ILLINOIS STATE BAR ASSOCIATION FEBRUARY 2020 VOL 63 NO. 1 Commercial Banking, Collections and Bankruptcy

The newsletter of the Illinois State Bar Association’s Section on Commercial Banking, Collections and Bankruptcy

Creditors’ Willful Violation of the Automatic Stay Under 11 U.S.C. § 362(k) of the Bankruptcy Code: When the Debtor Initiates Contact BY TAOFIKAT I. NINALOWO

Congress amended the provisions of an action taken by an entity in the creditors “regardless of lack of actual notice the Bankruptcy Code in 1984 to add 11 good faith belief that subsection of the commencement of the proceeding,” U.S.C. § 362(h), which allowed a debtor (h) applies to the debtor, the and relieves the debtor from financial to commence an action against a creditor recovery under paragraph (1) of pressure during the pendency of the for the creditor’s willful violation of the this subsection against such entity bankruptcy case.7 The protection afforded automatic stay.1 In 2005, the provisions shall be limited to actual damages.4 to the debtor, in effect, halts all collection of 11 U.S.C. § 362 was amended by The provision of 11 U.S.C. § 362(k) effort, and creates a “breathing spell” from the passage of the Bankruptcy Abuse (1) is one of the most fundamental the debtor’s creditors, giving the debtor an Prevention and Consumer Protection Act protections provided to debtors under opportunity to reorganize his debts.8 (“BAPCPA”), which integrated the text the Bankruptcy Code. This provision The automatic stay protects creditors of former subsection (h) into subsection serves to deter actions that attempt to by ensuring that they adhere to the (k)(1).2 BAPCPA also added §362(k) collect prepetition claims and/or actions Bankruptcy Code’s orderly reorganization (2), which limits the damages that may that otherwise interfere with property or liquidation processes, is designed be recovered under subsection (k)(1).3 protected by the automatic stay in to treat all creditors equally, and deters According to 11 U.S.C. § 362: bankruptcy proceedings. Section 326(a) creditors from pursuing alternative (k)(1) Except as provided in of the Bankruptcy Code sets out conducts methods to collect their debts.9 The paragraph (2), an individual that constitute violations of the automatic automatic stay remains in effect as to injured by any willful violation of a stay, while Section 362(b) itemizes property of the estate until such property stay provided by this section shall excluded conducts.5 The automatic stay is no longer property of the estate, and is recover actual damages, including is applicable once a bankruptcy petition in place until either the case is closed or costs and attorneys’ fees, and, is filed, is effective without any order or dismissed, or a discharge is granted or in appropriate circumstances, action by the bankruptcy court, and serves denied.10 The automatic stay terminates on may recover punitive damages. to protect both the debtor and creditors.6 the 30th day from the commencement of (2) If such violation is based on The automatic stay is triggered as to all the case where the debtor had a prior case that was pending and dismissed within the automatic stay may constitute a willful which acknowledged the debtor was in preceding year of the debtor’s current case violation. There is no statute of limitations bankruptcy but also advised him of his and no extension of the automatic stay was period within which actions for damages delinquency, requested payments, and sought and granted within 30 days of the for violation of the automatic stay under included a return envelope.26 In response new case.11 A debtor that has had at least 11 U.S.C. § 362(k) must be brought.17 If and following the instructions in the two cases pending and dismissed within a debtor successfully proves a creditor’s invoices, the debtor made numerous calls the preceding year and failed to obtain an willful violation of the automatic stay under to the creditor, requesting that the creditor extension within 30 days of filing the new 11 U.S.C. § 362(k), he may recover actual refrain from sending him future invoices.27 case does not have the protection of the damages, including costs and attorney’s Despite the debtor’s requests, the creditor automatic stay.12 fees, and in some circumstances, punitive continued sending invoices to the debtor, In determining whether a violation damages.18 Actual damages is mandatory leading the debtor to retain the services of of the automatic stay has occurred and once the debtor shows harm resulting from an attorney. Shortly thereafter, the debtor whether sanctions are warranted, courts the violation.19 The bankruptcy court may filed a motion, seeking for the creditor look to the facts and circumstances of exercise its discretion in awarding punitive to be found in violation of the automatic the particular case. To state a prima facie damages if it finds that the creditor acted stay.28 In ruling in favor of the debtor, the case for a creditor’s willful violation of the in bad faith, with malice, or egregiously.20 court found that the information in the automatic stay, the debtor must establish In appropriate circumstances, the court invoices were “self-serving statement[s that the following by a preponderance of the may award emotional distress to the did] not obviate the fact that [they] sought evidence: 1) the bankruptcy petition was debtor.21 Because the automatic stay is payment from the debtor,” and dismissed filed; 2) the debtor is an individual, rather considered to be a court order, the court the creditor’s argument that they were solely than an entity; 3) the creditor received may also use its civil contempt powers for informational purposes only.29 actual or constructive notice of the under 11 U.S.C. § 105(a) to either coerce the At least one court has found a creditor bankruptcy case; 4) the creditor’s action creditor’s compliance with court orders or in willful violation of the automatic stay was in willful violation of the automatic compensate the debtor for any loss resulting where the debtor initiated the contact, stay; and 5) the debtor suffered damages.13 from the creditor’s noncompliance with the to which the creditor responded. In In re Notice provided to creditors may be oral court’s order.22 Sullivan, the Bankruptcy Court for the or written, and may be given by any means Not all creditor correspondences to Northern district of New York found a and in any manner. the debtor during the pendency of the creditor in willful violation of the automatic Not all automatic stay violations case constitute a willful violation of the stay where the creditor refused to release are willful. While a creditor will not be automatic stay or warrant sanctions against an abstract of title upon the debtor’s sale sanctioned if the automatic stay violation the creditor. While some bankruptcy of real property until the debtor paid the is not willful, the action taken in violation courts have held that “letters or statements, creditor’s “bankruptcy attorney fees.”30 The of the automatic stay is nonetheless void ab including the lender’s position and the creditor’s attorney had prepared and filed initio.14 Thus, in order to recover damages status of the loan, should not be construed a proof of claim on behalf of the creditor for a creditor’s violation of the automatic as an improper demand for payment,” and subsequently billed $500.00 in attorney stay, the debtor must prove that the others have found a creditor to have fees, not included in the proof of claim.31 violation was willful. While the Bankruptcy willfully violated the automatic stay when During the pendency of the case, the debtor Code does not define the term “willful,” the creditor’s actions crossed the line from contacted the creditor to obtain a payoff courts have liberally construed willfulness permissible to prohibited communications amount for the mortgage encumbering in order to bolster the protections of by harassing or coercing the debtor into his personal residence.32 In response, the the automatic stay.15 In order to prove a paying pre-petition debts.23 Another creditor sent the debtor the payoff letter willful violation, the debtor must show critical factor in determining whether a which contained the mortgage principal that the creditor had knowledge of the creditor’s correspondence to the debtor balance and a line item for “bankruptcy automatic stay and intended the actions constitutes a willful violation of the attorney fees” of $500.00.33 On advice that constitute the violation.16 Thus, specific automatic stay involves a determination of counsel, the debtor paid off only the intent is not required for a willful violation of whether the information contained principal, interest and late charges, without of the automatic stay to occur. Neither in the correspondence was needed by disbursing the bankruptcy attorney fees.34 is the creditor’s good faith belief that it the debtor when sent.24 In In re Draper, Upon receiving authorization from the had a right to contact the debtor or to the the Bankruptcy Court for the Middle court, the debtor sold the real property and property relevant in determining whether District of Florida found a creditor to sought an abstract of title from the creditor the creditor willfully violated the automatic have violated the automatic stay where the to no avail.35 stay. The creditor’s inaction, refusal to act, creditor took steps that were designed to The debtor filed a motion for the creditor or failure to act within a reasonable time pressure the debtor into paying his debt.25 and its attorney to be found in willful to correct a continuing violation of the The creditor mailed the debtor invoices violation of the automatic stay, arguing

2 that the payoff letter and the creditor’s communicating directly with the debtor. 1. Ann K. Wooster, Annotated, What Constitutes “Will- subsequent refusal to provide the abstract of If a creditor failed to obtain relief from the ful Violation” of Automatic Stay Provisions of Bank- title until the debtor paid off the bankruptcy automatic stay and an action is initiated ruptcy Code (11 U.S.C.A. § 362(h)) Sufficient to Award Damages” Chapter 11 and 12 Cases, 2 A.L.R. Fed. 2d attorney fees constituted a continuation against the creditor for its willful violation 459 (2005). of post-petition collection activities in of the automatic stay, the creditor should 2. Bankruptcy Abuse Prevention and Consumer Act of 36 2005, Pub. L. No. 109-8, § 305(1)(B), 119 Stat. 23, 79 willful violation of the automatic stay. In invoke evidence, including circumstantial (Westlaw). opposition, the creditor disputed any such evidence, in disputing the claim and refute 3. Id. § 441(1)(B), 119 Stat. at 114. 4. 11 U.S.C. § 362(k)(1)(2) (West 2010). violation, arguing that it did not have an the elements of the prima facie case. Should 5. 11 U.S.C. § 362(a)(b) (West 2010). abstract of title for the debtor’s property and a debtor successfully establish that the 6. U.S. v. Dos Cabezas Corp., 955 F.2d 1486, 1491 (9th Cir. 1993) (noting that the provisions of the automatic of the $500 bankruptcy attorney fees, $350 creditor willfully violated the automatic stay are “two-fold,” protecting both the debtor and the was allocated towards post-confirmation stay, because an automatic stay violation, creditors). 37 7. Thompson v. CitiMortgage, Inc., No. 1:14-cv-02528- services, allowed under 11 U.S.C. § 506(b). standing alone, does not support award AT-AJB, 2015 WL 11578454, at *6 (N.D. Ga. Jan. 12, The creditor acknowledged that the of damages, arguments disputing that the 2015) (citing Mueller v. Nugent, 184 U.S. 1, 14 (1902) (“noting that the filing of bankruptcy petition operates remaining $150 was attributable to pre- debtor suffered actual damages should as notice to all the world of the pendency of proceedings confirmation fees but contended that the fee be raised. The creditor may attack the and as an injunction restraining all persons from med- dling with the bankrupt’s property.”)). did not rise to the level of an automatic stay excessiveness of any potential damages to 8. See H.R. Rep. No. 95-595, at 121-24 (1977), reprint- violation.38 be awarded by asserting that the debtor had ed in 1978 U.S.C.C.A.N. at 5963, 6082-85. 9. Id. The Sullivan court found the payoff letter a duty to mitigate all damages but failed to 10. 11 U.S.C. § 362(c)(1)(2) (West 2010). was in violation of the automatic stay. In so do so. If punitive damages are sought, the 11. 11 U.S.C. § 362(c)(3) (West 2010). 12. 11 U.S.C. § 362(c)(4) (West 2010). ruling, the court found that the facts did not creditor should dispute claims of malice 13. In re Sori, 513 B.R. 728, 732 (Bankr. N.D. Ill. 2014). justify the division of fees given the timing and/or erroneous conduct on its part. All 14. In re Velichko, 473 B.R. 64, 68 (Bankr. S.D. N.Y. 2012). of the charge and found the entire $500 to evidence showing an absence of, or fleeting, 15. In re Tyson, 450 B.R. 754, 766 (Bankr. W.D. Tenn be comprised of pre-confirmation legal fees and inconsequential nature of, emotional 2011). 39 16. In re Stephens, 495 B.R. 608, 615 (Bankr. N.D. Ga. in violation of the automatic stay. This was distress alleged to be suffered by the debtor 2013). especially so given the creditor’s subsequent should be presented. A creditor may also 17. In re Stanwyck, 450 B.R. 181, 193 (Bankr. C.D. Cali 2011). refusal to release the abstract of title absent assert the equitable defense of laches when 18. 11 U.S.C. § 362(k)(1) (West 2010). the debtor’s payment of the creditor’s a huge amount of time has elapsed between 19. Id. 20. See Tyson, 450 B.R. 754. attorney fee. The creditor’s argument that the time the creditor allegedly engaged in 21. See generally Tom Shaw, Note, More Than Money: the payoff letter was solely for informational conduct that violated the automatic stay and Emotional Distress Damages in Bankruptcy Proceed- ings, 66 Mercer L. Rev. 1143 (2015). purposes held no weight because the debtor the debtor’s motion for such violation. 22. 11 U.S.C. § 105(a) (West 2010). had paid off all mortgage charges with the Transparency on the part of the creditor 23. In re Taylor, 430 B.R. 305, 312 (Bankr. N.D. Ga. only outstanding charge being the creditor’s is critical throughout the pendency of the 2010) (citing In re Redmond, 380 B.R. 179, 186-87 (Bankr. N.D. Ill. 2007); In re Mosby, 244 B.R. 79, 87 bankruptcy attorney fees. While the debtor debtor’s bankruptcy case. The creditor n. 13 (Bankr. E.D. Va. 2000); In re LaFave, 9 B.R. 859 sought emotional distress damages, punitive must adhere to the Bankruptcy Code, (Bankr. E.D. Mich. 1981)). 24. See generally In re Sipe, No. 99-40166, 2001 WL damages, and attorney’s fees, the court Bankruptcy Rules, and applicable local 35672616 (Bankr. W.D. N.C. July 18, 2001). awarded only emotional distress damages rules, ensure that it informs its attorney, and 25. In re Draper, 237 B.R. 502 (Bankr. M.D. Fla. 1999). 26. Id. at 504. 40 and attorney’s fees. in applicable circumstances, the court, of 27. Id. To prevent any potential violations, any unforeseen circumstances, and redress 28. Id. at 505. 29. Id. creditors should obtain relief from the any such issues immediately.n 30. In re Sullivan, 367 B.R. 54 (N.D. N.Y. 2007). automatic stay under the applicable 31. Id. at 57. 32. Id. provisions of Section 362 of the Bankruptcy 33. Id. Code. Once a creditor has knowledge Taofikat I. Ninalowo is a May 2018 law school 34. Id. 35. Id. at 57-58. that the debtor is represented by counsel, graduate and recently completed a bankruptcy judicial clerkship in September 2019. 36. Id. at 58. all correspondence should be with the 37. Id. at 58-59. 38. Id. at 59. debtor’s counsel to eliminate the chances of 39. Id. at 60-62. potentially violating the automatic stay by 40. Id. at 64-67.

Reprinted with permission of the Illinois State Bar Association Vol. 63 No. 1 www.isba.org

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