Author: Andrew M. Thaler
The Bankruptcy Code provides for the imposition of an “automatic stay” of the commencement or continuation of actions against the debtor that were or could have been commenced before the bankruptcy filing or to recover pre-petition claims against the debtor unless an exception applies.
In a recently decided case, the Debtor was embroiled in state court divorce proceedings. Debtor was found to be in willful violation of the state court’s pre-petition order. The state court scheduled a contempt sentencing hearing which took place after the debtor filed bankruptcy. The state court found that the automatic stay did not apply to the hearing and ordered the immediate incarceration of the Debtor for 90 days or until such time as he paid $20,000 to Debtor wife’s attorney for attorneys’ fees incurred in connection with the divorce that had been reduced to judgment pre-petition.
In a recently decided case, the Debtor was embroiled in state court divorce proceedings. Debtor was found to be in willful violation of the state court’s pre-petition order. The state court scheduled a contempt sentencing hearing which took place after the debtor filed bankruptcy. The state court found that the automatic stay did not apply to the hearing and ordered the immediate incarceration of the Debtor for 90 days or until such time as he paid $20,000 to Debtor wife’s attorney for attorneys’ fees incurred in connection with the divorce that had been reduced to judgment pre-petition.
Debtor sought to hold the wife’s attorney liable for damages resulting from a willful violation of the automatic stay for the role he played and the position he advocated at the contempt sentencing hearing. (i.e. that because the attorneys’ fees were a non-dischargeable debt, the automatic stay did not apply)
The Bankruptcy Court determined that the contempt sentencing hearing itself would not be a violation of the stay if it fell within an exception to the automatic stay that provides that there is no stay if the contempt is criminal in nature. The state court was sensitive to the distinction between contempt proceedings based on failure to pay matrimonial obligations and sentencing for contempt where contempt had already been found pursuant to a valid and enforceable pre-petition order. The contempt sentencing hearing was found by the bankruptcy court to be criminal in nature to address the debtor’s contumacious conduct which represented an affront to the dignity of the state court. The Bankruptcy Court found that to the extent the purpose of the sentencing hearing was to mete out punishment for a previously-found contempt based on the Debtor’s failure to comply with court orders, the proceedings was not subject to the automatic stay. Accordingly the stay did not apply to the sentencing hearing. The key issue however became the resulting sentence by the state court and whether those acts were a violation of the stay.
The Bankruptcy Court determined that the terms of the sentence, where the state court imposed a provision which required the Debtor to pay the attorney money in partial satisfaction of its pre-petition judgment in order to be released from incarceration, violated the automatic stay (i.e. coercing payment of a pre-petition judgment). Had the state court merely directed incarceration of the debtor for a period of time as punishment for his willful violation of the court’s orders rather than craft a purge amount which required payment be made to a pre-petition creditor, the bankruptcy court would not have found the state court’s sentence to be a violation of the automatic stay.
Significant to the finding in this case, despite knowledge of a Debtor’s bankruptcy filing, the wife’s attorney appeared at the contempt sentencing hearing as a creditor apparently motivated by collecting on the judgment he had for his attorneys’ fees. The attorney argued that the attorneys’ fees would not be discharged because it was incurred during the course of the divorce proceeding. However the non-dischargeablility of the debt had no bearing on whether the stay applied. The Bankruptcy Court stated that if the attorney intended to, as he did, appear at the contempt sentencing hearing and advocated for a disposition that would result in payment of all or any part of its claim against the Debtor, it was incumbent upon that attorney to first seek relief from the automatic stay. In short, the Bankruptcy Court found the attorneys actions to be “a thinly veiled attempt to coerce payment of the debt“, something that is prohibited. The attorney was found liable for the Debtor’s legal fees and costs.
The fact that the state court determined the stay had not been violated was not binding on the Bankruptcy Court. The Bankruptcy Court has ultimate say and has authority to re-visit the state court’s analysis on the subject.
In this case, it appears that the wife’s attorney mislead the state court with regard to what was properly excepted from the automatic stay to secure payment of his legal fees. The intersection of bankruptcy and matrimonial law is complex. One acts at their own peril if they violate the automatic stay. More often than not, the best course of action is to seek an order vacating the automatic stay from the Bankruptcy Court, even if some of the relief sought is in the nature of a comfort order.
It should also generally be remembered that an individual injured by any willful violation of a stay is entitled to recover actual damages, including costs and attorneys’ fee, and in appropriate circumstances, may recover punitive damages. And, willfulness does not require that the creditor intend to violate the automatic stay, rather it requires that the acts which violate the stay be intentional. A good faith belief that one is not violating the automatic stay provision is not determinative of willfulness.
To avoid the many pitfalls bankruptcy poses to the unwary, it is advisable to seek advice of competent bankruptcy counsel to obtain proper guidance.
The Bankruptcy Court determined that the contempt sentencing hearing itself would not be a violation of the stay if it fell within an exception to the automatic stay that provides that there is no stay if the contempt is criminal in nature. The state court was sensitive to the distinction between contempt proceedings based on failure to pay matrimonial obligations and sentencing for contempt where contempt had already been found pursuant to a valid and enforceable pre-petition order. The contempt sentencing hearing was found by the bankruptcy court to be criminal in nature to address the debtor’s contumacious conduct which represented an affront to the dignity of the state court. The Bankruptcy Court found that to the extent the purpose of the sentencing hearing was to mete out punishment for a previously-found contempt based on the Debtor’s failure to comply with court orders, the proceedings was not subject to the automatic stay. Accordingly the stay did not apply to the sentencing hearing. The key issue however became the resulting sentence by the state court and whether those acts were a violation of the stay.
The Bankruptcy Court determined that the terms of the sentence, where the state court imposed a provision which required the Debtor to pay the attorney money in partial satisfaction of its pre-petition judgment in order to be released from incarceration, violated the automatic stay (i.e. coercing payment of a pre-petition judgment). Had the state court merely directed incarceration of the debtor for a period of time as punishment for his willful violation of the court’s orders rather than craft a purge amount which required payment be made to a pre-petition creditor, the bankruptcy court would not have found the state court’s sentence to be a violation of the automatic stay.
Significant to the finding in this case, despite knowledge of a Debtor’s bankruptcy filing, the wife’s attorney appeared at the contempt sentencing hearing as a creditor apparently motivated by collecting on the judgment he had for his attorneys’ fees. The attorney argued that the attorneys’ fees would not be discharged because it was incurred during the course of the divorce proceeding. However the non-dischargeablility of the debt had no bearing on whether the stay applied. The Bankruptcy Court stated that if the attorney intended to, as he did, appear at the contempt sentencing hearing and advocated for a disposition that would result in payment of all or any part of its claim against the Debtor, it was incumbent upon that attorney to first seek relief from the automatic stay. In short, the Bankruptcy Court found the attorneys actions to be “a thinly veiled attempt to coerce payment of the debt“, something that is prohibited. The attorney was found liable for the Debtor’s legal fees and costs.
The fact that the state court determined the stay had not been violated was not binding on the Bankruptcy Court. The Bankruptcy Court has ultimate say and has authority to re-visit the state court’s analysis on the subject.
In this case, it appears that the wife’s attorney mislead the state court with regard to what was properly excepted from the automatic stay to secure payment of his legal fees. The intersection of bankruptcy and matrimonial law is complex. One acts at their own peril if they violate the automatic stay. More often than not, the best course of action is to seek an order vacating the automatic stay from the Bankruptcy Court, even if some of the relief sought is in the nature of a comfort order.
It should also generally be remembered that an individual injured by any willful violation of a stay is entitled to recover actual damages, including costs and attorneys’ fee, and in appropriate circumstances, may recover punitive damages. And, willfulness does not require that the creditor intend to violate the automatic stay, rather it requires that the acts which violate the stay be intentional. A good faith belief that one is not violating the automatic stay provision is not determinative of willfulness.
To avoid the many pitfalls bankruptcy poses to the unwary, it is advisable to seek advice of competent bankruptcy counsel to obtain proper guidance.
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