An adversary proceeding in bankruptcy is a separate lawsuit filed within the bankruptcy case. Like most lawsuits, it starts when someone (the creditor, the bankruptcy trustee, or you) files a complaint. Most bankruptcies (especially here in SC) go through to completion and discharge without any adversary proceedings.This is mainly due to Bankruptcy attorneys being more skewed to a transactional side of practice and therefore not experienced with litigation. Many do not want to wade into this, but I find the practice to not only be a protection of my clients’ rights, but also to be a source of just compensation for clients being harassed by post-petition attempts to collect debts.
The majority of adversarial cases I file deal with a violation of 11 U.S.C. § 362, more commonly known at the automatic stay. In United States bankruptcy law, an automatic stay is an automatic injunction that halts actions by creditors, with certain limited exceptions, to collect debts from a debtor who has declared bankruptcy. Under section 362 of the United States Bankruptcy Code, the stay begins at the moment the bankruptcy petition is filed. This stay bars “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of a case under” title 11. The Bankruptcy Code also provides under Section 362(k) that any “individual injured by any willful violation of a stay provided by this section shall recover actual damages…and in appropriate circumstances, may recover punitive damages.” A willful violation of the automatic stay occurs when a “creditor knows of the pending bankruptcy petition and intentionally attempts to continue collection procedures in spite of it.”
In the United States Bankruptcy Court for the District of South Carolina, there is a real lack of case law on a lot of issues. I was happy to be able to recently achieve a victory for the Debtors’ Bar in our District. In this present case, a creditor had sent two post-petition attempts to collect a debt (in the form of letters) to a debtor client of mine. As such, I filed an adversarial action pleading three causes of action: violation of §362, negligence, and violation of the SC Unfair Trade Practices Act.
The Creditor’s attorney unwisely filed a motion to dismiss with regards to punitive damages for the first cause of action. At the hearing on his motion, the creditor’s attorney did not prevail. He cited cases from other districts and circuits (mainly bc like I said previously, there is an absence of law in SC) and did not persuade the Judge. He even made an argument that we would not have been there if I had picked up to the phone to call his client to tell them to stop the post-petition attempts to collect a debt. The first point I made when I began my oral argument was that I (and my client) are under no affirmative duty, whether under §362 or case law, to call the creditor and ask them to please stop violating Federal Law. The judge agreed with this, and now it has been established in open court here in the District of South Carolina that no prior notice is needed before the filing of an adversarial action under §362. I then turned my argument to support the fact that at a 12(b)(6) dismissal motion hearing, it is premature to dismiss a claim for punitive damages. This was supported by the fact that no discovery at all had been conducted in the case. This was also supported by the fact that the standard for a 12(b)(6) motion holds that all the Plaintiff’s factual allegations are true. In addition, the Defendant had not answered in this case, which made their position undefined. With skillful oral argument, the Judge agreed with me that it was premature, denied the motion to dismiss the punitive damages, and more importantly: issued an order detailing that it is not proper to dismiss a punitive damages claim until testimony can be given from the Plaintiff-Debtor.
After the hearing, I reiterated to Defendant’s counsel that §362(k) allows actual damages to be recovered. My client’s actual damages included my attorney’s fees, which were greatly increased with having to defend the motion to dismiss, and her emotional distress damages as she was a disabled person. Due to her disabilities, and hinted by the Judge in open court, there would also be an award of punitive damages given at trial by the Judge. The next week, the case was able to be settled in the five figure range which I feel was a very positive and just outcome for my client.
Any attorneys with bankruptcy cases in the District of South Carolina should feel free to contact me to co-counsel on any §362 violations that they come across in their cases.