A debtor that files a bankruptcy proceeding is automatically protected from collection actions by the bankruptcy “stay,” which stops all creditor actions to collect pre-petition debts. However, excluded from the stay is the “commencement or continuation of a criminal action or proceeding against the debtor.” This is called the “criminal prosecution exception” to the automatic stay. For example, the automatic stay does not stop a criminal prosecution for theft or passing bad checks. However, a court has recently held that a creditor’s threat to commence a criminal prosecution is a violation of the automatic stay and the court imposed a severe sanction on the creditor.

The recent case arose in Tennessee. Stephanie Poteat rented a home from John F. Weary, Jr. She defaulted on rent payments and moved out of the property. Weary then sent a letter to Poteat’s parents threatening criminal prosecution unless Poteat paid him $13,000.00. When that effort failed, Weary sued Poteat, and in response, Poteat filed a chapter 7 bankruptcy case. Weary received notice of the bankruptcy filing and the accompanying automatic stay. Nevertheless, he continued to send letters demanding payment and expressed his intention to pursue criminal charges against Poteat.

Poteat then brought a claim for damages against Weary in the bankruptcy court. She alleged that the threatening letters violated the automatic stay because Weary sent them attempting “to collect, assess or recover a claim against the debtor that arose before the commencement of the case.” Weary claimed in his defense that his conduct was protected by the criminal prosecution exception to the automatic stay. He argued that communicating his intent to pursue criminal prosecution came within the exception.

The bankruptcy court rejected this argument, found that Weary had willfully violated the automatic stay in an egregious manner and imposed a sanction of $7,500 in punitive damages. The bankruptcy court concluded that Weary’s letters did not constitute a criminal prosecution, and that the sole purpose for the letters was to coerce Poteat to pay a debt that arose before she filed her bankruptcy.

The bankruptcy court’s sanction was upheld on appeal. The appellate court pointed out that “nothing prohibited Weary from filing a police report, speaking with prosecutors or otherwise petitioning the government to commence a criminal action” against Poteat. He did not do this and he was not punished for doing this. Therefore, it was proper for the bankruptcy court to punish Weary for his conduct that violated the automatic stay.

Creditors must understand that passing bad checks and obtaining goods under false pretenses are crimes under state law. Weary’s experience teaches that a creditor may seek criminal prosecution by filing a complaint or speaking with a prosecutor about filing a criminal charge, but threatening to do so in a communication with a debtor in bankruptcy is a stay violation that can result in severe consequences.