My recent blog dealing with violation of the automatic stay has drawn some responses. See Back to Basics, Continued—Establishing the Creditor’s Notice Address for Notice of Bankruptcy Filing. Nothing seems to get a creditor’s attention more than a discussion of how to potentially avoid the disastrous implications of violating the Automatic Stay in a consumer’s Chapter 13 bankruptcy. As creditor’s lawyers we constantly face adversary proceedings in which debtors and their counsel seek to take advantage of a creditor’s inadvertent inattention to the notice of a bankruptcy filing. 

What to do? What to do…

I suggested two approaches in that February 1, 2023 blog. One is to sign up to receive all bankruptcy notices electronically through the National Creditor Registration Service. A second is to strengthen the claim of non-receipt of notice by beefing up one’s protocols.

But, what about a more aggressive approach? What about defending the Adversary Proceeding on the basis of the debtor’s counsel’s conduct? 

So, when a debtor’s petition is filed in questionable faith—without any effort at naming creditors, including you—there is a functional defense to be asserted that debtor’s counsel failed to take reasonable steps to identify, list and provide notice to the debtor’s creditors at the time the petition was filed. Such a situation may give rise to what amounts to deception—a filing in bad faith. There is a concept in law known as “clean hands.” That is, one who seeks to prosecute his or her position, should do so in good faith and with clean hands.

Also, damages in a claim for violation of the Automatic Stay are punitive in nature—seldom can debtor’s counsel prove actual damages suffered by the debtor. If a debtor’s counsel’s conduct materially contributes to the technical violation of the Automatic Stay, and if there are no actual, compensable injuries attributable to the violation, perhaps the bankruptcy judge will decide that the violation is not serious, substantial or compensable. 

Stay tuned for a future blog addressing mitigation of damages.

Practice Pointer: The next time that you are faced with a Notice of Violation, talk to your counsel about the facts and circumstances that may give rise to a meaningful defense. 

Please Note: This is the two hundred-forty-ninth blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking Dentons - Consumer Finance Report. To receive weekly insights to your email from the Consumer Finance Report blog, subscribe here.