Bankruptcy: Don't Violate the Automatic Stay

What happens when a major banking institution decides to proceed with the sale of levied property even though the property owner has filed bankruptcy and an Automatic Stay is in effect? That issue came up last week in Bankruptcy Court. The debtor had defaulted on a loan from her bank. The bank filed a collection suit against her, obtained a default judgment, and issued a writ of execution. The sheriff then levied on her personal property creating a lien on the property. An execution sale was subsequently scheduled, but before the sale date the bank received notice from the clerk of the bankruptcy court that the debtor had filed a Chapter 7 Bankruptcy petition. Because the collection suit was so close to its conclusion, the bank decided to proceed with the sale, thereby avoiding the need to become involved in the debtor’s bankruptcy proceedings. Was the bank's decision to proceed with the sale legal? Short answer: absolutely not.

Automatic Stay
Under Section 302 of the Bankruptcy Reform Act, filing a petition for bankruptcy automatically provides a debtor with protection from creditor harassment. In simple terms, the automatic stay is an injunction that arises by operation of law immediately upon the commencement of the bankruptcy case. It is described as automatic because the act of filing the bankruptcy petition is all that is required to bring it into effect. No application for the injunction is made, and no court order is needed. Its effect is to impose a wide-ranging prohibition on all collection activity against the debtor. Any action by a creditor after the Automatic Stay is in effect is void even if the creditor did not know about the Stay when the action was taken.

So What Happened to the Bank?
The Bankruptcy Court concluded that the bank sale was a violation of the Bankrupcty Code's Automatic Stay provisions. The fact that the bank continued with the sale even after receiving notice of the bankrupcty made the bank a willful transgressor of the Stay. The Court tonguelashed the bank's representative and reserved ruling on additional sanctions. The bank could be held in contempt of court or be held liable for the debtor's actual damages, including costs, attorney’s fees, and punitive damages. The Bankruptcy Court determined that the bank had committed a "willful violation" which means its actions were intentional, even if the creditor believed it had a right to proceed.