wHAT IF THEY VIOLATE THE STAY UNDER 11 USC 362

8 Aug

Dismissal Of A Bankruptcy Case Does Not End Or Prevent Automatic Stay Violation Litigation Even If The Court Does Not Explicitly Retain Jurisdiction Or Reopen The Case

Harris Hartz It is something that we as practitioners run into all of the time. A willful violation of the automatic stay took place when the bankruptcy case was pending, or the bankruptcy case gets dismissed during the stay litigation for one reason or the other. Then the violator comes in and argues that the bankruptcy court has somehow lost jurisdiction to hear the stay violation case. Or, the bankruptcy court dismisses the pending adversary proceeding sua sponte as if the adversary is based on the continued administration of the estate. Often times it is a self-fulfilling prophesy of sorts. In fact, the argument can almost rise to that of a strategy. If true, all the violator needs to do is disrupt the bankruptcy enough that it gets dismissed, often for non-payment of trustee payments, which usually is a result of the stay violation.

Although there are some judges that for some reason buy into this argument that dismissal of the bankruptcy ends or prevents the litigation on the stay violation case, most bankruptcy judges do not. Yet, for some reason, this issue is never much discussed or published.

Now, the United States Court of Appeals, 10th Circuit, has addressed the issue in Johnson vs. Smith. Writing for a unanimous panel, the decision was decided without oral argument by Judge Harris Hartz, in an appeal from the 10th Circuit BAP.

M&M Auto Outlet is Wyoming’s largest used car dealership. It was found to have willfully violated the automatic stay provisions of 11 U.S.C. § 362(a) of Tommy and Candice Johnson’s Chapter 13 bankruptcy. (Mr. Johnson later passed away). As a result, the Bankruptcy Court awarded damages as against M&M. $937.50 was awarded directly to Mr. and Mrs. Johnson, $5,028.50 in attorneys’ fees and $232.23 in expenses. M&M appealed that decision to the 10th Circuit BAP and then to the 10th Circuit Court of Appeals, before it was remanded back to the Bankruptcy Court to reconsider the amount of damages. During the reconsideration of damages, the Johnson’s bankruptcy case was dismissed. The Bankruptcy Court then reconsidered the damages, and the case was appealed again based upon the argument that because the bankruptcy had been dismissed, and alternatively because the Bankruptcy Court had not specifically retained jurisdiction of the matter in the dismissal order or otherwise reopened the bankruptcy to retain jurisdiction, that no jurisdiction existed by the courts to hear or decide this matter. The Bankruptcy Court dismissed M&M’s argument that dismissal of Mr. and Mrs. Johnson’s Chapter 13 bankruptcy divested the bankruptcy court of jurisdiction, and then awarded actual damages of $11,816.02. The BAP reduced this award by $17.34, but otherwise rejected the jurisdiction argument as well.

The 10th Circuit ruled that stay violation case was a “core proceeding … which have no existence outside of bankruptcy.” Therefore, stay violation cases are unique because they depend on the bankruptcy laws for their existence. It found that M&M was liable by virtue of the private cause of action under 11 U.S.C. § 362(k)(1). The Court found that M&M’s argument was supported by cases that hold that noncore and related matters are barred by the dismissal of a bankruptcy, but that was not the situation in the case at hand.

The 10th Circuit stated that “It is particularly appropriate for bankruptcy courts to maintain jurisdiction over § 362(k)(1) proceedings because their purpose is not negated by dismissal of the underlying bankruptcy case. They still serve (a) to compensate for losses that are not extinguished by the termination of the bankruptcy case and (b) to vindicate the authority of the automatic stay. Requiring the dismissal of a § 362(k)(1) proceeding simply because the underlying bankruptcy case has been dismissed would not make sense. A court must have the power to compensate victims of violations of the automatic stay and punish the violators, even after the conclusion of the underlying bankruptcy case”. (Internal cites omitted). The Court analogized this to other sanction hearings under Rule 11 sanctions. And, the Court stated that “Nothing in the Bankruptcy Code mandates dismissal of the § 362(k)(1) proceeding when the bankruptcy case is closed.”

Finally, the 10th Circuit ruled that “we see no basis for requiring a bankruptcy court to state explicitly that it is retaining jurisdiction over § 362(k)(1) adversary proceeding when it dismisses an underlying Chapter 13 case, or for requiring the Johnsons to move to reopen the Chapter 13 case to pursue the § 362(k)(1) adversary proceeding”.

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