Debtor’s Attorney Blamed for Violation of Bankruptcy Stay

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By Daniel Gill

A self storage company violated the automatic bankruptcy stay when it sold a debtor’s property, but the violation wasn’t “willful,” an Ohio bankruptcy court concluded. Therefore, the court awarded no damages ( In re McDuffie , Bankr. N.D. Ohio, 16-16613, 7/20/17 ).

The July 20 opinion by Judge Arthur I. Harris, U.S. Bankruptcy Judge for the Northern District of Ohio, included a “best practices” observation. The judge cautioned debtors’ counsel to be more vigilant in providing notice of a bankruptcy filing to creditors when a debtor is in imminent danger of losing property because of collection efforts.

On Dec. 2, 2016, Latonya McDuffie filed a Chapter 7 case. In Chapter 7, a debtor’s assets are liquidated by a trustee for the benefit of its creditors.

Filing for bankruptcy imposes an automatic stay under the Bankruptcy Code, which halts all collection proceedings against the debtor or its property.

A party must get court permission to lift the stay in order to proceed with an action against the debtor or property of the bankruptcy estate.

At the time she filed, McDuffie was delinquent for storage costs owed to Euclid Self Storage, from whom she rented a storage unit for personal papers and property.

Euclid had previously advised McDuffie that it was going to sell her property as allowed under Ohio law to recoup its rent. It sold all the contents of McDuffie’s storage unit on Dec. 6, 2016, two days before the court mailed notice of the bankruptcy filing to McDuffie’s creditors.

Warning from Court

The court found that the sale closed and the purchaser picked up the property before Euclid had notice of the bankruptcy filing.

McDuffie filed a motion to recover damages from Euclid for selling her property in violation of the automatic stay.

The court found that the sale was indeed in violation of the automatic stay, but it wouldn’t award damages against the company.

Euclid didn’t know of the bankruptcy at the time of the sale, so its violation wasn’t “willful,” a requirement for awarding sanctions against a party violating the stay, it said.

The court issued a warning to debtors’ counsel in its opinion.

“When a debtor is in imminent danger of losing property due to ongoing collection efforts, it is incumbent on the debtor’s attorney to take the initiative in promptly notifying the affected creditor of the debtor’s bankruptcy filing,” the court said.Had the debtor’s lawyer here simply reached out to Euclid on the day the bankruptcy was filed, the debtor’s property would likely not have been sold to a third party. Or if it was, then the debtor might have a remedy for the creditor’s willful violation of the stay, the court said.

Joanne Brown, Cleveland, represented McDuffie. Jeffrey M. Levinson, Cleveland, appeared for Euclid Self Storage.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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