Summary
holding imposition of sanctions under § 362(h), now § 362(k), may be brought by motion
Summary of this case from In re SmithOpinion
Case No. 01-51653, CHAPTER 7
June 25, 2001
ORDER IMPOSING SANCTIONS FOR VIOLATION OF THE AUTOMATIC STAY
This matter came on for hearing on June 13, 2001, on Debtor's motion, filed May 16, 2001, to find First Merit Bank ("First Merit") in. contempt for violation of the automatic stay (the "Motion"). The debtor stated in the Motion that, inter alia, First Merit had setoff finds from a post-petition deposit to cover a pre-petition negative account balance. Appearing at the hearing were Scott Dunning, pro se, and Cynthia Jeffrey, counsel for First Merit.
At the hearing, counsel for First Merit stated that although it had offset the debtor's account, it had accomplished the offsets pre-petition and had stopped offsetting the account when the petition was filed. The debtor stated that he had personally gone to First Merit on May 2, 2001, with a copy of his petition and had informed M. Jane Miller, Kenmore Branch manager, and Theresa Jackson, also of First Merit, of the filing. From the First Merit bank statement concerning the debtor's account, produced during the hearing, it was unclear what transactions had occurred and when. The Court ordered First Merit to file supplemental evidence to show what had transpired on the account and set a further hearing for June 22, 2001. First Merit filed its Supplemental Response on June 18, 2001, and a telephonic hearing was held on June 22, 2001.
At the June 22, 2001, hearing the issue of insufficiency of service of the Motion was raised for the first time. Both Ms. Miller and Ms. Jackson were served with the Motion by Certified Mail, Ms. Jackson on May 12, 2001, and Ms. Miller on May 14, 2001. Ms. Jeffrey stated on June 22, 2001 that service was insufficient under Fed.R.Bankr.P. 7004 (h) because these individuals are not officers of First Merit as required under the rule. The Court finds that this issue was not timely raised and that therefore the issue of insufficiency of service, if any, was waived. In addition, no evidence was on the record as to the positions these individuals held at First Merit and that they would not qualify as "officers" within the meaning of "officer, a managing or general agent, or . . . any other agent" as stated in Rule 7004 (h).
This proceeding arises in a case referred to this Court by the Standing Order of Reference entered in this District on July 16, 1984. This matter is a core proceeding pursuant to 28 U.S.C. § 157 (b) (2) over which this Court has jurisdiction pursuant to 28 U.S.C. § 1334 (b).
I. Issue Presented
Whether the sapplication by First Merit of the debtor's May 4 deposit to eliminate a negative balance in the debtor's checking account as of the filing date constitutes a willful violation of the automatic stay under 11 U.S.C. § 362 (a)(6) or (a)(7).
II. Findings of Fact
In accordance with Bankruptcy Rule 7052, the Court makes the following findings of fact:
1. Debtor filed a petition for relief under chapter 7 on May 2, 2001. First Merit is listed as an unsecured creditor holding a nonpriority claim of $2,742.76.
2. On May 2, 2001, First Merit was informed of the filing by the debtor who showed a copy of his file-stamped petition to individuals at First Merit, M. Jane Miller and Theresa Jackson.
3. On June 18, 2001, First Merit filed a Supplemental Response which indicated that as of the day of the filing the debtor's bank account showed a negative balance of $179.61.
4. On May 4, 2001, as shown on unnumbered page 3 of the Supplemental Response, the debtor made a post-petition deposit of $268.28. On the same day First Merit deducted the negative balance of $179.61 from the debtor's account, leaving a balance of $88.67.
5. First Merit argues in its Supplemental Response, at unnumbered page 4, that "[a]s a matter of law, the debtor's post-petition deposit into the account, in light of the existing negative balance could only be considered a voluntary payment. No demand or collection activity was undertaken by First Merit to collect the money." This ignores the fact that the debtor had no such "voluntary intent" or he would not have shown the First Merit employees his petition. It further ignores the activity of First Merit in the posting of the May 4 deposit in a manner, that, if left unaddressed, would satisfy the pre-petition debt as represented by the negative account balance.
That application of the deposit constituted collection activity by First Merit at a time when the First Merit employees causing such application had actual knowledge of the debtor's bankruptcy petition.
III. Conclusions of Law
The automatic stay becomes effective at the moment a debtor's bankruptcy petition is filed. 11 U.S.C. § 362 (a). Once effective, the automatic stay applies to "all entities" and to "any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case." 11 U.S.C. § 362 (a)(6). Unless otherwise ordered by the bankruptcy court, the protection afforded by the automatic stay continues until a discharge is granted or denied. 11 U.S.C. § 362 (c). Pursuant to § 362 (h), a person shall recover actual damages, including costs and attorney fees, and, in some circumstances, punitive damages, when that person is injured by a "willful" violation of the automatic stay. The term "willful," while not defined in the Bankruptcy Code, has been interpreted to mean simply acting intentionally and deliberately while knowing of a pending bankruptcy. See, e.g., Cuffee v. Atlantic Business Community Dev. Corp. (In re Atlantic Business community Dev. Corp), 901 F.2d 325, 329 (3rd Cir. 1990); Knaus v. Concordia Lumber Co., Inc. (In re Knaus,), 889 F.2d 773, 775 (8th Cir. 1989); In re Bloom, 875 F.2d 224, 227 (9th Cir. 1989). There is no evidence to rebut the debtor's contention that a copy of the petition was actually shown to First Merit personnel at the Kenmore branch and an Akron office, and First Merit's own evidence indicates that it offset the debtor's account May 4, 2001, from the debtor's post-petition deposit, to pay a pre-petition debt.
Section 362 (h) states that:
[a]n 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.
11 U.S.C. § 362 (h).
Section 362 (a)(7) states that the petition operates as a stay of "the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor." The setoff right as it pertains to pre-petition cross-claims is preserved in bankruptcy. 11 U.S.C. § 553. It is the act of setting off the debt that is prohibited by the automatic stay. The Supreme Court in Bank of Maryland v. Strumpf, 516 U.S. 16 (1995) held that a setoff occurs when (i) a decision to effectuate a setoff is made; (ii) action is taken to accomplish the setoff; and (iii) the setoff is recorded. Id at 19. Recording of the setoff entails reducing the account balance by the amount owed to the bank. Id. The Court also held that "[i]t is undisputed that under § 362 (a)(7) respondent's bankruptcy filing stayed any exercise of that right [of setoff] by petitioner." Id. Pursuant to Stumpf, First Merit could have frozen the account without violating the automatic stay which would have preserved the negative account balance. It chose instead to setoff a post-petition deposit to the account. This exceeds anything considered in Strurnpf.
In In re Pieri, 86 B.R. 208, 210 (9th Cir. BAP1988) the court held that "setoffs are stayed pending determination by the bankruptcy court that a setoff is proper and should be allowed. While setoffs are generally favored they are not automatically permitted." First Merit did not request relief from stay from the Court or use other means to avoid violation of the automatic stay. Moreover, the setoff allowed by the Bankruptcy code is only allowed "to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case . . . ." 11 U.S.C. § 553 (a). Setoff of pre-petition claims against post-petition property of the debtor is not permitted. 11 U.S.C. § 362 (a)(6).
The Court finds that First Merit willfully violated the automatic stay set forth in § 362 (a).
When pre-petition creditors ignore § 362 of the Bankruptcy Code, punitive damages are often appropriate. Damage awards under § 362 (h) have as their primary function deterrence of a pattern of behavior that ignores the automatic stay. In the past, this Court has been inclined to minimize the assessment of punitive damages when a holder of a pre-petition claim could produce evidence of a corporate policy and practice of abiding the automatic stay. See In re Riddick, 231 B.R. 265, 269 (Bankr. N.D. Ohio 1999). This Court continues to believe that enforcement of the automatic stay should be focused primarily on encouraging future compliance. In the current matter, First Merit simply ignored its notice of the debtor's filing and setoff the bank account, stating, however, that it considered the deposit a "voluntary payment" and that "no demand or collection activity was undertaken by First Merit to collect the money." Supplemental Response at unnumbered page 4. Such actions indicate that punitive damages are in order, and such statements may indicate that First Merit is unaware of the provisions of the Bankruptcy Code, and § 362 (a) in particular.
THEREFORE, IT IS HEREBY ORDERED:
1. That First Merit shall gather existing, written policies and procedures in effect as of May 2, 2001, with respect to dealing with the pendency of an account debtor's bankruptcy and avoiding violation of the automatic stay. First Merit shall consult with independent, outside counsel (who may be counsel of record in this matter, but also may be different counsel) to review these policies to determine if they are consistent with the provisions of § 362.
2. That by no later than July 20, 2001 First Merit's outside counsel shall file a report with the Court analyzing whether this matter was or was not treated in accordance with the policies and procedures referenced above. That analysis shall also consider what training is provided to First Merit personnel regarding bankruptcy in general and the automatic stay in particular. First Merit shall further report on any remedial provisions it intends to undertake to avoid violation of the automatic stay in circumstances such as this in the future.
4. That by no later than June 27, 2001, First Merit shall reinstate the setoff amount of $179.61 to the account of the debtor. In addition, First Merit is to pay through a direct deposit to debtor's account $750.00 of the $3,000 referenced in paragraph 5 below by no later than June 27, 2001.
5. That because the violation is found to be a willful one, the debtor is provisionally awarded punitive damages in the amount of $3,000. First Merit may purge itself of $2,250 of the $3,000 in punitive damages, if, after compliance with this Order, the Court concludes that the treatment of the debtor's account can be shown to be an anomaly in light of procedures in place as of May 2, 2001, as, reviewed by outside counsel and as filed with and reviewed by the Court, or, in the alternative, that First Merit has demonstrated its intent to take effective action to avoid recurrence of such activity.
6. That failure to comply with the deadlines set forth in this order may subject First Merit to further sanctions.
7. The Court reserves the right to schedule further hearings on this matter and require First Merit personnel to attend such hearings if the analysis, required by decretal paragraph 3, is inadequate in the Court's judgment.