How to Recover Sanctions for Violations of the Automatic Stay in Bankruptcy
Many bankruptcy practitioners think an automatic stay violation equals sanctions for every debtor. However, those sanctions are only available to “individuals,” not corporations, limited liability companies (LLCs), and others entities.
What is the Automatic Stay in Bankruptcy?
Upon the filing of a petition to begin Chapter 7 or Chapter 11 bankruptcy case, 11 U.S.C. 362(a) operates as a stay preventing any creditors of the debtor from taking various actions to pursue collection of the outstanding debts they hold. The stay operates when the petition is filed voluntarily or involuntarily. The automatic stay is intended to protect creditors and preserve the estate of first-time filing debtors (similar to fraudulent conveyance/fraudulent transfer actions intended to preserve the estate and unlike California’s recently modified homestead exemption intended to protect debtors).
How Long Does the Stay Remain in Effect?
To further the stay’s goal to protect the creditors of the estate, the bankruptcy code provides a time where the stay is mandatory. Section 11 U.S.C. 362(c) provides guidance as to how long the stay will remain in effect. Generally speaking, absent a motion for a relief from the stay by a creditor, 11 U.S.C. 362(c) provides that the stay will operate until:
(1) the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate;
(2)the stay of any other act under subsection (a) of this section continues until the earliest of—(A) the time the case is closed;(B) the time the case is dismissed; or
With the automatic stay likely in effect for the entirety of the bankruptcy case, the bankruptcy code must provide a way to ensure creditors do not violate the stay.
Sanctions For Violations of the Automatic Stay in Bankruptcy
In order to further the automatic stay’s goal to protect the estate, the Bankruptcy Code provides for sanctions to punish creditors who violate the automatic stay in 11 U.S.C. 362(k). Sophisticated bankruptcy attorneys often make claims that violations of the automatic stay in bankruptcy should allow the debtor to recover attorney’s fees and costs under both 11 U.S.C. §362(k)(1) and under the Court’s inherent powers found under 11 U.S.C. 105(a). Most commonly, debtors raise the issue of 11 U.S.C. Section 362(k)(1) provides that “an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.”
Only Individuals (Not Corporations) Can Recover Sanctions (Attorney’s Fees) in the Ninth Circuit
Under the plain text of 11 U.S.C. Section 362(k)(1), unless the debtor is an “individual,” no sanctions can be awarded in the Ninth Circuit. Notably, the Ninth Circuit has repeatedly held that “corporate debtors may not recover sanctions under section 362(h) [now k] because the statute refers only to ‘individual[s] injured by any willful violation of a stay.’ Johnson Envtl. Corp. v. Knight (In re Goodman), 991 F.2d 613, 618–20 (9th Cir.1993). See Chugach Timber Corp. v. Northern Stevedoring & Handling Corp. (In re Chugach Forest Prods., Inc.), 23 F.3d 241, 244 n. 4 (9th Cir.1994) (explaining Goodman). Therefore, because “Cascade is a corporate debtor, section 362(h) does not authorize the Sanctions Order.” In re Cascade Roads, Inc., 34 F.3d 756, 766 (9th Cir. 1994); see In re Pace, 67 F.3d 187, 193 (9th Cir. 1995), amended (Oct. 11, 1995) (“while a corporate entity can be a person, it cannot be an individual for purposes of section 362(h), because ‘individual’ is not synonymous with ‘person’ under the relevant provisions of the Bankruptcy Code”).
Section 105(a) Does Not Allow for Sanctions (Attorney’s Fees) in Favor of Corporate Debtors for Automatic Stay Violations
Aggrieved corporate debtors have looked for a way around this limitation by arguing that the general authority of the court under Section 105(a) of the Bankruptcy Code allows for the recovery of such sanctions. However, the Supreme Court of the United States explained that, “in exercising those statutory and inherent powers, a bankruptcy court may not contravene specific statutory provisions.” Law v. Siegel, 571 U.S. 415, 421 (2014). Interpreting Law v. Siegel, a bankruptcy court in California found that it was “not persuaded that § 105(a)’s civil contempt authority is available to an individual who seeks to recover the attorney’s fees and costs that are expressly unavailable under § 362(k)(1) and Sternberg.” In re Kutumian, No. 13-14675-B-7, 2014 WL 2024789, at *11 (Bankr. E.D. Cal. May 15, 2014).