Creditors Beware: A Restrictive Approach to the Criminal Prosecution Exception to the Automatic Stay

By Kirk B. Burkley

and Daniel R. Schimizzi

Bernstein-Burkley, P.C.

Pittsburgh, PA

                 A recent decision from the United States Court of Appeals for the Sixth Circuit will likely chill certain collection practices employed by aggressive creditors.  In the case of Weary v. Poteat, No. 15-5159, 2015 WL5712191 (6th Cir. Sept. 30, 2015), the Sixth Circuit reviewed the criminal prosecution exception to the automatic stay and upheld the bankruptcy court’s award of actual and punitive damages to the debtor for the creditor’s violation of the stay. 

            In Weary, after the Debtor defaulted on her rent payments and moved out of the rental property, her landlord commenced a civil action, claiming $24,999.99 in damages.  The Debtor then filed a chapter 7 bankruptcy petition with the United States Bankruptcy Court for the Eastern District of Tennessee.  After receiving notice of the bankruptcy, the landlord sent letters to the Debtor’s bankruptcy attorney and her mother threatening to pursue criminal charges against the Debtor.  As a result of the letters, the Debtor moved the bankruptcy court to hold the landlord in contempt for violating the automatic stay.  In defense, the landlord invoked the criminal prosecution exception, claiming that the letters communicated his intent to pursue criminal prosecution and fell within the exception. 

 

            The automatic stay prohibits creditors from engaging in any act to collect, assess or recover a claim against the debtor that arose before the commencement of the case.  See 11 U.S.C. §362(a). The automatic stay does not operate as a bar to “the commencement or continuation of a criminal action or proceeding against the debtor.”  11 U.S.C. §362(b)(1).  The bankruptcy court found that the landlord’s motivation for sending the letters was to threaten, harass and intimidate the Debtor in an effort to coerce her into making a payment.  More importantly, the letters were not in the nature of, or in furtherance of any, criminal prosecution; rather, the letters communicated the landlord’s threat to pursue criminal prosecution.  Finding that the landlord willfully acted to harass and coerce the debtor into paying him, the bankruptcy court awarded the Debtor with actual damages, including costs and attorneys’ fees, and punitive damages of $7,500.00. 

            The United States District Court for the Eastern District of Tennessee and the Sixth Circuit affirmed the bankruptcy court.  The Sixth Circuit noted that the landlord failed to challenge the bankruptcy court’s fact findings, or its exercise of discretion in imposing punitive damages.  The landlord also did not challenge the bankruptcy court’s finding of his intent underlying the letters, or of his knowledge of the bankruptcy case.  Since the letters were not in furtherance of any criminal prosecution and were intended to coerce payment from the Debtor, the plain language of Section 362(b)(1) prevented the letters from falling within the criminal prosecution exception.  The Sixth Circuit affirmed the bankruptcy court’s findings that the criminal prosecution exception to the automatic stay did not apply.  The Sixth Circuit also affirmed the award of actual and punitive damages, as the landlord did not challenge these findings.

            The practice point to take from this opinion is that the criminal prosecution exception to the automatic stay does not safeguard the threat of criminal prosecution.  Don’t take the risk:  if you have grounds to pursue criminal charges against a debtor, just do it.  Threatening to do so may run afoul of the automatic stay. 

 

Supreme Court to Hear Dischargeability Case

The Supreme Court has agreed to hear its first bankruptcy case of the current term.     On November 6, the Court granted certiorari in  Case No. 15-145, Husky Electronic, Inc. v. Ritz.   The case involves whether a non-dischargeability case under 11 U.S.C. Sec. 523(a)(2)(A) requires a false representation or can be satisfied by conduct.   The Fifth Circuit ruled against the creditor, holding that a fraudulent transfer of assets was not actionable under Sec. 523(a)(2)(A).    I previously wrote about the Fifth Circuit decision here.  

Bankruptcy Court Resolves Social Media Showdown

By Stephen W. Sather

Barron & Newburger, P.C.

Austin, TX

This is a story about guns and bankruptcy and social media in Texas.   When the dust had cleared, the gun shop's social media accounts had been pried out of the former owner's hands, having been found to be property of the estate.   In re CTLI, Inc., 528 B.R. 359 (Bankr. S.D. Tex. 2015). 

How Long Is Too Long to Reopen A Bankruptcy Case?

By Judith K. Fitzgerald,

Shareholder at Tucker Arensberg, P.C. and

Professor of Practice, University of Pittsburgh School of Law

In a per curiam opinion that is not precedential but of interest to lenders who take mortgages as security, the Court of Appeals for the Third Circuit decided that the Debtor’s effort to reopen her bankruptcy case was too late. 

The basic facts were stated by the court as follows:

In 1997, Scheib filed a Chapter 13 bankruptcy petition in the United States Bankruptcy Court for the Western District of Pennsylvania. The petition was converted to Chapter 7 and in 1998, the Bankruptcy Court granted a motion by Mellon Bank, N.A. (now The Bank of New York Mellon and BNY Mellon, N.A.) for relief from the automatic stay to pursue foreclosure of Scheib's property in state court. Scheib received a discharge releasing her from her dischargeable debts and her bankruptcy case was closed on October 14, 1998. Scheib was evicted from the property that was the subject of the state foreclosure action in 1999. Scheib has since filed, without success, numerous actions in state and federal court seeking to challenge the foreclosure. 

In 2013, Scheib filed a motion in Bankruptcy Court to reopen her case. Although the motion is far from clear, Scheib appears to allege that she paid her mortgage in full and that Mellon Bank committed fraud in the foreclosure action and the bankruptcy proceeding. . . .

In re Scheib, 2015 WL 6685714, at *1 (3d Cir. Nov. 3, 2015).

The Last Screen: A Cautionary Tale

By Judith Fitzgerald

Bankruptcy Judge (Ret.)

Tucker Arensberg, P.C.

University of Pittsburgh School of Law

Pittsburgh, PA

The United States Court of Appeals for the Second Circuit issued an opinion on October 30, 2015, that should be of interest to everyone who files pleadings electronically.  In Luther Franklin v. John McHugh,  Docket No. 14‐4096‐cv,[1] the Court of Appeals dismissed an appeal for lack of jurisdiction due to a failure to complete the filing under CM/ECF.  The attorney did everything CM/ECF requires, including paying the $505 filing fee, but then missed the last step, so the document was never actually submitted to the court.