Stuart v. City of Scottsdale (In re Stuart)

632 B.R. 531

IN RE: Mark E. STUART, Debtor.

Mark E. Stuart, Appellant,

v.City of Scottsdale; Russell Brown, Chapter 13 Trustee; City of Scottsdale Attorney's Office, Appellees.

BAP No. AZ-21-1063-FLS

Bk. No. 2:19-bk-05481-BKM

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Filed November 10, 2021

Chris D. Barski of Barski Law PLC, Scottsdale, argued for appellant Mark E. Stuart;

Vail C. Cloar of Dickinson Wright PLLC, Phoenix, argued for appellee City of Scottsdale.

Before: FARIS, LAFFERTY, and SPRAKER, Bankruptcy Judges.

FARIS, Bankruptcy Judge:

INTRODUCTION

After the City of Scottsdale garnished three of his bank accounts, debtor Mark E. Stuart filed a chapter 13¹ petition. Mr. Stuart argued that the automatic stay required the City to lift the garnishment immediately. Relying on City of Chicago v. Fulton , ––– U.S. ––––, 141 S. Ct. 585, 208 L.Ed.2d 384 (2021), the bankruptcy court ruled against Mr. Stuart. Mr. Stuart appeals, arguing that Fulton is inapplicable to this case and that the City engaged in "acts" that violated multiple subsections of § 362(a).

The bankruptcy court correctly held that the City did not violate the automatic stay. We AFFIRM. We publish to explain the effect of Fulton on a prepetition bank account garnishment.

FACTS

A. Prepetition events

Mr. Stuart has long pursued the City in various "public interest" cases. He lost one such case (the "State Court Action"), and in 2015 the state court awarded the City a final judgment exceeding $30,000 in sanctions and costs, plus interest (the "State Court Judgment"). The Arizona Court of Appeals affirmed the State Court Judgment.

In April 2019, the City served a writ of garnishment on Bank of America ("BOA"), where Mr. Stuart had three accounts. BOA froze the accounts, which held a total of $8,879.95.

Mr. Stuart sought to quash the writ, arguing that the bank accounts were community property not subject to the City's claims. The state court agreed that the State Court Judgment was unenforceable against any community property. However, it noted that Mr. Stuart had previously obstructed discovery, making it impossible for the City to determine the existence and nature of his property, and allowed the City an opportunity to conduct discovery. Before the City could take any further action, Mr. Stuart filed his bankruptcy petition.

B. Mr. Stuart's bankruptcy case and the City's response

On Saturday, May 4, 2019, Mr. Stuart filed a chapter 13 petition.² His attorney contacted BOA by fax dated May 6 (the next business day) and requested that it release the frozen funds. BOA responded the following day that it would retain the funds unless it was directed otherwise by the City or the bankruptcy court.

On May 7, Mr. Stuart's counsel contacted the City and demanded that the City direct BOA to release the frozen funds. The attorney handling the matter was out of town and did not respond immediately. Nevertheless, the City filed a motion to stay litigation in the State Court Action that same day. It requested that "all pending matters in this case, including any scheduled hearings, be stayed pending resolution from [sic] the bankruptcy proceedings." The state court granted the motion.

Also on May 7, Mr. Stuart, proceeding pro se, filed a document informing the state court of the stay and requesting that the state court quash the writ of garnishment.

On May 13, the responsible attorney for the City sent an e-mail to Mr. Stuart's counsel, BOA's counsel, and others. He said that he had been out of the office the previous week and stated that he believed that "the funds being held by the bank pursuant to the garnishment became property of the bankruptcy estate. Accordingly, the City of Scottsdale does not have a current possessory interest in them ...." He concluded that "the City will abide whatever disposition of those funds is made in accordance with the Bankruptcy Statutes/Rules."

Counsel for BOA responded that he would direct BOA to release the funds once the City quashed the writ of garnishment. Counsel for the City wrote back that "[t]he City has requested a stay of the proceedings in state court. The City does not oppose release of the funds by the Bank."

The City also filed a response to Mr. Stuart's request to quash the writ. It took the position that the court should "deny Stuart's request as the court has already provided Stuart to [sic] the relief which he is entitled, i.e., a stay of the proceedings. However, the City does not oppose release of the funds by [BOA] and does not object to a court order instructing [BOA] to release the funds." It argued that, under § 362(a), it was not required to dismiss the garnishment proceedings, only to stay them, which the court had already done. Because funds had not left Mr. Stuart's accounts, there was nothing to "return." Nevertheless, it repeated that it "does not object to an order from this Court authorizing [BOA] to release any hold on funds that may have arisen as a result of the garnishment."

On May 14, the state court issued a minute order that: (1) granted Mr. Stuart's request to quash the writ; (2) denied the City's request for a stay, because all matters were previously stayed; and (3) denied Mr. Stuart's request for a return of the funds, because the monies remained in his accounts. BOA unfroze the three bank accounts shortly thereafter.

C. The motions for sanctions for the City's stay violation

Mr. Stuart filed a motion for sanctions ("Stay Violation Motion") against the City³ based on the alleged violation of the automatic stay.⁴ He asserted that there was no dispute that the City knew of the automatic stay yet refused to dismiss the state court garnishment action. He argued that the City had an affirmative duty to remedy the violation by releasing the frozen account funds. He alleged that the garnishment and the stay violation caused him and his wife severe psychological distress, including anxiety, depression, and sleeplessness.

The City objected to the Stay Violation Motion. It argued that it never held the garnished funds and never took any action after the bankruptcy filing, including continuing the garnishment action or exercising control over estate property. It contended that BOA held the funds and that the City had done all that was required of it, i.e., move to stay the State Court Action. It was not required to dismiss any judicial action, only "maintain the status quo ante." It pointed out that Mr. Stuart did not identify any act that violated the automatic stay. The City took the position that it had "nothing to do with" the return of the frozen funds and stated (falsely) that it had "filed a request to quash the writ."

Mr. Stuart filed a reply brief and asserted that sanctions were warranted under § 362(a)(1), (2), (3), and (6).

At the hearing on the Stay Violation Motion, the bankruptcy court recognized that the City immediately sought to stay the State Court Action but nevertheless faulted the City for not seeking to quash the writ of garnishment. The bankruptcy court cited an unpublished Ninth Circuit decision, Best Service Co. v. Bayley (In re Bayley) , 678 F. App'x 593 (9th Cir. 2017), for the proposition that the City violated the automatic stay "by failing to promptly direct Bank of America to return the funds and/or promptly requesting the writ be quashed ...." It said that its decision was a "preliminary ruling" subject to an evidentiary hearing to determine damages.

The court entered a minute order determining that the City violated the automatic stay ("Stay Violation Ruling"). It allowed Mr. Stuart to proceed with an evidentiary hearing for a determination of damages against the City and its attorneys in the State Court Action.⁵

Mr. Stuart filed a motion for sanctions ("Sanctions Motion") under § 362(k) against the City and two of its attorneys. He sought damages for physical and psychological distress for himself and his non-debtor wife, Virginia Stuart, as well as costs associated with the Stay Violation Motion, totaling $20,783. Additionally, he requested $30,000 in punitive damages and attorneys' fees and costs. The City opposed the motion.

D. The City's motion for reconsideration

Prior to the hearing, the City filed a motion for reconsideration ("Reconsideration Motion") of the Stay Violation Ruling under Civil Rule 60(b), made applicable in bankruptcy via Rule 9024. It argued that the U.S. Supreme Court's recent Fulton decision "clarified that the mere retention of property post-petition does not comprise a violation of the automatic stay as a matter of law." It contended that Fulton dictated that the City needed only to refrain from disturbing the status quo and was not required to release the garnished funds or direct BOA to release the funds.

Mr. Stuart opposed the Reconsideration Motion, arguing that Fulton ’s narrow holding under § 362(a)(3) was inapplicable to this case because the City denied ever possessing Mr. Stuart's property. Rather, Mr. Stuart focused on the continuation of the writ of garnishment, which he contended was an act to collect and enforce the State Court Judgment under § 362(a)(1), (2), (3), and (6).

The bankruptcy court held a hearing on the Reconsideration Motion. It took the matter under advisement and issued a supplemental minute entry/order granting the Reconsideration Motion. It noted that "the crux of its [Stay Violation Ruling] was that the City of Scottsdale had an affirmative duty to ensure the release of funds frozen by Bank of America based on the City of Scottsdale's pre-petition garnishment action." It clarified that its "focus was on the retention of estate property as being in violation of the stay" and that "the Court ruled that the City of Scottsdale's failure to direct or otherwise secure release of the frozen funds violated the stay under § (a)(3)." It held that, "[u]nder Fulton that conclusion is now wrong.... [M]ere retention of an estate asset is not an act in violation of § 326(a)(3) [sic] and there is no requirement that an...