The automatic stay is a powerful tool of the Bankruptcy Code, affording debtors a breathing spell from creditors seeking payment. Section 362(k)(1) of the Bankruptcy Code reinforces the stay by allowing individual debtors to recover actual and punitive damages for willful violations.

We’ve covered several decisions analyzing what constitutes an automatic stay violation and the remedy for such a violation. Violations come in many forms. For instance, courts have found harvesting cranberries on a debtor’s farm to be a stay violation and that computer error can constitute a willful violation. Recently, the United States Bankruptcy Court for the Eastern District of North Carolina held that suspension of the individual debtors’ wholesale warehouse club membership was a stay violation. In awarding sanctions for a stay violation, the court in In re Heeley analyzed what constituted a willful violation and what remedy was proper.

Wholesale Deals – Debtors Prohibited!

Prepetition, the debtors, Mr. and Ms. Heeley, wrote a $215.65 check to BJ’s Membership Club, Inc. for goods purchased at a BJ’s store. Subsequently, the debtors filed for relief under chapter 13.

After filing, the debtors repeatedly provided BJ’s with notice of the case. First, the debtors sent notice to BJ’s electronically and by mail. Shortly thereafter, the debtors received a letter from BJ’s, dated after the receipt of electronic notice, stating that the debtors’ check had been returned for insufficient funds. Upon receiving the letter, Ms. Heeley called the BJ’s store, informed a store manager of the case, and provided the bankruptcy case number and her attorney’s contact information. Providing even more notice, the debtors’ attorney served the BJ’s store by mail with the “Notice of Chapter 13 Bankruptcy Case, Meeting of Creditors, & Deadlines” and added the company to the case mailing matrix.

A few weeks later, Ms. Heeley attempted to buy groceries at the store, but found her membership card denied upon checking out. A store manager explained that Ms. Heeley could not use her membership card until she had paid all of her outstanding charges owed to BJ’s, referring to the prepetition check returned for insufficient funds. Ms. Heeley (yet again) informed the manager of her bankruptcy filing and explained that the store’s debt would be handled in the bankruptcy case. She left, presumably frustrated and grocery-less.

Despite the multiple notices of the debtors’ bankruptcy filing, BJ’s referred its claim to a check collection program. To Ms. Heeley’s dismay, she received a letter from a collection program threatening criminal prosecution if she failed to pay the amount due under the prepetition check. Fearing prosecution, Ms. Heeley traveled 35 miles to pay the debt in person.

Ms. Heeley, justifiably frustrated that she was deprived the breath of fresh air that bankruptcy promises, filed a motion seeking sanctions against BJ’s. BJ’s did not respond to the motion and did not appear at the hearing.

“Malicious” Prosecution of Debt

The issues before the court were whether BJ’s received sufficient notice and willfully violated the stay. The bankruptcy court also considered whether sanctions were appropriate.

The court began its analysis by emphasizing that section 362(a)(6) states that a bankruptcy petition automatically imposes a stay of “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case . . . .” Additionally, section 362(k)(1) provides that an individual debtor injured by a willful stay violation may recover damages.

To start, the court found that notice was sufficient. Under Bankruptcy Rule 9036, creditors can elect to receive electronic notice, which BJ’s did. Additionally, BJ’s received notice by mail, telephonically, and in person. Next, the court analyzed what constitutes a willful stay violation. Looking to cases in the Fourth Circuit, the court noted that a creditor does not need to act with specific intent to violate the automatic stay. Rather, a creditor must only commit an intentional act while having knowledge of the automatic stay. The court held that BJ’s had both constructive and actual notice of the debtors’ case and chose to ignore and violate the automatic stay provisions. By prohibiting Ms. Heeley from shopping at its store and threatening criminal prosecution, BJ’s sought to collect a prepetition debt. The court found that the referral of the check to the collection program constituted a willful violation of the stay and collection of the funds ratified the improper action.

After determining that notice was sufficient and that BJ’s willfully violated the stay, the court considered whether sanctions were appropriate. Under section 362(k)(1), an individual debtor injured by a stay violation can recover actual damages and, sometimes, punitive damages. Actual damages can include compensation for emotional distress caused by a creditor’s stay violation. The bankruptcy court found that actual damages were warranted to compensate the Heeleys for their distress, time, energy, and money expended as a result of BJ’s actions. Namely, the threat of criminal prosecution caused Ms. Heeley “significant and unnecessary distress,” and the debtors could recover for the time and expense of paying the funds in person, bringing the motion, and appearing at court.

The court did not stop there. It found that BJ’s acted maliciously in its continued prosecution of the check after receiving notice of the debtors’ case. By circumventing the bankruptcy process and the automatic stay protections, BJ’s improperly obtained payment from the debtors and were, thus, subject to sanctions. Although BJ’s initially succeeded in getting the debtors to pay the few hundred dollar debt, the court ordered BJ’s to pay $5,601.30 in actual damages, $3,500 for the debtor’s legal services, and $5,000 in sanctions. An expensive bill for preventing Ms. Heeley from buying groceries!

You Can Shop ‘Til You Drop

The outcome of this case reminds us of the flexibility of the automatic stay. Demanding payment for a prepetition debt clearly constitutes a stay violation, but suspending a debtor’s store membership is less obviously a violation, because the suspension was not, on its face, a demand for payment. Nevertheless, the court emphasized that BJ’s suspension of the membership was an attempt at circumventing the bankruptcy process and, thus, would not be tolerated. A debtor will not be deprived of the automatic stay’s breath of fresh air, which may ultimately come in the form of a “good air” scented candle, rightfully purchased from BJ’s.