In re: McCarthy, 123 F.4th 456 (9th Cir. 2023)
The case of In re: McCarthy presents a pivotal moment in the interpretation and application of the automatic stay provision under the U.S. Bankruptcy Code.
Whether XYZ Bank’s indirect actions of contacting McCarthy’s employer for employment verification, despite the automatic stay being in effect, constituted a violation of the automatic stay under § 362 of the U.S. Bankruptcy Code.
The automatic stay provision under § 362 of the U.S. Bankruptcy Code prohibits any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the bankruptcy case. A 'willful' violation occurs if a creditor (1) knew of the automatic stay and (2) intended the actions that violated the stay.
The Ninth Circuit held that XYZ Bank’s conduct did indeed constitute a willful violation of the automatic stay. The communications with McCarthy’s employer were determined to be actions intended to pressure McCarthy indirectly and further the Bank's collection interests.
In re: McCarthy is significant for its elucidation of the scope of the automatic stay, particularly concerning indirect creditor actions that may pressure debtors. For law students, the case underlines the importance of both the letter and spirit of bankruptcy laws meant to protect debtors from any actions that could disturb the bankruptcy process. It demonstrates how courts evaluate creditors' business practices vis-à-vis equitable concerns in bankruptcy cases.