The Pendulum Swings: Bad Check Prosecutions and the Automatic Stay

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 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 thirty-five 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 pre-petition 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 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

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.