Violating the automatic stay does not rise to the level of contempt without intent to violate the stay, according to an opinion by District Judge Brian M. Cogan of the Eastern District of New York in Brooklyn.
A creditor had a judgment lien against the soon-to-be bankrupt. When the 10-year lien was about to expire, the creditor secured an order from the state court extending the lien. Just before the judgment lienholders’ foreclosure sale a few weeks later, the debtor filed bankruptcy.
The judgment creditor did not know the county clerk had never filed the extension order until the trustee sued to void the lien under the trustee’s strong-arm powers. When the judgment creditor inquired in the clerk’s office as to why the extension order had not been filed, the county clerk entered the order extending the judgment lien.
The trustee then sought a citation of contempt against the judgment creditor for violating the automatic stay. The bankruptcy judge found the creditor in contempt.
The judgment creditor appealed and won when Judge Cogan set aside the contempt finding.
Judge Cogan based his Aug. 13 decision on the language of Section 362(a)(4), which proscribes an “act to create” a lien. It is not enough, he said, that an act results in the creation of a lien. He said the “act must have as its purpose the creation of the lien, not just that the act gave rise to the lien as a collateral result of the act.”
In other words, Judge Cogan said, the creditor “must intend or at least reasonably anticipate bringing about the consequences of his act.”
In this instance, Judge Cogan said the creditor’s inquiry “was merely asking what the devil happened to its $1.1 million lien.” It was different, he said, from saying, “Whatever happened, you need to fix it now.” Judge Cogan said there were a “number of actions the county clerk might have taken” that would not have violated the automatic stay.
Although the judgment lienholder was off the hook for contempt and possible sanctions, Judge Cogan summarily upheld the bankruptcy court’s judgment voiding the lien.
Judge Cogan had substantial experience with bankruptcy law before ascending to the bench in 2006.