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Criminal Prosecution Not an Attempt To Collect Debt, Not a Violation of Stay

Monday, September 23, 2013
By Stephanie M. Acree

Sept. 19 --A debtors' counterclaim, which asserted that a creditor's pursuit of a criminal complaint violated the automatic stay of Bankruptcy Code Section 362, was properly dismissed, the U.S. Bankruptcy Appellate Panel for the Eighth Circuit held Aug. 29 (Legendary Stone Arts, LLC v. Maness (In re Maness), B.A.P. 8th Cir., No. 13-6037, 8/29/13).

Judges Thomas L. Saladino, Robert J. Kressel, and Anita L. Shodeen found that the criminal prosecution was not an attempt to collect a debt, even though restitution was a potential remedy of the prosecution, and therefore affirmed the bankruptcy court. 

Lien Fraud Statute

Debtors Wendell and Carolyn Maness owned a business customizing and installing granite counter tops called MO Housing Corporation d/b/a/ Top Shop North. For several years, Top Shop obtained the raw materials for its countertops from Legendary Stone Arts LLC.

In early 2011, the owners of Legendary Stone, Jeff Williams and Aaron Toney, contacted the Jackson County, Mo., prosecutor's office regarding their dealings with Mr. Maness. Williams and Toney claimed they had supplied materials and labor to Top Shop on numerous projects and were owed more than $66,000. During his conversation with the prosecutor's office, Williams mentioned Missouri's lien fraud statute, which makes it a felony under certain circumstances for a defendant to receive payment on a construction project and not pay a supplier. 

Arrest for Theft

On Feb. 15, 2011, Williams and Toney filed a criminal complaint against Mr. Maness with the Independence, Mo., police department. Two days later, the Manesses filed for Chapter 7 protection. Legendary Stone filed an adversary proceeding seeking a determination that the debt for the materials and labor was nondischargeable pursuant to Section 523(a)(2)(A) of the Bankruptcy Code and that the Manesses were liable for the debt under the Missouri lien fraud statute.

Mr. Maness was charged with theft under the lien fraud statute and eventually released on bond. While the criminal case was pending, Williams contacted the police department several times to check on the status of the case. The criminal charges against Mr. Maness were eventually dismissed, but the Manesses filed a counterclaim against Legendary Stone claiming that the criminal complaint and Williams's contact with the police department were attempts to collect a debt in violation of the stay.

Following discovery and depositions, Legendary Stone moved for summary judgment on the counterclaim, which the court granted. The court also subsequently dismissed Legendary Stone's adversary complaint, finding that the money was owed by Top Shop and not by the Manesses personally. The Manesses appealed the grant of summary judgement as to their counterclaim to the BAP. 

Intent to Collect?

While Section 362(a) of the Bankruptcy Code generally acts as to stay collection efforts against a debtor, Section 362(b)(1) provides that Section 362(a) does not stay criminal actions or proceedings against a debtor. The BAP said that courts disagree as to whether all criminal prosecutions are excepted from the stay or whether there should be an exception for criminal prosecutions where the purpose is to collect a debt.

In this case, the bankruptcy court and the parties operated on the assumption that there is an exception when the “principal purpose” of the criminal prosecution is to collect a debt and neither party disputed this on appeal. Rather, the Manesses argued that in light of Williams's numerous contacts with the police department, the bankruptcy court erred in finding there was no intent to collect a debt. The Manesses argued a trial was necessary to determine the intent of the plaintiffs' contact with the police. 

Restitution Never Mentioned

The BAP noted that the depositions of the police officers who were contacted by Williams provided no evidence that Williams or Toney was attempting to collect a debt through the criminal case. The officers said that the phone calls and e-mails they received were routine checks on the status of the case and offers to provide relevant information. The officers also testified that restitution was never mentioned. The Manesses provided no evidence to contradict this testimony. The BAP also said there was no evidence that Williams or Toney contacted the Manesses to threaten criminal charges if their debt was not paid.

At oral argument, the Manesses argued that it could be inferred from the totality of the circumstances that Williams and Toney intended to collect a debt through the criminal prosecution. Those circumstances, they argued, were: “(i) the fact that Legendary Stone commenced an adversary proceeding to hold the debt nondischargeable; (ii) that Mr. Williams purportedly knew that restitution was a potential remedy in a criminal proceeding; (iii) that Mr. Williams brought the lien fraud statute to the attention of the Independence police department; and (iv) the sheer number of contacts with the police department regarding the prosecution.” 

Innocuous Facts

The BAP was not persuaded, and said that the Manesses must “do more than provide innocuous facts from which one could 'infer' that someone 'might' have an intent to collect a debt.” The BAP said it would only consider “reasonable inferences,” meaning those that “support[] a viable legal theory” and are supported by “significant probative evidence.”

“It seems that Mr. and Mrs. Maness would have us establish a rule that if restitution to the victim is a potential remedy of a criminal prosecution, the crime victim must have no further contact with the prosecuting authorities,” the BAP said. “That is simply not the law.” Having found that there was no evidence that Williams or Toney sought restitution as part of the criminal prosecution, the BAP affirmed the ruling of the bankruptcy court.

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