Creditor Socked with $41,000 in Sanctions for Filing Trumped-Up Criminal Charges

Bankruptcy Judge David M. Warren of Raleigh, N.C., socked a remorseless creditor with $41,000 in actual and punitive damages for having a debtor jailed on trumped-up embezzlement charges designed to collect a $1,500 debt.

The creditor is lucky the damages were only $41,000 for willfully violating the automatic stay and the discharge injunction, but Judge Warren was smart. He made findings of fact so the $41,000 won’t be dischargeable if the creditor files his own bankruptcy petition.

The Embezzlement Charges

The debtor ran an antiques shop that failed. She owed a consignor some amount of money, but how much is unclear. The consignor brought suit in small claims court to collect $1,400. The day before the hearing, the debtor filed a chapter 7 petition pro se. In the petition, she listed the consignor as a creditor owed some $4,000.

Advised of the bankruptcy filing by the debtor, the hearing officer in small claims court adjourned the hearing. In his July 15 opinion, Judge Warren said the creditor was angry for having the hearing adjourned.

The creditor claimed he was told by the hearing officer and others in the small claims court that he should file criminal embezzlement charges. And that’s what he did. He filed a complaint with the police department claiming he was embezzled to the tune of $1,500.

The debtor was arrested about six weeks after bankruptcy. She remained in jail for more than two weeks because she could not post a $4,500 bond. Finally, she was released from jail but required to wear an ankle monitoring device and told not to leave home. She was required to pay $850 for the ankle monitor.

While on home confinement, the debtor was unable to work or seek employment. The debtor claimed she was humiliated and suffered severe emotional distress. She wore the ankle monitor for 120 days.

The debtor received her discharge eight weeks after the arrest. By that time, the debtor had a lawyer, who notified the creditor and the district attorney about the discharge. The letter demanded that the creditor take no action to collect the debt, but Judge Warren said the creditor took no action to have the prosecutor dismiss the criminal action.

The prosecutor did not dismiss the criminal action, which remains pending, Judge Warren said. Although the criminal action was not stayed by the bankruptcy, he said that a “more astute” prosecutor would have inquired about the bankruptcy and mitigated some of the debtor’s damages in the process.

Three months after discharge, the debtor reopened her case and filed a motion for sanctions.

The Criminal Complaint Backfires

Judge Warren ruled that the exception to the automatic stay for criminal proceedings in Section 362(b)(1) “does not permit a creditor to instigate a criminal proceeding against a debtor if the primary purpose is to recover a dischargeable debt.” He said the Bankruptcy Code has ample protections for creditors who have been defrauded.

Even if someone in the state court had advised the creditor to file embezzlement charges, Judge Warren ruled that the creditor nonetheless violated the automatic stay by attempting to recover a claim after having actual notice of bankruptcy. The creditor, he said, “defied the Bankruptcy Code and this court” by his “purposeful and willful violation of the automatic stay.”

Judge Warren saw “malicious evil sprinkled with reckless indifference.” He said the creditor’s “egregious and overt violation caused a willful and malicious injury to the Debtor within the meaning of 11 U.S.C. § 523(a)(6).” In other words, if the creditor files bankruptcy, the findings will make the contempt sanction nondischargeable.

Judge Warren decided that the creditor’s “continued and deliberate failure to withdraw the criminal complaint” amounted to a violation of the discharge injunction.

Judge Warren decided that damages were warranted for the debtor’s “extensive, deep, harmful, and significant emotional distress . . . suffered as a result of the unfettered narcissistic will of [the creditor].” He assessed actual damages of $5,000 for lost income, $850 for the ankle monitor, and about $7,100 for attorneys’ fees.

For punitive damages, Judge Warren awarded the debtor $16,000, or $1,000 for each day she was in jail, and $12,000, or $100 for each day she wore the ankle monitor.

Questions

If there is an appeal, will the sanctions satisfy the standard of Taggart v. Lorenzen, 139 S. Ct. 1795, 1799 (June 3, 2019), where the Supreme Court held that a court “may impose civil contempt sanctions [for violating the discharge injunction] when there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order”?

The Ninth Circuit Bankruptcy Appellate Panel recently held that the Taggart standard also applies to contempt for violation of the automatic stay. Suh v. Anderson (In re Jeong), 19-1244, 2020 BL 102971 (B.A.P. 9th Cir. March 16, 2020). To read ABI’s report on Suh, click here.

Evidently, the creditor was not represented by counsel. A lawyer would have known that prosecuting the criminal complaint violated the automatic stay. A represented creditor would not have an objectively reasonable basis for pursuing embezzlement, and more so because the debtor’s failure to pay appears to have been a breach of contract, not any form of fraud or embezzlement.

Will lay people be held to the same standard? Invoking Taggart, can a lay person avoid contempt of the automatic stay or the discharge injunction by claiming ignorance of the nuances of bankruptcy law?

If Taggart provides a defense for creditors who lack counsel, the automatic stay and the discharge injunction will lose efficacy. If Taggart is a defense, some debtors who can’t afford counsel will end up paying discharged debts.