When Bankruptcy Attorneys Go Too Far

April 15, 2014 at 8:52 am Leave a comment

I have a sneaking suspicion that this morning’s blog will warm the hearts of many credit union employees responsible for collecting debts.  It also provides useful instruction about the dos and don’ts of collection efforts once a member has declared bankruptcy and your credit union has notice of an automatic stay.

I know many of you already know this, but in case your second cup of coffee hasn’t kicked in, section 362(a)(6) of the bankruptcy code imposes an automatic stay applicable to all entities prohibiting any act to collect, assess or recover a claim against a debtor that arose before the bankruptcy filing.  A willful violation of this provision occurs anytime a creditor is put on notice of an automatic stay and continues to try to collect a debt.  Violations can result in damages and payment of a debtor’s attorney fees.

The case I am talking about, which was recently highlighted in an article in the New York Law Journal, is called In Re: Beth M. Squire, 13-62070 and is currently being appealed to the district court.  The facts are straight forward enough.  Consumer took out an unsecured loan with Berkshire Bank, which she was paying off using automatic ACH withdrawals from her account at Citizens Bank.  That money was pulled on the 30th of each month.  No one denies that Berkshire received notice of the Chapter 7 bankruptcy filing on January 3, 2014 or that two weeks later, the bank reached out to the debtor’s attorney James Selbach to see if his client wanted to continue to make the ACH payments.  Mr. Selbach acknowledged receiving the phone call but never called the bank back.  In the meantime, Berkshire Bank never cancelled the ACH payment and on January 30th it attempted to transfer $199.53 from the debtor’s Citizens bank account.  This account was empty and the debtor was charged $35 due to insufficient funds.

The case gets interesting for our purposes because on the same day that the bank made the ACH transaction, Mr. Selbach filed what the bankruptcy court described as a “boiler plate” motion claiming that Berkshire Bank violated the automatic stay and seeking not only damages but attorney fees.

Northern District Bankruptcy Judge Margaret Cangilos-Ruiz limited damages in the case to the amount of the ACH payment, $199.5, and wrote a decision critical of what she clearly feels is the excessive use of motions claiming violations of automatic stays.  Most importantly, she admonished the attorney that the bankruptcy code “was not designed to encourage a debtor or her counsel to lay in wait until a violation occurs and then pounce upon the creditor.  It is the opinion of the court that litigation over this violation which caused minimal damage should have ended before it started.”

The court also expressed that while a debtor’s attorney is under no obligation to return phone calls the creditor does not violate the automatic stay provisions of the bankruptcy code simply by reaching out to an attorney and seeing if a debtor wishes to continue making payment on a debt.

Mr. Selbach is appealing the court’s ruling.  He unabashedly told the New York Law Journal that he has brought hundreds of motions alleging automatic stay violations.  He argues that such motions are precisely what Congress intended to happen when it authorized debtors to recoup attorney fees.

Here are some interesting take-aways from this case.  First, even though the court is clearly exasperated by the debtor-attorney conduct, no one disputes that the bank violated the automatic stay provision.  As a result, while it is perfectly appropriate to reach out to opposing counsel, you should never do so in lieu of cancelling ACH withdrawals once you have been put on notice of an automatic stay.  Second, this case dealt with an automatic stay involving an unsecured loan so the bank could have ended the ACH payment as soon as it received notice but chose not to.  The court indicated that it would have expected the bank to act more quickly had it the case involved a garnishment of the debtors’ wages.

Entry filed under: Legal Watch. Tags: , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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