482
Chapter 30
Bankruptcy Law
Case 30.1
C.A.7 (Wis.),2009.
In re Kuehn
563 F.3d 289, Bankr. L. Rep. P 81,465
United States Court of Appeals,
Seventh Circuit.
In the Matter of Stefanie Kim KUEHN, Debtor-Appellee.
Appeal of Cardinal Stritch University, Inc.
No. 07-3954.
Argued May 28, 2008.
Decided April 16, 2009.
EASTERBROOK, Chief Judge.
This case presents a single question: Does a university violate the Bankruptcy Code’s automatic stay or discharge
injunction by refusing to provide a transcript because pre-petition debt remains unpaid?
Stefanie Kim Kuehn, an art teacher, enrolled in a two-year master’s degree program at Cardinal Stritch University.
She took advantage of the University’s pay-as-you-go plan but stopped paying midway through the first year. The
University nonetheless allowed her to take exams, receive grades, and sign up for new classes. She completed all of
CHAPTER 30: BANKRUPTCY LAW 483
the work required for a master’s degree, which the University awarded. But when Kuehn asked for a transcript-the
proof necessary to receive an increase in salary from her school district-the University refused because she owed
more than $6,000 in tuition.
Unwilling to pay her debt to the University-even though the increase in her salary would cover the whole tuition in less
than two years, and she could have borrowed against that increase-and unable to obtain a transcript without
payment, Kuehn filed a bankruptcy petition listing the University as a creditor. (Kuehn’s lawyer had advised her that
the University *291 would have to provide her a transcript if she filed for bankruptcy.) While the case was pending
Kuehn again requested a transcript, and the University again refused to provide one. After the bankruptcy court
issued an order discharging her debt to the University, 11 U.S.C. § 727, Kuehn yet again asked for a transcript and as
before agreed to pay the transcript fee, but not the tuition. Again the University refused. Kuehn contends that the pre–
discharge refusal violated the Bankruptcy Code’s automatic stay, 11 U.S.C. § 362(a), and the later one the discharge
injunction, 11 U.S.C. § 524(a), because the refusals were acts to collect her unpaid debt. Bankruptcy Judge Martin
ordered the University to provide a transcript and pay damages and attorneys’ fees. The district court affirmed. 2007
WL 5118398, 2007 U.S. Dist. LEXIS 88191 (W.D.Wis. Nov. 30, 2007). It followed
In re Merchant,
958 F.2d 738, 741
(6th Cir.1992), the only appellate decision on the subject-but, alas, an unreasoned one.
[1] If Kuehn had attempted to purchase a transcript on credit, and the University, having been burned once, proved
unwilling to make another loan, this would be an easy case. Sections 362(a) and 524(a)(2) apply only when a creditor
acts to
collect
a pre-petition or discharged debt. Although the failure to repay a debt factors into a credit score, the
use of a credit score is forward-looking. Potential creditors consider creditworthiness to evaluate the wisdom of future
transactions, not to collect unpaid debts. Any other entity deciding whether to extend credit would consider Kuehn’s
failure to pay, and the University may do the same.
[2] Other sections of the Bankruptcy Code set out some circumstances in which creditors may not consider a debtor’s
prior bankruptcy filing. See 11 U.S.C. § 366 (utilities may not refuse services if the debtor provides adequate
assurance of payment within 20 days); 11 U.S.C. § 525 (anti-discrimination provision applicable to employers and
government entities). Otherwise, however, yesterday’s failure to pay is a proper basis for tomorrow’s refusal to extend
credit. The Fair Credit Reporting Act permits bankruptcy filings to appear on consumer reports for 10 years from the
date of discharge. See 15 U.S.C. § 1681c. It follows that within 10 years from the date of discharge a prospective
creditor may consider discharged debts in determining creditworthiness.
[3] But Kuehn is willing to pay in advance for a transcript of her grades, and *292 the University’s only reason for
balking is to induce her to pay for the education-yet that debt has been discharged. The University contends that it
does not have a contractual obligation to provide a transcript and that, without an obligation, a passive refusal to deal
cannot be an act to collect. It relies on
Citizens Bank of Maryland v. Strumpf,
516 U.S. 16, 116 S.Ct. 286, 133 L.Ed.2d
484 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW TODAY
[4] The district court applied what several courts have dubbed a “coercive effects” test: a creditor acts to collect a debt
if it acts or fails to act, in a coercive manner, with the sole purpose of collecting that debt. This “test” can’t be found in
the Code, and situations to which it applies will be rare, because most acts or failures to act have multiple purposes,
such as minimizing risk based on creditworthiness. A rational creditor does itself no favors by refusing to engage in
future transactions when the debtor will pay cash. See
In re Kmart Corp.,
359 F.3d 866, 873 (7th Cir.2004). If the
creditor has competitors, the debtor will deal with them and the creditor loses profit. If the creditor has market power
in the goods or services being sold, it will maximize its profit by setting a monopoly price for future transactions, not by
trying to collect a debt. Pursuing bygones is a sure way to reduce future profits. If the University is not obligated to
provide Kuehn a transcript, its best course of action is to sell the transcript for as much money as possible. That
amount is unrelated to Kuehn’s unpaid debt.
At oral argument we asked the University if it could charge Kuehn a large sum (say, 25% of the salary increase she
stands to receive from her employer) for a transcript. It replied that it could not. That answer undermines its position
that it has no obligation to provide a transcript to Kuehn. A provider of goods and services usually is free to charge
whatever the market will bear. We could not find any laws or regulations limiting the price of college transcripts. So
why does the University think that the fee for a transcript must be nominal, limited to the costs of printing and
certifying the grades? Perhaps the answer is that providing a transcript is an implicit part of the educational contract,
covered by the fee for the course hours, and that Kuehn therefore has a contract or property right for which she has
already paid. (Well, she hasn’t paid, but her obligation to do so has been discharged, so it comes to the same thing.)
The University cannot charge Kuehn extra if the fee for instruction covers transcripts too. Then *293 the University’s
refusal to certify a transcript of Kuehn’s grades would be an act to collect the discharged debt and would violate both
the automatic stay and the discharge injunction. See
In re UAL Corp.,
412 F.3d 775, 778 (7th Cir.2005).
[5] Well, then, does Kuehn have a property interest because a certified transcript is part of the package of goods and
services that a college offers in exchange for tuition? Property interests are created and defined by state law unless a
CHAPTER 30: BANKRUPTCY LAW 485
[6] Wisconsin courts have not considered whether a student has a contract or property right to receive a transcript. No
Wisconsin statute is on point. Under Wisconsin common law, property rights may arise from custom and usage. See
Delaplaine v. Chicago & N.W. Ry.,
42 Wis. 214 (Wis.1877) (riparian water rights);
Keogh v. Daniell,
12 Wis. 163
(Wis.1860) (movable fixtures). Universities have consistently provided transcripts at or around cost. A transcript
currently sets students back $4 at Cardinal Stritch University, $3 at Harvard University, and nothing at the University
of Chicago if delivered electronically (otherwise $12). Fees at other universities are similar. We could not find any
case in any court where a university had asserted that it could charge a student more than cost for a transcript, and,
as far as we can tell, no university has ever tried to profit by charging a fee based on the transcript’s effect on a
student’s future income. This custom is similar to those in
Delaplaine
and
Keogh.
That Wisconsin has not previously recognized a right to receive a transcript does not affect our analysis. Since
colleges don’t treat registrars’ offices as profit centers, the question has not arisen. What we need to know is how the
Supreme Court of Wisconsin would handle it if it *294 were to come up. And we think it likely-it is impossible to say
more-that the state judiciary would deem the students and colleges to be joint owners of the data reflecting grades,
because that is how the educational contract is routinely understood.
A longstanding custom or practice does not prevent change. For example, airlines used to carry checked baggage
without a fee. But nobody, including the Supreme Court of Wisconsin, would conclude that United Airlines is depriving
passengers of their property when it now charges for checked bags. The cost of checking baggage is determined by
contractual rights that can be altered by the parties. Cardinal Stritch University could announce to future students that
transcript fees would reflect the value of the education. But the University did not say any such thing to Kuehn when
she enrolled, or even when she graduated, and it can’t change the terms of a contract after the fact-even when those
terms are implied rather than express.
That a student has a right to a copy of the transcript does not leave educational institutions without the means to
Case 30.2
C.A.5 (Tex.),2010.
In re TransTexas Gas Corp.
597 F.3d 298, Bankr. L. Rep. P 81,684
United States Court of Appeals,
Fifth Circuit.
In the matter of: TRANSTEXAS GAS CORP., et al., Debtor.
John R. Stanley, Sr., Appellee-Cross-Appellant,
v.
U.S. Bank National Association, as Liquidating Trustee, Appellant-Cross-Appellee.
National Union Fire Insurance Company of Pittsburgh, Pennsylvania, Plaintiff-Appellee,
In the related appeal, the liquidating trustee for TransTexas, U.S. Bank National Association, argues that a different district court
erred in denying coverage to the estate under a policy issued by National Union Fire Insurance Company. The district court held
that the just-described bankruptcy judgment against Stanley was not a “Loss” under the policy. We AFFIRM.
CHAPTER 30: BANKRUPTCY LAW 487
I. FACTS AND PROCEDURAL HISTORY
TransTexas Gas Corporation was engaged in exploration, production, and transmission of oil and natural gas. In April 1999,
TransTexas filed for Chapter 11 bankruptcy protection. The reorganization plan provided that the company would enter a three–
year Employment Agreement with John Stanley, Sr., the company’s founder. Stanley would serve as Chief Executive Officer and
be one of five directors. The Agreement was effective March 17, 2000.
The Employment Agreement provided that Stanley could be terminated beginning two years after its execution. (His departure was
effective a few days before the Agreement’s second anniversary, but neither party presents that as an issue.) At termination,
Stanley would be entitled to severance pay. If he were dismissed for reasons other than cause, he would receive three million
dollars. If he were terminated for cause, his payment would be one and a half million dollars. If he voluntarily resigned, he would be
paid no severance.
Despite its reorganization, TransTexas struggled financially. In February 2001, a law firm retained by the Board to investigate
allegations of Stanley’s wrongdoing found that he could validly be dismissed for cause. However, if Stanley brought suit contesting
departure. In March, Stanley and TransTexas agreed that he would resign. On March 14, 2002, the Board executed a “Separation
Agreement.” It explicitly superseded his Employment Agreement. He was to be paid three million dollars in installments. Stanley
received $2,270,794.90 before the payments ceased.
In April 2002, TransTexas purchased an executive and organization liability insurance policy (“the Policy”) from National Union.
Stanley was an insured for any covered claims that were made during the policy period, regardless of when the incidents giving
our opinion. To keep them distinct, we will refer to this first decision as being that of Chief Judge Hayden Head. He held that
Stanley’s severance payments were avoidable as fraudulent transfers pursuant to Section 548 and TUFTA, but not as preferential
transfers under Section 547(b). Stanley’s repayment obligation was unaffected by the partial disagreement with the bankruptcy
court.
On appeal now, both parties assert error. U.S. Bank seeks reversal of the district court’s holding that the transfers were not
II. DISCUSSION
We examine the issues raised in these two appeals in the following order. We first analyze whether the payments amounting to
more than two million dollars were fraudulent transfers. U.S. Bank is actually the appellant in that case, as it seeks overturning of
the decision that the payments to Stanley were not
preferential
transfers. Because we hold that the payments were fraudulent
under the Bankruptcy Code, we need not consider other possible violations, including TUFTA or Section 547(b).
Cir.2005).
[2][3][4] Findings of fact may not be set aside unless they are clearly erroneous.
In re Martin,
963 F.2d 809, 813-14 (5th Cir.1992).
In examining for clear error, we review the record as a whole and not just the evidence supporting the finding.
Anderson v. City of
Bessemer City,
470 U.S. 564, 573-74, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985). Stanley alleges that heightened scrutiny must be
given to the fact-findings because those issued by the bankruptcy court were “essentially verbatim recitals” of U.S. Bank’s
Section 548. When the district court rejected that Section 547(b) applied, it did so due to the legal conclusion that Stanley had to
be an insider at the time of the actual payment. For Section 548, the court held it was enough that insider status existed at the time
the obligation arose. These conclusions do not impugn the validity of the attendant findings of fact that supported both theories.
[7] With respect to conclusions of law, the bankruptcy court’s decisions are reviewed
de novo. See Pullman-Standard v. Swint,
456
U.S. 273, 287, 102 S.Ct. 1781, 72 L.Ed.2d 66 (1982).
FN1. (a)(1) The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an
employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the
benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years
before the date of the filing of the petition, if the debtor voluntarily or involuntarily-
Two elements are clearly satisfied. The severance payments made to Stanley after his dismissal were obligations incurred by
TransTexas within two years of its petition date.
Superficially, it would appear that the third element of Stanley’s being an insider is beyond question. That element is challenged,
though, on the basis that at the time of the actual payments, Stanley had left the company and was no longer an insider. We now
turn to this, the first of Stanley’s issues.
(1) Payments to an Insider
[11] Stanley devotes a substantial portion of his appellate brief to the argument that he was not an insider as meant by the statute.
Most of that argument is directed towards the separate question of whether the payments should be set aside as preferential
transfers.
See
11 U.S.C. § 547(b). If he is also asserting that his departure from the company by the time of the payments matters
(2) Reasonably Equivalent Value, and
(3) Intent to Hinder Creditors
We join these two issues because the text of Section 548 makes clear they are alternatives. In order to affirm, we must conclude
there was no clear error in finding that the payments were made either with the intent to hinder, delay, or defraud a creditor, or that
FN2.
Matter of Dunham
resolved a prior uncertainty as to the review standard, as the opinion explained. 110 F.3d at 289.
This is not to say that
de novo
review is never appropriate when examining the bankruptcy court’s treatment of
reasonably equivalent value. We should examine “ ‘
de novo
the methodology employed by the bankruptcy court in
assigning values to the property transferred and the consideration received.’ ”
In re Hannover Corp.,
310 F.3d 796, 801
(5th Cir.2002) (quoting
Dunham,
110 F.3d at 289 n. 11). Likewise, where the specific transaction in question gives a
[17] Further, “reasonably equivalent value” means that “the debtor has received value that is substantially comparable to the worth
of the transferred property.”
BFP v. Resolution Trust Corp.,
511 U.S. 531, 548, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994). The
bankruptcy court here found that Stanley used overreaching tactics, abusing his position of authority to obtain favorable terms in
the Separation Agreement to which he was not entitled. The district court did not adopt the bankruptcy court’s finding that
TransTexas received
no
value for Stanley’s resignation. It did agree that Stanley’s concessions to the company did not reasonably
The bankruptcy court found there was no value to the 2002 agreement to pay three million dollars. The district court assigned
some value to the exchange, such as Stanley’s release and covenant not to sue. Stanley suggests that by agreeing to “go quietly,”
he provided benefit to the company.
The problem factually for each court that has examined the early 2002 Separation Agreement is that at least for a year prior to the
termination, there had been evidence of good cause for which Stanley could be terminated. Such a termination would have
Stanley. The Board’s decision was not to terminate him for cause; “the decision not to terminate Stanley for cause (in fact, he
resigned) was in effect a self-fulfilling prophesy” to justify paying three million dollars instead of half that amount if he were
terminated for cause. Those conclusions were stated in resolving the issue of preferential transfers under Section 547(b). We see
in them only an analysis of what the Board’s decision in January to terminate and to pay three million dollars did to the issue of
creation of an obligation. It does not undermine other findings that the obligation was disproportionate to what was legally owed.
1996),
aff’d,
130 F.3d 657 (5th Cir.1997). What someone’s labor is worth seems to us a much different proposition than whether
the straightforward terms of an employment agreement could fairly be interpreted to require payment of three million dollars or half
CHAPTER 30: BANKRUPTCY LAW 491
FN3. If Stanley were entitled to some payment but one substantially less than three million dollars, no one has argued that
this would make it error to declare the entire transaction fraudulent. Regardless, Section 548 speaks in terms of avoiding
a “transfer,” not part of a transfer, when there is not reasonably equivalent value.
The reasonable equivalency fact-finding was not clearly erroneous. Even under a slightly more intense look caused by the
bankruptcy court’s nearly verbatim adoption of the proposal of one party, we still see no error.
(4) Insolvency of TransTexas
TransTexas was found either to be insolvent or became insolvent by virtue of the financial obligations incurred by the three million
dollar Separation Agreement. Stanley challenges the insolvency calculation used by the bankruptcy court. Similar to what we
(5) Trustee’s Fees and Costs; Stanley’s Proof of Claim
For these reasons, the concluding issues raised by Stanley regarding the need to set aside the order to pay the trustee’s fees and
costs, and to allow Stanley’s claim for three million dollars, must fail. His argument is based on the premise that we would agree
with his arguments regarding the fraudulent transfer. We have not and thus reject these final points.
B. National Union’s Policy Coverage for a “Loss.”
bankruptcy court was in “the timing of TransTexas’ payments to Stanley” and “that TransTexas intended to hinder, delay or defraud
its creditors.” There was not, U.S. Bank argues, any holding that Stanley was not owed the money.
[19] The summary judgment was proper if the pleadings and evidence show that there was no genuine issue as to any material
fact and that National Union was entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c);
Celotex Corp. v. Catrett,
477 U.S.
317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The interpretation of an insurance policy is a question of law that we review
de
[25] Stanley suffered a loss in the colloquial sense that the bankruptcy court required him to pay a judgment. However, the critical
issue here is whether the repayment of the amounts received, which we have concluded were avoidable fraudulent transfers,
constitute an insurable “Loss” under the Policy. A definition of the relevant term is in the Policy.
“Loss” means damages, settlements, judgments (including pre/post-judgement interest on a covered judgment), Defense Cost
and Crisis Loss; however, “Loss” (other than Defense Costs) shall not include … (6) matters which may be deemed uninsurable
491. Harbor denied the claim, and Nortex brought suit in Texas state court.
Id.
The Texas court held that when Nortex settled its claims with Humble and Texaco, it did not sustain a “Loss” within the meaning of
Id.
at 494.
In the other decision relied upon by the district court, the Seventh Circuit construed the term “Loss” in an insurance policyFN4 similar
FN4. The directors’ and officers’ insurance policy purchased by Level 3 defined “Loss” as “the total amount which any
Insured Person becomes legally obligated to pay … including, but not limited to … settlements.”
Level 3,
272 F.3d
.
at 909.
The court held that “a ‘loss’ within the meaning of an insurance contract does not include the restoration of an ill-gotten gain.”
Id.
at
910. Damages paid by Level 3 to the plaintiffs for which Level 3 sought reimbursement were “restitutionary in character.”
Id.
The
court also explained that the “insured incurs no loss within the meaning of the insurance contract by being compelled to return
property that it had stolen, even if a more polite word than ‘stolen’ is used to characterize the claim for the property’s return.”
Id.
at
911. We agree with this interpretation and hold that the return of funds due to a fraudulent transfer is in the nature of restitution.
U.S. Bank argues that the bankruptcy court never found that Stanley was required to return the severance payments on the basis
that he was never legally entitled to them. It argues that unlike “the insured in
Nortex,
Stanley had a clear contractual right to the
548. The parties have cited neither to a provision in the Code nor to precedent to support that making more than a reasonably
equivalent exchange is fraudulent only for the excess amount. Because of the bankruptcy laws, Stanley was entitled to none of the
CHAPTER 30: BANKRUPTCY LAW 493
FN5. In light of our holding, we need not address the district court’s alternative that even if the bankruptcy judgment did
constitute a “Loss,” it would fall within the Policy’s “profit or advantage” exclusion.
In Case No. 08-41128, we AFFIRM the district court on the basis that TransTexas’s payments to Stanley were avoidable fraudulent
transfers under Section 548.
In Case No. 08-20401, we AFFIRM the district court’s judgment in favor of National Union.
Case 30.3
U.S.,2010.
United Student Aid Funds, Inc. v. Espinosa
130 S.Ct. 1367, 176 L.Ed.2d 158, 78 USLW 4207, 63 Collier Bankr.Cas.2d 428, 76 Fed.R.Serv.3d
364, Bankr. L. Rep. P 81,716, 10 Cal. Daily Op. Serv. 3559, 2010 Daily Journal D.A.R. 4307, 22
523(a)(8), 1328. The Federal Rules of Bankruptcy Procedure require bankruptcy courts to make this undue hardship determination
in an adversary proceeding, see Rule 7001(6), which the party seeking the determination must initiate by serving a summons and
complaint on his adversary, see Rules 7003, 7004, 7008. The debtor in this case filed a plan with the Bankruptcy Court that
proposed to discharge a portion of his student loan debt, but he failed to initiate the adversary proceeding as required for such
discharge. The creditor received notice of, but did not object to, the plan, and failed to file an appeal after the Bankruptcy Court
at 26.
As the Federal Rules of Bankruptcy Procedure require, the clerk of the Bankruptcy Court mailed notice and a copy of Espinosa’s
FN1. United is a guaranty agency that administers the collection of federally guaranteed student loans in accordance with
regulations promulgated by the United States Department of Education. See,
e.g
., 34 CFR § 682.200
et seq.
(2009).
United received this notice and, in response, filed a proof of claim for $17,832.15, an amount representing both the principal and
the accrued interest on Espinosa’s student loans.
Id.,
at 35. United did not object to the plan’s proposed discharge of Espinosa’s
FN2. The discharge order contained an apparent clerical error that the courts below considered and addressed in
adjudicating these proceedings. See n. 4,
infra
.
In 2000, the United States Department of Education commenced efforts to collect the unpaid interest on Espinosa’s student
loans.FN3 In response, Espinosa filed a motion in 2003 asking the Bankruptcy Court to enforce its 1997 discharge order by directing
the Department and United to cease all efforts to collect the unpaid interest on his student loan debt.
FN3. After Espinosa completed payments under the plan, United assigned Espinosa’s loans to the Department under a
reinsurance agreement. After these proceedings began, United requested and received a recall of the loans from the
Department. App. to Pet. for Cert. 63.
United opposed that motion and filed a cross-motion under Federal Rule of Civil Procedure 60(b)(4) seeking to set aside as void