The Pendulum Swings: Bad Check
Prosecutions and the Automatic Stay
By: Ryan Gonder
Businesses, or more generally, creditors, must be very careful as they navigate the waters with
bad checks and debtors who enter bankruptcy. Subject to only a few enumerated exceptions, the
automatic stay of § 3621 in the Bankruptcy Code gives debtors breathing room and creditors are
specifically prohibited from any acts to collect pre-petition debt. Violations of the automatic stay result
in compensatory and, more importantly, punitive damage awards. Specifically, under § 362(a)(6) a
violation of the automatic stay will occur for any act to collect or recover pre-petition claims.2 One of
the exceptions to the automatic stay, however, is in § 362(b)(1), which allows the continuation or start
of a criminal proceeding against the debtor.3 The plain language of the Code provides law enforcement
and related individuals what seems to be the unfettered discretion to begin or continue criminal
prosecutions against the debtor, but courts have differences of opinions on this interplay.4
Bankruptcy courts have not spoken in a unified voice on whether bad check prosecutions are
subject to the stay, however, at one point the prevailing view was for courts to find an absolute
exception and even the Ninth Circuit went so far as to overturn its previous ruling where it applied the
exception only in certain circumstances.5 Nevertheless, in a recent pronouncement, we have another
court that has cut against what was once thought of as the dominant rule and found that the criminal
proceeding exception to the automatic stay does not apply when the prosecution in question is
motivated by a bad faith or an attempt to collect a debt. This article will first introduce that case, In re
Heeley. 6 After a thorough discussion of Heeley, the article will then explain the two views on the
criminal proceeding exception to the automatic stay.
In In re Heeley, the court reminds us of how limited the exception in § 362 (b)(1) can be in
certain courts.7 In that case, the chapter 13 debtor brought an action against the private merchant
creditor, BJ’s Membership Club, Inc. The United States Bankruptcy Court for the Eastern District of
1
11 U.S.C. § 362 (a).
“[A]ny act to collect, assess, or recover a claim against the debtor that arose before the commencement of the
[bankruptcy filing.]” 11 U.S.C. § 362(a)(6).
3
[C]ommencement or continuation of a criminal action or proceeding against the debtor. 11 U.S.C. § 362 (b)(1).
4
See In re Branch, 525 B.R. 388, 395-97 (Bankr. E.D. Mich. 2015); In re Dovell, 311 B.R. 492, 494 (Bankr. S.D. Ohio
2004) citing In re Muncie, 240 B.R. 725, 727 (Bankr. S.D. Ohio 1999); see also In re Taylor, 16 B.R. 323, 325-26
(Bankr. D. Md. 1981).
5
See In re Bartel, 404 B.R. 584, 589-90 (B.A.P. 1st Cir. 2009) citing In re Gruntz, 202 F.3d 1074, 1085 (9th Cir. 2000);
see In re Taylor, 16 B.R. 323, 325-26 (Bankr. D. Md. 1981) contra. In re Caldwell, 5 B.R. 740, 742
(Bankr.W.D.Va.1980).
6
In re Heeley, 14-03291-5-DMW, 2014 WL 7012652 (Bankr. E.D.N.C. Dec. 11, 2014).
7
Worth mentioning, the Fourth Circuit once declared that (b)(1) was an absolute exception. This court, within the
Fourth Circuit, seems to think not. The case that declared an absolute rule was Simonini v. Bell (In re Simonini), 69
Fed.Appx. 169, 170-71 (4th Cir.2003).
2
1
North Carolina found that the Creditor violated § 362(a)(6) of the automatic stay and awarded actual8
($5,601.30 to Debtor; $3,500.00 to Debtor’s law firm) and punitive damages ($5,000.00). Before filing
for bankruptcy, the debtor in Heeley wrote a $215.65 check to BJ’s for goods purchased at its Cary,
North Carolina store. The Debtors listed BJ’s as a creditor and BJ’s received notice at a Philadelphia,
Pennsylvania P.O. Box of the bankruptcy filing three days later, but then sent a letter to the Debtors on
June 14, 2014, stating that the check has been returned for insufficient funds. Ms. Heeley called the
Cary Store explaining that there was a pending bankruptcy case and provided their attorney’s contact
information. On June 23, 2014, nine days later, the Debtors served the Cary Store with a formal notice
and certificate of service was filed with the court. Two weeks later, Ms. Heeley visited the Cary Store to
buy groceries. At check-out, her BJ’s membership card was not accepted and the manager explained
that she could not shop there until she has paid all outstanding (pre-petition) charges to BJ’s. Ms.
Heeley again explained that her husband has filed for bankruptcy, and that her debt would be handled
in the bankruptcy case.
Upon receiving notice of the bankruptcy case, BJ’s referred its bad check claim to the “Worthless
Check Collection Program” (“WCP”) for the county. The Debtor on September 9, 2014 received a letter
from WCP, which “threatened criminal prosecution if the Debtors failed to pay the amount due under
the worthless check before October 9, 2014.” Afraid of criminal prosecution, Ms. Heeley traveled thirtyfive miles to pay, in person, the outstanding claim. BJ’s received the outstanding claim amount, and did
not respond to the Motion for Sanctions (this case) nor did it appear at the hearing.
The court found a violation of the automatic stay under (a)(6) because BJ’s had constructive and
actual notice of this case and decided to ignore it. Specifically, BJ’s went wrong when it collected a prepetition debt by excluding the Debtors from shopping at its Cary Store and by the threat of criminal
prosecution. The referral of the debt to WCP constituted a willful violation of the stay, and the
“acceptance of the collected funds indorsed that improper action.” The punitive damages were
warranted because BJ’s actions were “particularly malicious” through the continued prosecution of the
worthless check after receiving multiple notices, “circumvention of the bankruptcy process and the
protections afforded by the automatic stay,” and “BJ’s improper[] obtain[ment of] money from the
Debtors.”
In Heeley, one can see that the court does not take the absolutist view point on bad check
prosecutions. This court finds that the criminal proceeding exception to the automatic stay does not
apply for bad check prosecutions when the motivation behind the referral to the WCP was to collect the
8
According to the court, these included:
a. The sum of $300.65 paid through the WCP;
b. All costs incurred by Ms. Heeley in making the payment to BJ's through the WCP;
c. The costs incurred in connection with the Motion and hearing;
d. Actual emotional distress suffered by the Debtors; and
e. Punitive damages.
2
pre-petition debt.9 This is analogous to this court’s previous holdings in In re White and In re Byrd.10 The
bad faith/motivated to collect a pre-petition debt qualified exception is explained:
[O]nce a debtor files a petition for bankruptcy, a disgruntled creditor may not then
approach a governmental prosecutorial entity in order to prompt a criminal action to
recover debt. If the creditor already has complained to authorities by the time a petition
is filed, those authorities may commence or continue a criminal prosecution ... as they
see fit. But if the debtor files for bankruptcy before a creditor complains to prosecuting
authorities, that complaint ... may constitute a violation of the automatic stay or
discharge injunction.11
The qualified exception rule for § 362(b)(1) finds actions that are initiated for the purposes of
collecting a debt to not meet the exception from the automatic stay, whether in the form of a criminal
proceeding or not.12 In addition, bad faith prosecutions on behalf of the government also do not qualify
as an exception under § 362(b)(1) because the policy that a bankruptcy should not allow a debtor to
avoid criminal proceedings is no longer furthered. As the court in In re Taylor stated:
Prosecutions instituted primarily to vindicate the public welfare by punishing criminal
conduct of the Debtor and to discourage similar conduct of others are not usually
interfered (sic) with by Bankruptcy Courts. When it is clear that the principal motivation
is neither punishment nor a sense of public duty, but rather to obtain payment of a
dischargeable debt either by an order of restitution or by compromise of the criminal
charge upon payment of the civil obligation, the Bankruptcy Court may properly enjoin
the criminal proceeding.13
Some courts reject the qualified exception rule and instead follow the absolute exception rule.
The absolute exception approach does not contemplate the creditor’s motives (primary or secondary) or
the bad faith of the prosecution.14 According to these courts, § 362(b)(1) categorically excepts criminal
prosecutions from the automatic stay.15 These courts find solace in the language of the exception itself
and the difficulty in applying the qualified exception mentioned above.16 The language is clear,
according to the courts that follow the absolute exception, that it should apply to all criminal actions or
proceedings and to find otherwise would “insert phrases and concepts into the statute that simply are
9
In re Heeley, 14-03291-5-DMW, 2014 WL 7012652, *2 (Bankr. E.D.N.C. Dec. 11, 2014).
In re White, BKR. 09-05578-8-JRL, 2010 WL 2465340, at *2 (Bankr. E.D.N.C. June 11, 2010); In re Byrd, 256 B.R.
246, 252 (Bankr.E.D.N.C.2000).
11
In re White, BKR. 09-05578-8-JRL, 2010 WL 2465340, at *2 (Bankr. E.D.N.C. June 11, 2010) citing In re Byrd, 256
B.R. 246, 252 (Bankr.E.D.N.C.2000).
12
Id.; In re Muncie, 240 B.R. 725, 727 (Bankr. S.D. Ohio 1999).
13
In re Alan I. W. Frank Corp., 19 B.R. 41, 43-44 (Bankr. E.D. Pa. 1982) citing In re Taylor, 16 B.R. 323, 325 (Bankr. D.
Md. 1981). See also Younger v. Harris, 401 U.S. 37 (1971); 3 Collier on Bankruptcy 362–48 (15th ed. 1999).
14
In re Storozhenko, 459 B.R. 697, 705-06 (Bankr. E.D. Mich. 2011) explaining Gruntz v. County of Los Angeles (In re
Gruntz), 202 F.3d 1074, 1085–87 (9th Cir.2000) (en banc).
15
See Sylvestre v. Safeway, Inc., 1992 WL 111853, *1 (4th Cir. May 27, 1992).
16
Id.
10
3
not there.”17 The idea behind the exception—criminals should not be able to hide behind a bankruptcy
filing—cannot be halted even when there is a possibility of bad faith or immoralities taken by the
creditor.
In 2009, the Bankruptcy Appellate Panel for the First Circuit found that it was the prevailing
standard to find an absolute exception under § 362(b)(1).18 That is, however, no longer the case. As the
opinion in Heeley illustrates, courts have strayed away from the prevailing view and find a qualified
exception. This recent ruling shows how complicated and unpredictable bad check prosecutions are
when it comes to bankruptcy. Business owners will inevitably find themselves in the business of bad
check prosecutions. With that in mind, they must be aware of the courts’ diverging views on this matter
at the risk of incurring sanctions for violations of the automatic stay.
17
18
Gruntz, 202 F.3d at 1085.
In re Bartel, 404 B.R. at 590.
4