Creditor Not Sanctioned For Stay Violation

Overheard an interesting case in bankruptcy court concerning a debtor’s petition to sanction a creditor for pursuing a state court case against the debtor after he filed bankruptcy. The debtor’s attorney explained to the judge that he had repeatedly told the creditor’s collection agent and their attorney about the debtor’s bankruptcy and suggested they drop their action against the debtor. Nevertheless, the creditor’s attorney pursued discovery from the debtor and went as far as filing in state court a motion to show cause why the debtor should not be held in contempt of court. The debtor had to appear in state court with his attorney to personally explain to the judge that his bankruptcy stayed further discovery or any other activity in the state proceeding. The debtor appeared in bankruptcy court in a wheelchair breathing through an oxygen mask and unable to speak directly to the judge. His attorney showed that the debtor’s disability made it unusually difficult for him to go to state court because the creditor would not abide by the bankruptcy stay.

The debtor’s attorney stated that the debtor sought sanctions against the creditor company but not against the creditor’s attorneys. The judge denied sanctions. The judge reasoned that while the creditor’s attorney clearly knew that collection and discovery was going on after the bankruptcy there was no evidence that officers of the company knew their attorney was violating the stay. Since the debtor’s attorney had dropped demand against the creditor attorney the judge had insufficient evidence of intentional wrongdoing on behalf of the creditor company even though, as the debtor argued, the creditor’s attorney was acting as an agent of the client.

In this case a debtor’s attorney extended some professional courtesy to a fellow attorney to relieve them of personal liability and by doing so lost a recovery for the debtor at this hearing. It seemed clear that the bankruptcy judge would have entered a sanction against the creditor’s attorney in favor of the debtor. Before an attorney lets a fellow attorney off the hook he should make sure the client consents after the client understands what may be the loss of a potential source of monetary recovery.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida