Foster v. Capital City Credit, Inc. (In re Foster)

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IN RE: SHERRY FOSTER DEBTORS

HERRY FOSTER PLAINTIFF v. CAPITAL CITY CREDIT, INC., ET AL DEFENDANTS

No. 22-10665

Adversary No. 23-1002

United States Bankruptcy Court, M.D. Louisiana

June 30, 2023

CHAPTER 7

MEMORANDUM OPINION

MICHAEL A. CRAWFORD UNITED STATES BANKRUPTCY JUDGE

This matter came on for trial on June 8, 2023, on the debtor's adversary proceeding seeking: (a) a finding that multiple automatic stay violations occurred, (b) to impose sanctions for willful violations of the automatic stay, and (c) a turnover order as to of certain post-petition garnishments of wages.^[1] Specifically, Sherry Foster ("Debtor") alleges in her Amended Complaint^[2] that the defendants, Capital City Credit Inc. ("Capital"), Capital's counsel, Richard D Bankston ("Mr. Bankston") and Richard D. Bankston Attorney at Law, Inc. ("Bankston Law Firm") (collectively "Defendants"), willfully violated the automatic stay under 11 U.S.C. § 362 by failing to stop garnishing Debtor's wages after she filed her Chapter 7 petition on December 16, 2022.

Baton Rouge Constable's Office ("Constable") was initially a named defendant but was dismissed as a party on Debtor's motion.^[3]

Debtor seeks actual and punitive damages, including attorney's fees and costs. Debtor also requests a finding that Debtor's post-petition wages are "legally exempt" from seizure anyway pursuant to La. R.S. 20:32.^[4]

Mr. Bankston sought summary judgment^[5] dismissing him from the adversary. On June 8, 2023, both the Motion for Summary Judgment^[6] and trial of the Amended Complaint^[7] filed by Debtor came before the court. After hearing argument of counsel on summary judgment, and for the reasons orally rendered, the court denied summary judgment^[8] and proceeded with the trial. Upon conclusion of the trial, the court afforded the parties until June 22, 2023, to file post-trial memoranda. ^[9] Thereafter, the court took the matter under advisement. The court now renders its ruling.

Jurisdiction, Venue and Core Status

This Court has subject matter jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157. Venue is proper pursuant to 28 U.S.C. § 1409(a). The matter constitutes a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A), (B), (E), and (O).

Background

Capital was awarded a judgment against Debtor on June 21, 2007,^[10] and revived its judgment on February 6, 2017.^[11] In order to collect the amount due from Debtor, Capital began garnishing Debtor's wages well prior to her filing a bankruptcy petition on December 16, 2022.^[12]

Debtor alleges that Defendants made the following post-petition wage garnishments in violation of the automatic stay under 11 U.S.C. § 362: (1) $96.91 on December 27, 2022, (2) $104.22 on January 4, 2023, and (3) $77.60 on January 11, 2023.^[13] Defendants acknowledge^[14] that the $104.22^[15] and $77.60^[16] garnishments were made post-petition and voluntarily turned over those funds to Debtor prior to trial.^[17] As to the $96.91 garnishment, however, Defendants contend it was made before the bankruptcy was filed and therefore did not violate the stay and should not be turned over. Thus, the remaining issues for trial were whether the $96.91 garnishment was made pre- or post-petition and whether Debtor is entitled to damages related to Defendants' actions and conduct with respect to any of the three garnishments.

The $96.91 Garnishment

Debtor contends that Defendants violated the automatic stay by garnishing $96.91 post-petition on December 27, 2022. Section 362(a) of the Bankruptcy Code provides that the filing of a bankruptcy case "operates as a stay … of":

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;

(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate; …^[18]

Estate property, to which the automatic stay applies, is defined in section 541 of the Bankruptcy Code and includes "all legal or equitable interests of the debtor in property as of the commencement of the case."^[19] Therefore, pre-petition wage garnishments, which necessarily means the debtor no longer had an interest in the property on the filing date, do not violate the stay. But any post-petition garnishment made is undoubtedly a violation of the stay, irrespective of notice or actual knowledge.

Debtor alleges that Defendants garnished $96.91 post-petition on December 27, 2022. However, the facts proven at trial show that Debtor's employer withheld $103.09 from her wages on December 15, 2022, the day before she filed her bankruptcy petition.^[20] Her employer then sent the garnished wages to the Constable.^[21] The Constable deducted a $6.18 fee before sending $96.91 to the Bankston Law Firm on December 27, 2023.^[22] Although Mr. Bankston testified, without challenge, that his office received the funds on December 27, 2023, Debtor's wages were actually garnished the day before the case was filed.

The Court holds that the $96.91 garnishment did not violate the automatic stay pursuant to section 362, and therefore, certainly no sanctions for willfully violating the stay are warranted with respect to that garnishment. Likewise, the $96.91 being held by Defendants is not subject to a turnover order because it does not constitute property of the estate. Section 542 of the Bankruptcy Code, entitled "Turnover of property to the estate," provides in pertinent part:

(a) Except as provided in subsection (c) or (d) of this section, an entity, …, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.

The $96.91 can neither be recovered by the trustee for administration by the estate^[23] nor claimed as exempt by the Debtor. Section 363(b)(1) of the Bankruptcy Code, entitled "Use, sale, or lease of property," provides in pertinent "[T]he trustee, after notice and a hearing, may use, sell, or lease, … property of the estate, …"^[24] Again, this ability is contingent upon the funds being property of the estate. And similarly, the $96.91 is already the net portion of the 25% of net wages not subject to exemption by the Debtor under La. R.S. 13:3881.

Damages under Section 362(k)

Turning to the latter two garnishments, Debtor seeks damages against Defendants for "willful violation" of the automatic stay under 11 U.S.C. § 362(k), which provides, "… an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages."

The stay under section 362 is "automatic" in that it occurs by operation of law and is "self-executing."^[25] This means that parties who do not yet have notice of the bankruptcy and the automatic stay, "may violate the stay without realizing that it has taken effect."^[26] The Bankruptcy Code does not impose sanctions for unknowing violations. Only "willful violations" of the stay are subject to sanctions. A "willful violation" under section 362(k) has three elements, all of which must be present: "(1) [The alleged violator] must have known of the existence of the stay; (2) [its] acts must have been intentional; and (3) [its] acts must have violated the stay."^[27]Debtor bears the burden of proving those three elements by a preponderance of the evidence.^[28]

Defendants do not dispute that the $104.22^[29] and $77.60^[30] garnishments were initiated post-petition, and therefore were, at a minimum, technical stay violations by someone. Ironically, the most likely violator was the Constable. Regardless, Defendants have understandably focused their attention on persuading the court that their actions were not willful (and thus not sanctionable).

At the outset, retention of the funds received by Defendants after the bankruptcy was filed was likely not a stay violation at all, much less one warranting sanctions for willful conduct. Indeed, in City of Chicago, Illinois v. Fulton,^[31] the U.S. Supreme Court recently held that "mere retention of estate property after the filing of a bankruptcy petition does not violate § 362(a)(3) of the Bankruptcy Code."^[32] It also held that "§ 362(a)(3) prohibits collection efforts outside the bankruptcy proceeding that would change the status quo."

Debtor has neither shown nor even alleged that Capital applied the $181.82 to the debt owed. Prior to the voluntary release of the funds, the Bankston Law Firm held the garnished funds in its trust account. That action merely maintained the status quo. As a result, it was not an action taken in violation of the stay under § 362(a). Applying Fulton to the case at bar, Defendants did not violate the stay by failing to immediately turn over the funds.

Even had Debtor met her burden of proving a stay violation however, Debtor has not shown willfulness. The following relevant facts are not in dispute. First, the notice of Debtor's petition was mailed to Capital and its counsel, Mr. Bankston, five days after the filing, or on December 21, 2022, through the Bankruptcy Noticing...