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Pursuant to Section 362(a)(1) of the Bankruptcy Code, the filing of a bankruptcy petition creates an automatic stay against “the commencement or continuation … of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case …, or to recover a claim against the debtor that arose before the commencement of the case.”  Pursuant to Section 362(a)(3) of the Bankruptcy Code, the filing of a bankruptcy petition stays “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.”  The stay is effective immediately upon the filing of the petition.  Section 362(k) of the Bankruptcy provides that “an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.”

Thompson v. General Motors Acceptance Corporation, 566 F.3d 699 (7th Cir.2009) held that a creditor who had repossessed a vehicle pre-petition and then refused to return it to the debtor after a chapter 13 case was filed violated the automatic stay.  The court held that passively holding onto an asset can constitute “exercising control” over it and violate Section 362(a)(3) of the Bankruptcy Code. Id. at 703.  Reasoning that the vehicle would provide more benefit to the debtor and all of his creditors if the debtor could use it, Id. at 702, the court held that the creditor must turn over the vehicle and then seek adequate protection of its security interest in the asset or a modification of the automatic stay from the bankruptcy court. Id. at 708.

There is a split among the courts as to whether the Thompson rational has any relevancy with respect to pre-petition citation liens.  The case of In re Smiley, 2018 WL 385374 (Bankr.N.D.Ill.), detailed this dispute.  In Smiley, the debtor argued that Bank of America willfully violated the automatic stay by refusing to take affirmative steps to release funds in the debtor’s bank accounts at JP Morgan Chase Bank, frozen pursuant to a pre-petition citation proceeding.  The court held that “[w]hile the automatic stay prohibits a creditor from foreclosing on the citation lien, it does not require the creditor to give up the lien.” Id. at *2,  In other words, “the automatic stay does not require a judgment creditor to dismiss a citation proceeding and thereby give up the citation lien.” Id.

The Smiley court distinguished treatment of prepetition liens from that under Thompson’s.  First, it stated that a creditor with a citation lien on bank funds is not in possession or control of the funds.  Rather, the bank served with the citation is required to hold the funds, with a court order required to terminate the citation proceeding or otherwise release the funds. Id. at *3.  In Thompson, the creditor had possession of the car and could have made it available to the debtor without approval from a court.  Second, a creditor with a security interest in a vehicle is materially different than a creditor with a citation lien.  The court noted that “In Thompson, the creditor’s lien was created by a written security agreement with the debtor that would continue to be valid whether the creditor kept possession of the vehicle or not.” Id.  However, in the case of a citation lien on a bank account, once the funds in the account are released, the creditor loses its lien on those funds. Id.  Recognizing that the Bankruptcy Code provides a number of potential grounds to attack or avoid a lien but “until such an action is filed and succeeds, a creditor retains its pre-petition lien rights in bankruptcy.” Id. at *4.

An opposing decision was reached in In re Rose, 2012 WL 4511342 (N.D.Ill.).  Rose, involved a debtor who filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code.  Prior to the petition, a judgment creditor caused a Citation to Discover Assets to Third Party (the “Citation”) to be served on the debtor’s bank.  The bank placed an administrative hold on debtor’s bank accounts pursuant to the Citation.  At the time of the filing, the Debtor had $767 on deposit in the bank.  A paralegal at the debtor’s counsel’s office, called the judgment creditor to inform it of the bankruptcy case and requested that it take steps to release the hold on debtor’s bank accounts.  However, the judgment creditor stated that it required an order from the bankruptcy court to release the hold.

Rose held that §362(a) is clear: the provision operates to stay the continuation of all judicial proceedings which includes the maintenance of collection actions filed in state court”  It then concluded that the judgment creditor continued its collection proceeding when it refused to take steps to release the hold upon learning of the bankruptcy petition.  “At that point, it was [the judgment creditor’s] duty to take steps to dismiss the Citation.  Instead, [it] refused and demanded that Debtor obtain a court order.”  This refusal, the court explained, was a continuation of the citation proceeding which violated §362(a)(1).

The citation proceeding against Debtor commenced by Adler constituted a judicial proceeding against Debtor or to recover a claim against Debtor, and Adler’s refusal to discontinue the proceeding and have the funds released was a violation of §362(a)(1).

Id. at *4.

 

Matthew T. Gensburg
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