Even if there is “some ambiguity” about the debtor’s interest in property, knowledge that the debtor has filed bankruptcy is enough to find a willful violation of the automatic stay, according an opinion by a district judge in Seattle upholding Bankruptcy Judge Mary Jo Heston.
The debtor was the beneficiary of a spendthrift trust. In his September 16 opinion, District Judge Mark S. Lasnik said that property in a spendthrift trust cannot be seized for payment of the beneficiary’s debt. However, he said that trust property becomes subject to seizure if the asset has already accrued to the beneficiary, “even if the asset is still in the hands of the trustee.”
In the case on appeal, the settlor of the trust had died. Judge Lasnik said that the debtor’s interest in the real property “had accrued” as of the date the debtor filed her bankruptcy petition. Evidently, title to the property remained in the trust. Although the time for distribution had come, the property had not been distributed to the debtor.
The lender was foreclosing the trust property. Judge Lasnik said that the lender had received two notices of the debtor’s bankruptcy, the second coming the day before foreclosure. He said that the lender “did nothing to stop foreclosure” and “took no steps to undue the violation for more than five months.”
Bankruptcy Judge Heston found a willful violation of the automatic stay. The lender contended there was no stay violation because there was “some ambiguity” about the nature of the debtor’s interest in the property.
Judge Lasnik said that the argument was “untenable.” He said that the lender “clearly knew that [the debtor] had an interest in the property even if it did not know the full legal contours of that interest.” He continued, saying:
Even if [the lender] were unsure of the exact nature of [the debtor’s] interest in the property, it had notice of her bankruptcy filing and her claim of interest when it moved forward with the foreclosure sale.
Citing a Ninth Circuit decision from 2002, Judge Lasnik said that a willful stay violation occurs if the creditor knew about the automatic stay and its actions were intentional. Specific intent is not required. He said it would be sufficient if the conduct was intentional, “regardless [of] whether the creditor believes in good faith that it has a right to the property.”
“Once a creditor becomes aware of a debtor’s bankruptcy, it has a duty to cease all collection efforts against the bankruptcy estate and to undo any acts that violated the automatic stay,” Judge Lasnik said, citing a Ninth Circuit Bankruptcy Appellate Panel opinion from 2013.
Because the lender had notice of the bankruptcy and the debtor’s interest in the property, Judge Lasnik upheld the finding of a willful stay violation by Bankruptcy Judge Heston.
Taggart
In his opinion, District Judge Lasnik did not cite Taggart v. Lorenzen, 139 S. Ct. 1795, 1809 (2019), where the Supreme Court held that there can be no sanctions for civil contempt of the discharge injunction if there was an “objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.” Instead, Judge Lasnik cited pre-Taggart authority from the Ninth Circuit.
On appeal, the lender cited Taggart but didn’t make a big deal about it. Was that because Taggart would not affect the outcome?
Here’s the post-Taggart analysis in a case like this: Taggart says that the test is objective, not subjective. So, the lender’s subjective doubt about the debtor’s interest in the property is inconsequential. The test is objective.
After Taggart, is it objectively reasonable to ignore a debtor’s claim of interest in property when the interest in real property is not recorded? In this case, the debtor apparently told the lender that she was in bankruptcy, that she was the beneficiary of the trust and that her interest in the trust property had accrued by the settlor’s death.
To this writer, it seems objectively unreasonable to ignore a debtor’s claim of an interest in property and, instead, presume that the debtor is prevaricating. Rather, a reasonable creditor would investigate by contacting a competent authority who could verify whether the debtor had an interest in the property and describe the nature of that interest.
If Taggart means that a creditor can assume without investigation that the debtor is lying, the Supreme Court will have eroded the efficacy of the automatic stay. Perhaps the rule should be: The debtor’s claim must be taken as true until proven otherwise. The debtor or counsel can always be sanctioned for making a false or fraudulent representation if the debtor was lying.
Even if there is “some ambiguity” about the debtor’s interest in property, knowledge that the debtor has filed bankruptcy is enough to find a willful violation of the automatic stay, according an opinion by a district judge in Seattle upholding Bankruptcy Judge Mary Jo Heston.
The debtor was the beneficiary of a spendthrift trust. In his September 16 opinion, District Judge Mark S. Lasnik said that property in a spendthrift trust cannot be seized for payment of the beneficiary’s debt. However, he said that trust property becomes subject to seizure if the asset has already accrued to the beneficiary, “even if the asset is still in the hands of the trustee.”
In the case on appeal, the settlor of the trust had died. Judge Lasnik said that the debtor’s interest in the real property “had accrued” as of the date the debtor filed her bankruptcy petition. Evidently, title to the property remained in the trust. Although the time for distribution had come, the property had not been distributed to the debtor.