The Case for Broadening the Stay to Protect Entities Under 362(h)

The Case for Broadening the Stay to Protect Entities Under 362(h)

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The automatic stay provisions in the U.S. Bankruptcy Code, codified at 11 U.S.C. §362(a)(1)-(8), are "fundamental debtor protections provided by the bankruptcy laws." H.R. Rep. No. 595, 95th Cong., 1st Sess. 340, reprinted in U.S. Code Cong. & Ad. News 5963, 6296. The automatic stay provides the debtor a "breathing spell" from creditors by stopping all collections efforts, all harassment and all foreclosure actions. The automatic stay also provides creditor protection by providing an orderly liquidation procedure under which all like-situated creditors are treated equally. Without the automatic stay, creditors would be able to pursue their own remedies against debtors to the detriment of other creditors.

Since these principles are the cornerstones of the Bankruptcy Code, bankruptcy courts are mandated to award damages in cases involving a willful violation of the automatic stay. Section 362(h) of the Code provides: "An individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages." Since the Code does not define "individual," some courts have broadly held for purposes of §362(h) that "individual" should refer to all debtors, including corporations, partnerships and municipalities. Other courts have restrictively held that the term "individual" refers only to natural persons and that artificial persons (i.e., corporations, partnerships and municipalities) must resort to the bankruptcy court's discretionary contempt powers in 11 U.S.C. §105(a) to seek relief for willful violations of the automatic stay.

Conflicting Circuit Case Law

Numerous circuit, district and bankruptcy courts have spent considerable time, and litigants have incurred significant delays and litigation costs in addressing whether the term "individual" in §362(h) includes artificial persons. Five circuit courts of appeals already have considered this issue. The Third and 4th Circuits have held that §362(h) should be applied to corporate debtors, while the 2nd, 8th, 9th and 11th Circuits each have ruled that "individual" for purposes of §362(h) includes only natural persons.

Following the enactment of subsection (h) to §362 by the Bankruptcy Amendments and Federal Judgeship Act of 1984, the 4th Circuit determined that a corporate debtor could seek relief under §362(h). Budget Service Co. v. Better Homes Inc., 804 F.2d 289 (4th Cir. 1986). After reading subsection (h) in conjunction with the entire automatic stay provisions in §362, the 4th Circuit held that it was "unlikely that Congress meant to give a remedy only to those individual debtors against those who willfully violate the automatic stay provisions of the Code as opposed to debtors which are corporations..." Id. at 292.

The Better Homes decision was followed by the 3rd Circuit's decision in Cuffee v. Atlantic Business and Community Development Corp., 901 F.2d 325 (3rd. Cir. 1990), and several bankruptcy courts. See, e.g., In re Mallard Pond Partners, 113 B.R. 420 (Bankr. W.D. Tenn. 1990); In re Nash Phillips/Copus Inc., 78 B.R. 798 (Bankr. W.D. Tex. 1987); In re Tel-A-Communications Consultants Inc., 50 B.R. 250 (Bankr. D. Conn. 1985). Some courts have reasoned that a restrictive signification of the word "individual" is not necessarily inherent, and that it may, in proper cases, include artificial persons. Black's Law Dictionary 913 (4th ed. 1951) (citing State v. Bell Telephone Co., 36 Ohio St. 310, 38 Am. Rep. 583). See Morris v. St. Joseph Medical Center Inc. (In re Fisher), 1996 WL 695401 at *5 (D.Kan. Nov. 27, 1996); In re Mallard Pond, 113 B.R. at 423. Other courts have extended the term "individual" to mean "entity," which is defined at 11 U.S.C. §101(15) to include, among others, persons and governmental units. See, e.g., In re Bair Island Marina & Office Center, 116 B.R. 180, 185 n.2 (Bankr. N.D. Cal. 1990) ("individual" means "entity" as defined in the Bankruptcy Code).

Relying on the "plain meaning" rule, the 2nd, 8th, 9th and 11th Circuits reached the opposite conclusion. The 2nd Circuit's decision in Maritime Asbestosis Legal Clinic v. LTV Steel Co. (In re Chateaugay Corp.), 920 F.2d 183 (2nd Cir. 1990), was the first ruling by a federal court of appeals to hold that corporate debtors could not recover damages under §362(h). The 2nd Circuit reasoned that since the amendment was included in the "Consumer Credit Amendments," Congress probably intended to provide broader protection to natural persons than corporations.

In adopting the 2nd Circuit's reasoning, the 9th Circuit also refused to allow corporations to use §362(h) against creditors that willfully violated the automatic stay in Johnston Environmental Corp. v. Knight (In re Goodman), 991 F.2d 613 (9th Cir. 1993). The 9th Circuit, as did the 2nd Circuit, emphasized that corporate debtors have the ability to pursue discretionary civil contempt orders under §105(a) for violations of the automatic stay instead of §362(h). See, also, In re Just Brakes Corporate Systems, 1997 WL 109266, No. 96-2078 (8th Cir. March 13, 1997). Recently, the 11th Circuit fully embraced the 9th Circuit's position in Jove Engineering v. Internal Revenue Service, 92 F.3d 1539 (11th Cir. 1996).

Bankruptcy Law Technical Corrections Act of 1997

In its 1993 report to Congress, the Judicial Conference of the United States recommended an amendment to 11 U.S.C. §362(h) to substitute the word "entity" for "individual" in an effort to achieve uniformity and avoid costly litigation. Rep. John Conyers, Jr. (D-Mich.), ranking member of the House Judiciary Committee, proposed the Judicial Conference's earlier recommendation in H.R. 120, cited as "Bankruptcy Law Technical Corrections Act of 1997," introduced in the House of Representatives on January 7, 1997. Section 10 of H.R. 120 specifically proposes to amend subsection (h) of §362 by striking "individual" and inserting "entity." However, a substitute bill approved by the House Judiciary Committee (H.R. 764) in June does not include the §362 language.

"Individual" Should Be Replaced With "Entity"

Lower federal courts and legal scholars have debated for approximately 13 years as to whether §362(h) applies to all debtors or only to natural persons. Rational arguments have been presented by both schools of thought. For example, one argument is that "individual" does not include artificial persons because Congress defined the word "person" under §101(14) of the Bankruptcy Code to include the word "individual" and also the words "partnership" and "corporation." This indicates that Congress uses the word "persons" to include natural persons and artificial persons, while the word "individual" is used to limit the application of the statute to natural persons only. On the other hand, the automatic stay protection in §362(a) expressly applies to "entities." It, therefore, seems unlikely that only natural persons have a remedy under §362(h) and that artificial persons are meant to have a different remedy under §105(a) for an identical violation of the automatic stay. See In re Mallard Pond Partners, 113 B.R. 420, 423 (Bankr. W.D. Tenn. 1990) (citing In re Tel-A-Communications Consultants Inc., 50 B.R. 250, 254 (Bankr. Conn. 1985)).

Regardless of Congress' intention when it passed §362(h) in the 1984 Amendments, Congress should now eliminate this split of authority and amend subsection (h) of §362 by striking "individual" and inserting "entity," as part of the reform legislation now pending in Congress. In doing so, Congress will preserve the purpose and policy of the automatic stay provisions to give all debtors an equal chance to a fresh start and allow all debtors to successfully liquidate their assets or attempt repayment or reorganization plans under chapters 7, 9, 11, 12 and 13. At the same time, Congress will promote uniformity among the federal courts and end the wasteful litigation on this issue.

Journal Date: 
Wednesday, October 1, 1997