Accidents Don’t Cut It – Ensuring You Don’t “Unintentionally” Violate the Automatic Stay

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A debtor files for bankruptcy protection, and his or her creditors are sent notice of the filing. Despite having received the notice, due to a breakdown in internal procedures one of the creditors, a bank, accidentally takes action to collect on the debt after the filing of the bankruptcy case – thus violating the automatic stay. Since the violation was unintentional, surely the bank cannot be sanctioned, right? Wrong. 
 
Federal law provides that the filing of a bankruptcy petition stays most actions to recover money or property from the debtor, including 
  • the commencement or continuation of lawsuits or other proceedings that were or could have been commenced before the bankruptcy filing; 
  • the enforcement of judgments obtained before the commencement of the bankruptcy case; 
  • acts to obtain possession or exercise control over property of the bankruptcy estate; 
  • acts to create, perfect or enforce liens against property of the bankruptcy estate or the debtor; 
  • acts to collect, assess or recover claims that arose before the commencement of the bankruptcy case; 
  • the setoff of debts that arose before the commencement of the bankruptcy case; or
  • the commencement or continuation of certain tax proceedings. 
A creditor’s willful violation of the automatic stay will result in the injured individual receiving damages, including costs, attorneys’ fees and, when appropriate, punitive damages. So what exactly constitutes a “willful” violation of the automatic stay? If the creditor takes some action that unintentionally violates the automatic stay, can this result in sanctions? 
 
The resounding answer in North Carolina is yes – an unintentional violation of the automatic stay can, and will, result in sanctions. The United States Bankruptcy Court for the Eastern District of North Carolina has reiterated this principle in recent cases. 
 
In re Exum
After receiving notice of a chapter 13 bankruptcy case filing, SunTrust Bank sent five post-petition notices to the debtors attempting to collect on a vehicle loan. The debtors and debtors’ counsel contacted SunTrust numerous times regarding the notices, and a representative in SunTrust’s bankruptcy department acknowledged that SunTrust was aware of the debtors’ bankruptcy and the notices should not have been sent; however, the notices did not cease. After the debtors testified they suffered emotional distress and mental anguish as a result of the post-petition notices, the Court found SunTrust violated the automatic stay. In doing so, the Court noted that even though SunTrust did not intend to violate the automatic stay, it did intend to mail the notices. Further, since SunTrust regularly deals with bankrupt customers, it should have had procedures in place to prevent these notices from being sent after a customer has filed for bankruptcy protection. As a result, the Court held the violation was willful and awarded $2,500 in actual damages, $2,500 in attorneys’ fees, and $10,000 in punitive damages. 
 
In re Bonnie J. Carlton 
Similarly, in this case, the debtor defaulted on vehicle loan payments to Wells Fargo Bank, N.A., and Wells Fargo eventually repossessed the debtor’s vehicle. After the repossession, the debtor filed a chapter 13 bankruptcy case and faxed a copy of the petition to Wells Fargo. The debtor later learned that Wells Fargo had sold the car at an auction eight days after the debtor filed the bankruptcy case, and the debtor’s attorney sought damages for Wells Fargo’s violation of the automatic stay. Wells Fargo argued the violation was an accident and referred to its exemplary past record of honoring the automatic stay. The Court found that even though Wells Fargo did not intend to violate the automatic stay, it did intend to sell the car. As a result, the violation was willful and the Court awarded the debtor $12,500 for the average value of the car when it was sold, $3,000 for the cost of retaining replacement transportation, and $8,500 for attorneys’ fees.
 
These decisions illustrate that the “it was an accident” excuse will not cut it. To determine whether a creditor has violated the automatic stay, courts will consider whether the creditor intended to take whatever action violated the stay, not whether the creditor intended to violate the automatic stay. As a result, banks need to ensure reliable procedures are in place to avoid unintentionally violating the automatic stay.
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A debtor files for bankruptcy protection, and his or her creditors are sent notice of the filing. Despite having received the notice, due to a breakdown in internal procedures one of the creditors, a bank, accidentally takes action to collect on the debt after the filing of the bankruptcy case – thus violating the automatic stay. Since the violation was unintentional, surely the bank cannot be sanctioned, right? Wrong.

Federal law provides that the filing of a bankruptcy petition stays most actions to recover money or property from the debtor, including 

  • the commencement or continuation of lawsuits or other proceedings that were or could have been commenced before the bankruptcy filing; 
  • the enforcement of judgments obtained before the commencement of the bankruptcy case; 
  • acts to obtain possession or exercise control over property of the bankruptcy estate; 
  • acts to create, perfect or enforce liens against property of the bankruptcy estate or the debtor; 
  • acts to collect, assess or recover claims that arose before the commencement of the bankruptcy case; 
  • the setoff of debts that arose before the commencement of the bankruptcy case; or
  • the commencement or continuation of certain tax proceedings. 

A creditor’s willful violation of the automatic stay will result in the injured individual receiving damages, including costs, attorneys’ fees and, when appropriate, punitive damages. So what exactly constitutes a “willful” violation of the automatic stay? If the creditor takes some action that unintentionally violates the automatic stay, can this result in sanctions?

The resounding answer in North Carolina is yes – an unintentional violation of the automatic stay can, and will, result in sanctions. The United States Bankruptcy Court for the Eastern District of North Carolina has reiterated this principle in recent cases.

In re Exum

After receiving notice of a chapter 13 bankruptcy case filing, SunTrust Bank sent five post-petition notices to the debtors attempting to collect on a vehicle loan. The debtors and debtors’ counsel contacted SunTrust numerous times regarding the notices, and a representative in SunTrust’s bankruptcy department acknowledged that SunTrust was aware of the debtors’ bankruptcy and the notices should not have been sent; however, the notices did not cease. After the debtors testified they suffered emotional distress and mental anguish as a result of the post-petition notices, the Court found SunTrust violated the automatic stay. In doing so, the Court noted that even though SunTrust did not intend to violate the automatic stay, it did intend to mail the notices. Further, since SunTrust regularly deals with bankrupt customers, it should have had procedures in place to prevent these notices from being sent after a customer has filed for bankruptcy protection. As a result, the Court held the violation was willful and awarded $2,500 in actual damages, $2,500 in attorneys’ fees, and $10,000 in punitive damages.

In re Bonnie J. Carlton 

Similarly, in this case, the debtor defaulted on vehicle loan payments to Wells Fargo Bank, N.A., and Wells Fargo eventually repossessed the debtor’s vehicle. After the repossession, the debtor filed a chapter 13 bankruptcy case and faxed a copy of the petition to Wells Fargo. The debtor later learned that Wells Fargo had sold the car at an auction eight days after the debtor filed the bankruptcy case, and the debtor’s attorney sought damages for Wells Fargo’s violation of the automatic stay. Wells Fargo argued the violation was an accident and referred to its exemplary past record of honoring the automatic stay. The Court found that even though Wells Fargo did not intend to violate the automatic stay, it did intend to sell the car. As a result, the violation was willful and the Court awarded the debtor $12,500 for the average value of the car when it was sold, $3,000 for the cost of retaining replacement transportation, and $8,500 for attorneys’ fees.

These decisions illustrate that the “it was an accident” excuse will not cut it. To determine whether a creditor has violated the automatic stay, courts will consider whether the creditor intended to take whatever action violated the stay, not whether the creditor intended to violate the automatic stay. As a result, banks need to ensure reliable procedures are in place to avoid unintentionally violating the automatic stay.

 

Topics:  Automatic Stay, Creditors, Debtors, Sanctions

Published In: Bankruptcy Updates, General Business Updates, Finance & Banking Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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