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To Stay Clear of Stay Violations, Action May be Required

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Andrea Davison
BKK Business Law Newsletter
July 2015

The automatic stay, imposed (automatically, of course) by the filing of a voluntary bankruptcy petition, is the most fundamental of protections offered by the Bankruptcy Code. The stay, governed by 11 U.S.C. § 362, is designed to provide debtors with a “breathing spell” from creditors and the opportunity to liquidate or reorganize under the supervision of the bankruptcy court. It bars not only the commencement of any action against the bankruptcy debtor to collect debts, but also the continuation of any action instituted prior to the bankruptcy petition date.

By statute, any debtor injured by a creditor’s willful violation of the automatic stay may recover damages, including costs and attorneys’ fees from the violating creditor. See 11 U.S.C. §362(k). Case law makes clear that the willfulness requirement does not require a specific intent by the creditor to violate the automatic stay. Instead, it is sufficient to show that the creditor knew that the automatic stay was in effect and then intentionally acted (or failed to act) in a manner that violated the stay.

With that statutory background, creditors proceeding to collect are often faced with the question of what exactly to do – or not to do – upon a debtor’s bankruptcy filing to avoid committing a stay violation.  May the creditor simply sit back and not take action? Or must the creditor, in certain circumstances, take affirmative action to avoid violating any of the debtor’s rights vis a vis the automatic stay? Last year, the District Court for the Eastern District of Virginia answered the latter question in the affirmative.

In Skillforce Inc. v. Hafer, 509 B.R. 523 (E.D. Va. 2014) (Ellis, J.), the District Court was presented the following question: whether a status hearing on debtor’s interrogatories served by the creditor constituted a "continuation" of an action against the debtor and therefore a violation of the automatic stay that the creditor had a duty to prevent. Confirming the Bankruptcy Court, the District Court held that Skillforce’s failure to either withdraw the interrogatories or formally request that the state court cancel the status hearing constituted a continuation of an action against a debtor in violation of the stay. A status hearing , the Court found, does not fall under the settled exception for the performance of “ministerial acts” during the stay; that is, the court retained some discretion or judgment in the hearing and therefore it could not be held without violating the stay.

Reviewing the decisions of other courts faced with a similar question, the Court summarized the guiding principle as follows: “[a] creditor or the creditor’s legal representative has an affirmative duty, post-petition, to discontinue any proceeding it has initiated or continued, or to take appropriate steps to halt that proceeding if the proceeding: (i) jeopardizes or threatens in any way the integrity of the bankruptcy estate, or (ii) exposes the debtor to harassment or coercion or otherwise inhibits the debtor’s “breathing spell from [her] creditors.” Id. At 531, quoting Grady v. A.H. Robins Co., 839 F. 2d 198, 200 (4th Cir. 1988). Given the high stakes of a stay violation, and this ruling imposing an affirmative duty to prevent any such harassment, creditors are advised to proceed carefully and deliberately when they learn of a debtor’s bankruptcy.

Andrea Campbell Davison is an associate attorney practicing in the areas of bankruptcy, creditors’ rights and financial restructuring. She can be reached at 703.525.4000 or adavison@beankinney.com.