Friends Don’t Let Friends Violate Automatic Bankruptcy Stay

Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.

By Daniel Gill

A neighbor violated the automatic bankruptcy stay when she paid off a debtor’s bank loan and then received the first installment of repayment under an agreement the two had worked out on their own, a New York bankruptcy judge ruled ( In re Greene , 2017 BL 291060, Bankr. W.D.N.Y., No. 17-20543, 8/18/17 ).

Judge Paul R. Warren, of the U.S. Bankruptcy Court for the Western District of New York, said Donna Smith and her bankrupt tenant and friend, Audrey M. Greene, established a post-petition obligation that replaced a debt that “was otherwise dischargeable in bankruptcy.”

The court ruled their deal null and void, and ordered that Smith return to Greene the first installment under their repayment note of $100 and pay $1,000 in attorneys fees.

Although Warren found that Smith violated the stay and now owed Greene money, he hoped the two would remain friends.

Greene rented a home from a company owned by Smith. The two lived in the same neighborhood and had become friends, the court said. When Greene took out a personal loan from a credit union, Smith helped her get the loan by signing a personal guaranty.

Greene filed for bankruptcy. In Chapter 7, a debtor’s assets are liquidated by a trustee for the benefit of creditors and receives a discharge, an order wiping out most types of personal debt. The filing also triggers an automatic stay against any efforts by creditors to collect a debt against the debtor or her property.

Greene told Smith about the bankruptcy filing. Because she was concerned about the effect of the bankruptcy on their credit, Smith paid off the credit union debt of about $2,269, the court said.

Smith then had Greene execute a note to repay her for the amount of the settled credit union debt, and had Greene make a $100 payment.

By doing so, Smith violated the automatic stay, the court said. By having Greene sign the new note payable to Smith, Smith was collecting on a possible pre-petition, or pre-bankruptcy, debt. Such a debt might arise only if Smith had to pay on her guaranty. .

Greene was represented by Thomas A. Corletta, Rochester, N.Y. John M. Bansbach, Rochester, N.Y., represented Smith.

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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