The City of Chicago impounded vehicles for nonpayment of fines. When the owners filed chapter 13 cases and requested that the city return their vehicles, the city refused. The bankruptcy court held that the city’s refusal violated § 362(a)(3) because it had acted to “exercise control over” the debtors’ vehicles. The Supreme Court reversed. City of Chicago v. Fulton, 141 S. Ct. 585 (2021).
The Court held that merely retaining possession of estate property does not violate the automatic stay. Section 362(a)(3) prohibits affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed. In Stuart v. City of Scottsdale (In re Stuart), 632 B.R. 531 (B.A.P. 9th Cir. Nov. 10, 2021), the court applied the teaching of Fulton to a prepetition bank account garnishment.
The City of Scottsdale was awarded $30,000 in sanctions and costs against Stuart. They served a writ of garnishment on Bank of America (BOA) where Stuart had three accounts. BOA froze the accounts. Stuart filed a chapter 33 petition and argued that the automatic stay required the City to lift the garnishment immediately. The city filed a motion to stay litigation in the state court action. The city did not oppose release of the funds by the bank, and they were released.
Stuart filed a motion for sanctions for violation of the stay. The bankruptcy court decided that the city violated the automatic stay and allowed Stuart to proceed with an evidentiary hearing for a determination of damages against the city and its attorneys. On reconsideration the bankruptcy court examined subsections (a)(1), (2), (3), and (6) and declined to find any stay violation. Stuart appealed to the BAP. which affirmed the bankruptcy court.
Based on Fulton, the BAP held that the city did not violate § 362(a)(3) by its inaction.
Where a creditor has executed a prepetition writ of garnishment against a debtor’s bank account, it is under no affirmative obligation to release the funds and need only maintain the status quo. 632 B.R. 531, 540.
The BAP then reviewed the other subsections of § 362 relied on by Stuart.
Section 362(a)(1) prohibits the “continuation . . . of a judicial, administrative, or other action or proceeding against the debtor . . .” The city did not have to quash the garnishment to avoid a “continuation.” Leaving the action and the garnishment in place did not disturb the status quo.
Section 362(a)(2) prohibits “the enforcement against the debtor or against property of the estate, of a judgment obtained before the commencement of a case under this title.” The city took no position on whether the state should order the release of the account funds. The city did not do anything to enforce the state court judgment.
Section 362(a)(6) prohibits “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.” The mere retention of a valid prepetition state court attachment or lien without more, is not a violation of§ 363(a)(4)-(6).
Doing nothing is not an “act.”