Creditors Rights

Creditors Beware: Potential Pitfalls of Automatic Stay Violations

The “automatic stay” is one of the principal immediate benefits of filing bankruptcy. Upon filing a bankruptcy petition, the automatic stay springs into effect to stop any creditor’s debt collection efforts, lien enforcement actions, lawsuits and a host of other actions against the debtor and the debtor’s property. It is primarily designed to maintain the status quo while the court examines the debtor’s financial situation. The automatic stay is often likened to “closing the windows and locking the doors” to prevent any property from leaving the newly-created bankruptcy estate. As its name implies, the automatic stay is effective without any further action by the debtor or the court, and the court will eventually monitor the gathering and distribution of the debtor’s assets. However, until that time, or until the stay is lifted, creditors are generally precluded from taking any action against the debtor or the debtor’s estate.

Pursuant to the Bankruptcy Code, 11 U.S.C. 362(b), there are exceptions to the stay such as civil actions involving the establishment of paternity or the collection of a domestic support obligation. However, the exceptions outlined in § 362(b) are often narrowly construed, and the courts have broad powers to extend the reach of the automatic stay even further when necessary.

Most creditors readily acknowledge that the automatic stay applies to them, but they ask the court to lift the stay via a “motion for relief” under 11 U.S.C. § 362 of the Bankruptcy Code. Such motions commonly allege a lack of adequate protection of an interest in estate property, or lack of an adequate “equity cushion,” or, alternatively, that the debtor does not have equity in the subject property and that the property is not necessary to an effective reorganization in bankruptcy. If the court grants the creditor’s motion for relief, the creditor may repossess and foreclose upon its collateral; however, the creditor is still prohibited from pursuing any actions against the individual debtor. The stay continues until the earlier of the dismissal or the closing of the bankruptcy case, and any actions in violation of the stay are void in Texas. See In re Pierce, 272 B.R. 198, 204 (Bankr. S.D. Tex. 2001).

Not only are actions taken in violation of the stay void in Texas, but they may also be punishable by the court, particularly where the court finds that the creditor willfully violated the automatic stay. See In re Repine, 536 F.3d 512 (5th Cir. 2008). For example, Section 362(k) creates a private cause of action for a debtor to file suit against a creditor who willfully violates the automatic stay to the injury of the debtor. If the creditor is aware of the stay and intentionally acts in violation of the stay, the law provides that the debtor shall recover actual damages, including costs and attorney’s fees.

In addition to economic loss, emotional damages also qualify as actual damages. For example, in a recent appeal before the Fifth Circuit, the Court found that emotional distress damages may also be awarded in the appropriate case, but the plaintiff is required to set forth “specific information” concerning damages caused by his alleged emotional distress rather than relying only on “general assertions.” Repine, 536 F.3d at 521—522. For example, in Repine, the creditor was an attorney for the Debtor’s ex-wife in connection with a child support enforcement action wherein the family court held the debtor in criminal contempt for failure to pay child support and ordered that he be incarcerated until he paid the amounts due and owing to his wife and child. The parties eventually negotiated options for settling the child support enforcement action and securing the debtor’s release from jail, and the court entered an agreed order lifting the automatic stay to enforce the settlement terms. Specifically, the agreed order provided that attorney’s fees due and owing to the ex-wife’s attorney shall be provided for as a priority unsecured claim to be paid through the debtor’s Chapter 13 plan.

In light of the bankruptcy court’s entry of the agreed order, the family court held a hearing regarding the debtor’s release from jail, where the attorney opposed the debtor’s release, as she was concerned that her fees would not be paid. After the hearing, the debtor remained in jail since he had still not paid child support, during which time his father passed away. Also, the attorney threatened in a fax that she would refuse to appear in court to submit an agreed order releasing the debtor from jail, despite her client’s wishes, until she received “a copy of the certified checks” for her attorney’s fees. Subsequently, the attorney’s client and the debtor jointly moved to enforce the bankruptcy court’s agreed order, and the court ordered the attorney to appear and show cause why she should not be held in contempt for attempting to collect her attorney’s fees in violation of the automatic stay.

Despite being personally served with the show cause order, the attorney failed to appear, and the bankruptcy court issued a warrant for her arrest. The U.S. Marshal took the attorney into custody, and the bankruptcy court admonished the attorney to cease any and all collection efforts. Nevertheless, the attorney continued her efforts to collect her attorney’s fees and continued to refuse to consent to the debtor’s release from jail so he could attend his father’s funeral. Consequently, the ex-wife and debtor commenced an adversary proceeding seeking damages and attorney’s fees for the attorney’s willful violation of the automatic stay. After a two-day trial, the bankruptcy court awarded the plaintiffs actual damages (including $4,400.00 for emotional distress, punitive damages and attorney’s fees.) The attorney appealed; however, the district court affirmed the bankruptcy court’s decision.

Subsequently, the Fifth Circuit Court of Appeals vacated the bankruptcy court’s decision in part, finding that the debtor’s general testimony that he felt “very upset” at what his sons would think of him for being in jail and that it was “very traumatic” for him to miss his father’s funeral was insufficient evidence to support an award of emotional damages. Repine, 536 F.3d at 522. However, it is important to note that such an award is available to the plaintiff who makes specific, supportable assertions of emotional distress.

Furthermore, Section 362(k) provides that, in “appropriate circumstances,” a debtor may recover punitive damages. 11 U.S.C. 362 (k). In defining “appropriate circumstances,” the Fifth Circuit recently ruled that an “egregious” intentional misconduct is required on the violator’s part in order to impose punitive damages. Repine, 536 F.3d at 521. In Repine, the Fifth Circuit affirmed the bankruptcy court’s award of punitive damages, finding that the attorney’s violation of the stay was particularly egregious, “reckless,” and “arrogant,” especially since the attorney ignored the court’s orders and her client’s wishes, and she persisted in her collection efforts despite the bankruptcy court’s admonishment.

Accordingly, once a creditor becomes aware of a debtor’s bankruptcy filing, it is imperative that all collection efforts and communications of any kind with the debtor cease immediately in order to prevent any violation of the automatic stay. Once a creditor is aware of the stay and acts in violation of the stay, the debtor likely becomes entitled to actual damages and, in certain cases, may be awarded punitive and emotional damages. Such consequences may be easily avoided with a quick bankruptcy search of the subject obligor(s) prior to any communications, demands or other debt collection acts.

Creditors should consult with legal counsel soon after a bankruptcy filing in order to obtain advice for promptly and effectively protecting such creditors’ rights.

By David M. O’Dens and Kerry M. Hayden