A federal appellate court has considered whether a consumer violated bankruptcy's automatic stay when the consumer filed a complaint with the state real estate commission against a licensee who was in bankruptcy.
In 1997, Lori Sevigny ("Buyer") entered into a transaction to purchase land from Lester Pryor ("Trustee"), a trustee for the estate of Mary Perry. The estate was represented by licensed real estate salesperson Judith McMullen ("Licensee"). The Buyer allegedly paid a deposit of $10,200 ("Deposit") to the Licensee. The transaction fell through, and the land in question was eventually purchased by a company controlled by the Licensee's father. The Deposit was never returned to the Buyer and the Licensee claimed that she never received it.
In 2000, the Licensee filed a chapter 7 bankruptcy under the federal bankruptcy code. An attorney for the Buyer filed a nondischargability complaint, seeking repayment of the Deposit. The Licensee then converted her chapter 7 petition to a chapter 13. Chapter 13 allows a consumer more time to repay their debts through restructuring, whereas a chapter 7 involves a liquidation of a debtor's assets and then a distribution of the recovered amount to the debtor's creditors, with the remainder of the debts being discharged forever. The Buyer misunderstood the effect of the Licensee's conversion to a chapter 13 bankruptcy, as she thought the entire bankruptcy proceeding was complete. The Buyer was unable to communicate with her attorney to clear up this misunderstanding.
In July 2000, the Buyer filed a complaint with the Massachusetts Division of Registration for Real Estate Agents ("Division"), alleging that the Licensee had fraudulently withheld the Deposit. Since the only proof before the Division was a canceled check endorsed by the Trustee, the Division dismissed the complaint for lack of evidence.
In September 2000, the Buyer retained a new attorney, who filed a lawsuit against the Licensee to recover the Deposit. The new attorney did not know about the Licensee's bankruptcy filing. As part of this proceeding, an affidavit of the Trustee was submitted, in which the Trustee stated that the Licensee had shortchanged the estate by selling the property at a low price to the company controlled by her father and that the Licensee had retained the Deposit. Once the new attorney was made aware of the bankruptcy filing, he dismissed the lawsuit because of the automatic stay.
In December 2000, the Licensee filed a lawsuit in the bankruptcy court against the Buyer, alleging that the Buyer had violated the automatic stay by filing a complaint with the Division. The bankruptcy court dismissed the lawsuit, and this decision was affirmed by a federal district court. The Licensee appealed these rulings.
The United States Court of Appeals, First Circuit, affirmed the rulings of the lower courts. The court first looked at the automatic stay prohibitions. Generally, the automatic stay in bankruptcy prohibits all attempts to collect money from the debtor as well as the commencement of any legal actions against the debtor during the course of the bankruptcy. The automatic stay begins at the commencement of a bankruptcy filing.
However, there are exceptions to the automatic stay's prohibitions. One exception is any enforcement action brought before a regulatory agency. The purpose behind this exception is to avoid abuse of the bankruptcy process by filings attempting to avoid the imposition of discipline. Bankruptcy courts have developed a test to analyze what sort of filings fall into this exception, which require a determination of whether the enforcement action is filed pursuant to the regulatory agency's public policy agenda or is instead an attempt by a creditor to use the regulatory agency filing to collect from the debtor's bankruptcy estate.
The court found that the Buyer's complaint fell within the exception. First, the filing met the public policy exception because the Division regulates its licensees in order to protect the public from incompetent real estate professionals. Second, there was no way the Buyer could recover any damages from the Licensee in this proceeding, as the Division only had the power to revoke, suspend, or refuse to renew the Licensee's real estate license. Thus, the court ruled that the Buyer's filing with the Division was not barred by the automatic stay.
Next, the court considered whether the Buyer's lawsuit filing was a willful violation of the automatic stay. The bankruptcy court had found that the violation was not willful, as the Buyer had misunderstood the bankruptcy proceedings and had not been able to communicate with her attorney on her mistaken beliefs. Further, the bankruptcy court noted that the lawsuit was immediately withdrawn by the new attorney once he learned of the Licensee's bankruptcy. The court found these were factual issues which were appropriately resolved by the bankruptcy court and so the court affirmed the bankruptcy court's determination that the Buyer's violation of the automatic stay was not willful.
McMullen v. Sevigny (In re McMullen), 386 F.3d 320 (1st Cir. 2004).