• Garnishments
• Motions for Turnover
• Violations of Stay

In Re Worley, Bk. 98-82923 (Bankr. D. Neb. April 29, 1999)

http://www.nebar.com/bankruptcy/Worley.htm

On November 5, 1998, judgment creditor filed a garnishment with the Deuel County Court. On November 13, 1998, the debtors filed a chapter 13 bankruptcy. Thereafter, the court clerk paid the garnished amount to the creditor. The debtor filed a motion to turnover the funds. The creditor argued that it should not be required to turn over funds paid to it post petition because the officials of the county court had no actual knowledge or actual notice of the debtor's bankruptcy petition. The Court held that whether or not the county court had actual knowledge was not relevant to the matter before the Bankruptcy Court. The creditor, Prince-Empson Agency, Inc., was a transferee and couldn't invoke protection. The Court sustained debtor's motion to turnover funds. The Court stated that once the debtors filed their chapter 13 petition, the creditor was stayed from utilizing the garnishment remedy and from collecting any property belonging to the bankruptcy estate. No funds held by the bank or the court should have been delivered to the judgment creditor after the petition was filed.

 

In Re Holland, Neb. Bkr. 90:425 (Bankr. D. Neb. 1990) (Chapter 11) (Judge Minahan)

 

This matter came before the Court upon a motion for contempt filed by the debtor. The Court noted that the motion would be treated as a motion for imposition of damages pursuant to 11 U.S.C. § 362(h) for violation of the stay. Aware of the debtor’s bankruptcy filing, the debtor’s former spouse garnished individual retirement accounts at a bank and at a savings and loan. The former spouse argued that no violation of the stay had occurred because the retirements accounts were not property of the estate. The Court indicated that the former spouse was wrong in that property of the estate includes exempt property. The Court further held that although the former spouse had willfully violated the stay, such violation did not cause damage to debtor. Therefore, no sanctions were imposed.

 

In Re Alberti, Neb. Bkr. 90:643 (Bankr D. Neb. 1990) (Chapter 13) (Judge Mahoney)

This matter came before the Court upon a motion for contempt filed by the debtor against Dan Witt Builders, Inc. The Bankruptcy Court rejected creditor’s contention that 11 U.S.C. § 362 imposed only a prohibitory injunction and not a duty to take affirmative action. The Court held that a creditor’s failure to stop a prepetition garnishment against a debtor after the creditor has learned of debtor’s bankruptcy filing constituted a violation of the stay. In addition, a creditor’s failure to voluntarily turn over property of a debtor which was lawfully seized prepetition also constituted a violation of the stay.

Hoffman v. Connecticut Dept. of Income Maintenance, 109 S.Ct. 2818 (1989). (Justice White) (5:4)

certiorari to the U.S. Court of Appeals for the 2^nd Circuit

http://laws.findlaw.com/US/492/96.html

Petitioner chapter 7 trustee filed separate adversarial proceedings in Bankruptcy Court. One was a "turnover" proceeding pursuant to 11 U.S.C. § 542(b) against respondent Connecticut Department of Income Maintenance to recover Medicaid payments owed for services rendered by a bankruptcy convalescence home. The other adversary proceeding again respondent Connecticut Department of Revenue Services sought pursuant to 11 U.S.C. § 547(b) to avoid the payment of state taxes, interest, and penalties as a preference. Respondents moved to dismiss both actions as barred by the Eleventh Amendment. The Supreme Court held that Congress, in enacting 11 U.S.C. § 106(c), did not abrogate the States' Eleventh Amendment immunity from actions pursuant to 11 U.S.C. § 542(b) and 547(b). Therefore, petitioner trustee's actions were barred by the Eleventh Amendment.

 

United States v. Whiting Pools, Inc., 103 S.Ct. 2309 (1983).

(Justice Blackmum) (9:0)

certiorari to the U.S. Court of Appeals for the 2^nd Circuit

http://laws.findlaw.com/US/462/198.html

The Supreme Court held that 11 U.S.C. § 542(a) authorized the Bankruptcy Court to subject the Internal Revenue Service to a turnover order with respect to property the Internal Revenue Service has seized prepetition.

In Re Knaus (Knaus v. Concordia Lumber Company, Inc., 889 F.2d 773 (8^th Cir. 1989). (This case has frequently been cited by the Nebraska judges in violation of the stay situations.)

Debtor/appellant purchased certain merchandise from the creditor/appellee on credit. Upon nonpayment the lumber company got a judgment and a writ of execution under which the sheriff seized grain and equipment belonging to the debtor/appellant. While the property was in the possession of the sheriff before the sale, debtor/appellant filed bankruptcy. Debtor's counsel demanded that the lumber company return the property to the debtor pursuant to 11 U.S.C. § 542. The creditor refused to comply, and the debtor filed an action with the U.S. Bankruptcy Court to obtain turnover of the property. At the hearing the creditor admitted that the property was property of the estate and consented to its turnover. The Bankruptcy Court found that the refusal to return the property was accompanied by willfulness and malice. The evidence showed that the creditor's president had attempted to persuade the debtor's church elders to excommunicate the debtor from the church for filing the bankruptcy petition. The Bankruptcy Court held that the creditor violated the automatic stay of 11 U.S.C. § 362, and awarded the debtor attorney fees of $270 and punitive damages of $750. The U.S. District Court for the Western District of Missouri reversed the lower court, and an appeal was taken to the Eighth Circuit which reversed the District Court.

The Eighth Circuit failed "to see any distinction between a failure to return property taken before the stay and a failure to return property taken after the stay. In both cases the law clearly requires turnover…The duty to turn over the property is not contingent upon any predicate violation of the stay, any order of the bankruptcy court, or any demand by the creditor…Rather, the duty arises upon the filing of the bankruptcy petition." Further, the Court reasoned that….those who unjustly retain possession of such property might do so with impunity."

In Re McAtee, Bk. No. 99-80004 (Bankr. D. Neb. March 22, 1999)

http://www.nebar.com/bankruptcy/Mcatee.htm

Court sustained debtor's motion for turnover because lease had not been terminated by repossession, and the debtors did have an interest in the lease, and in the vehicle on the bankruptcy petition date. Prior to bankruptcy, the debtors entered into an agreement with Cash In A Flash, Inc., who paid the debtors $1000 in exchange for debtors transferring title to their automobile to the creditor. In a separate transaction, the debtors executed a document entitled "Automobile Lease Agreement" whereby they leased the same vehicle back from Cash In A Flash for a given period. The lease contained numerous provisions which were reviewed by the Court and found to be ambiguous and inconsistent with each other. Debtors defaulted in the payments, and creditor obtained possession of the vehicle. Debtors filed a chapter 13 petition and the motion for turnover, and the creditor resisted on the theory that the lease was terminated by repossession.

Court did not resolve another pending dispute between the debtors and Cash In A Flash regarding the legal significance of the document which had been referred to as a lease. The debtors suggested that the actual transaction was a loan of $1000 and the granting of a security interest in the vehicle. Cash In A Flash asserted that the document was a true lease with an option to purchase. Court stated that particular issue could only be resolved by an appropriate adversary proceeding.

Citizens Bank of Maryland v. Strumpf, 116 S.Ct. 286 (1995).

(Justice Scalia) (9:0)

certiorari to the U.S. Court of Appeals for the 4^th Circuit

http://supct.law.cornell.edu:8080/supct/html/94-1340.ZS.html

Debtor/respondent had a checking and a loan with the bank/petitioner. After debtor/respondent had defaulted on loan and had filed bankruptcy, the bank/petitioner placed an "administrative hold" on so much of the debtor's account as it claimed was subject to setoff. The issue was whether this violated the automatic stay pursuant to 11 U.S.C. § 362(a)(7). The Supreme Court answered no, and held that an administrative freeze on debtor's account did not violate the automatic stay.

Laughlin v. Internal Revenue Service, 912 F.2d 197 (8^th Cir. 1990)

The Internal Revenue Service did not violate the automatic stay by serving a chapter 13 trustee with a notice of levy upon funds owed to taxpayers from chapter 13 debtors. The debtors, estate, and creditors were unaffected by the levy. The strong, well-reasoned dissent, was filed and is usually the version quoted. The property of the estate issue was decided differently by another panel of the 8^th Circuit in Security State Bank v. Nieman, 1 F.3d 687 (8^th Cir. 1993).

 

United States v. McPeck, 910 F.2d 509 (8^th Cir. 1990).

The proper procedure when the IRS's claim for taxes exceeded the total amount that a debtor was awarded against the IRS for its willful violation of the automatic stay was to offset the debtor's recovery against the IRS's tax claim.

 

LaBarge v. Vierkant (In Re Vierkant), Bk. No. 99-6049MN (B.A.P. 8^th Cir. November 2, 1999) (Chief Judge Koger) (before Koger, Hill, and Schermer) (Chapter 7)

http://ls.wustl.edu/cgi-bin/8th/baprelease.pl (1^st case)

Creditor/appellee/LaBarge filed an adversary proceeding against the debtors/appellants/Vierkants contending that the damage award that he obtained in state court after the filing of the bankruptcy was a nondischargeable debt under 11 U.S.C. § 523(a)(6). LaBarge also argued that the default judgment collaterally estopped the Vierkants from contesting the willful and malicious nature of the debt. State court action dealt with a retaliatory discharge complaint.

The Appellate Court stated that the circuit courts that have addressed the issue of whether actions in violation of the automatic stay are void ab initio or voidable are split. The Eighth Circuit has not addressed this issue, and in a 1997 opinion expressly declined to do so. See Riley v. United States, 118 F.3d 1220, 1222 n. 1 (8^th Cir. 1997), cert. denied, 118 S.Ct. 1299, 140 L.Ed.2d 466 (1998). The 8^th Circuit Bankruptcy Appellate Panel aligned themselves with the majority position and held that an action taken in violation of the automatic stay is void ab initio.

The Court also ruled that as a matter of law, a void default judgment cannot be given collateral estoppel effect in an adversary proceeding seeking the nondischargeability of a debt based upon that default judgment. Accordingly, the bankruptcy court erred by giving the void default judgment collateral estoppel effect in this section 523(a)(6) adversary proceeding.