Results of Violation of Automatic Stay and Release Injunctions

The automatic stay takes effect immediately when a debtor files a petition for receivership. The scope of application of automatic suspension is wide. The stay applies to all creditors and prohibits formal and informal actions against the debtor and his assets. And once the case is over, the discharge injunction enjoins the creditor’s action to recover personal liability for a debtor’s prepetition debt.

The consequences of violations of the automatic suspension and release order can be serious. Creditors who willfully breach 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, injunctive relief violations – subject to penalties in the nature of civil contempt – may result in monetary penalties. These penalties may include compensatory damages, attorneys’ fees and punitive damages. Below are some cautionary tales demonstrating the seriousness of these violations.

Because of the potentially severe penalties for violating the automatic stay and release injunction, creditors should be confident that they have policies and procedures in place specifically to report bankrupt accounts, ensure that activity collection stops during the suspension and to adjust accounts as appropriate after a discharge is entered.

1. Failure to terminate debt collection activity already in progress at the time bankruptcy is filed may result in both automatic stay and discharge injunction violations

A penalized a judgment creditor who failed to terminate a pre-bankruptcy wage garnishment proceeding. The judgment creditor, assignee of a money judgment against the debtor, served an income restraint order on the debtor’s employer. A few weeks later, the debtor filed for Chapter 7 bankruptcy, triggering the automatic stay. The debtor’s discharge was registered a few months later. However, the creditor merely “closed” its file on the debtor, but did not take steps to permanently end the restraining order. As a result, the order remained dormant, but began triggering payroll deductions during and after the bankruptcy filing. Even after being advised of these facts, the creditor waited 19 days to terminate the restraint order. The creditor’s failure to permanently 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 injunction liberating. To further compound the problem, the creditor did not immediately terminate the order after receiving the notice, but instead waited 19 days, while being aware of the continued breach of the injunction, resulting in at least two additional garnishments.

As a result of the breach of the creditor’s stay, the bankruptcy court awarded the debtor actual damages of $9,883.35, as well as punitive damages of $25,000.

Carry: Creditors are reminded to take prompt action to cease all collection activity, even if already in progress, upon receipt of notice that a debtor has filed for bankruptcy. Waiting just a few days to end collection activity can result in hefty fines and penalties, including punitive damages. Creditors should ensure that they actively monitor their mailboxes for bankruptcy notices and have streamlined policies and procedures in place to promptly process such notices for all accounts, especially those in collection.

2. Carrying out collection practices as usual after receiving the notice of bankruptcy can be expensive

Even when actual damages are low, bankruptcy courts can award significant punitive damages for stay violations, such as one . Car dealership activated a ‘kill switch’ and repossessed debtor’s vehicle after debtor filed for Chapter 13 bankruptcy. Despite knowledge of bankruptcy, dealership refused to return possession of the vehicle, initiated a payment request after the request and continued to control the vehicle for weeks. This conduct constituted willful violations of the automatic suspension. Actual damages were low – the court found only $150 in actual damages for the deprivation of the debtor’s vehicle. However, the court determined that the creditor’s willful breach 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 dealer’s conduct was particularly egregious. The dealership not only refused to comply after being repeatedly notified of the bankruptcy filing, but also dismissed the debtor, the debtor’s attorney, and the Chapter 13 trustee. The creditor did not respond to appeals, provided false information, demanded payment of a prior claim in order to comply with its unconditional obligations under the bankruptcy code, claimed non-payment of sums actually paid by the debtor when he had proof that the debtor had actually made those payments, and generally gave the debtor and trustee “the sleight of hand” for almost a month. Furthermore, the dealer showed no remorse for his actions, arguing that he committed, at most, only a technical violation of the suspension despite all evidence to the contrary.

This case demonstrates the serious risks of ignoring a debtor’s bankruptcy filing and pursuing collection efforts as usual. Such disregard for automatic suspension can result in severe punitive damages, even when the actual damages are small.

Carry: While it makes good business sense to perform a cost-benefit analysis to determine whether implementing or changing policies and procedures is the best business judgment or whether certain responsibilities may be the “cost of making business”, creditors should be very aware that the costs of breaching the automatic injunction of stay or discharge can far outweigh the mere actual damages incurred by the debtor. Too often, courts impose punitive damages on creditors whose stay violations may not cause much actual harm. These punitive damages can be very expensive and difficult to predict. As such, creditors should ensure that their policies and procedures have an effective mechanism for receiving notices of bankruptcy or discharge, annotating accounts, and modifying collection activities accordingly.

3. Beware of computer-generated communications

Creditors attempted to evade liability by blaming the tortious communications on automated computer systems. For example, one unsuccessfully argued that a computer-generated overdue statement sent to a Chapter 13 debtor was not a “deliberate” automatic stay violation. The credit union pointed to the fact that it had also flagged the debtor’s line of credit account for no collection activity, reported the account as included in bankruptcy to credit bureaus and, through its internal procedures, subsequently charged the line of credit the credit. But such acts, which seem consistent with the automatic suspension, are irrelevant to the analysis of whether the computer-generated statement violated the suspension – and sending the statement did in fact violate the suspension. The credit union acknowledged that it was notified of the bankruptcy before sending the statement. And the statement to the debtor stated that the payments were due monthly, indicated that the account was overdue, and instructed the debtor to remit the amount owed immediately. The court found that the statement violated automatic suspension, dismissed the defense that “my computer did it” and allowed the case to sue the credit union to determine damages for its willful violation of the automatic suspension.

Carry: A number of bankruptcy courts have made it clear that the “my computer did” defense is a no-start “since intelligent beings still control the computer and could have altered the programming appropriately.” Creditors should note that the courts expect them to shape their internal policies and procedures so that they are consistent with the legal requirements imposed on them by the Bankruptcy Code. In the example above, the credit union recognized that its internal system was set up such that when a member’s account was overdue, its computer system would automatically generate an overdue account statement. Although the credit union indicated in its internal record system that the debtor member was bankrupt, it did not prevent its system from automatically initiating default collection practices in violation of the Bankruptcy Code. Creditors who fail to learn this lesson and adjust their IT systems accordingly are exposing themselves to costs, fees or other damages.

© 2022 Bradley Arant Boult Cummings LLPNational Law Review, Volume XII, Number 25

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