In re Banks

577 B.R. 659

IN RE: Robert P. BANKS, Debtor.

Case No. 16–12978–KHK

United States Bankruptcy Court, E.D. Virginia, Alexandria Division.

Signed August 31, 2017

Richard G. Hall, Annandale, VA, for Debtor.

MEMORANDUM OPINION

Kevin R. Huennekens, UNITED STATES BANKRUPTCY JUDGE

THIS CASE came before the Court on the Rule to Show Cause issued April 20, 2017, ordering Craig E. Baumann ("Baumann") to appear and show cause (i) why he should not be held in contempt for a willful violation of the automatic stay of the Bankruptcy Code, 11 U.S.C. § 362(a), and for a willful violation of the Court's discharge order and the injunction imposed by 11 U.S.C. § 524, and (ii) why sanctions, including an award of damages, both actual and punitive, and an award of attorney's fees should not be imposed upon him. An evidentiary hearing was conducted on July 25, 2017 (the "Trial"), at the conclusion of which the Court advised Debtor's counsel to submit a fee application (the "Fee Application") and ordered Baumann to immediately remit to the Debtor the monies of the Debtor being held by Baumann in his trust account. The Court thereupon took the matter of damages under advisement. This Memorandum Opinion sets forth the Court's findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.¹

Facts

Baumann is an attorney licensed to practice law in the Commonwealth of Virginia and is a member in good standing of the bar of this Court. Robert P. Banks (the "Debtor") is employed as a mechanic by Beatty Management Company ("Beatty Management"). The Debtor rented an apartment from Baumann in 2015. After the Debtor defaulted under the terms of the lease, Baumann had the Debtor evicted from the apartment. On September 23, 2015, Baumann obtained a judgment against the Debtor in the General District Court of Fairfax County (the "General District Court") for unpaid rent. On November 16, 2015, Baumann commenced an action in the General District Court to garnish the Debtor's wages (the "First Garnishment"). The return date on the First Garnishment was set for July 6, 2016, at which time the General District Court ordered that the funds withheld from the Debtor's wages pursuant to the First Garnishment be paid over to Baumann (the "Garnishment Order"). On August 10, 2016, Bauman commenced a second garnishment action against the Debtor in the General District Court, returnable on January 31, 2017 (the "Second Garnishment").

The Debtor filed a petition for relief under Chapter 7 of the Bankruptcy Code (the "Bankruptcy Case") on August 30, 2016 (the "Petition Date"), in the United States Bankruptcy Court for the Eastern District of Virginia (the "Court"). Baumann was properly scheduled as an unsecured creditor in the amount of $8,709.40 on Schedule F annexed to the bankruptcy petition. Baumann was included on the creditor service list that the Debtor filed with the Court. The Clerk's Office of this Court duly issued a Notice of Chapter 7 Bankruptcy Case to Baumann and all of the Debtor's other scheduled creditors on Official Form 309A (the "Bankruptcy Notice"). The Debtor's bankruptcy counsel, Thomas Andrews ("Andrews"), served Baumann with a Suggestion of Bankruptcy that he filed in the General District Court. Notwithstanding the commencement of the Debtor's bankruptcy case, Baumann took no action to stop the Second Garnishment. The Debtor received a discharge on December 15, 2016.²

As the return date for the First Garnishment fell within the 90–day period immediately preceding the Petition Date, the Garnishment Order on the First Garnishment was avoidable under 11 U.S.C. § 547 as a preferential transfer. See In re Baum, 15 B.R. 538, 540–41 (Bankr. E.D. Va. 1981). The Debtor claimed $500 of his prepetition garnished wages exempt on his schedule C pursuant to Virginia Code § 34–4. The Debtor was entitled to avoid and recover from Baumann the amount he had claimed as exempt in accordance with 11 U.S.C. § 522(g) and (h). Baumann agreed to have the $500 exempt portion from the First Garnishment returned to the Debtor. Accordingly, Baumann sent Andrews two copies of an order of payment (the "Order of Payment") to be entered by the General District Court decreeing that $500 of the funds that had been withheld by the Debtor's employer pursuant to the First Garnishment be paid over to Andrews for the benefit of the Debtor. Andrews endorsed the orders and returned them to Baumann.

Some party (the identity of whom has no bearing on the ruling in this case) altered the Order of Payment that was entered by the General District Court after it had been endorsed by Andrews.³ The first alteration changed the case number from the First Garnishment action to the Second Garnishment action. The second alteration changed the number of garnished checks from one $500 check to four checks. The alterations that were made to the Order of Payment had the effect of making the Order of Payment completely inapplicable to the First Garnishment and the Debtor's recovery of the exempted funds. Instead, the altered Order of Payment purported to deal only with the Second Garnishment of the Debtor's postpetition wages.

The altered Order of Payment was entered by the General District Court on January 31, 2017, the return date for the Second Garnishment. The General District Court sent Baumann four checks totaling $1,667 issued by the Debtor's employer for the monies withheld from the Debtor's postpetition wages. Baumann did not immediately return these postpetition funds to the Debtor. Baumann did not send a copy of the altered Order of Payment to Andrews after it had been entered by the General District Court. Baumann did not take any action to have the altered Order of Payment corrected by the General District Court.

Instead, Baumann negotiated the four checks and retained the proceeds in his escrow account. One of the four checks did not clear the employer's account.⁴ On February 15, 2017, Baumann sent an e-mail communication to the Debtor's employer, Beatty Management, asking when Beatty Management would be remitting the full amount due under the Second Garnishment action (the "Dunning Communication"). The Dunning Communication threatened to have the General District Court issue a show cause summons against Beatty Management if the wages were not turned over to him. As a result of this Dunning Communication, Beatty Management withheld additional money from the Debtor's postpetition wages and sent Baumann the replacement check he had demanded (the "Replacement Check").

Postpetition wages were withheld from the Debtor on at least four occasions as a result of the Second Garnishment. The Debtor never did receive the $500 portion that he had claimed exempt from the First Garnishment. Baumann acknowledged that he continues to hold the funds he received from the Second Garnishment in his trust account along with the Replacement Check. On March 13, 2017, the Debtor filed a Motion to Reopen his Bankruptcy Case along with an Application for a Rule to Show Cause (the "Application"). A copy of the Application was sent to Baumann the same day. On March 22, 2017, Baumann filed a response to the Application, contesting the relief requested by the Debtor. A hearing on the Application occurred on April 11, 2017. The Bankruptcy Case was reopened by an order entered April 20, 2017. The Court entered the Rule to Show Cause the next day.

Jurisdiction and Venue

The Court has subject matter jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the General Order of Reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. A proceeding to prosecute a violation of the automatic stay or a violation of the discharge injunction is a core proceeding under 28 U.S.C. § 157(b)(2)(A). See Budget Serv. Co. v. Better Homes of Virginia, Inc., 804 F.2d 289, 292 (4th Cir. 1986). Accordingly, the Court has the authority to enter a final order subject to the right of appeal under 28 U.S.C. § 158. Venue is appropriate in this Court pursuant to 28 U.S.C. § 1408.

Analysis

The filing of a petition under section 11 U.S.C. § 301 operates as a stay preventing most creditor actions against the debtor, property of the debtor, and property of the estate. 11 U.S.C. § 362(a). The automatic stay is:

one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.

Better Homes of Virginia , 804 F.2d at 292 (quoting H.R. Rep. No. 95–595, at 340–42 (1977), as reprinted in 1978 U.S.C.C.A.N. 5787, 6296–97; S. Rep. No. 95–989, at 54–55 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5840). The stay, which takes effect immediately upon filing a bankruptcy petition, applies nationwide and without notice. See In re A.H. Robins Co. , 63 B.R. 986, 988 (Bankr. E.D. Va. 1986) (citing In re Johns–Manville Corp., 57 B.R. 680, 686 (Bankr. S.D.N.Y. 1986) ). It stays, among other things, "any act to collect ... a claim against the debtor that arose before the commencement of the [bankruptcy] case." 11 U.S.C. § 362(a)(6). In a case under chapter 7, the automatic stay remains in effect as to actions against the debtor until the debtor is granted or denied a discharge. See id. § 362(c)(2)(C).

Section 524(a)(2) of the Bankruptcy Code imposes an injunction after the issuance of the discharge order "against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as personal liability of the debtor, whether or not discharge of such debt is waived." With respect to dischargeable debts, the discharge injunction serves to replace the automatic stay. Any behavior which would constitute a violation of the automatic stay would also...