Automatic Stay Violations And Damage Awards

22 Aug Automatic Stay Violations And Damage Awards

The Bankruptcy Abuse Prevention Consumer Protection Act (BAPCPA) which went into effect on October 17, 2005, appears to be living up to its name with the changes to 11 USC 362. Indeed, for creditors who violate the automatic stay, there no longer appears to be a good faith exception due to new “consumer protections.”

In the past there appeared to be an exception for creditors who violated the automatic stayif the acts were done in good faith due to a bona fide question of law regarding the applicability of the automatic stay. In other words, if a creditor technically violated the automatic staybut believed it was not violating the stay due to the facts or its interpretation of the law, such an act would not have been considered “willful” so as to allow damages, attorney fees, and costs.

The good faith exception now appears to have been eliminated under BAPCPA. In the case of In re Mu’min, 374 B.R. 149, 168-169 (Bankr.E.D.Pa.2007), the Bankruptcy Court ruled that BAPCPA legislatively overuled this good faith exception:

When University Medical Center was decided, there was no express, statutory good faith exception to liability for intentional actions taken in violation of the automatic stay with knowledge of the bankruptcy case set forth in then 362(h). As a result, University Medical Center can be considered as a judicial gloss on the text of the pre-BAPCPA Code, designed to effectuate a Congressional intent that conduct with a certain type of scienter (i.e., good faith) should not be subject to the damages remedy provided in 362(h) (now 362(k)).

In enacting BAPCPA, Congress modified the Code provision addressed in University Medical Center and expressly addressed the issue of good faith. In doing so, Congress provided for only a limited, statutory good faith exception to the 362(k) damage remedy. The express, statutory good faith exception is more limited than the one expressed in University Medical Center in two distinct ways: (1) the limitation applies only to good faith violations of 362(h), which relates only to action taken in the good faith belief that the automatic stay has terminated because a debtor fails to perform his or her obligations under 521(a)(2) in a timely manner; and (2) it precludes only the imposition of punitive damages and in no situation restricts the imposition of “actual damages” for willful violations of the automatic stay.

With Congress having addressed the issue of a good faith exception to 362(k) liability expressly through the BAPCPA, the plain language of 362(k)’s exception does not encompass other types of arguably good faith conduct that Congress could have chosen to exempt from liability. Given this carefully constructed exception drawn by Congress, I conclude that University Medical Center is inconsistent with 362(k), insofar as the case held that a party is not subject to actual damages for voluntary acts taken with knowledge of the bankruptcy case in violation of the automatic stay when a party relies upon “persuasive legal authority” and the law on the issue is sufficiently unsettled.

Accordingly, the only possible good faith exception to violations of the automatic stay that remain under BAPCPA arise only in the limited context of a violation based upon the creditor’s interpretation of whether the debtor timely reaffirmed, redeemed, or surrendered collateral, and only to the extent that the exception only eliminates punitive damages, but not actual damages, attorney fees or costs.

So what does this mean? Pretty much any act by a creditor in technicalviolation of the automatic stay is now actionable, despite the fact that the creditor truly believes its actions are completly justified. For instance, in the case of In re Lightfoot, 399 B.R. 141 (Bankr. E.D.Pa. 2008)a creditor repossessed 2 vehiclesfrom the debtor during the bankruptcy, under the belief that the vehicles were the spouse’s and not the debtor’s and therefore not part of the estate, and also believing that the debtor was not a party to the contract or liable for the vehicles. In that case, the Bankruptcy Court agreed that the vehicles were not property of the debtor’s or the estate. However, after evidence was presented as to whether the debtor was liable for the vehicles, the Court concluded that the debtor was nevertheless liable to the creditor.

In that case, even though the property was not part of the estate, even though the creditor truly believed the debtor was not obligated for the debt, and even though it took a bankruptcy court decision to finally decide whether the debtor was in fact liable on the vehicles, the creditor was still liable for violating the automatic stay. In fact, in that case there were no actual damages, yet the creditor was issued $1,000.00 in punitive damages! $1,000.00 punitive damages against a creditor where no actual damages existed and where the creditor truly thought the debtor was not liable!

So Creditors beware. Should you take any actions in violation of the automatic stay, you will most likely pay some money as a result. The days of innocence via good faith are now over.

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