule 52 of the Federal Rules of Civil
Procedure.
A separate order consistent with this decision will be entered.
Dated: September 25, 2020.
BY THE COURT:
5,
CE fy
Hon. Catherine J. Furay
U.S. Bankruptcy Judge

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10463401. Public record. Not legal advice.