Thursday, November 19, 2015

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. 


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