Violation of the Automatic Stay

On August 23, 2017, Judge Shannon of the Delaware Bankruptcy Court issued an order that is a reminder that this is a court of equity – and that at the end of the day, he will act equitably.  A copy of Judge Shannon’s opinion (the “Opinion”) is available here.  Mr. Welsh filed the complaint that led to this Opinion, seeking damages for emotional distress, and punitive damages, for alleged violations of the automatic stay.

Brian Welsh is a debtor in bankruptcy case no. 14-11503 in the Bankruptcy Court for the District of Delaware.  On April 13, 2012, despite his mortgage being in default, Bank of America (“BofA”) mistakenly recorded a satisfaction of mortgage.   On February 7, 2014, BofA
filed a complaint in the Superior Court in the State of Delaware to set aside the Satisfaction.  On June 18, 2014, prior to any disposition in the Superior Court litigation, Mr. Welsh filed his Chapter 13 petition. On November 3, 2014, in order to protect its interest, BofA filed a proof of claim on account of the mortgage.  In response to an adversary proceeding seeking to avoid BofA’s claim, the Court issued a decision on October 1, 2015, in which it held that a bona fide purchaser would not have been on notice of the Superior Court litigation as of the Petition Date, and the lien was therefore avoided pursuant to Section 544(a)(3).  At that time, Judge Shannon said that Mr. Welsh “will benefit mightily due to [Defendant’s] honest mistake”, in essence obtaining “a house for free”.

As the facts are provided by Judge Shannon in the Opinion, it appears that he would be inclined to rule that BofA did violate the automatic stay.  This is reinforced by his denial of the defendants’ motion to dismiss the complaint.  He does, however, issue a parting word of guidance to the parties that makes exceptionally clear that the Debtor should not expect to receive any amount of damages due to BofA’s violation of the automatic stay.  “Candor requires that the Court advise the parties that it is highly unlikely that, at trial, this Court would award damages to the Plaintiff beyond the free house he has already obtained.”

When I was in law school, I heard numerous times that “pigs get fat and hogs get slaughtered”.  Mr. Welsh got a rich reward due to his handling of his bankruptcy petition – a free home.  Anything more than a free home, which had a mortgage of $205,000, may be more than a judge in a court of equity could in good conscience award.