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Companies should be extremely careful not to violate the automatic stay when they receive notice that a customer has filed for bankruptcy. Even a simple computer glitch can expose you to liability if collection actions are mistakenly pursued against a customer in bankruptcy.
Most collection departments are familiar with and understand the automatic stay, which prohibits creditors from collecting or attempting to collect debts that arose prior to a bankruptcy filing. The stay is called “automatic” because it takes immediate effect when a person or corporation files the bankruptcy petition and requires no further court action or order.
Navigating a Debtor-Friendly Environment
Bankruptcy courts consider the automatic stay to be one of the most fundamental rights provided to a debtor. Consequently, they apply its provisions broadly and strictly. Furthermore, the automatic stay is a court injunction whose violation is contempt, punishable by stiff fines and attorneys’ fees. The Bankruptcy Code further provides that an individual injured by any willful violation of a stay shall recover actual damages (including costs and attorneys’ fees), as well as punitive damages in appropriate circumstances. In some jurisdictions, the recovery can even include compensatory damages for emotional distress, though jurisdictions vary as to whether the definition of an “individual” includes corporations or partnerships. In light of these potentially costly consequences, collection departments typically maintain strict policies—from placing a bankruptcy notation in a collection file to removing the account from collections—in order to prevent such violations.
But what happens if your fail-safe policy actually fails? For example, suppose your collection department learns that one of your customers, a person with an aging outstanding account, has filed for bankruptcy. Following company policy, the assigned credit representative removes the customer’s name from the collections database, adds a bankruptcy notation to the file and ceases all collection calls. Then the unthinkable happens: due to a computer glitch, the name actually remains in the collection database and a collection letter is inadvertently sent to the customer. Surely this sort of innocent mistake—where no one intended to violate the automatic stay—is not considered a “willful violation” and, therefore, grounds to haul you into court, right?
Wrong. The term “willful” applies only to the act that violated the automatic stay. As long as the act itself was intentional (in this case, sending the collection letter), it does not matter that no one intended to violate the stay. If your company had knowledge of the bankruptcy and allowed the letter to be sent, a computer failure does not excuse the violation. Consequently, you will be responsible for any actual damages suffered by the individual.
The good news is that the court is not likely to award punitive damages under these circumstances. In considering whether to award punitive damages, courts look to the nature of the creditor’s conduct, the nature and extent of harm to the debtor, the creditor’s ability to pay damages, the level of sophistication of the creditor, the creditor’s motives and any provocation by the debtor.
It is important to remember that the bankruptcy courts take a debtor-friendly view of the automatic stay, and the Bankruptcy Code applies a nearly strict liability standard for imposing damages for violations. Therefore, companies should ensure that their collection departments establish clear, effective guidelines for preventing violations and train their employees thoroughly in the proper implementation of those policies.
© 2010 Much Shelist Denenberg Ament & Rubenstein, P.C.
