Stay Violations: Void Or Voidable?
Stay violations occur when a creditor takes actions that are prohibited by the automatic stay provision of the bankruptcy code, which is found at 11 U.S.C. § 362. “As a general rule, the filing of a bankruptcy petition operates as a stay against actions affecting the property of the bankruptcy estate. 11 U.S.C. § 362(a). Because the stay takes effect upon filing, without the need for further action, it is often referred to as an ‘automatic’ stay.” In re Nelson, 994 F.2d 42, 44 (1st Cir. 1993).
The automatic stay sweeps broadly, enjoining the commencement or continuation of any judicial, administrative, or other proceedings against the debtor, enforcement of prior judgments, perfection of liens, and “any act to collect, assess or recover a claim against the debtor that arose before the commencement of the case.” 11 U.S.C. § 362(a)(6). “The automatic stay created upon the filing of a bankruptcy petition … does not require actual notice to be effective and, for the most part, prevents a creditor from taking any action to collect a pre-petition debt regardless of notice.” Vargason, 260 B.R. 488, 492 (Bankr. D.N.D. 2001).
This article addresses what happens when stay violations occur. Depending on where the bankruptcy was filed, stay violations may be considered void or only voidable. If the stay violation is void, then the action taken by the creditor had no legal effect and the debtor is not required to take any action to prove otherwise. However, if the stay violation is merely voidable, then the action taken by the creditor has legal effect unless and until the debtor seeks to have that action declared void by a court.
The majority of courts have held that actions taken in violation of the stay are void ab initio. Specifically, the First Circuit, Second Circuit, Third Circuit, Seventh Circuit, Eighth Circuit, Ninth Circuit, and Eleventh Circuit have held that actions taken in violation of the stay are void ab initio.
See In re Myers, 491 F.3d 120, 127 (3d Cir. 2007) (“[A]ctions taken in violation of the stay are void.”); United States v. White, 466 F.3d 1241, 1244 (11th Cir. 2006) (quotation omitted) (“It is the law of this Circuit that ‘[a]ctions taken in violation of the automatic stay are void and without effect.’”); Middle Tenn. News Co. v. Charnel of Cincinnati, 250 F.3d 1077, 1082 (7th Cir. 2001) (“Actions taken in violation of an automatic stay ordinarily are void.”); LaBarge v. Vierkant (In re Vierkant), 240 B.R. 317, 325 (B.A.P. 8th Cir. 1999) (“We hold that an action taken in violation of the automatic stay is void ab initio.”); Soares v. Brockton Credit Union (In re Soares), 107 F.3d 969, 976 (1st Cir. 1997) (adopting the majority view and holding actions taken in violation of the stay are void); Rexnord Holdings v. Bidermann, 21 F.3d 522, 527 (2d Cir. 1994) (internal citation omitted) (“The stay is effective immediately upon the filing of the petition and any proceedings or actions described in section 362(a)(1) are void and without vitality if they occur after the automatic stay takes effect.”); Schwartz v. United States (In re Schwartz), 954 F.2d 569, 571–72 (9th Cir. 1992) (“[A]bsent affirmative relief from the Bankruptcy Court, violations of the stay are void”); Job v. Calder (In re Calder), 907 F.2d 953, 956 (10th Cir. 1990) (per curiam) (internal citations omitted) (“Ordinarily, any action taken in violation of the stay is void and without effect even where there is no actual notice of the existence of the stay.”).
The Fourth Circuit has not yet addressed the validity of acts in violation of the automatic stay. However, courts within the Circuit have adopted the majority position. See Ellison v. Comm’r, 385 B.R. 158, 165 (S.D.W. Va. 2008) (“[T]he Court follows the majority of circuits in holding that violations of the automatic stay are void as a matter of law.”).
The Sixth Circuit has held that actions in violation of the stay are neither “voidable” nor “void,” but “invalid” and subject to cure. See Easley v. Pettibone Mich. Corp., 990 F.2d 905, 911 (6th Cir. 1993) (“[W]e hold that actions taken in violation of the stay are invalid and voidable and shall be voided absent limited equitable circumstances.”).
Only the Fifth Circuit has found that stay violations are “voidable” rather than “void.” See Chapman v. Bituminous Ins. Co. (In re Coho Res., Inc.), 345 F.3d 338, 344 (5th Cir. 2003) (“We adhere to the view that violations are merely ‘voidable’ and are subject to discretionary ‘cure.’”). See also Bronson v. United States, 46 F.3d 1573, 1578 (Fed. Cir. 1995) (“We agree with the Circuits that have held that it is inaccurate and overly broad to characterize every violation of § 362 as being absolutely void.”).