It has become increasingly common for companies to use nonattorneys in attorney roles for the purpose of cutting costs. However, occasionally these “fee-saving” measures actually end up costing a company even more than if they had an attorney do the work in the first place. Nowhere can this be more problematic [or expensive] than in the bankruptcy area, particularly if the company fails to have procedures in place to recognize and react to the automatic stay in routine collection matters.
This is what happened in a recent case decided by the Eleventh Circuit.[1] The court in Parker v. Credit Central affirmed lower court decisions that creditor “Credit Central willfully contravened the automatic stay in reckless disregard of the law and Parker’s rights” and affirmed an award of $10,000 in punitive damages and $30,000 in attorney’s fees.
The Credit Central Case
On Aug. 14, 2012, Credit Central filed a collection action in small claims court for $1,200 against Marion Parker. Credit Central did not use the services of an attorney in connection with the collection action. Nine days later, Parker filed a chapter 13 petition and called Credit Central to advise it of his bankruptcy filing. On Aug. 26, 2012, a notice of the commencement of Parker’s chapter 13 case was mailed to Credit Central. Credit Central admitted to receiving both the phone call and the notice of commencement. Two days after receiving the notice, Credit Central filed a proof of claim in the bankruptcy proceeding.
Even though it had actual knowledge of the pendency of the chapter 13 filing and had filed a proof of claim, it neglected to take any affirmative steps to stop or dismiss its pending collection action as required by the Code. On Sept. 29, 2012, Parker was served process, in connection with the collection action, at his place of employment. Less than a month later, an automatic default judgment was entered against him in the collection case.
The day after entry of the default judgment, Parker filed an adversary complaint against Credit Central to collect damages and attorney’s fees caused by its willful violation of the automatic stay. The bankruptcy court, finding a wilful violation of the stay, awarded Parker compensatory damages, punitive damages and attorney’s fees.
On appeal, the district court vacated the award for compensatory damages. However, both the district and circuit courts affirmed the award for punitive damages and attorneys’ fees. In its opinion, the Eleventh Circuit noted that “Credit Central acted with reckless disregard of the automatic stay by using non-attorney staff to prosecute small claims actions for the admitted purpose of lessening its legal costs.”
Steps to Consider
As all bankruptcy attorneys are aware, violating the automatic stay in a bankruptcy proceeding is a serious, and potentially costly, matter. At the same time, companies facing ever-increasing legal fees often use nonattorney employees to do legal tasks, in many cases opening themselves up to increased liability. In this case, Credit Central was aware of the fact that Parker filed for bankruptcy, yet it continued to pursue its small claims collection action against him. Whether this was due to Credit Central’s clerk not knowing about bankruptcy law or a communication disconnect between Credit Central’s claim collection group and legal group, there are several ways for attorneys to advise their clients to efficiently, yet effectively, prevent this from happening to them.
First, attorneys should advise and assist their clients to create a centralized system that keeps track of all legal actions pending against or including their customers or counterparties. This system will provide a place to enter information such as Parker’s phone call notification of bankruptcy and the Notice of Commencement received, as well as information related to the small claims action against him. With everything in one place, there is less of a chance that things like bankruptcy proceedings and automatic stays can be overlooked in the future.
Second, to the extent nonattorneys are being used to conduct legal functions such as collecting amounts due from customers and counterparties, attorneys should offer to provide client employees training on legal concepts. For example, claim collectors should not only be familiar with the small-claims process in court, but also other areas of the law such as bankruptcy and general litigation. Had the collecting agent in Credit Central been aware of the legal repercussions of bankruptcy (including, but not limited to, the automatic stay), perhaps this whole matter could have been avoided.
Third, attorneys should work with their clients to develop a method whereby a legal professional can oversee the legal issues related to small claims and collections while also keeping a legal budget in mind. Even if a company cannot afford a team of lawyers on staff or retainer to deal with small claims and collections, there should be at least one person with legal training and accreditation to oversee the process. For example, the attorney could oversee the central system tracking claims and customer status, while nonattorneys can make the phone calls or fill out the administrative paperwork. To the extent a customer filed bankruptcy or took some other legal action, the issue would be flagged and the attorney could provide proper guidance and next steps. That same attorney could be the one to train and supervise nonattorney employees working on collections and other related legal matters.
Conclusion
Violating the automatic stay in bankruptcy can have dire consequences on a party. In Credit Central, the lack of attorney oversight cost Credit Central $40,000 — 33 times the amount it was seeking to collect, and undoubtedly an even greater multiple of what might actually have been collected. Using this case as an example, cutting costs doesn’t always save money, especially when it comes to using lawyers. However, with a little compromise and a lot of organization, attorneys can and should help their clients avoid these situations.