IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
TODD LEE SMITH, MARCIA LEIGH SMITH,
ORDER DECLINING TO IMPOSE SANCTIONS
This matter is before the Court on the debtors' request that sanctions be imposed against Kansas
State University (KSU) for violating the discharge injunction established by 11 U.S.C.A. §524(a).
The debtors are represented by counsel Mark W. Neis. KSU is represented by counsel Richard
H. Seaton. The Court has heard evidence, reviewed the relevant pleadings, and is now ready to
The debtors filed a chapter 13 bankruptcy petition in 1988. After a dispute with a creditor was finally determined, their plan was confirmed by order entered in July 1990. KSU was one of the creditors treated in their plan. They completed their plan payments in 1994. According to the uncontradicted testimony of a KSU employee, a note written on the university's copy of a summary of the trustee's final report and account for the case indicated the school should wait for the debtors' discharge and then write off the debt. The debtors' discharge pursuant to §1328(a) was entered on March 30, 1994.
On April 25, 1994, though, instead of writing off the debt, KSU's Controller's Office sent Mr. Smith a letter stating that the discharge had not affected his obligation to the university because "an educational loan may not be discharged unless the court determines that such loan would pose an undue hardship on you, or that your loan first became due more than five years before filing of your petition in bankruptcy," and KSU had received no such determination. On Wednesday, April 27, Mr. Smith called the school and then faxed a letter to his attorney, Mr. Neis, indicating that he had spoken to someone in KSU's Controller's Office who did not understand that all his student loans had been discharged and asking Mr. Neis to contact them. That same day, Mr. Neis spoke to someone in the Controller's Office, seeking acknowledgement of KSU's error and assurances that Mr. Smith would not be troubled by further collection efforts. He warned the employee to whom he spoke that he would initiate contempt proceedings if the matter "was not immediately taken care of." True to his word, he filed a motion on April 28 for an order directing KSU to show cause why it should not be held in contempt for violating the discharge granted to Mr. Smith pursuant to §1328(a). He also sent a letter offering to settle the matter for a specified sum.
The Controller's Office was unable to contact KSU's attorney for bankruptcy matters, Mr. Seaton,
for several days. On the following Monday, May 2, he prepared a letter to Mr. Neis, asking him
to convey to Mr. Smith KSU's apologies for its error in sending the April 25 collection letter and
telling him the Controller's Office had withdrawn all attempts to collect the debt because it was
discharged in the chapter 13 proceeding. The letter was faxed to Mr. Neis that day.
DISCUSSION AND CONCLUSIONS
As an initial matter, KSU contends the Court does not have authority to impose any monetary sanctions here because the university is protected by the sovereign immunity of the State of Kansas under the Eleventh Amendment to the United States Constitution. This Court has previously ruled that monetary sanctions for violation of the discharge injunction may be imposed against state governments because §106(c) of the Bankruptcy Code waives their immunity in that situation. In re Daley (Daley v. Parrish), No. 93-40288-13, Adv. No. 93-7073, Order on Availability of Money Damages Against State Official (Bankr.D.Kan. Sept. 20, 1993); In re Taylor, No. 89-40019-13, Order Imposing Punishment for Violating Discharge Injunction (Bankr.D.Kan. Jan. 11, 1994); see also In re Shafer, 146 B.R. 477, 480 n.6, modified on other grounds 148 B.R. 617 (D.Kan. 1992) (although Judge Crow refused to apply it to the federal government, he agreed this Court's reasoning applied to state governments). The Court remains convinced it may require a state agency like KSU to pay money damages for violating §524(a).
The Court finds that KSU knew that Mr. Smith's debt had been discharged and that it had no legal basis to try to collect from him. Nevertheless, because a note indicating the debt should be written off was overlooked, KSU improperly directed a collection letter to Mr. Smith. As the Court indicated at the hearing on this matter, it is convinced this action was not malicious but merely negligent.
Mr. Smith and his attorney both reasonably contacted KSU to inform it the debt had been discharged and to demand that it cease collection activities. However, it was unreasonable for Mr. Neis to expect that the university bureaucracy could correct the situation in less than twenty-four hours. He should have recognized that the person to whom he spoke, not an attorney, would probably have to contact someone with greater knowledge and authority. In addition, the Court believes counsel should be somewhat more patient and understand that mistakes are more likely to be made in a case like this one where the law governing the dischargeability of student loan debts in chapter 13 was changed over three years before the debtor received his discharge so that Mr. Smith's debt would not have been discharged had his bankruptcy case been filed after November 1990.
On the third working day after Mr. Neis contacted KSU, Mr. Seaton faxed him a letter apologizing for the mistake and promising no more collection efforts would be made. Had Mr. Neis simply allowed a bit more time for a response, the matter could have been resolved without the Court's involvement. Under the circumstances, the Court believes KSU's prompt letter of apology and promise to stop collection efforts was an adequate response to remedy its negligence, and no further sanction is necessary.
IT IS SO ORDERED.
Dated at Topeka, Kansas, this _____ day of September, 1994.
JAMES A. PUSATERI
CHIEF BANKRUPTCY JUDGE