Concluding that the Supreme Court’s Fulton decision overruled prior Ninth Circuit authority, the Ninth Circuit Bankruptcy Appellate Panel held that a creditor no longer violates any provision of the automatic stay in Section 362(a) by maintaining the status quo and declining to vacate a prepetition attachment.
While the decision under Section 362(a)(3) is no surprise given that Fulton addressed the same subsection, the November 10 BAP opinion is noteworthy for finding no stay violations under any other subsection in Section 362(a).
The Prepetition Attachment
A municipality in Arizona obtained a $30,000 judgment against an individual and served a writ of garnishment on a bank that held about $9,000 belonging to the judgment debtor in three accounts.
The judgment debtor moved in state court to quash the garnishment, contending that the accounts were community property. The state court allowed the city to take discovery, but the debtor filed a chapter 13 petition before the city took further action in state court.
Once in bankruptcy, the debtor’s counsel sent messages to both the city and bank demanding the release of the attachment. The city’s attorney responded by filing a motion to stay the litigation in state court.
The debtor moved the state court to vacate the garnishment. The city’s attorney responded by saying that the city would abide by whatever decision was made under the Bankruptcy Code and did not oppose releasing the funds.
More specifically, the city told the debtor that Section 362(a) only required staying the proceedings, not dismissing the garnishment.
The state court vacated the garnishment, and the bank released the funds. The debtor then filed a motion in bankruptcy court seeking $30,000 in damages for a willful violation of the stay under Section 362(k).
The Pre-Fulton Finding of a Stay Violation
At the ensuing hearing held before the Supreme Court handed down Fulton, the bankruptcy court cited Ninth Circuit authority from 2017, faulted the city for not vacating the garnishment, and entered an order finding a stay violation. The bankruptcy court told the debtor to proceed with a hearing to fix damages.
After Fulton came down, the city filed a motion for rehearing under Bankruptcy Rule 9024 and Federal Rule 60(b). The bankruptcy court granted rehearing.
The Ruling After Fulton
Ruling under Fulton, the bankruptcy court said that its prior ruling was wrong and that the automatic stay does not require a creditor to take affirmative action under any of the subsections in Section 362(a).
The debtor appealed to the BAP, but Bankruptcy Judge Robert J. Faris affirmed for the BAP in an opinion on November 10.
First, Judge Faris dealt with the question of whether the city properly moved for rehearing under Bankruptcy Rule 9024. He said that the finding of a stay violation was not a final order in the absence of a decision fixing damages.
Because there was no final order, Judge Faris said that Rule 9024 did not apply and that the “bankruptcy court was free to review and change its own interlocutory order whether or not Rule 9024 permitted it to do so.”
Judge Faris therefore reviewed the reconsideration order de novo.
Fulton Means No Stay Violation
Citing City of Chicago v. Fulton, 141 S. Ct. 585, 208 L. Ed. 2d 384 (Sup. Ct. Jan. 14, 2021), Judge Faris saw no error when the city “failed to move to quash the writ of garnishment or cause [the bank] to unfreeze the bank accounts.” To read ABI’s report on Fulton, click here.
Before Fulton, Judge Faris cited the Ninth Circuit for having held that the knowing retention of estate property violates Section 362(a)(3). Fulton, he said, overruled those decisions.
Judge Faris quoted Fulton for saying that Section 362(a)(3) contains no affirmative turnover obligation and that mere retention of estate property does not violate the stay. He affirmed the bankruptcy court’s ruling on subsection (a)(3) by saying that the city “had no affirmative duty to ensure the return of estate property to [the debtor].”
Judge Faris cited Margavitch v. Southlake Holdings LLC (In re Margavitch), 20-00014, 021 BL 383922, 2021 Bankr. Lexis 2784, 2021 WL 4597760 (Bankr. M.D. Pa. Oct. 6, 2021), as being directly on point. In Margavitch, he described Bankruptcy Judge Mark J. Conway of Wilkes-Barre, Pa., as finding “no affirmative obligation to release the funds and [said that the creditor] need only maintain the status quo.” To read ABI’s report on Margavitch, click here.
Having found no violation of Section 362(a)(3), Judge Faris saw no violation of any other subsection in Section 362(a).
By promptly taking steps to stay the litigation in state court, Judge Faris said there was no violation of subsection (a)(1), which bars the continuation of a suit against a debtor. Because the city had done nothing to enforce the judgment or the writ, he saw no violation of subsection (a)(2).
Likewise, there was no act to recover a claim against the debtor and no violation of subsection (a)(6), because the city only maintained the status quo.
A Possible Qualification
Judge Faris concluded his opinion by saying there was no stay violation because the city “did nothing to change the status quo” and “immediately asked the state court to stay the case.”
Is there significance in Judge Faris’s use of the word “immediately”?
Assume that the motion was sub judice in state court to convey estate property to a creditor. Would the creditor violate the automatic stay if the creditor does not ask the state court to withhold a decision conveying property to the creditor?
Concluding that the Supreme Court’s Fulton decision overruled prior Ninth Circuit authority, the Ninth Circuit Bankruptcy Appellate Panel held that a creditor no longer violates any provision of the automatic stay in Section 362(a) by maintaining the status quo and declining to vacate a prepetition attachment.
While the decision under Section 362(a)(3) is no surprise given that Fulton addressed the same subsection, the November 10 BAP opinion is noteworthy for finding no stay violations under any other subsection in Section 362(a).