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Respect The Automatic Bankruptcy Stay

The purpose of this post is to discuss the automatic stay provision of 11 U.S.C. § 362(a) in the Bankruptcy Code and to provide an illustration of a violation of the stay.  Judge Philip Klingeberger’s 7-25-08 opinion in In Re:  Galmor, 2008 Bankr. LEXIS 2201 (N.D. Ind. 2008) (Galmore.pdf) is a very thoughtful decision intended “to send a clear message” that willful stay violations “will not be tolerated.”

Primer.  Courtesy of Judge Klingeberger, here are some general principles: 

 When a debtor files a bankruptcy petition, the automatic stay takes effect, and Section 362(a) prohibits creditors from taking certain actions to collect their debts.
 The stay is self-executing and is effective upon filing of the bankruptcy petition.
 The stay prohibits, among other things, the enforcement of a deficiency judgment or collection on a claim that arose before the commencement of the bankruptcy case. 
 The rationale behind the stay is, in part, to give the bankruptcy court an opportunity to assess the debtor’s situation and to embark on an orderly course of resolving the estate.  The stay prevents a “chaotic and uncontrolled scramble for the debtor’s assets in a variety of uncoordinated proceedings in different courts.” 
 “The debtor has the burden of providing the creditor with actual notice of the bankruptcy and, upon so providing, the burden shifts to the creditor to prevent violations of the automatic stay.”
 If uncertain about the applicability of the stay, the creditor may petition the bankruptcy court for clarification. 
 Sanctions should not be imposed where there has been a technical violation of the stay.
 However, Section 362(k) provides monetary relief for willful violations of the automatic stay.

Backdrop.  Dykstra held a pre-petition judgment, had filed a motion to enforce the judgment by proceedings supplemental and had requested that defendant/judgment debtor Galmor appear in court to answer as to any assets.  The state court issued an order to appear, which Galmor ignored.  The state court then directed Galmor to appear and show why she should not be held in contempt.  Galmor blew off that hearing too, so the state court issued a bench warrant.  Subsequently, Galmor filed a petition for bankruptcy relief.  Amazingly, Dykstra showed up at Galmor’s Section 341 meeting of creditors in bankruptcy court and facilitated the arrest of Galmor pursuant to the bench warrant previously issued in state court.   

Elements of action.  Galmor sued Dykstra for damages for alleged willful violations of the automatic stay.  Here is what debtor’s must prove in order to recover:

1. That a bankruptcy petition was filed;
2. That the debtor is an “individual” under the automatic stay provision;
3. That the creditor had notice of the petition;
4. That the creditor’s actions were in willful violation of the stay; and
5. That the debtor is entitled to a form of relief provided by section 362(k).

The contested issue in Galmor was #4.   

Be proactive.  One of the interesting questions in Galmor was whether the creditor had a duty to take affirmative action to halt the effect of the pre-petition bench warrant in the wake of the automatic stay.  In Galmor, Dykstra not only permitted but indeed assisted with the arrest - at the first meeting of creditors in bankruptcy court no less.  Judge Klingeberger held:

Galmor was at risk of being arrested on a state court “collection device” bench warrant during her appearance at her section 341 meeting, an appearance mandated by the federal law of the Bankruptcy Code.  This is completely contrary to the purpose of the Bankruptcy Code and has the effect of rendering section 362(a) ineffective as to Dykstra’s debt.  The circumstances in this case raise the issue of whether a creditor, or an attorney, who has notice of a bankruptcy filing and had previously caused a bench warrant to be issued in order to collect a debt, has an affirmative duty to request that the warrant-issuing court recall the warrant.  The court determines that this affirmative duty should be imposed.  . . .   

Willful violation.  Based upon the following rationale, the Court held Dykstra’s actions to be a willful violation of the automatic stay and awarded punitive damages. 

Dykstra was not at all sensitive to any potential violation of the automatic stay, nor did he make any statement at the meeting of creditors that the warrant fell into the hands of federal law enforcement personnel by mere happenstance.  It is clear that it was Dykstra’s intent to appear at the section 341 meeting to have Galmor arrested as either punishment for not paying the debt and/or as a method to attempt to collect the debt.

Secured lenders and their counsel need to be sensitive to the automatic stay and cease all non-bankruptcy collection proceedings.  As Judge Klingeberger noted, the automatic stay “is a powerful tool” and should be respected accordingly.  For more on the automatic stay, please see my 7-18-08 post “Does a Guarantor’s Bankruptcy Stop a Foreclosure Case Against the Borrower?” 

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