In re Highsmith
MEMORANDUM OPINION DENYING LEAVE TO FILE AN UNTIMELY RESPONSE, FINDING WILLFUL VIOLATION OF THE AUTOMATIC STAY, AND SETTING A FURTHER HEARING TO QUANTIFY DAMAGES
This matter came before the Court on Debtor’s Motion for Sanctions against Harnett County Social Services (“Harnett County”) and/or North Carolina Department of Health and Human Services (DHHS) for Violation of the Automatic Stay [Doc. # 53] (the “Motion for Sanctions”) on October 22, 2015 (the “Hearing”). The Motion for Sanctions was filed on September 17, 2015, and Harnett County filed a Response on October 15, 2015 [Doc. # 62] (“Harnett County Response”). At the Hearing on October 22, A.B. Harrington, III, appeared on behalf of the Debtor, Richard Sparkman appeared on behalf of Harnett County, and Richard M. Huston, II, appeared as Trustee. The Court received testimony from the Debtor, Gail Newson Highsmith, and Daphne Tyler, Program Administrator for Harnett County.
The North Carolina Department of Health and Human Services (“DHHS”) concedes that it was properly and timely served with the Motion for Sanctions. [Doc. # 69 (“Motion for Leave to Respond”), ¶ 6; Affidavit of Rose Thompson (“Thompson Affidavit”), ¶¶ 3 and 4]. Nevertheless, DHHS did not respond to the Motion for Sanctions prior to the hearing, and did not appear at the hearing. Over a week after the Hearing, on October 30, 2015, DHHS belatedly
On February 1, 2013, the Debtor became aware that her Social Security benefits had been garnished in the amount of $252.90. Id. Having been in bankruptcy for almost a year, the Debtor contacted Harnett County in person on February 18, 2013, and informed the County that she had filed bankruptcy. Debtor then informed her attorney that her wages were being garnished and that, due to the reduction in wages caused by the garnishment, she could no longer afford to make the payments on her home. Debtor’s counsel filed a motion on February 27, 2013, to surrender the Debtor’s home [Doc. # 23]. The motion cites unforeseen loss of income caused by no longer receiving food stamps and garnishments on her retirement income by Harnett County. At the hearing on the motion on March 29, 2013, the Court stated that the garnishment appeared to constitute a violation of the automatic stay and asked the Debtor’s attorney to investigate and take any steps necessary to cease any further post-petition garnishments.
In response to the Court’s admonitions, on April 16, 2013, Debtor’s attorney wrote a letter to Harnett County Department of Social Services, informing it of the stay violations caused by the garnishment and asking Harnett County to explain the post-petition garnishments. [Doc. # 53-1]. Harnett County did not respond to the notice of the stay violation until two weeks later, by sending a letter from county attorney Penny K. Bell to Debtor’s counsel on April 30, 2013. In this letter, the county stated that it had not been informed of the bankruptcy until February 18, 2013, and explained the pre-petition basis for the garnishment. Ms. Bell explained that the garnishments were a result of the Debtor’s agreement to repay Harnett County but that the “garnishment ha[d] been removed and the matter ha[d] been placed on hold pending further instruction,” due to the Debtor’s attorney’s inquiry. [Doc. # 53-2].
The letter sent by Harnett County on April 30, 2013, also acknowledged that, despite knowing of the bankruptcy on February 18, 2013, the garnishment was not actually removed until after the Debtor’s attorney sent his letter in April. In the interim, on March 4, 2013, and April 1, 2013, respectively, the Debtor remitted two additional direct payments in the amount of $50.00 each to Harnett County consistent with the terms of the pre-petition repayment agreement. Harnett County accepted these payments even though there is no dispute that it had knowledge of the bankruptcy and the automatic stay at that time. Had those payments not been made, it is possible the
Despite the County’s knowledge of the bankruptcy, and despite its statement that the problem had been solved, the improper garnishments resumed in July of 2015. [Doc. # 62]. The Debtor’s Social Security benefits were garnished in the amount of $203.13 in July of 2015, and $278.38 on August 1, 2015.
According to the Debtor’s testimony, the Debtor contacted DHHS and spoke to a representative named Kiki Turner, who reportedly looked into the Debtor’s case and informed her that the renewed garnishments were in error. Ms. Turner was not present at the Hearing. Daphne Tyler, program administrator for Harnett County, testified that the Debtor contacted Harnett County directly on August 4, 2015, by phone and spoke with Tyler. The Debtor informed Tyler of the garnishments and her resulting extreme hardship, including checks to her supplemental health insurance provider and landlord that were returned to her due to insufficient funds in her bank account, resulting in the loss of supplemental insurance and being subjected to a summary eviction action. That day, Tyler asked the case investigator to pull and review anything involving bankruptcy in the Debtor’s file. On the same day, the case investigator informed Tyler that there were no bankruptcy papers in Debtor’s file, and nothing in the file at all to indicate the Debtor was in bankruptcy.
Tyler also testified that she alerted DHHS by fax to stop garnishments on the Debtor’s account due to her bankruptcy filing. Tyler acknowledged that DHHS should have been alerted to the Debtor’s bankruptcy as of 2013, and there should have been an indication on her to stop the garnishment due to the bankruptcy.
Tyler provided testimony concerning EPICS, the computer system through which the county and DHHS manage support payments and garnishments. According to Tyler, the county inputs any repayment agreement into the EPICS system. After this input, garnishment of the client’s benefits will happen automatically if any payment under the plan is missed. Tyler testified that when she inputs a payment agreement into the system, she knows that a garnishment will occur automatically if the County does not record a timely payment under the plan on the system. Tyler testified, when payment occurs, an investigator or clerk “goes into the EPICS system, keys in the amount of the payment, the date of receipt,” and the payment shows up in the system. But when there is no payment,’ a no payment receipt automatically initiates EPICS to garnish funds from the Debtor’s Social Security benefits and the funds are directed to DHHS. Tyler testified that EPICS is a state system, and that, although the County’s inputs will'trigger an automatic garnishment if there is a default', the actual garnishments are effectuated at. the state level. She testified that she knew a garnishment would start automatically if the investigator clerk did not key in a timely payment.
On August 12, 2015, both Tyler and a program integrity investigator, Cynthia Collier, wrote and signed a letter to the Debtor, following up on their conversations about the latest garnishments. In the let
Harnett County did not offer any evidence, other than testimony, of direct communication between the DHHS and Har-nett County concerning garnishments.
The Debtor established that she suffered damages as a result of the garnishments and the continued deprivation of her income. She testified that she already was on an extremely tight budget of $1,095.00 per month after deductions from pension, and the garnishments took approximately a fifth to a quarter of her monthly income. Additionally, the Debtor currently is the only caretaker of four dependents: a sixteen year old daughter, a grandson age 8, a granddaughter age 6, and a granddaughter age 4. Debtor’s non-filing spouse resides in a nursing and rehabilitation center.
The Debtor testified that the garnishments left her checking account totally empty and resulted in a cascade of consequences and damages. When her rent check was returned for insufficient funds, her landlord commenced summary eviction .proceedings against her, and the Debtor was required to go to court to attempt to remain in her residence. As a result of bank overdraft fees, the check she had written to pay her electric bill similarly was dishonored and she was removed from the utility’s equal payment plan. Her hospitalization and supplemental medical insurance coverage from Equitable Life was cancelled because she missed two insurance payments due to returned checks caused by the garnishments. Her home renter’s insurance was cancelled for the same reason. The Debtor also was justifiably distraught that the garnishments would continue into future months and neither Harnett County nor DHHS could tell her when the garnishments would cease and when she would be reimbursed for the money already improperly garnished. Letters to the Debtor conveyed that the process could take “several months,” and were non-committal and blasé about the deprivation of the Debtor’s meager income. [Doc. # 53-3]. The Debtor also testified to the emotional and physical toll that the stress caused, including a rise in blood pressure that sent her to the doctor, poor sleep due to stress, and fear of being thrown out onto the street with her young dependents because of an inability to pay full rent.
Although the bank charged her fees for the checks that were returned for insufficient funds, the Debtor was able to get the bank to refund the charges after explaining the situation. The Debtor was able to further mitigate some of her damages by attending the summary eviction proceedings, where the judge allowed her to remain in her apartment after considering
As of the date of the hearing, the Debtor testified she had received three checks from DHHS in repayment of the garnishments. She testified to being owed still one check, and there was no evidence from Harnett County to dispute the continued failure to turnover these wrongfully held funds.
The Debtor moved for sanctions against both Harnett County and the State of North Carolina DHHS. In its Response, Harnett County does not dispute that both garnishments occurred and does not deny the garnishments were an attempt to collect a pre-petition debt. Harnett County argues that the garnishments were a mistake, initiated solely at the state level and not by Harnett County. Therefore, Harnett County believes it is not responsible for any of the garnishments. The county argues that the garnishments were “not made by Harnett County; were without the knowledge of Harnett County; and were beyond the control of Harnett County.” [Doc. # 62], Harnett County also alleges it took immediate, affirmative steps to ameliorate the situation “in order to minimize any inconveniences to the Debt- or.” Id.
Harnett County argues two bases upon which it should not be liable for a violation: (1) the acts triggering the garnishments were not willful, and (2) Harnett County had no control over the garnishment system, which is controlled at the state level by DHHS.
In her testimony, Daphne Tyler stated that in her conversation with a representative from DHHS concerning the garnishment, DHHS conceded that a mistake had been made at their level. In its untimely filed Proposed Response with an attached affidavit from Betsy E. Moore, DHHS details the garnishment as being a product of “troubleshooting that the DHHS Information Technology Division (“DHHS IT”) was performing on DHHS’s computer systems .... ” [Doc. # 69-2, ¶ g], DHHS stated in its Amended Motion to File Response that the cause of the garnishment was a compounding computer error that was not corrected for approximately four months. [Doc. # 73]. DHHS states this DHHS IT mistake caused the bankruptcy litigation code to be removed inadvertently from Debtor’s EPICS record. Id. This inadvertent removal, DHHS claims, caused the Debtor’s overpayment claim to be “au
DISCUSSION
A. The Motion for Leave to File a Response
In order for the Court to allow DHHS’s Proposed Response and grant the Motion for Leave to File a Response, DHHS must show that DHHS’s failure to file a response by the deadline was due to excusable neglect. Fed. R. Bankr. Pro. Rule 9006; In re Brown,
Eight days after the Court heard arguments on the Debtor’s Motion for Sanctions, and approximately a month and nine days after DHHS was served with the Motion for Sanctions and Notice of Hearing, DHHS filed a motion asking the Court to accept its untimely Response to the Motion for Sanctions. [Doc. # 69]. In DHHS’s Proposed Response, DHHS admits to having timely received service of the Motion for Sanctions on or about September 21, 2015. Id., ¶ 6. DHHS alleges, however, that because it was not served with Harnett County’s Response to the Motion for Sanctions, it did not have an opportunity to respond to the allegations contained in the County’s Response regarding DHHS’s responsibility in the alleged violations. Id., ¶ 17.
DHHS did not need Harnett County’s Response to the Motion for Sanctions in order to be alerted that the Debtor sought relief directly against DHHS. The Motion for Sanctions clearly asserts that both DHHS and Harnett County are liable for the violations of the automatic stay. DHHS has not cited any authority to support the proposition that a properly served respondent is not required to respond to a motion unless a co-respondent properly serves its response upon all parties to the contested matter. Such a rule would be ill advised, and, in any event, DHHS should have been aware that Harnett County was attempting to place the blame on DHHS. As noted by DHHS in its motion for the Court to consider its late filed response, the Debtor states in its original motion that “Harnett County is transferring its culpability to the North Carolina Department of Health and Human Services.” [Doc. #53, ¶ 6 and Exhibit C]. The letter from Harnett County to the Debtor that is attached to the Debtor’s Motion for Sanctions contains repeated references to the state program and state responsibility for .the garnishments or any repayment. Debtor listed the alleged violations, described Harnett County’s conduct surrounding the garnishments, and stated that DHHS was accountable for the garnishment as the alleged error causing them to resume came from DHHS.
DHHS’s rationale for its lack of response is illogical and inexcusable. Ignoring the original motion which clearly seeks relief against DHHS, and then filing a response only after waiting to see whether or not Harnett County might take full responsibility for the alleged violation, or whether the county might continue by response to insist the error was caused at the state level, does not demonstrate either good faith or the level of diligence required for excusable neglect when DHHS was properly served with a motion that clearly sought relief against it.
On November 20, 2015, DHHS filed an Amended Motion for Leave to File Response [Doc. # 78] (the “Amended Motion to File Response”). Through the Amended Motion to File Response, DHHS purports to solidify the bases and timeline for the errors that occurred which initiated the garnishments on Debtor’s Social Security benefits. For the same reasons set forth above, the Court will DENY the Amended Motion to File Response, but the Court nevertheless notes that the timeline presented by DHHS does not contradict the Debtor’s timeline or the timeline presented by Harnett County in testimony and through timely filed motions and responses. DHHS expands upon and details the computer error that Harnett County said caused the garnishments, thus supporting and not contradicting Harnett County’s testimony as to how the garnishment occurred.
B. Automatic Stay
The filing of a petition under 11 U.S.C. § 301 “operates as a stay, applicable to all entities, of ... any act to collect, assess, or recover a claim against the debt- or that arose before the commencement of the case under this title....” 11 U.S.C. § 362(a)(6). The automatic stay is one of the most fundamental and important protections given to debtors under the Bankruptcy Code. See In re Barrow, Case No. 14-06570-5-SWH,
The Bankruptcy Code establishes the automatic stay not only as a fundamental protection to a debtor filing a petition, but also to creditors seeking a just and successful distribution. Baum, v. United Virginia Bank (In re Baum),
There is no question that the automatic stay was actually violated in 2015 when the Debtor’s Social Security benefits were garnished after both Harnett County and DHHS were informed of Debtor’s bankruptcy. The evidence presented at the Hearing also establishes that the stay violation caused significant injury to the Debtor, which injury was compounded by the subsequent delay in refunding improperly garnished funds. DHHS and Harnett County contend that this violation of the stay was not willful as contemplated by 11 U.S.C. § 36200(1). The Court disagrees.
Willful violation of the automatic stay occurs when a creditor has knowledge of the bankruptcy case and takes an intentional action.
To establish a willful stay violation, it must be shown that the party knew of the bankruptcy filing and then took some action. It does not matter whether the party had specific intent to violate the stay or acted in good faith based upon a mistake of law or legal dispute regarding its rights. In re Sharon [234 B.R. 676 ] at 687-688 [(6th Cir. BAP 1999)]; In re Ramirez,183 B.R. 583 , 589 (9th Cir. BAP 1995); In re Bloom,875 F.2d 224 , 226 (9th Cir.1989). When reasonable, actual notice is received, it becomes a creditor’s responsibility to ensure it has not violated the stay, or if it has been before receipt of actual notice, to reverse any action taken through direct and affirmative measures. In re Smith,180 B.R. 311 , 319-321 (Bankr.N.D.Ga.1995); In re Sams,106 B.R. 485 , 490-491 (S.D.Ohio 1989).
In re Johnson.
Harnett County concedes that it input the pre-petition payment agreement and that it knew that, once it had done so, any missed payment automatically would trigger a garnishment at the state level. Nevertheless, it argues that the violation was not willful because the garnishment occurred at the state level. On the contrary, a creditor violates the stay willfully when it has knowledge of the bankruptcy and it fails to take possible and necessary action to prevent the continuation of the collection process; in such an instance, inaction amounts to reckless disregard and a violation of the automatic stay. Johnson,
In Elder, the debtor sought an injunction against a creditor, alleging that garnishments initiated by the creditor violated the automatic stay. In re Elder,
As recognized in Elder, when a creditor sets the garnishment in motion, it is responsible for what happens thereafter. See id. at 494. Regardless of how easy or difficult it is to stop the garnishment, the creditor must take the necessary steps to effectively cease the garnishment. Simply alerting the third party who actually garnishes the debtor’s Social Security benefits to stop the process is not enough if the process requires more than a notification. In re Scroggin,
Once the garnishment began and Har-nett County had notice of the bankruptcy filing, it was obligated to take whatever steps were necessary in order to halt or dismiss the garnishment — on its end and in its dealing with DHHS. Reliance on a broken chain of communication or an improperly functioning computer system is no excuse for the hardships imposed on the Debtor and her four dependents, even if Harnett County sees these garnishments as mere “inconveniences.” For a woman and her family living paycheck to paycheck, those two garnishments were the difference between sufficient medical insurance, utilities, a roof over their heads, and the completion of a chapter 13 bankruptcy plan.
Harnett County also argues that it was a computer error on DHHS’s end that triggered the garnishments, and, therefore, the violation was mere “innocent clerical error” and not willful. Harnett County did not offer evidence of any specific computer error that caused the post-petition garnishments. Moreover, the insufficiencies in this case are not limited.to mere computer error. Harnett County’s own testimony established that, more -than two years after being notified of the Debtor’s bankruptcy, there was no indication whatsoever in the Debtor’s file of a bankruptcy filing. The absence of any indication of the bankruptcy demonstrates that the county and DHHS did not have a sufficient process in place to protect against violations of the automatic stay. In any event, even if the violations here were solely attributable to computer error, this district has been reluctant to allow “computer problems” to be an excuse for the inaction that follows any systematic error. See In re Drake,
Truliant created and continues to utilize its computer system to, among other things, efficiently send billing notices to its customers. The purpose of sending billing notices is for Truliant to collectpayments from its customers. Truliant determined to collect' money from its customers through the billing notices sent by its computer system. While the first billing notice may not have been intentionally sent, the second billing notice was intentionally sent because of the Trustee’s letter. The Trustee’s letter sufficiently put Truliant on notice that it violated the automatic stay by sending the first billing notice ... The second billing notice was sent to intentionally collect a debt from someone that Truli-ant actually knew to be in bankruptcy and therefore was a willful violation of the automatic stay.
As in Drake, the method of using a computer system to collect payments due under the overpayment agreements in this case, requires Harnett County and the DHHS to be responsible for the violations when insufficient action is taken to halt the garnishment.
Government entities are not held to a different standard. The Western District of North Carolina in Shealy similarly found that the South Carolina Tax Commission willfully violated the automatic stay even though the violations were caused by “clerical error” because the violations resulted from the Commission’s disregard of action necessary to respect the automatic stay. In re Shealy,
In two eases from the Western District of North Carolina, the district court and bankruptcy court have distinguished Shealy, finding no willful violation of the stay where the violations were caused by innocent clerical error that caused no injury to the debtor and were quickly and easily halted and remedied. See Hamrick v. Defense Finance & Accounting Service (In re Hamrick),
In Hamrick, the creditor relied on a system by which a computer program would send automatic demand notices to debtors who were in payment default unless a computer code was placed on the debtors’ account signifying that a particular debtor was in bankruptcy. In re Ham-rick,
Similarly, in Peterson, the court clearly and primarily was concerned with debtor’s counsel’s overreaching and vexatious con
There appears to be no real injury to the debtor by Chevy Chase Bank’s actions. There was some measure of shock, disturbance, and annoyance, but nothing that would amount to an injury meriting damages. The actual monetary cost to the debtor was minimal and was quickly remedied.
Id. at 472. The court noted there was no other evidence of any action by the creditor demonstrating a willful violation: though there was a previous violation of the automatic stay in Peterson, the two violations were unrelated, isolated events and did not indicate a pattern of repeated collection efforts; there was no indicia of indifference to the stay; there was no aggravated conduct by the creditor; and there was no flagrant or persistent refusal to cease action after being advised of the bankruptcy proceeding. Id. at 471.
Here, by contrast, there is real, actual, significant, and compounding harm to the Debtor which occurred as a result of repeated violations of the stay. The record contains no indication that counsel’s motive is vexatious as the court found in Peterson. The Debtor was subjected to summary ejectment proceedings, her supplemental insurance was cancelled, she lost the ability to participate in a utilities repayment program, and she suffered emotional distress. The garnishments in this case also cannot be viewed in a vacuum. See In re Shealy,
EPICS was built to manage payments and collections, including processing garnishments. The computer action that triggers a garnishment from the debtor is an intentional act to collect money from the Debtor. It is the responsibility of the user of any computer program to ensure it is functioning properly. See, e.g., Rijos v. Vizcaya & Citibank, (In re Rijos),
While Harnett County attempted to communicate with the Debtor, the Court is deeply concerned by the alleged errors in the EPICS system that allowed the Debt- or’s Social Security benefits to be garnished, even after a problem already had been detected. This situation is even more troubling given that the garnishments attempted to collect a debt that Harnett County states in writing has been waived. [Motion for Sanctions, Exhibit C (Doc. # 53-3) ] (“This was a State action made in error, as your repayment of the claim was waived some time ago.”).
CONCLUSION
Willful violations of the automatic stay occurred when DHHS and Harnett County failed to halt the garnishments of Debtor’s Social Security benefits in the amount of $203.13 in July, 2015, and $278.38 in August, 2015, and when they failed to immediately correct these garnishments. For the reasons set forth herein, the Court will enter its Orders DENYING the Motion for Leave to Respond and Amended Motion to Respond, and enter its order: (1) finding that Harnett County and DHHS each committed willful violations of the automatic stay for which they are jointly and severally liable; (2) setting a further hearing to liquidate the amount of damages, including emotional damages, if any, caused to the Debtor by the violations set forth herein.
SO ORDERED.
Notes
. Local Bankruptcy Rule 9013-l(e) provides, "[a]ny party against whom relief is sought may file a written response to the motion .... A response and accompanying affidavits, if any, to a motion shall be served within the earlier of 14 days from the date of service of the motion, or 3 business days from the date of the hearing on the motion, unless otherwise ordered or provided in the Federal Rules of Bankruptcy Procedure or these Local Rules.”
. Harnett County and DHHS further violated the automatic stay by accepting the $50 post-petition payments from the Debtor; the Debt- or did not move for sanctions with respect to either the initial garnishments in the case or the county’s acceptance of the post-petition payments, but instead assumed the issue had been resolved through contact by the Debtor’s attorney.
. 3 DHHS asserts in its untimely Proposed Response that all amounts now have been repaid.
. 4 DHHS asserts that it is unable to find in its records a copy of the Certificate of Notice [Doc. # 57] or the Notice of Hearing [Doc. #56] related to the Debtor’s original Motion for Sanctions. (Thompson Affidavit ¶ 4.b.). Nevertheless, as conceded in the Thompson Affidavit, the Certificate of Notice filed by the Bankruptcy Noticing Center avers that the Notice of Hearing was properly mailed to DHHS at its proper service address. Id. When an item is properly mailed, a presumption of receipt arises which is rebuttable only by clear and convincing evidence. In re Burton-Alston,
. Having lost her residence and unable to complete her plan payments, the Debtor has filed a motion for a hardship discharge under 11 U.S.C. § 1328(b). [Doc. # 54],
. 6 Even if the Court had considered the Motion for Leave to Respond or the Amended Motion for Leave to Respond, the defective computer program that DHHS asserts resulted in bankruptcy safeguards being overridden indicates that DHHS did not have sufficient mechanisms in place to prevent improper garnishments in violation of the automatic stay. In both Peterson and Hamrick, the courts specifically noted that the creditors had sufficient mechanisms in place to prevent violations of the automatic stay. Peterson,