24 February 2020

Ward and Smith, P.A.

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If a creditor wants to continue a lawsuit against a debtoroutside of bankruptcy, repossess collateral, terminate a lease, setoff debts, or pursue other collection efforts, it first must obtainstay relief from the bankruptcy court. The "automaticstay" is a command to halt action, and creditors violate it attheir own peril.

But what about inaction? If a creditor began collectionactivity before the bankruptcy, must it unwind its actions whennotified of the filing? Can a creditor violate the automaticstay by doing nothing? A recent decision by a bankruptcycourt in Virginia says "yes," but other courts have said"no." The United States Supreme Court is likely toresolve the uncertainty this summer. Meanwhile, creditors maywant to err on the side of caution.

Attorney Griffin represented Randi Nimitz in her divorce beforeshe filed for bankruptcy. Griffin did not pay all her legalfees, and Griffin obtained a judgment against her for$10,000. Virginia allows wage garnishment, so Griffinobtained a garnishment order against Nimitz. The statecourt was holding $1,000 in wage deductions, and a hearing onturning over the funds to Griffin was scheduled when Nimitz filedChapter 7. Her bankruptcy petition listed Griffin'sjudgment as debt and claimed an exemption in the $1,000.Nimitz's counsel notified Griffin and demanded he terminatesthe garnishment. Griffin refused. He claimed that hecould do nothing because he had no legal obligation to takeaffirmative action to terminate the garnishment.

Nimitz moved for Griffin to be held in contempt for a willfulviolation of the automatic stay. The bankruptcy courtagreed. To prove a stay violation, a party must establishthat (1) a violation occurred, the violation was committedwillfully, and (3) the violation caused actual damages. Theautomatic stay prohibits any act to obtain possession of propertyof the estate or to exercise control over estate property.The bankruptcy court reasoned that property seized pre-petition,but not yet liquidated, remains property of the bankruptcyestate. The debtor's bankruptcy estate includes apossessory interest in property not held at the time of filing.

The bankruptcy court concluded that Griffin's refusal toterminate the garnishment amounted to the improper exercise ofcontrol over the debtor's property. Griffin did notassert an ownership interest or lien in the garnished funds, whichdid not help his argument. The bankruptcy court awardedNimitz attorneys' fees of $2,400 to prosecute the contemptmotion.

The United States Supreme Court should rule definitively on thisissue sometime this summer. It is possible they will rulethat mere inaction does not violate the automatic stay. Butunless that happens, creditors who fail to unwind collectionefforts when demanded to do so by a debtor in bankruptcy risk beingheld in contempt and liable for damages.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.

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