A decision by Bankruptcy Judge Jason A. Burgess of Jacksonville, Fla., could be read to mean that a creditor who has been notified about a debtor’s bankruptcy violates the automatic stay if the creditor fails to dissolve a writ of garnishment and continues seizing the debtor’s income after filing.
Judge Burgess found no safe harbor for the creditor under either Taggart v. Lorenzen, 139 S. Ct. 1795, 1799 (2019), or City of Chicago v. Fulton, 141 S. Ct. 585, 590 (2021). To read ABI’s reports on Fulton and Taggart, click here and here.
The Pre-Petition Garnishment
The debtor was a physician facing multiple judgments and IRS liens. The holder of a judgment for some $1 million obtained a writ of garnishment from state court and served the writ on an insurance company that provided a substantial portion of the debtor’s income.
The insurance company responded to the writ by saying it owed the debtor about $12,000 and would continue to withhold payments until further order of the state court. The debtor soon thereafter filed a petition under Subchapter V of chapter 11 and filed a suggestion of bankruptcy with the state court, notifying the creditor of the existence of the automatic stay.
The notice requested that the garnishment be released as soon as possible. The creditor responded by saying that it was not required to dissolve the writ automatically on notification of bankruptcy.
The debtor’s counsel contacted the creditor a second time, saying that the insurance company would release neither pre-petition nor post-petition funds until the writ was dissolved. Again, the creditor declined to dissolve the writ or release funds that were garnished post-petition.
The debtor filed a motion, dragging the creditor into court and claiming violations of the automatic stay under Sections 362(a)(1), (a)(2) and (a)(3). At the ensuing hearing, Judge Burgess “unequivocally” directed the creditor to dissolve the writ and said explicitly that post-petition income should not be garnished. The judge also directed the creditor to file a notice of dissolution immediately with the state court.
The writ not having been lifted and the insurer still continuing to withhold the debtor’s post-petition income, the debtor brought the creditor back into court two weeks later. The creditor claimed that the failure to dissolve the writ was an “oversight.” At that point, two months after the chapter 11 filing, the creditor dissolved the attachment.
However, the creditor had garnished some $70,000 after filing. The debtor said that the garnishment represented about one-third of his post-petition income.
After the final hearing, Judge Burgess ordered briefing and issued his opinion on April 5, finding willful violations of the automatic stay.
No Defense from Taggart or Fulton
Judge Burgess dealt with the creditor’s arguments under Taggart and Fulton that it was not required to dissolve the writ automatically on notification of the bankruptcy filing.
In Fulton, the Supreme Court said that “[a]cts that simply maintain the status quo do not violate the automatic stay.” Fulton, supra, at 590. In Taggart, the Court held that a court “may impose civil contempt sanctions [for violating the discharge injunction] when there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.” Taggart, supra, at 1799.
Judge Burgess began his analysis of the merits by pointing out that Fulton dealt with alleged violations of the automatic stay under Section 362(a)(3) for attempting to “control” estate property. The debtor was also moving under subsections (a)(1) and (a)(2) for continuing an action or enforcing a judgment after filing. He pointed out how Fulton specifically said it was not deciding the meaning of subsections other than (a)(3).
Judge Burgess also noted how Taggart dealt with an alleged violation of the discharge injunction, not an automatic stay violation under Section 362(k), which protects an individual debtor. The judge said he was not required to decide whether Taggart limited sanctions under Section 362(k) to willful violations because he found a willful violation.
Judge Burgess found that the “Creditor failed to timely either stay or dismiss the pre-petition garnishment action against the Debtor, even after the Court directed it to dissolve the Writ.” [Emphasis in original.] As a defense, he said that “the Creditor has maintained that it was ‘not affirmatively required to dissolve the Writ simply because the Debtor filed for bankruptcy.’”
“Upon receiving notice of the Debtor’s bankruptcy filing,” Judge Burgess found that “the Creditor not only failed to take affirmative action to dissolve the Writ or stay the case as to the Debtor in state court, but it also failed to dissolve the Writ after the Court specifically instructed it to do so.” Based on that finding, he held there were willful violations of Section 362(a)(1) and (a)(2).
Turning to Section 362(a)(3), Judge Burgess rejected the creditor’s Fulton defense, based on the idea that merely retaining property after filing does not change the status quo and is no offense.
Judge Burgess distinguished the case before him from Fulton, where the city of Chicago held a car that it had impounded before bankruptcy. In the case before him, Judge Burgess said that “the continued post-petition garnishments materially altered the status quo.”
Judge Burgess also distinguished two post-Fulton decisions finding no post-filing obligation to lift garnishments. In In re Stuart, 632 B.R. 531, 542-43 (B.A.P. 9th Cir. 2021), there was no post-petition garnishment, only a retention of property garnished before filing. To read ABI’s report on Stuart, click here.
Likewise, in Margavitch v. Southlake Holdings, LLC, 19-05353-MJC, 2021 WL 4597760, at *6 (Bankr. M.D. Pa. Oct. 6, 2021), there was no stay violation because the creditor had maintained the filing-date status quo. To read ABI’s report, click here.
Having distinguished the two cases, Judge Burgess held that the creditor “was required to either stay or dissolve the Writ to prevent the continued post-petition garnishment of funds which altered the status quo.”
Concluding the opinion, Judge Burgess said that the failure to terminate the writ resulted in the post-petition garnishment of $70,000, causing the debtor to miss payroll and lose several employees who quit. Finding willful violations of the stay, he called for a second trial on damages.
A decision by Bankruptcy Judge Jason A. Burgess of Jacksonville, Fla., could be read to mean that a creditor who has been notified about a debtor’s bankruptcy violates the automatic stay if the creditor fails to dissolve a writ of garnishment and continues seizing the debtor’s income after filing.
Judge Burgess found no safe harbor for the creditor under either Taggart v. Lorenzen, 139 S. Ct. 1795, 1799 (2019), or City of Chicago v. Fulton, 141 S. Ct. 585, 590 (2021).