The automatic stay is immediately effective when a debtor files a petition for bankruptcy relief. The scope of the automatic stay is broad. The stay applies to all creditors and prohibits both formal and informal actions against the debtor and his property. And after the case is complete, the discharge injunction enjoins creditor action to collect on the personal liability of a debtor’s prepetition debt.
Consequences for violations of the automatic stay and discharge injunction can be severe. Creditors that willfully violate the automatic stay may be liable to debtors for actual damages, including costs, attorneys’ fees, and, in appropriate circumstances, punitive damages. Similar to stay violations, discharge injunction violations — punishable by sanctions in the nature of civil contempt — may result in monetary sanctions. These sanctions may include compensatory damages, attorneys’ fees, and punitive damages. Below are just a few cautionary tales demonstrating the seriousness of such violations.
Due to the potentially severe sanctions for violating the automatic stay and discharge injunction, creditors should be certain that they have policies and procedures specifically addressing flagging accounts in bankruptcy, ensuring that collection activity halts while the stay is in place, and adjusting accounts as applicable after a discharge is entered.
1. Failure to terminate debt collection activity already in motion when a bankruptcy is filed can lead to both automatic stay and discharge injunction violations
A bankruptcy court in California penalized a judgment creditor that failed to terminate wage garnishment proceedings set in motion pre-bankruptcy. The judgment creditor, an assignee of a money judgment against the debtor, had an earnings withholding order served on the debtor’s employer. A couple weeks later, the debtor filed Chapter 7 bankruptcy, triggering the automatic stay. The debtor’s discharge was entered a couple months later. However, the creditor merely “closed” their file on the debtor but did not take steps to affirmatively terminate the withholding order. As a result, the order remained dormant, but began triggering payroll withholdings during and after the bankruptcy case. Even after being notified of these facts, the creditor waited 19 days to terminate the withholding order. The creditor’s failure to affirmatively terminate the garnishment order to prevent it from becoming active — as it did when the debtor’s disposable income exceeded a certain limit — violated the automatic stay and then the discharge injunction. Further compounding the issue, the creditor did not immediately terminate the order upon receiving notice, but instead waited 19 days, all the while having knowledge of on-going violation of the discharge injunction, which led to at least two additional garnishments.
As a result of the creditor’s stay violation, the bankruptcy court awarded the debtor actual damages of $9,883.35, as well as punitive damages of $25,000.
Takeaway: Creditors are reminded to take swift action to cease any and all collection activity, even if it is already in motion, upon receiving notice that a debtor has filed for bankruptcy. Waiting mere days to terminate collection activity can result in hefty fines and penalties, including punitive damages. Creditors should be sure to actively monitor their mailboxes for bankruptcy notices and have streamlined policies and procedures in place to quickly process such notices for all accounts, particularly those in collections.
2. Proceeding with collection practices as usual after receiving notice of bankruptcy can be costly
Even where actual damages are low, bankruptcy courts may award significant punitive damages for stay violations, as one North Carolina car dealership creditor learned. The car dealership activated a “kill switch” and repossessed the debtor’s vehicle after the debtor filed a Chapter 13 bankruptcy petition. Despite knowledge of the bankruptcy, the dealership refused to surrender possession of the vehicle, initiated post-petition demand for payment, and continued control of the vehicle for weeks. This conduct constituted willful violations of the automatic stay. Actual damages were low — the court only found $150 in actual damages for deprivation of the debtor’s vehicle. However, the court determined that the creditor’s willful violation of the stay merited punitive damages in the amount of $15,000. The court also awarded attorneys’ fees in the amount of $3,754 and costs of $59.90.
It should be noted that the dealership’s conduct was particularly egregious. The dealership not only refused to comply after being repeatedly notified of the bankruptcy filing, but was dismissive to the debtor, debtor’s counsel, and the Chapter 13 trustee. The creditor failed to return calls, provided false information, demanded payment of a prepetition claim in order to comply with its unconditional obligations under the Bankruptcy Code, asserted non-payment of amounts actually paid by the debtor despite having evidence that the debtor actually made such payments, and generally gave the debtor and trustee “the runaround” for almost a month. Moreover, the dealership showed no remorse for its actions, arguing that, at most, it committed only a technical violation of the stay despite all the evidence to the contrary.
This case demonstrates the serious risks of disregarding a debtor’s bankruptcy filing and continuing collection efforts as usual. Such disregard for the automatic stay may result in serious punitive damages, even where actual damages are low.
Takeaway: While it makes good business sense to conduct a cost benefit analysis when determining whether implementing or changing policies and procedures is the best business judgment or whether certain liabilities may be the “cost of doing business,” creditors should be very mindful that the costs of violating the automatic stay or discharge injunction may greatly outweigh the mere actual damages a debtor incurs. All too often, courts impose punitive damages against creditors whose stay violations may not cause a great deal of actual harm. These punitive damages can be very costly and difficult to predict. As such, creditors should ensure that their policies and procedures have an effective mechanism for receiving notice of bankruptcy cases or discharges, annotating accounts, and changing collections activities accordingly.
3. Watch out for computer-generated communications
Creditors have tried to escape liability by blaming offending communications on automated computer systems. For example, a credit union in Pennsylvania unsuccessfully argued that a computer-generated past due statement sent to a Chapter 13 debtor was not a “willful” violation of the automatic stay. The credit union pointed to the fact that it had also marked the debtor’s line of credit account for no collection activity, reported the account as included in a bankruptcy to the credit bureaus, and, through its internal procedures, had later charged off the line of credit. But such acts, which appear harmonious with the automatic stay, are irrelevant to the analysis of whether the computer-generated statement violated the stay — and sending the statement did in fact violate the stay. The credit union acknowledged it had notice of the bankruptcy prior to sending the statement. And the statement to the debtor indicated payments are due monthly, stated that the account was past due, and requested that the debtor remit the amount due immediately. The court found that the statement violated the automatic stay, rejected the defense that “my computer did it,” and allowed the case to proceed against the credit union to determine damages for its willful violation of the automatic stay.
Takeaway: A number of bankruptcy courts have made clear that the “my computer did it” defense is a non-starter “since intelligent beings still control the computer and could have altered the programming appropriately.” Creditors should take note that courts expect them to shape their internal policies and procedures such that they are harmonious with the legal requirements placed upon them by the Bankruptcy Code. Critical in the above example was the credit union’s admission that their internal system was set up in such a way that when a member’s account was past due, their computer system automatically generated a past due statement. While the credit union did mark in their internal system of record that the member-debtor was in bankruptcy, they failed to prevent their system from automatically initiating default collection practices in violation of the Bankruptcy Code. Creditors that fail to learn this lesson and to adjust their computer systems accordingly open themselves up to costs, fees, or other damages.