When in Doubt, File a Motion: Trends Concerning Automatic Stay Violations

by Spilman Thomas & Battle, PLLC

Bankruptcy filings in Virginia, and nationwide, declined significantly in 2012, and it appears the decline is continuing in 2013.1  However, thousands of cases continue to be filed, and it is important for practitioners to continually assess recent developments and trends in the case law. A debtor files a bankruptcy petition seeking the automatic stay as his primary shield. As a result, violations of the stay are frequently alleged, and creditors must proceed cautiously once a bankruptcy petition is filed. This article focuses on recent decisions from the Bankruptcy Courts in Virginia concerning alleged violations of the automatic stay by creditors.

Litigation over alleged automatic stay violations appears to have been much more frequent over the past few years, and, as a result, the Courts have had an opportunity to provide additional clarity to creditors’ duties and debtors’ protections upon the filing of a petition. The Courts have addressed the requirements imposed by the stay with respect to garnishments, repossessed vehicles, administrative holds, removal of personal property from premises abandoned by the debtor, and a few unique situations that do not arise frequently but are instructive nonetheless. Ultimately, Judge Mayer succinctly summarized all of the recent litigation over the automatic stay by observing: “One cardinal rule of bankruptcy practitioners is, if there is doubt as to whether the automatic stay applies, file a motion.” Gordon Props., LLC v. First Owners Ass’n of Forty Six Hundred (In re Gordon Props., LLC), 460 B.R. 681, 699 (Bankr. E.D. Va. 2011) (Mayer, J.)

Judge Mayer’s advice is particularly well-taken because of the strict standard employed when determining whether a creditor can be held in contempt for violation of the stay. In order to prevail, a debtor need only prove that a creditor committed an intentional act with knowledge of the automatic stay. In re Seaton (sometimes referred to as the “pink box case”), 462 B.R. 582, 592 (Bankr. E.D. Va. 2011) (St. John, J.). In that case, a landlord, under an apparently-mistaken belief that the debtor-tenants had moved out of their apartment, cleaned the apartment and removed the debtors’ remaining personal items, throwing them in a nearby dumpster. Id. at 586-88. The debtors filed a Motion for Sanctions against the landlord asserting that this action violated the automatic stay, and the landlord defended by asserting that it did not “intend to violate the automatic stay.” Id. at 592. The Court, however, held that the “absence of specific intent to violate the automatic stay . . . fails to negate the willfulness of the actions.” Id. While not considered by the Court when determining whether an award of actual damages was appropriate, the landlord’s specific intention was considered by the Court when it refused to award punitive damages. Id. at 603-04.

The clear standard articulated by Judge St. John, however, is more difficult to apply in the garnishment context because debtors generally assert that a creditor’s inaction violates the automatic stay. While it is clear that a judgment creditor “may not elect to take no action or refuse to cooperate” and shield itself from liability for an alleged violation of the automatic stay, In re Williams-Nobles, 459 B.R. 242, 246 (Bankr. E.D. Va. 2011) (Santoro, J.), the extent of action required by a creditor with respect to a pending garnishment post-petition was not clear at the time Williams-Nobles was decided. In that case, a judgment creditor that had filed a garnishment received notice that the judgment debtor had filed a Chapter 7 petition. Id. at 243-44. Counsel for the debtor insisted that it was the judgment creditor’s affirmative duty to cause the garnishment to be dismissed and the garnished wages to be returned. Id. at 244. Creditor’s counsel called debtor’s counsel and said that the creditor would take no action against the debtor, and creditor’s counsel did nothing further. Id. Debtor’s counsel did not prepare an order dismissing the garnishment or engage in any further discussions with creditor’s counsel. Instead, debtor’s counsel filed a motion seeking to hold the judgment creditor in contempt for failing to dismiss the garnishment. Id. After observing that “the continuation of a garnishment proceeding against a debtor is a violation of the automatic stay,” Judge Santoro held that this principle did not impose a duty on the judgment creditor to prepare the dismissal order. Id. at 246. Instead, Judge Santoro held that judgment creditors cannot refuse to endorse an order dismissing the garnishment after it has been prepared by counsel for the debtor. Id. at 246-47. In the process, Judge Santoro reminded us that many disputes can be avoided or resolved by the use of common sense and professional courtesy. Id. at 247.

While a failure to communicate substantially contributed to the dispute in Williams-Nobles, lack of prompt action taken by both the debtor and creditor played a large role in the outcome of Jones v. Tri-City Auto Sales (In re Jones), 2012 WL 5993760 (Bankr. E.D. Va. Nov. 30, 2012) (Tice, J.). In Jones, the debtor filed a motion seeking turnover of a vehicle repossessed by the secured creditor pre-petition and seeking to recover damages for an alleged violation of the automatic stay. Id. at *1. The debtor filed its Chapter 13 petition on February 3, 2012, and requested the creditor to return the vehicle. Id. The debtor then waited to file the motion for turnover until March 5, 2012. Id. The vehicle was ultimately returned to the debtor on March 7, 2012. Id. The debtor alleged that the failure to turn over the vehicle at his request violated the automatic stay, and the creditor defended on the grounds that the requirement to turn over property is often conditioned upon the debtor’s provision of adequate protection. Id. at *2. The Court took issue with the delay by both parties in bringing the issues before the Court. Id. On the one hand, the creditor could have filed a motion for adequate protection under § 362(f); on the other hand, the debtor could have filed its motion for turnover more promptly. Id. at *3-4. As a result, the Court found that the creditor had willfully violated the stay but awarded the debtor attorney’s fees in a substantially reduced amount. Id. at *4.

Creditors also can escape liability by taking prompt and clear action in the context of administrative holds on a debtor’s bank accounts. In Jernigan v. Wells Fargo Bank, N.A., the debtor alleged that the creditor’s imposition of an administrative hold on three of the debtor’s accounts violated the automatic stay. Jernigan, 475 B.R. 535 (Bankr. W.D. Va. 2012) (Krumm, J.). Judge Krumm observed that where a hold is temporary and serves merely to “maintain the status quo and preserve property of the estate,” an administrative hold does not violate the automatic stay. Id. at 539 (quoting In re Phillips, 443 B.R. 63, 66 (Bankr. M.D.N.C. 2010)). Because the creditor placed an administrative hold on the accounts and sent a letter to the Chapter 7 Trustee and the debtor’s counsel within four days of the petition date requesting instruction from the trustee regarding the funds, the Court held that the administrative hold did not violate the stay. Id. at 539-40.

While the cases above provide useful guidance in some common situations, the Court addressed fairly unique circumstances in In re Gordon Properties, LLC v. First Owners Association of Forty Six Hundred. There, the debtor owned several units in a condominium, but, as a result of miscalculation of dues payable to the owners’ association on one of the units, owed the association over $300,000.00 as of the petition date. 460 B.R. at 685. The association’s bylaws prohibited a delinquent unit owner from voting at any meeting of the members of the association. Id. at 685 n. 1. The board of directors of the association cancelled its first post-petition annual meeting because a quorum was not present; however, in calculating the number of members present, the board refused to count the debtor based on the bylaws. Id. at 687-89. The Court held that the enforcement of this provision was an act to collect a debt, id. at 693-94, and, as a result of the violation, held the association in contempt and awarded punitive damages of $100,000.00 with the opportunity to purge the award if the association held its annual meeting and gave the debtor the right to vote at that meeting. Id. at 699-700. In so holding, the Court cautioned that “[n]ot only are obvious acts . . . prohibited, but less direct acts are also prohibited.” Id. at 692.

In addition to establishing or reaffirming context-specific rules, the recent cases involving the discharge injunction and automatic stay provide guidance applicable to many disputes that arise in bankruptcy cases, and elsewhere. Common sense, prompt action, and professional courtesy can help debtors and creditors avoid time-consuming litigation. In addition, in situations where the requirements of the automatic stay are less than clear, the parties should file appropriate motions and seek guidance from the Courts. 

See http://valawyersweekly.com/vlwblog/2013/02/05/bankruptcy-filings-down-in-virginia-u-s/ (last visited February 10, 2013).

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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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