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

by Spilman Thomas & Battle, PLLC
Contact

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).
 

For more information, please contact:

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.

© Spilman Thomas & Battle, PLLC | Attorney Advertising

Written by:

Spilman Thomas & Battle, PLLC
Contact
more
less

Spilman Thomas & Battle, PLLC on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.