Summary:
The Male Debtor, the owner of IPS Construction, personally guaranteed a loan to M.G. Brown, a division of Foreman’s Inc. After IPS failed to pay its debt, M.G. Brown commenced a small claims lawsuit in 2010. After the magistrate entered a judgment in favor of M.G. Brown on January 12, 2011, the Male Debtor appealed and the matter was referred to arbitration. Neither Debtor attended the arbitration and subsequently, on June 1, 2011, the Debtors filed Chapter 13 bankruptcy, listing as a creditor, among others, M.G. Brown. On June 30, 2011, M.G. Brown sent IPS a copy of the arbitration award, with a hand written note implying that the Debtor was attempting to delay payment. The Debtors’ bankruptcy attorney sent M.G. Brown a letter advising it of the bankruptcy, but M.G. Brown claimed it never received the letter. M.G. Brown sent two further letters to IPS, also with handwritten notes, indicating that it was aware of the Debtors’ bankruptcy. At that point the Debtors filed a Motion for Sanctions for Violation of 11 U.S.C. § 362(k). M.G. Brown asserted that the notices were sent only to IPS and not to the Debtors personally and did not, accordingly, violate the automatic stay in the Debtors’ bankruptcy. The bankruptcy court was not persuaded by this argument and further found that as neither M.G. Brown nor its parent corporation had any policies or procedures for handling bankruptcy notices, that these demand letters were in willful violation of the stay. Following testimony from the Debtors about their emotional distress, the bankruptcy court awarded $2,500 in actual damages, $10,000 in punitive damages, and $2,500 in attorneys’ fees.
Commentary:
While this sanction award was very good outcome for the Debtors, the continued difficulty of a small business owner facing collection calls directed to corporation, particularly if defunct, is often a good enough reason for that business entity to file Chapter 7 itself.
For a copy of the opinion, please see:
Coopersmith- Violation of Automatic Stay for Collection Attempts Related to Corporate Guarantor.pdf
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