In re Legrand

612 B.R. 604

IN RE: Dumace Leonard LEGRAND, Debtor.

Case No. 19-21198-C-7

United States Bankruptcy Court, E.D. California.

Dated: February 06, 2020

Susan J. Turner, River City Law, Sacramento, CA, for Debtor

Laura McCarthy Hoalst, Winn Law Group, Fullerton, CA, for Respondents Cavalry Portfolio Services, Cavalry SPV-1, LLC, & Winn Law Group

Before: Christopher M. Klein, Bankruptcy Judge

Dkt. Control No. SJT-1

CHRISTOPHER M. KLEIN, Bankruptcy Judge:

"No fair ground of doubt as to whether the [bankruptcy discharge] order barred the creditor's conduct" warrants civil contempt says the Supreme Court. Taggart v. Lorenzen, ––– U.S. ––––, 139 S.Ct. 1795, 204 L.Ed.2d 129 (2019). This is such a case.

Although civil contempt for discharge violations is warranted, the automatic stay remedy under 11 U.S.C. § 362(k)(1) applies because the series of offending wage garnishments began before discharge at the behest of debt collectors who had no sense of urgency about obeying the law. Civil contempt's milder remedies do not eclipse the stronger medicine of § 362(k)(1).

There would have been no violations if the respondents had terminated their earnings withholding order before "closing" their files and sticking their heads in the sand. Debt collectors have an affirmative duty upon learning of bankruptcy to terminate garnishments they have launched.

The stay-violating conduct having been "willful" within the meaning of § 362(k)(1) and there also being "no fair ground of doubt as to whether" the automatic stay and the discharge injunction barred the garnishments, § 362(k)(1) stay violation remedies, including punitive damages, are appropriate.

Facts

Cavalry SPV I, LLC, as assignee of Citibank, N.A. ("Cavalry"), obtained a $20,791.07 money judgment against Dumace LeGrand in a California state court.

A Writ of Execution directed to the Sheriff of Los Angeles County was issued January 8, 2019.

An Application for Earnings Withholding Order and an Earnings Withholding Order ("EWO") were prepared January 30, 2019, on official California forms on behalf of Cavalry by its attorney, Winn Law Group ("Winn"), filed February 4, 2019, and served on LeGrand's employer on February 5, 2019.

Winn advertises its expertise in debt collection matters as the "premier creditor's rights firm in California."¹

The Employer's Return form on the EWO reported gross earnings of $1,008.00 during the last weekly pay period. It further reported in Item 5 that "employer has received another order affecting the employee's earnings and earnings are being withheld for this other order because this order does not have higher priority." The other order was described as "CA Child Support, Case 15FL00805MOD4, currently $216.48 weekly."

The Employer's Return did not check the box: "This order is not effective for the reason shown in Item 5. It is returned to the levying officer with this return." Thus, the Employer's Return made clear that it was retaining the order, which is the result contemplated by California Code of Civil Procedure § 706.030(c)(3) when there is extant withholding for support.

Cavalry and Winn received the Employer's Return dated February 14, 2019, noting the existing withholding for support.

LeGrand filed chapter 7 case No. 2019-21198 on February 28, 2019. His chapter 7 discharge was entered June 17, 2019. The chapter 7 case was closed June 24, 2019.

Cavalry and Winn were listed as creditors and admit that they had notice of the case and of the discharge.

Upon learning of the filing of the chapter 7 case, Cavalry and Winn "closed" their files, but they did not terminate Cavalry's EWO even though they admit that they had an affirmative duty to do so. Nor is it controverted that they knew from the Employer's Return that their EWO had been retained by LeGrand's employer and, thus, remained potentially effective.

LeGrand's employer did not have notice of the existence of his bankruptcy case until June 28, 2019, eleven days after his discharge was entered.

The employer honored Cavalry's EWO for payrolls of May 22, June 19, June 26, July 3, July 10, July 17, and August 7, 2019, for a total of $883.35.

On July 10, 2019, LeGrand's counsel sent to Winn a letter by fax transmission (which was received) demanding immediate termination of the garnishment, return of collected funds, $500.00 in damages, and $500.00 in attorney's fees. Her letter stated an intent to pursue formal action if there was no resolution by July 15, 2019. She followed her letter with repeated futile attempts to talk with Winn by way of voicemail messages requesting that her calls be returned.

Winn did not respond to the July 10 letter from LeGrand's counsel, did not respond to counsel's voicemail messages, and did not otherwise attempt to communicate with her before she filed and served the motion for sanctions and fees on July 26, 2019.

On July 29, 2019, Winn executed, for Cavalry, a Notice of Termination of EWO and sent a copy to LeGrand's counsel. This was Winn's first communication to LeGrand's counsel.

The Notice of Termination was directed to the Los Angeles County Sheriff, who supposedly terminated the EWO on August 2, 2019, but not in time to prevent another garnishment on August 7.

This court issued an Order to Show Cause why Cavalry and Winn should not be held in civil contempt or otherwise sanctioned for violating the automatic stay and the discharge injunction.

Analysis

Assessing the questions of automatic stay violation, civil contempt, and their consequences requires an excursion through the California wage garnishment statute.

I

California wage garnishment procedure is prescribed by Chapter 5 of the California Code of Civil Procedure. CAL. CODE CIV. PRO. §§ 706.010 - 706.154.

A

The dramatis personae include "judgment creditor," "judgment debtor" (aka "employee"² )," "employer,"³ and the "levying officer" (Sheriff or authorized public officer).

B

The key concepts relevant here are "earnings,"⁴ "disposable earnings,"⁵ "writ of execution," "earnings withholding order,"⁶ "employer's return," "levy of execution,"⁷ "lien created by service of earnings withholding order,"⁸ "withholding period,"⁹ "priority of earnings withholding order,"¹⁰ "withholding order for support,"¹¹ "ineffective earnings withholding order,"¹² "dormant EWO," and "suspended EWO."

A cousin not governed by the Wage Garnishment Law is the "earnings assignment order for support," which, as an assignment, has superpriority over all EWOs.¹³

C

The lien created by service of an EWO puts the employer at risk of liability for so long as the EWO remains in the hands of the employer. In addition to being a lien on the employee's wages, it constitutes a lien on employer's property in the amount required to be withheld. CAL. CODE CIV. PRO. § 706.029.

D

Situations involving multiple EWOs receive three alternative treatments under the California Wage Garnishment Law.

First, the usual rule is that EWOs of equal priority are honored seriatum - first come, first served. If one such EWO is in force when the employer receives a second EWO of equal or lesser priority, the second EWO is "ineffective" and is returned

CAL. CODE CIV. PRO. § 706.23(c). to the levying officer to await a subsequent levy after the first EWO is paid in full. CAL. CODE CIV. PRO. § 706.023(c).¹⁴

Or, second, if the second-arriving EWO is senior in priority, then an EWO already in effect becomes "suspended" while the priority order is paid but remains in the hands of the employer to be resumed when the priority EWO is paid in full. CAL. CODE CIV. PRO. §§ 706.022(a)(4) & § 706.032(a)(2).¹⁵

Or, third, when support is involved, an employer withholds earnings simultaneously pursuant to an EWO for support (or earnings assignment order for support) and another EWO. CAL. CODE CIV. PRO. § 706.030(c)(3).¹⁶

Why the simultaneous treatment? Simple. There is a statutory limit to the amount that may be withheld per pay period, typically 25 percent of disposable income. CAL. CODE CIV. PRO. §§ 706.050 - 706.052.

Consider, as an example, a $300.00 withholding limit due to disposable income of $1,200.00. If there is a priority support order (earnings assignment order or EWO for support) for $250.00, then the remaining $50.00 is available for the non-support EWO.

But if earnings for a particular pay period do not permit withholding more than the support amount, then there is nothing for the EWO to capture and, hence, that EWO is said to be "dormant." CAL. CODE CIV. PRO. § 706.022(a)(4). The "dormant" EWO lays to the side ready to pounce whenever there is an amount that can be withheld in excess of the support amount.

In other words, when an EWO for support and an EWO are simultaneously in effect, the amount required to be withheld for support is deducted first and the amount, if any, for the non-support EWO is determined by subtracting the support amount from the total amount that could otherwise be withheld under a non-support order. AHART, ENFORCING JUDGMENTS §§ 6:1224-25.

In scenarios two ("suspended" EWO) and three ("dormant" EWO), the employer retains an EWO until it terminates.

The facts of this case suggest that the third scenario applied, which permits simultaneous withholding. The employer, in light of exposure to the attendant lien, likely would have returned Cavalry's EWO as ineffective if it could have done so.

It appears that what happened is that initially LeGrand's income was less than or equal to the support order, and that Cavalry's EWO lay "dormant." When LeGrand began to work overtime in May 2019, the increase in income had the effect of raising the limit on what could be garnished above the sum needed to honor the support order, at which point Cavalry's "dormant" EWO pounced on the surplus available to withhold.

Therein lies the answer to the question, "Why no withholding before May 22 on Cavalry's EWO?" Answer: no increased income until the May 22 payroll. LeGrand's overtime averaged 23.35 hours per week for the seven weeks in question.¹⁷

E

Cavalry and Winn suggest in defense that an...