Violations of the automatic stay

When a Chapter 7, or any other type of bankruptcy, is filed the automatic stay of Bankruptcy Code (11 U.S.C.) Section 362(a) goes into effect and bars most types of creditor actions against the debtor or the debtor’s property.  What happens if a creditor violates the automatic stay?  What happens if a creditor proceeds with a foreclosure upon real property, obtains a judgment or garnishes the debtor’s wages, after a bankruptcy is filed?

First, actions taken in violation of the automatic stay are not legally valid, whether or not the creditor had notice of the bankruptcy filing.  In re Shamblin, 890 F. 2d 123 (9th Cir. 1989).  There are two schools of thought on how to view the validity of actions taken in violation of the stay.  First, some cases hold that,  “Any action taken in violation of the stay is void and without effect.”  Franklin Savings Ass’n v. Office of Thrift Supervision, 31 F. 3rd 1020, 1022 (10th Cir. 1994).  Second, some cases hold that actions taken in violation of the stay are voidable, not void.  See e.g. Jones v. Garcia, 63 F. 3rd 411 (5th Cir. 1995).  The distinction is that, if the actions are void, it means that they have no force, whether or not a court rules on their validity, whereas, if the actions are voidable, that means that the debtor can set the actions aside, but he, she or it has to obtain a court order to do so.

Second, Bankruptcy Code (11 U.S.C.) Section 362(k)(1) provides that, “an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.”  (In cases in which the creditor has a good faith belief that his, her or its actions were permitted by Section 362(h), only actual damages are allowed.)  As the Second Circuit Court of Appeals stated, “any deliberate act taken in violation of a stay, which the violator knows to be in existence, justifies an award of actual damages. An additional finding of maliciousness or bad faith on the part of the offending creditor warrants the further imposition of punitive damages…” In re Crysen/Montenay Energy Co., 909 F. 2d 1098 (1990).

 

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