Failure to Timely Dissolve Garnishment After Bankruptcy Filing Leads to Automatic Stay Violation
Failure to Timely Dissolve Garnishment After Bankruptcy Filing Leads to Automatic Stay Violation
A creditor was found to have willfully violated the automatic stay by failing to dissolve a pre-petition writ of garnishment. According to the U.S. Bankruptcy Court for the Middle District of Florida, the creditor failed to act timely, even after it was ordered to immediately dissolve the writ.
The creditor argued that it was not required to affirmatively dissolve the writ simply because the debtor filed for bankruptcy. Such argument relied on City of Chicago v. Fulton, where the U.S.
Supreme Court held that “that mere retention of estate property after the filing of a bankruptcy petition does not violate § 362(a)(3) of the Bankruptcy Code.” The court disagreed. It found Fulton distinguishable because, in that case, the absence of a violation to § 362(a)(3) was premised on the fact that the status quo was maintained (the creditor did not return the debtor’s impounded vehicle). In this case, however, the court saw the continued post-petition garnishments as a material alteration of the status quo.
Additionally, the bankruptcy court concluded that the continued post-petition garnishments in this case implicated other automatic stay provisions that were not at issue in Fulton, namely: the “continuation ... of a judicial, administrative, or other action or proceeding against the debtor ....” (Section 362(a)(1)), and “the enforcement against the debtor, or against property of the estate, of a judgment obtained before the commencement of the case.” (Section 362(a)(2)).
Of note, the court declined to address whether, in light of the U.S. Supreme Court’s decision in Taggart v. Lorenzen, a motion for contempt for violation of the automatic stay, requires that courts evaluate whether there was no fair ground of doubt as to whether the creditor’s conduct might be lawful.
The bankruptcy court found that, under either standard, the creditor’s conduct was willful. Although Taggart involved a violation to a discharge injunction, some courts have applied its standard to violations of the automatic stay. See In re Arcapita Bank B.S.C. 12-11076 (SHL), at *10 (Bankr.
S.D.N.Y. Feb. 3, 2023).
In the District of Puerto Rico, a case involving a pre-petition garnishment was also found distinguishable from Fulton. Educ. Technical Coll., Inc. v. Atue Real Estate S.E., 643 B.R. 301 (Bankr. D.P.R. 2022).
Although the case did not involve a post-petition garnishment, Judge Godoy found that the allegation that the defendants purposely misled the debtor as to which party had possession of the pre-petition garnished funds established a plausible violation of the automatic stay.