622 B.R. 354
Bankr. W.D. Wis.2020Background
- Kelly and Richard Hazelton filed joint Chapter 7 in July 2016 and received a discharge in October 2016; they listed UW‑Stout tuition as a “student loan.”
- Kelly completed degree credits in 2015 but owed summer tuition; UW‑Stout withheld her degree and relied on a prior Payment Agreement that allowed deferred payment/finance charges.
- Wisconsin DOR forwarded the Hazeltons’ 2016 tax refund ($1,635.71) to UW‑Stout to satisfy the tuition balance; the degree was later issued.
- Debtors reopened the case and moved for contempt/sanctions alleging the refund seizure violated the discharge injunction; parties agreed there were no material factual disputes and waived an evidentiary hearing.
- Bankruptcy Court initially held the tuition was a nondischargeable “loan” under §523(a)(8); District Court reversed (debt discharged) and remanded for sanctions; Seventh Circuit later dismissed its appeal for lack of jurisdiction, leaving sanctions determination to the bankruptcy court.
- On remand this bankruptcy court applied Taggart’s objective‑reasonableness standard and denied sanctions, attorneys’ fees, and punitive damages.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Did UW‑Stout’s seizure of the tax refund violate the discharge injunction? | Hazelton: debt was discharged; seizure impermissible collection. | UW‑Stout: debt not discharged (falls within §523(a)(8) student‑loan exception); seizure lawful. | District Court found the debt discharged, but on remand the bankruptcy court found no sanctions because UW‑Stout had an objectively reasonable basis to believe its conduct legal. |
| Are contempt sanctions / return of seized funds / actual damages warranted? | Hazelton: seek return of refund, actual damages, sanctions, attorneys’ fees. | UW‑Stout: there was a fair ground of doubt; no willful bad faith; fees/ damages not justified. | Denied: Taggart requires no fair ground of doubt; court found a reasonable basis for UW‑Stout’s position, so sanctions and refund return not awarded. |
| Are attorneys’ fees or punitive damages recoverable? | Hazelton: fees and punitive damages appropriate given UW‑Stout’s conduct. | UW‑Stout: no bad faith; punitive damages barred against governmental unit under §106; fees require bad faith or contempt. | Denied: fees denied under American Rule absent bad faith/willful disobedience; punitive damages not available under §106 and not shown here. |
Key Cases Cited
- Taggart v. Lorenzen, 139 S. Ct. 1795 (2019) (civil contempt for discharge violations requires no fair ground of doubt/objectively reasonable basis that creditor’s conduct might be lawful)
- In re Chambers, 348 F.3d 650 (7th Cir.) (2003) (when unpaid tuition qualifies as a "loan" under §523(a)(8): funds changed hands or a separate agreement extending credit)
- Hazelton v. Board of Regents, 952 F.3d 914 (7th Cir. 2020) (appellate court dismissed appeal for lack of jurisdiction; sanctions remanded to bankruptcy court)
- In re Sterling, 933 F.3d 828 (7th Cir. 2019) (elements and burden for contempt findings in bankruptcy)
- Cox v. Zale Delaware, Inc., 239 F.3d 910 (7th Cir. 2001) (bankruptcy court contempt power and circumstances for awarding attorneys’ fees)
- Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440 (2004) (States are bound by bankruptcy discharge orders)
- Baker Botts L.L.P. v. ASARCO LLC, 576 U.S. 121 (2015) (American Rule: each litigant pays own fees unless statute/contract provides otherwise)
- Randolph v. IMBS, Inc., 368 F.3d 726 (7th Cir. 2004) (willful violation requires actual knowledge of the bankruptcy discharge)