632 B.R. 531
9th Cir. BAP2021Background
- Prepetition: Arizona state court awarded City of Scottsdale a judgment; in April 2019 the City served a writ of garnishment on Bank of America that froze three of Stuart’s accounts holding $8,879.95.
- Stuart filed chapter 13 on May 4, 2019; his counsel immediately asked BOA and the City to release the frozen funds.
- The City filed a motion to stay the state-court proceedings on May 7, told parties it believed the frozen funds became estate property, and repeatedly said it would not oppose release of the funds or a court order directing release.
- The state court quashed the writ on May 14 and BOA unfroze the accounts; Stuart then moved for sanctions for an alleged automatic-stay violation.
- The bankruptcy court initially ruled the City violated § 362(a)(3) (relying on Bayley) and set an evidentiary hearing on damages, but on reconsideration (citing the Supreme Court’s Fulton decision) vacated that ruling and denied the stay-violation/sanctions motion.
- The BAP affirmed: under Fulton the City’s inaction preserved the status quo and did not willfully violate the automatic stay under § 362(a)(1), (2), (3), or (6).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether City violated § 362(a)(3) by failing to cause bank to release prepetition-garnished funds | City’s retention of the garnishment and failure to promptly quash it or cause turnover was an affirmative act/retention in violation of § 362(a)(3) | Fulton controls: § 362(a)(3) prohibits affirmative acts that disturb the status quo; mere retention without more does not violate § 362(a)(3) | No violation — Fulton forecloses an affirmative-turnover duty; City’s inaction preserved the status quo |
| Whether City “continued” a proceeding in violation of § 362(a)(1) | City’s opposition to quashing the writ meant it continued the state-court collection proceeding | City promptly moved to stay the state-court action and took no steps to advance collection; staying pending bankruptcy suffices | No violation — staying the prepetition proceeding maintained status quo and satisfied Eskanos’ “dismiss or stay” principle |
| Whether City enforced a prepetition judgment under § 362(a)(2) | Maintaining the writ equaled enforcement of the State Court Judgment postpetition | City did not direct BOA to hold or collect funds postpetition and did not take affirmative enforcement steps | No violation — passive maintenance of prepetition garnishment is not enforcement absent affirmative postpetition action |
| Whether City took acts to collect under § 362(a)(6) | Refusing to dismiss the writ and seeking to keep funds frozen amounted to collection efforts | City only preserved its prepetition position and expressly said it would not oppose release; no postpetition collection acts occurred | No violation — mere retention/maintenance of a lien or attachment without further action does not constitute collection |
Key Cases Cited
- City of Chicago v. Fulton, 141 S. Ct. 585 (2021) (§ 362(a)(3) prohibits affirmative acts that change the status quo; mere retention of estate property postpetition does not violate the stay)
- Cal. Emp’t Dev. Dep’t v. Taxel (In re Del Mission Ltd.), 98 F.3d 1147 (9th Cir. 1996) (previous Ninth Circuit rule that knowing retention of estate property violated § 362(a)(3))
- Eskanos & Adler, P.C. v. Leetien, 309 F.3d 1210 (9th Cir. 2002) (creditors must dismiss or stay pending collection actions to avoid continuing a proceeding under § 362(a)(1))
- Best Serv. Co. v. Bayley (In re Bayley), [citation="678 F. App'x 593"] (9th Cir. 2017) (unpublished Ninth Circuit decision requiring affirmative turnover where creditor directed third party to hold levied funds; relied on pre-Fulton precedent)