Gruntz v. County of Los Angeles (In re Gruntz) Part II

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Nov 2000

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Editor's Note:

Part I of this article appeared in the <a href="/abidata/online/journaltext/00octcode.html">October 2000</a> issue.

</blockquote>

The second issue before the court in Gruntz v. County of Los Angeles (In re Gruntz)<a href="#1" name="1a">1</a> was the applicability
of the automatic stay to criminal proceedings. The debtor contended that the automatic stay was applicable
because the underlying purpose of the prosecution was debt collection. The Ninth Circuit rejected the
debtor's argument. As a matter of statutory construction, the debtor's argument was tenuous. The court
stated:

<blockquote>
Most importantly, it is quite at odds with the plain words of the statute. Quite simply, the
Bankruptcy Code declares that §362 does not stay "the commencement or continuation of a
criminal action or proceeding against the debtor." On its face, it does not provide any exception
for prosecutorial purpose or bad faith. If the statutory command of the Bankruptcy Code is clear,
we need look no further: it must be enforced according to its terms. Indeed, to do otherwise would
insert phrases and concepts into the statute that simply are not there (citation omitted).<a href="#2" name="2a">2</a>
</blockquote>

The Ninth Circuit also thought that its holding was consistent with bankruptcy policy. Bankruptcy is
predicated on the protection and financial rehabilitation of honest debtors. The Ninth Circuit thought that
a bankruptcy case was not intended to interfere with the operation of the police power, and it stated:

<blockquote>
Further, in the case of the automatic stay, Congress has specifically subordinated the goals of
economic rehabilitation and equitable distribution of assets to the states' interest in prosecuting
criminals. The state of California has chosen to criminalize a parent's failure to support a dependent
child. That is a judgment reserved to the state; it is not for the bankruptcy court to disrupt that
sovereign determination because it discerns an economic motive behind the criminal statute or its
enforcement. In the automatic stay exception, Congress clearly has instructed federal courts not to
allow bankruptcy proceedings to impede such an exercise of state police powers (citation and
footnote omitted).<a href="#3" name="3a">3</a>
</blockquote>

The court also reasoned that a debtor could petition for a writ of habeas corpus as a means of attacking
the validity of his or her conviction. Moreover, pursuant to Bankruptcy Code §105(a), a debtor could seek
an injunction to enjoin a criminal proceeding. The Ninth Circuit concluded this part of its opinion by
stating:

<blockquote>
In the end, this is not a chronicle of creditor and debtor, but of crime and punishment. Gruntz was
lawfully prosecuted, convicted and ordered to be incarcerated. As a matter of law, the automatic stay
did not apply to prevent this course of events. The words of the statute mean what they say: all
criminal proceedings, including those to which Gruntz was subject, are excepted from the reach of
the automatic stay. Thus, unless a specific §105 injunction applies, state trial courts need not seek
bankruptcy court approval before commencing criminal proceedings. To the extent that it conflicts
with this interpretation of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §362(b)(1)</a>, Hucke is overruled.<a href="#4" name="4a">4</a>
</blockquote>

This author submits that the Ninth Circuit incorrectly decided the issue concerning whether a criminal
proceeding could violate the automatic stay. The Ninth Circuit's holding is too broad. One of the strengths
of the common law system is that its system of adjudication permits judges to adopt the law to address
different situations. The Ninth Circuit's ruling is contrary to the common law system of adjudication
because it constricts a judge's ability to apply Bankruptcy Code §362(a)(6) when a creditor is attempting
to utilize the criminal process to collect a debt.

There is abundant case law authority holding that a creditor's filing a criminal complaint against a
debtor for the purpose of collecting a debt is a violation of the automatic stay.<a href="#5" name="5a">5</a> In Brown v. Foley (In re
Brown),<a href="#6" name="6a">6</a> the debtor filed for chapter 7 on Feb. 23, 1996. The debtor listed the defendant as a creditor on
his schedules, and the creditor acknowledged receiving notice of the bankruptcy. On June 6, 1996, the
debtor received his discharge. After receiving notice of the debtor's bankruptcy, the creditor filed a criminal
complaint against the debtor, and he testified before the grand jury. On May 24, 1996, the grand jury
indicted the debtor. On June 20, 1996, the debtor was arrested. The prosecutor wrote a letter that if the
creditor were paid $2,100, which was the approximate amount of the debt, the creditor would consent to
a one-year deferral of the criminal case. The court ruled that the creditor flagrantly violated the automatic
stay and discharge injunction. Rather than recognize the validity of the automatic stay and accept the loss,
the creditor elected to pursue an indictment designed to humiliate and embarrass the debtor into paying the
debt. The court assessed punitive damages for the violations of the automatic stay and the discharge
injunction.

Another relevant case is Ohio Waste Services Inc. v. Fra-Mar Tire Service Inc. (In re Ohio Waste Services
Inc.).<a href="#7" name="7a">7</a> There, on Jan. 16, 1981, the debtor wrote a check that was dishonored. Thereafter, on Feb. 17, 1981,
the debtor filed for chapter 11. On July 7, 1981, W. Kenneth Zuk Esq., attorney for the defendant, wrote a
letter referring the bad check to the county prosecutor. Mr. Zuk wrote the referral letter as part of a collection
effort to collect the debt for his client. Mr. Zuk thought that a criminal prosecution could be employed to
extract the payment of the debt. The bankruptcy court ruled that the referral letter violated the automatic stay,
and it stated:

<blockquote>
Neither the investigation leading up to the prosecution, nor the prosecution itself, would have been
commenced but for the action taken by Mr. Zuk, attorney for Fra-Mar, in his efforts to collect the
debt due Fra-Mar from debtor. Mr. Zuk's action of writing the letter to the prosecutor was in direct
violation of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §362(a)(1)</a>.<a href="#8" name="8a">8</a>
</blockquote>

The preceding discussion reflects that debtors can be at the mercy of unscrupulous creditors who
attempt to circumvent the automatic stay by making a referral to the bad-check division to compel payment
of a potentially dischargeable debt. The importance of making Bankruptcy Code §362(a) applicable to
creditors attempting to use the criminal process to collect a debt is that Bankruptcy Code §362(h) permits
a debtor to recover damages, including attorneys fees. The ability to recover attorneys fees provides debtor's
counsel with an incentive to protect the debtor from unwarranted criminal prosecutions. Therefore, debtor's
counsel will ensure that the automatic stay is not violated.

The remedies that the Ninth Circuit discusses are illusory. Most debtors lack the resources to litigate
in different courts. It is expensive to commence an adversary proceeding to obtain a Bankruptcy Code
§105(a) injunction. In addition, the Younger abstention doctrine presents a formidable obstacle to obtaining
injunctive relief.

The Ninth Circuit failed to discuss that the Bankruptcy Code punishes malefactors by making certain
debts non-dischargeable.<a href="#9" name="9a">9</a> If a debtor has engaged in inequitable conduct, then there is a strong probability
that some of the debtor's debts will be held to be non-dischargeable. For example, the Bankruptcy Code
renders non-dischargeable debt incurred through fraud.<a href="#10" name="10a">10</a> The bankruptcy system does provide a creditor
with a potent remedy. Consequently, the Ninth Circuit's ruling was unreasonably broad, and it could act
to weaken the equilibrium of the bankruptcy system.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… F.3d 1074 (9th Cir. 2000) (en banc)</a>. Many of the thoughts for this article were developed in the Consumer
Bankruptcy Law course at the LL.M. Program at St. John's University School of Law. <a href="#1a">Return to article</a>

<a name="2">2</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 1085</a>. <a href="#2a">Return to article</a>

<a name="3">3</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 1086</a>. <a href="#3a">Return to article</a>

<a name="4">4</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 1087</a>. In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Oregon, 992 F.2d 950 (9th Cir. 1993)</a>, the court ruled that if the primary purpose
of the prosecution was the collection of a debt, then the prosecution violated Bankruptcy Code §362(a)(6). <a href="#4a">Return to article</a>

<a name="5">5</a> E.g., <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. Joseph Wholesale Liquor Co. v. Butler (In re Butler), 74 B.R. 106, 107 (W.D. Mo. 1985)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
v. Foley (In re Brown), 213 B.R. 317, 320-21 (Bankr. W.D. Ky. 1997)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Brown, 105 B.R. 531
(Bankr. D. S.D. 1989)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Latham (In re Padget), 37 B.R. 280, 283-84 (Bankr. W.D. Ky. 1983)</a>;

<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Van Riper, 25 B.R. 972 (Bankr. W.D. Wis. 1982)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Waste Services Inc. v. Fra-Mar Tire Service Inc. (In
re Ohio Waste Services Inc.), 23 B.R. 59 (Bankr. S.D. Ohio 1982)</a>. <a href="#5a">Return to article</a>

<a name="6">6</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 317 (Bankr. W.D. Ky. 1997)</a>. <a href="#6a">Return to article</a>

<a name="7">7</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 59 (Bankr. S.D. Ohio 1982)</a>. <a href="#7a">Return to article</a>

<a name="8">8</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 60</a>. <a href="#8a">Return to article</a>

<a name="9">9</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §523(a)</a>. <a href="#9a">Return to article</a>

<a name="10">10</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §523(a)(2)</a>. <a href="#10a">Return to article</a>

Journal Authors

Carlos J. Cuevas

Journal Date

Wednesday, November 1, 2000 - 12:00