On the filing of a bankruptcy petition, does a cash deposit in lieu of a supersedeas bond become estate property available for distribution to all creditors, or does it belong to the judgment creditor?

On an issue where the courts are divided, Bankruptcy Judge James R. Sacca of Atlanta concluded that the estate’s contingent interest either terminated when the appellate process was completed or the debtor’s loss on appeal established cause to terminate the automatic stay.

Before bankruptcy, the corporate debtor was saddled with a $572,000 judgment. The debtor deposited $62,500 in cash with the state court in lieu of a supersedeas bond. The day after the Georgia Supreme Court denied certiorari, the debtor filed a chapter 11 petition.

Without obtaining a modification of the automatic stay and before the time elapsed for the debtor to file a reconsideration motion in the state Supreme Court, the judgment creditor initiated proceedings in the state trial court to release the cash deposit.

The debtor sought sanctions in bankruptcy court for violating the automatic stay. The debtor also sought a declaration that the cash deposit became estate property on the filing of the petition and was available for distribution to all creditors.

The debtor lost on all counts in Judge Sacca’s October 31 opinion.

Conceding that a bond would not be available to creditors generally, the debtor argued that a cash deposit was different because it originated as the debtor’s property. Judge Sacca rejected the distinction, following a line of cases treating a bond and a cash deposit interchangeably.

Judge Sacca said the Eleventh Circuit has not ruled on whether a supersedeas bond becomes estate property. Although the lower courts are split, he said the majority conclude that a bond becomes estate property, temporarily, if the appeal has not been completed. He said the courts are also split on the disposition of the judgment creditor’s interest in the bond when the appeal is completed.

Some courts hold, Judge Sacca said, that the bond drops out of the estate when the appeal is completed, divesting the debtor of its contingent interest and allowing the judgment creditor to proceed. Others require the judgment creditor to obtain a modification of the stay before proceeding against the bond.

Judge Sacca held that the judgment creditor’s “interest in the cash did not just vanish when [the debtor] filed for bankruptcy, which would have resulted in [the judgment creditor] having the same status as a general unsecured creditor.”

However, Judge Sacca found that the creditor’s action to collect the cash deposit did violate the automatic stay because the creditor moved before the decision in the state Supreme Court was final. In view of “confusion” about the date when the appeal became final and “unsettled law on the issue of the nature of the estate’s interest in the cash deposit,” he concluded that the stay violation was not willful and that the debtor had sustained no damages. Thus, he ruled that the stay violation was not sanctionable.

Even if the deposit was estate property, Judge Sacca held that the estate’s interest in the cash either dissolved on completion of the appeal, thus entitling the creditor to proceed against the deposit, or he found cause and modified the stay.