You obtained a money judgment against a debtor on behalf of one of your clients, only to find out that the debtor just filed for bankruptcy protection. Now what? First and foremost, you need to be aware of the existence of the automatic stay imposed by section 362 of the Bankruptcy Code, and take affirmative action to avoid violating the stay. See, 11 U.S.C. § 362. The filing of a bankruptcy petition operates automatically as a stay of any act whereby a creditor seeks to exercise some control over the debtor or property of the estate, including the enforcement of a judgment obtained pre-petition, as well as “any act to collect, assess, or recover a claim against the debtor that arose before the commencement” of the bankruptcy case. 11 U.S.C. § 362(a)(1)-(6).  

 

            In order to establish that the stay has been violated, the debtor must demonstrate (a) that a bankruptcy petition was filed; (b) that the debtor is an individual; (c) that the creditor received notice of the petition; (d) that the creditor’s actions were in willful violation of the stay; and (e) that the debtor suffered actual damages. See, id. at § 362(k). A good faith mistake of law or a legitimate dispute as to the legal rights does not serve to relieve a willful violator. A willful violation of the automatic stay may lead to sanctions which include actual damages (in some jurisdictions, emotional damages are recoverable), including costs and attorneys’ fees, and in appropriate circumstances, punitive damages. Typically, punitive damages are only awarded where the violator’s conduct is found to be particularly egregious, vindictive, and/or malicious. 

 

A violation of the automatic stay is “willful” if “the violator (1) knew of the automatic stay and (2) intentionally committed the violative act, regardless whether the violator specifically intended to violate the stay.” Jove Eng’g, Inc. v. Internal Revenue Serv., 92 F.3d 1539, 1555 (11th Cir. 1996).   Accordingly, specific intent to violate the stay is not required. The intentional or willful act must only be that the creditor intended to do the alleged act – there is no need to prove that the creditor intended to violate the stay. See, In re Crysen, 902 F.2d 1098, 1105 (2d Cir. 1990)(“[A]ny deliberate act taken in violation of a stay, which the violator knows to be in existence, justifies an award of actual damages.”).   
 

Creditors have an affirmative duty to cease collection of pre-petition obligations promptly upon receipt of the notice of the filing, or upon becoming aware of the bankruptcy filing; the actual notice generated by the bankruptcy court is not necessary to put a creditor or party in interest on notice. A telephone call from a debtor or his counsel will suffice to put a creditor on notice of the bankruptcy filing. Some courts have even gone so far as to impose a duty of inquiry where a debtor or counsel advises creditor’s counsel that a bankruptcy filing is imminent. See, In re MacDonald, 6 B.R. 23, 24 (Bankr. N.D. Ohio 1980)(creditor should have called the bankruptcy court to verify whether a bankruptcy petition was filed before repossessing debtor’s vehicle after her counsel indicated that a bankruptcy filing was “imminent”); In re Thacker, 24 B.R. 835, 839 (Bankr. S.D. Ohio 1982)(after receiving a telephone call and letter from debtor’s counsel advising that the debtor filed for bankruptcy protection, the creditor had a duty to “definitively ascertain for himself whether the petition had been filed….”). 

 

Once a creditor has received notice of the filing, it is required, “when necessary, to take affirmative steps to restore the status quo at the time of the filing of the petition for relief.” Miller v. Savings Bank of Baltimore, 22 B.R. 479, 481 (D. Md. 1982). This duty is imposed even where collection efforts were initiated without knowledge of the bankruptcy filing. “A creditor who has initiated [a] collection action without knowledge of a bankruptcy petition has an affirmative duty to restore the status quo without the debtor having to seek relief from the Bankruptcy Court.” In re Dungey, 99 B.R. 814, 816 (Bankr. S.D. Ohio 1989). The rationale behind this obligation is that placing the onus on the debtor, as opposed to the creditor, to take affirmative legal steps to restore the status quo “would subject the debtor to financial pressures the automatic stay was designed to temporarily abate, and render the contemplated breathing spell from his creditors illusory.” Miller, 22 B.R. at 481.   

 

The duty to cease collection efforts extends to income executions and requires creditors to ensure that any funds seized post-petition are returned to the debtor. “[C]ases widely agree that a garnishing creditor has an affirmative duty to stop garnishment proceedings when notified of the automatic stay.” In re Roberts, 175 B.R. 339, 343 (BAP 9th Cir. 1994). “It makes no difference whether the garnishment was filed prior or subsequent to the filing of the Chapter 13 petition. At whatever stage the garnishment is, the creditor’s attorney must do everything he can to halt the proceeding.” In re O’Connor, 42 B.R. 390, 392 (Bankr. E.D. Ark. 1984). Creditors must also take affirmative steps to stop any foreclosure sales and repossessions. “Based on [the] language of 362(a)(1) many courts have emphasized the obligation incumbent upon creditors to take the necessary steps to halt or reverse any pending State Court actions or other collection efforts commenced prior to the filing of a bankruptcy petition, including garnishment of wages, repossession of an automobile, foreclosure of a mortgage or a judgment lien and, thereby, maintain, or restore, the status quo as it existed at the time of the filing of the bankruptcy petition.” In re Sams, 106 B.R. 485, 490 (Bankr. S.D. Ohio 1989). 

 

            Creditors must be particularly vigilant to ensure that the stay is not violated where a sheriff or marshall is involved. After learning of a bankruptcy filing, a creditor cannot assume that the sheriff will also receive notice. In fact, in most cases, the sheriff or marshall will not be notified by the court or the debtor. Moreover, any action taken by a sheriff or marshall which violates the stay will more than likely be imputed to the creditor. As stated in Sams: 

The provisions of the automatic stay place the responsibility to discontinue any pending collection proceedings squarely on the shoulders of the creditor who initiated the action…. [T]he creditor sets in motion the process. The creditor is in the driver’s seat and very much controls what is done thereafter if it chooses…. [The creditor] cannot choose to do nothing and pass the buck to the garnishee or to the court in which the garnishment is filed to effectuate the stay. Positive action on the part of the creditor is necessary so that [the collection activity] is stayed.

 

Id. at 491. 

 

Accordingly, upon receiving notice of the bankruptcy filing, creditors should immediately notify a sheriff or marshall by telephone of the bankruptcy filing and request that enforcement be immediately ceased. This author believes that it is also advisable to follow up with letter to the sheriff, and seek confirmation from the sheriff soon thereafter that any collection or enforcement activity has in fact been discontinued. As they say, an ounce of prevent is worth a pound of cure. This certainly rings true when dealing with the automatic stay.    

 

            If you are ever in a position where you find that you have violated the automatic stay, whether the debtor and/or his counsel are aware of the violation or not, it is advisable to take immediate steps to restore the status quo. For instance, if you inadvertently send a demand letter to, or commence an action against a bankrupt debtor, whether you had prior notice or not, the best course is to immediately notify debtor’s counsel, issue a mea maxima culpa, and if some action is required to restore the status quo, advise counsel that you will take immediate action. Then, take the necessary action immediately and advise counsel in writing once status quo is restored and the steps that were taken. This may not avoid a sanctions motion, but your actions will be viewed more favorably by a bankruptcy judge, and should serve to mitigate damages.  

 

 

Mr. Tompsett is a member of the New York State and Monroe County Bar Associations. He is a Past President of the Avon Rotary Club, and has served on its Board of Directors for five years.   Mr. Tompsett also enjoys presenting the CARE Program (Credit Abuse Resistance Education) to area high schools, which is a national program aimed at educating teens and young adults regarding the consequences of abusing consumer credit and overspending.  In 2007, Mr. Tompsett received the Rotarian of the Year Award and is a Paul Harris Fellow.  While in law school, Mr. Tompsett was a member of the law review. 

 

Mr. Tompsett is married with two children, and in his spare time enjoys sailing, fishing, and equestrian sports.