The recent case of In re Sullivan, 2007 WL 987328 (Bankr.N.D.N.Y. 2007) follows a line of decisions from the US Bankruptcy Court for the Northern District of New York that add teeth to the proposition that debtors should be compensated for the damages that arise from creditors systemic, continuing and egregious violations of the automatic stay provisions of the Bankruptcy Code.

The case involved a motion for violations of the automatic stay provisions of 11 U.S.C. § 362 against Washington Mutual Bank, F.A. and its agent, the Law Offices of Shapiro & DiCaro, LLP. Shapiro & DiCaro filed a proof of claim on behalf of Washington Mutual which set out an outstanding mortgage balance in the amount of $2,169.22, and subsequently billed Washington Mutual $500.00 in attorney fees. No attorney fees were included in the proof of claim.

After confirmation the Debtor contacted Washington Mutual to obtain a payoff amount for the mortgage which encumbered his personal residence, and which was within several hundred dollars of being paid in full after nearly 30 years of payments. The Debtor received in response a December 6, 2004 payoff letter from Shapiro (”Payoff Letter”) containing the mortgage’s $175.53 principal balance, and a line item for “Bankruptcy Attorney Fees” of $500.00.
During the course of closing, Shario further refused to release the abstract of title for the loan without payment of the $500 fees.

The court held that charging these unapproved legal fees by the mortgage company was a violation of the automatic stay, and that the debtor was entitled to damages. This is a huge win for those of us who litigate mortgage servicer abuses in New York, as it verifies the position that we’ve all been taking - that legal fees left undisclosed on a proof of claim simply cannot be recovered from the debtor in the absence of court approval.

According to debtor’s counsel Theodore Araujo:

It is particularly important to note that the only defendant in this case was a law firm. In the past the cost of enforcing the stay provisions has fallen on counsel for the debtors. It is common for Bankruptcy Judge’s to belittle motions that seek to enforce the automatic stay that are brought by debtors. It is not uncommon for the Bankruptcy Courts to state to debtors counsel that the debtor should have taken actions to prevent the abuse of the stay after the fact rather then assert their rights under the statute.

This is the only circumstance in my knowledge where the costs of enforcing a remedial statute in Federal Law that creates a substantive right on behalf of a protected party, is borne by the party that was to be protected. Even so called “de-minimus” violations of the stay are egregious in the opinion of most debtors when they have gone through the tortuous route of filing Bankruptcy to gain a fresh start.

The creditors have decided that the continued practice of violating the automatic stay provisions are cheaper and more profitable then complying with the law. It is time that more Courts start to realize that these are real cases that cause traumatic injury.

Mr. Araujo a member of the National Association of Consumer Bankruptcy Attorneys, is an attorney with the Bodow Law Firm, PLLC in Syracuse.