Contributed by Doron P. Kenter.
“Sticks and stones may break my bones, but words [may result in sanctions for violation of the automatic stay]” – Traditional Nursery Rhyme (adapted)
“Don’t Drink and Dun” – Anonymous
The automatic stay is a hallmark of the modern bankruptcy regime. Upon commencing a bankruptcy case, a debtor generally benefits from the imposition of an “automatic stay,” effectively forbidding creditors from taking any actions to attempt to collect on a prepetition debt. Among other things, section 362(a) of the Bankruptcy Code prohibits any acts “to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate” or “to collect, assess, or recover a claim against the debtor that arose before the commencement of the [bankruptcy] case.” The automatic stay is designed to provide the debtor with a “breathing spell,” during which time it can sort out its debts and pursue a reorganization or liquidation. The automatic stay has the additional benefit of allowing creditors to line up to assert their claims in the bankruptcy case, without prejudicing the rights of creditors that may not be the first to line up to collect on their debts. If a creditor violates this automatic stay, it may be subject to sanctions, including the cost of attorneys’ fees incurred by the debtor in connection with opposing these efforts to prematurely collect prepetition debts.
But the question remains: what exactly constitutes an “act” to recover property or to collect on a claim? A recent case from the Bankruptcy Court for the Northern District of Iowa suggests that these actions may include more than we might expect
In In re Ehlinger, an individual debtor (a bar owner) filed a chapter 7 petition because of impending efforts to collect a prepetition judgment against him in favor of a company that operated several stores in the area. Fewer than two months after the debtor filed his chapter 7 petition, the store manager, while on a pre-Halloween bus tour of various area bars, made an unscheduled stop at the debtor’s bar, at which time the store manager (who had been drinking) entered the bar “for the purported purpose of using the restroom.”
Though the parties’ versions of the facts differ from this point on, the court afforded principal credibility to the debtor’s story. In brief, the store manager approached the bar, and, while intoxicated, “talk[ed] loudly,” yelling and swearing. Among other comments, the store manager “yelled something” about the debtor having “filed bankruptcy against him,” in a voice that was loud enough for others at the bar to hear. After he was escorted out of the bar, the store manager called the police to report a “drug transaction” that he said he had witnessed in the debtor’s bar. The police then arrived at the bar, but found no illegal activity.
The bankruptcy court concluded that the store manager’s statements about the debtor’s bankruptcy and about wanting payment for money owed, in a voice loud enough to be heard by other customers, constituted a willful violation of the automatic stay. Notably, the court did not address whether the store manager’s call to the local police to report a fictitious crime could constitute such a willful violation of the stay, but rested its decision solely on the creditor’s “loud” statements about the debtor’s bankruptcy case. In considering the appropriate remedy for this violation of the automatic stay, the court concluded that the debtor’s asserted damages were unsupported by the record and, accordingly, awarded damages in the aggregate amount of $1,000 (which was less than half of the debtor’s purported attorneys’ fees).
Though the court’s decision may have been a pyrrhic victory for the debtor (insofar as he incurred close to $3,000 in attorneys’ fees for an ultimate award of just $1,000), the decision is a notable one in the broader context. The store manager took no legal action and did not threaten the debtor in any way. According to the court’s version of the facts, he did not “demand” payment on the debt. He simply stated something (loudly) about the debtor’s bankruptcy case and about wanting payment for the money owed. Apparently, public statements about a debtor’s bankruptcy case and/or about wanting to be paid prepetition debts can constitute willful violations of the automatic stay. (As we learned in first year Contracts, drunkenness — even to the point of being “high as a Georgia pine” — is no excuse for otherwise inappropriate conduct.) While the court did not elaborate on the contours of what types of statements would give rise to such a violation, the case begs a number of questions – how “public” must the statement be? What kinds of statements are impermissible? Would public statements in the news or on the internet constitute such violations of the stay? What about impulsive comments on Facebook, Twitter, Tumblr, or Friendster? (okay, Friendster may not be a problem). Though debtors would still need to show damages resulting from such statements in order to obtain a judgment against the creditor, they could conceivably argue that any statements that could be perceived as negative caused their business to suffer, either as a direct result of the statements or as a result of these negative perceptions associated with the debtor or its business.
Though the court’s decision in Ehlinger arises from a brief encounter in an Iowa bar, it reminds us to take great care in our interactions with bankrupt individuals and enterprises.