The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., ret.), analyzing a recent decision of interest:
The United States Bankruptcy Court for the Middle District of Pennsylvania (the “Court”) recently ruled that the failure of a judgment creditor to withdraw a pre-petition attachment lien on a debtor’s credit union account was not a violation of the automatic stay, § 362(a)(3) of the Bankruptcy Code, following the Supreme Court’s decision in City of Chicago, Illinois v Fulton, 141 S. Ct. 585 (2021). The Court, moreover, extended the reasoning of Fulton to apply to any allegation of stay violation under subsections (1), (2), (4), (5) and (6). In re Margavitch, 2021 WL 4597760 (Bankr. M.D. Pa. Oct. 6, 2021).
To view the opinion, click here.
In March 2018 Southlake Holdings, LLC (“Southlake”), through its agent, filed suit against Anthony Mark Margavitch in the Pennsylvania state court and obtained a judgment against him for $33,282. In November 2019, Southlake requested and received a writ of execution, which allowed it to garnish Margavitch’s account at the Penn East Federal Credit Union. Margavitch (debtor) filed a chapter 13 bankruptcy in December 2019 with the garnishment order still in effect.
After the commencement of the chapter 13 case, debtor’s counsel made several informal requests that Southlake withdraw the garnishment, but it declined to do so, believing such withdrawal was not necessary. Much later, after debtor confirmed a plan providing for 100% payment of Southlake’s claim, Southlake finally withdrew the garnishment. Debtor’s counsel initiated an adversary proceeding against Southlake for violation of the automatic stay pursuant to § 362(k), asserting in main a violation of § 362(a)(3).
Cross motions for summary judgment were filed by the parties based on agreed undisputed facts, largely as recited here. Debtor recognized the Supreme Court ruling in Fulton – which had ruled that the City of Chicago, which had repossessed multiple debtors’ cars prepetition, could retain that possession postpetition without violating the automatic stay provisions of § 362(a)(3)—but distinguished it. He argued that Fulton only held “that mere retention of estate property after the filing of a bankruptcy petition does not violate § 362(a)(3),” and since Southlake here was not “in possession” of any of the debtor’s property, Fulton did not apply. The Court rejected debtor’s arguments and granted summary judgment for Southlake.
The Court characterized the actions of Southlake, in not withdrawing the garnishment, “more appropriately….as inactions.” After the bankruptcy was filed, Southlake took no affirmative steps to enforce or otherwise try to collect money under the garnishment. This inaction defeated any stay violation claim after Fulton. The Supreme Court had ruled that § 362(a) imposed no “turnover obligations” and could not be construed as an enforcement arm for § 542 (the turnover statute). Interpreting specifically the language of subsection (a)(3), which stays any act to obtain possession of or exercise control over property of the estate, the Court opined, as had the Supreme Court in Fulton, that maintaining the status quo is not “an act,” which requires doing something affirmative.
Although the Court acknowledged that Fulton had limited its holding to the one alleged violation before it—that of subsection (a)(3)—it ruled that its reasoning can be applied to all other subsections of § 362. Subsections (4), (5) and (6) also stay “any act”; since the Court considered doing “an act” necessary for a violation, none could be alleged here. Subsection (a)(1) prohibits the “continuation” of a proceeding against the debtor, another term which requires the creditor take affirmative steps, none of which occurred here. Finally, subsection (2) prevents “enforcement of a pre-petition judgment”. Black’s Law Dictionary defines enforcement to be “an act or process of compelling compliance” with something. There was that magic word “act” again, so without some affirmative steps being taken, no § 362(a) violation could be asserted.
When Fulton returned to the Seventh Circuit on remand, the circuit in turn remanded the case to the bankruptcy court for rulings on whether any other subsections of § 362(a) had been violated when Chicago retained the cars. The debtors in those consolidated cases had additionally asserted violations of subsections (4) and (6), which the bankruptcy court had not reached since it concluded subsection (a)(3) had been violated. I am certain debtors’ counsel around the country maintained some optimism that stay violations might be successfully asserted under those additional subsections, since that remained an open issue. Cases such as this one would put a damper on any optimism that chapter 13 debtors may use a stay violation as a valid reason to ask that their repossessed cars be returned. It is not difficult to see how the Court here expanded Fulton’s reasoning to all subsections, based on the words of the Supreme Court. I fear that without a legislative amendment to the Bankruptcy Code, chapter 13 debtors around the country will be deprived of their repossessed cars, property usually vital to chapter 13 debtors’ ability to work and repay creditors. Creditor and debtors alike will suffer in the meantime.
This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.