DOES REPORTING YOUR DEBTOR’S BAD CHECK TO PROSECUTORS VIOLATE THE AUTOMATIC STAY?

 By Scott Blakeley ^[i] 

You authorize a “cash sale” to a sole proprietorship customer.  Your delivery driver picks up a check from your customer with delivery of the goods.  The goods are delivered, but when the business check from your customer is presented it is returned “NSF”.  The bank presents the check twice for payment, but the check does not clear.  You send a letter demanding the debtor replace the check.  However, you receive notice that your customer files an individual Chapter 7 bankruptcy (the liquidation chapter of the Bankruptcy Code), and schedules your company as a creditor for the amount of the bad check.    

You are well aware that with your customer’s bankruptcy filing, all collection efforts on the NSF check must immediately cease because of the automatic stay.  But can you make a criminal referral to the county prosecutor for their prosecution of the debtor under the state’s bad check statute? In a recent bankruptcy case, In re Hartung^[ii], the bankruptcy court recently considered the question and found the creditor had not violated the automatic stay.

               

Bad Check, Bankruptcy And Criminal Referral 

     The debtor, an individual, issued a check to the creditor for goods.  The check did not clear after two attempts by the bank, and was returned “NSF”.  The debtor filed a Chapter 7 petition, and scheduled the creditor as holding an unsecured claim for the amount of the “NSF” check.  The creditor reported the bad check with the county prosecutor for criminal prosecution.  The county prosecutor pursued the debtor for the crime of passing a bad check.  The debtor advised the county prosecutor of the bankruptcy filing.  The prosecutor stated the bankruptcy did not discharge the bad check debt.  The debtor was convicted and ordered to jail.         

 

Debtor Claims Creditor Violates Automatic Stay

The debtor contended that the creditor willfully violated the automatic stay by reporting the debtor’s bad check to the county prosecutor for criminal prosecution.  The debtor argued that the creditors referral to the county prosecutor was an attempt by the creditor to collect on the delinquent account.  The creditor claimed that reporting the bad check to the county prosecutor was for information purposes and not to collect a debt.  The debtor conceded that the county prosecutor’s criminal prosecution of the debtor was excepted from the automatic stay.  However, the debtor claimed that because the creditor violated the automatic stay by referring the matter, the prosecutor could not proceed with its criminal prosecution against the debtor.   

 

How Broad Is The Automatic Stay? 

The automatic stay is an injunction, which automatically and immediately goes into effect as soon as a bankruptcy case is field, whether the bankruptcy filing is one under Chapter 7, 11 or 13, whether the case was commenced as an involuntary bankruptcy.  The stay is automatic in the sense that it arises automatically upon filing the bankruptcy case by operation of law, without the bankruptcy court having to enter an order stating that it exists.  The stay is in effect even where the creditor has not been given notice that the bankruptcy case has been filed.     

The automatic stay prohibits any creditor from taking action against the property of the estate and against the debtor, unless relief from stay is obtained.  For example, a vendor is barred from seeking or levying writs of attachments or garnishments, and also stays the vendor from a judicial lien against the debtor, but has not yet levied on any property.  The stay also enjoins secured creditors from repossessing or selling collateral. The purpose of the automatic stay is to give the debtor breathing room, and to protect creditors from each other by preserving the bankruptcy estate intact until property can be distributed according to the bankruptcy priority scheme and allow orderly administration of the case.  The scope of the automatic stay is so broad that any action to collect is probably stayed.  The debtor cannot modify the stay without the bankruptcy court agreeing to this and creditors having the opportunity to comment. 

Damages are assessed against a creditor only where it is shown that the creditor had notice or knowledge of the bankruptcy filing.  Where there is a willful violation of the stay, the court will award an individual debtor actual damages, including a debtor=s attorney=s fees and costs for enforcing the violation.  The court may also award punitive damages to punish the creditor. 

     But how broad is the automatic stay?  Does it block criminal referral of a bad check?

 

Bad Check Laws 

Bad check law is governed by state, not federal, legislation.  All states have bad check laws.  Each state may have different statutory provisions as to whether a party may be guilty of a crime and may be subject to civil penalties.  Bad check law combats the principle of deception: the buyer of goods or services deceives the vendor into believing that payment is made, and the vendor releases the goods in reliance on such representation.   

Generally, a vendor is required to establish the buyer’s intent to defraud and knowledge of insufficient funds for a valid claim under the bad check laws.  Most states provide that it is prima facie evidence of insufficient funds if: (a) the check was not honored, and (b) the buyer did not pay the check after written notice of dishonor of the check.  Under the bad check laws, a vendor may have claims against the buyer on a civil basis (collection of the debt) and a criminal basis.

 

Criminal Laws 

The majority of the states treat the crime of bad checks as a misdemeanor.  In states that make a distinction regarding a felony or misdemeanor, the amount of the check usually determines if the crime is a misdemeanor or a felony.  Generally, it must be established that the debtor had knowledge of the lack of funds.  Generally, in those states that treat a bad check as a felony, punishment may be by imprisonment for up to one year.  It is the state or county authorities that prosecute the crime.  Prosecutors criminally pursue debtors for bad checks to collect and send a message that persons that write bad checks will be prosecuted.

 

Reporting Bad Check Does Not Violate Automatic Stay Court Rules 

                The court disagreed with the debtor’s position, stating that: 

“The protections afforded by section 362(a) [automatic stay provision of Bankruptcy Code] are not so broad as to forestall a creditor’s right to report a crime.  Indeed, citizens have an obligation to report crimes in order to protect society and to maintain the integrity of our criminal justice system.  Once a crime is reported, the county attorney’s office then makes an independent decision as to whether criminal proceedings are warranted based upon the facts as presented.  The result urged by Debtors would impermissibly hinder prosecutors and interfere with a State’s right to enforce its criminal statutes. . . In the end, this is not a chronicle of creditor and debtor, but of crime and punishment.”[iii] 

The court noted that if it adopted the debtor’s position a prosecutor would be barred from obtaining evidence of criminal wrongdoing from a creditor after a debtor files bankruptcy.  The automatic stay does not bar the creditor from referring the bad check.