Debtors’ Failure to Mitigate Dooms Contempt Action

Posted by NCBRC - August 21, 2015

Debtors’ failure to prove actual damages, in addition to an apparently deliberate failure to mitigate damages deprived them of an award of sanctions without regard to whether Solutions Finance willfully violated the stay. In re Phillips, No. 15-30632 (Bankr. E.D. Tenn. July 13, 2015). After the debtors, Jason and Amy Phillips, filed for chapter 7 bankruptcy listing “Salution Finance” as an unsecured creditor, the Bankruptcy Notification Center sent a notice of bankruptcy to the listed address. Nonetheless, Solutions continued to seek repayment of the debt by contacting the debtors and Mr. Phillips’ sister. The debtors filed a motion for contempt for violation of the automatic stay.

Counsel for the debtors did not contact Solutions prior to filing the motion for sanctions, nor did either of the debtors inform Solutions of the bankruptcy when they spoke to Solutions’ representatives after they had filed their petition. The only contact debtors’ counsel had with Solutions prior to the motion was a “stunt” of sending Solutions a certified letter with no content and no return address in an apparent attempt to verify Solutions’ address. When a representative from Solutions discovered the sender and tried to contact him, debtors’ counsel did not return the call. Solutions did not flag the debt as in bankruptcy until the debtors filed their motion for sanctions.

Certain factual allegations relating to receipt of notice and Solutions’ post-petition conduct arose at the evidentiary hearing but the court ultimately determined that the discrepancies were either insubstantial or irrelevant in light of its final ruling. With respect to damages the debtors sought recompense for Mr. Phillips’s “embarrassment, frustration and emotional distress” and “actual damages as a result of [Solutions’s] violation of the automatic stay.” Mr. Phillips testified that he did not miss any work as a result of Solutions’ conduct and that the only actual expenses incurred by the debtors related to travel to their attorney’s office and to court. Mr. Phillips offered no evidence to support his claim for emotional distress nor did he submit any evidence as to mileage or parking costs associated with prosecution of the motion for sanctions.

The court concluded that the debtors failed to sustain their burden of proving that they suffered damage based on the alleged stay violation and that, even if they had, their failure to mitigate by contacting Solutions prior to the motion for sanctions stripped them of any right to compensation. With respect to mitigation, the court found that the automatic stay is a shield rather than a sword, and as such, debtors have an obligation to minimize damage where possible. In this case, the court found that it was likely that the debtors could have avoided all expenses related to the claim had they contacted Solutions prior to filing for sanctions.

Phillips Bankr. ED Tenn opinion

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  1. By Bankruptcy News Briefs 8/21 | NACBA Now on August 21, 2015 at 2:49 pm

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