Firm’s post-petition control over garnished funds violates stay

Where a law firm continued to exercise control over garnished funds after receiving notice of the debtor’s bankruptcy filing, it violated the automatic stay. The debtor was awarded attorneys’ fees, but because she did not suffer damages and the firm’s actions were not an egregious violation of the stay, she was not awarded compensatory or punitive damages.

Background

This matter came before the court on the debtor’s motion for sanctions for violation of the automatic stay against J. Douglas Griffin and J. Douglas Griffin PLLC. The respondents filed a response to the motion. The court heard the parties’ arguments Nov. 5, 2019.

Liability

This court has held that the failure to release a garnishment upon the filing of a bankruptcy petition violates the automatic stay. In fairness to the respondents, the issue of a refusal to release seized property upon a bankruptcy filing is now the subject of some controversy in the case law.

The majority of circuit courts to look at the issue have decided that creditors are under an affirmative obligation to release seized property. On the other hand, the Third Circuit, the D.C. Circuit and the 10th Circuit have held that creditors do not violate the automatic stay merely by “maintaining the status quo.” The Fourth Circuit has not addressed the issue. The court concludes that respondents have violated § 362(a)(3) by continuing to exercise control over the garnished funds post-petition.

Respondents argue that a dismissal before the return date of the garnishment would have required a dismissal of the entire garnishment, including wages that were earned outside of the 90-day period preceding the bankruptcy. In this case, it did not matter that a portion of the wages were earned outside of the 90 days because they had not been paid over to the creditor. The debtor retained an interest in all of the garnished wages at the time of her bankruptcy filing.

Although the debtor’s ability to avoid a preferential transfer under § 522(h) is limited to transfers occurring within the 90 days preceding the bankruptcy case (one year for transfers to insiders), the debtor’s ability to avoid transfers under § 522(f) (that is, to avoid judicial liens that impair the debtor’s right to exempt her property) and 522(i) (the ability to recover the value of the transfer) is not so limited.

In fact, this case is even more compelling than the majority-rule cases cited above, in that the respondents have never asserted that they have a legal interest in the garnished funds superior to the debtor’s right to exempt the funds. The respondents have not challenged the debtor’s claim that the funds are exempt. The debtor would have been entitled to avoid any lien arising by virtue of the garnishment.

The respondents have not moved for adequate protection, and have not articulated any reason why the funds should not be released to the debtor. Secured creditors at times may have legitimate reasons for resisting a turnover of property to the debtor – when a vehicle, for example, is uninsured. Here, the respondents had no legal basis not to release the garnishment. The court finds that the respondents have violated the automatic stay.

Damages

The burden is on the debtor to prove her damages by a preponderance of the evidence. Here, other than the debtor’s attorneys’ fees, the debtor has suffered no damages. She has been deprived temporarily of the use of the garnished funds, but they will be returned to her shortly. She did not appear at the hearing before this court and she did not testify to any time lost from work.

Section 362(k) permits an award of punitive damages. However, the court does not find the actions of the respondents to be an egregious violation of the automatic stay, nor does the court find that the respondents acted with malevolent intent. The debtor’s request for an award of punitive damages will be denied.

Finally, § 362(k) permits an award of attorneys’ fees. The court finds that an award of attorneys’ fees is warranted. The court, having independently reviewed the fee request, finds that the fees are reasonable and were incurred to prosecute the debtor’s legal right to a release of the garnished funds. The court, therefore, will award the debtor $2,366 in legal fees.

In re Nimitz, No. 19-12741, Dec. 11, 2019. EDVA Bankr. at Alexandria (Kenney). VLW No. 019-4-034, 12 pp.