Bank of Am., N.A. v. Johnson (In re Johnson)

• Decision Date: 25 September 2012
• Docket Number: No. 12–50338–PWB.,12–50338–PWB.
• Citation: 479 B.R. 159
• Parties: In the Matter of Albert F. JOHNSON, III, Debtor. Bank Of America, N.A. Movant, v. Albert F. Johnson, III, Respondent; and Crowne Aviation Services, LLC, Intervening Party.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

479 B.R. 159

In the Matter of Albert F. JOHNSON, III, Debtor.Bank Of America, N.A. Movant,

v. Albert F. Johnson, III, Respondent;andCrowne Aviation Services, LLC, Intervening Party.

No. 12–50338–PWB.

United States Bankruptcy Court,

N.D. Georgia,

Atlanta Division.

Sept. 25, 2012.

Jeff Golomb, Krause Golomb & Witcher LLC, NE Atlanta, GA, for Debtor.

Beth E. Rogers, Rogers Law Offices, Atlanta, GA, for Movant.

Jeff Golomb Krause Golomb & Witcher, LLC, Atlanta, GA, for Intervening Party.

ORDER

PAUL W. BONAPFEL, Bankruptcy Judge.

This Order deals with several issues arising out of the prepetition garnishment by Bank of America, N.A. (the “Bank”) of the wages of the Chapter 7 debtor, Albert F. Johnson, III (the “Debtor”), owed by Crowne Aviation Services, LLC (the “Employer”).

Three of them involve the automatic stay of 11 U.S.C. § 362(a). The first is whether the stay applied to prevent the Bank from pursuing a claim in the garnishment action against the Debtor's Employer based on its failure to comply with the garnishment summons. If so, the questions are whether the Debtor is entitled to damages and whether cause exists under § 362(a) to modify the stay to permit the Bank to pursue the claim against the Employer.

The other issues are whether the Debtor may exempt the funds that the Bank seeks to recover from the Employer and avoid the Bank's lien on them under 11 U.S.C. § 522(f). The answers to these questions are usually not complicated. The automatic stay applies to a garnishment action, a debtor may claim an exemption in garnished wages that the creditor has not yet received (to the extent of applicable limits on the debtor's exemptions), and the debtor may avoid a garnishment lien as a judicial lien under § 522(f). Unless the bankruptcy court sustains a valid objection to a debtor's exemption of the funds or denies the debtor's motion to avoid the creditor's lien, the debtor is entitled to the funds. So unless the bankruptcy court determines that the debtor cannot obtain the funds, there is no cause to lift the stay to permit a creditor to pursue anything in the garnishment action.

The Bank contends that these rules do not apply here because its claim against the Employer is based on the Employer's failure to respond properly to the garnishment summons. Because it has an independent claim against the Employer that does not involve a claim against the Debtor, his property, or property of the estate, the Bank concludes that the automatic stay does not apply and that the Debtor has nothing to exempt.

I. Procedural Background

After obtaining a judgment against the Debtor, the Bank filed a wage garnishment action against his Employer. The last day for the Employer to answer the garnishment summons was the same date the Debtor filed his Chapter 7 petition, pro se. The bankruptcy filing occurred about an hour and a half before the garnishment court's clerk's office closed.

About a month after the filing of the case, the Bank filed a motion for relief from the automatic stay (the “Stay Motion”) to permit it to proceed against the Employer.¹ The Stay Motion asserts that the Employer had failed to file an answer in the garnishment action, that the Debtor had no interest in funds garnished from prepetition wages, and that wages that an employer is holding at the time of a bankruptcy filing are not property of the estate. Two days after filing the Stay Motion, the Bank filed motions in the garnishment court seeking entry of default judgment against the Employer or, alternatively, a hearing to determine the Employer's liability for failure to answer the garnishment summons.

Both the Debtor, now represented by counsel,² and the Employer oppose the Stay Motion.³ They contend that the automatic stay applied to the garnishment action and that, therefore, the Employer is not in default because the bankruptcy filing occurred before its answer was due. The Debtor, but not the Employer, seeks sanctions for violation of the stay under 11 U.S.C. § 362(k). The Debtor also asserts that he is entitled to exempt any garnished funds and to avoid the creditor's lien under § 522(f). ⁴ The Bank objects to the exemption of, and the avoidance of its lien on, the funds.⁵

During the course of the bankruptcy case, the Bank learned that the Employer had not withheld any wages from the Debtor in response to the garnishment summons. The Bank did not assert this fact in its Stay Motion, but it now contends that the automatic stay did not apply to the prosecution of its claim against the Employer because it is based on the Employer's independent liability for failure to answer the garnishment summons and, as such, is not an action against the Debtor or property of the estate that the automatic stay prohibits.

Pursuant to Fed.R.Civ.P. 52(a), applicable under Fed. R. Bankr.P. 7052 and 9014, Part II of this Order states the Court's findings of fact, which are undisputed, with regard to these issues, and Parts III through VII state its conclusions of law.⁶ The Court summarizes its ruling here.

First, the Court concludes that the automatic stay applies to a garnishment action in its entirety, including its continuation to prosecute a claim to establish a garnishee's independent liability unless that liability has been established through an unmodifiable judgment prior to the filing of the bankruptcy petition. (Part IV). This means that the Employer was not in default at the time of the filing of the bankruptcy case, that continuation of the garnishment action violated the automatic stay, and that the Bank is subject to damages under § 362(k) for violation of the stay. The Court will give consideration to the question of damages in further proceedings in accordance with its directions in Part VII.

Second, because the parties agree that the Employer did not withhold funds from the Debtor's prepetition wages, the Debtor has no property interest in the funds in question. Accordingly, the Debtor has nothing to claim as exempt, and he cannot avoid the Bank's lien under § 522(f) with regard to the funds the Bank seeks from the Employer. (Part V).

Third, because the Bank's claim against the Employer exists independently of its claim against the Debtor and is not a claim against property of the estate or against the Debtor or his property, cause exists to modify the automatic stay to permit the Bank to pursue its claim against the Employer based on the Employer's independent liability. To provide the Employer an opportunity to respond to the garnishment summons, the Court will modify the stay immediately to permit the employer ten days to file an answer and defer modification of the stay to permit the Bank to proceed until that time has expired. (Part VI).

II. Facts

The Bank obtained a judgment against the Debtor in the amount of $156,305, plus interest and costs on April 29, 2011.⁷ On August 4, 2011, the Bank filed a continuing wage garnishment action against the Employer in the State Court of Fulton County but did not effect service of summons of garnishment until November 18, 2011.⁸

The Employer was required to file an answer to the summons of garnishment no later than January 3, 2012.⁹ At 3:35 p.m. on that date, the Debtor filed a Chapter 7 bankruptcy case,¹⁰ about an hour and a half before the Clerk's office of the State Court of Fulton County closed at 5:00 p.m. ¹¹ The Employer did not file an answer on January 3.¹²

On January 18, 2012, the Bank filed a Notice of Bankruptcy in the garnishment action ¹³ and a notice of appearance in this case.¹⁴ On January 20, the Bank received an answer to the summons of garnishment, but the Employer did not file it in the garnishment court until January 30, 2012. ¹⁵ The Employer's answer stated only that the Debtor had filed a bankruptcy case on January 3. It did not state what wages the Debtor had earned during the applicable period and did not calculate the amount of wages subject to garnishment. The Employer did not remit any funds to the garnishment court.

On February 1, the Bank filed its Stay Motion. It seeks relief from the automatic stay to proceed against the Employer in the garnishment action. The Stay Motion asserted that the Employer had not filed an answer in the garnishment action,¹⁶ that the Debtor had no interest in funds garnished from prepetition wages,¹⁷ and that wages that an employer is holding at the time of a bankruptcy filing are not property of the estate. ¹⁸

Two days after filing the Stay Motion, on February 3, the Bank filed two papers in the garnishment action seeking relief against the Employer.

The first was a motion for default judgment in the amount of $156,305.55 plus accrued interest, attorney's fees, and costs,¹⁹ a total amount in excess of $210,000.²⁰ This motion stated that the Employer had served an answer but asserted that the Employer was in default because it had not filed it. The motion also asserted that the Employer was in default because the answer did not set forth the wages subject to garnishment and the amount due and because the Employer did not pay any funds into the garnishment court.²¹ The motion referred to the Debtor's bankruptcy filing but offered no reason why the automatic stay did not apply to suspend the requirement of an answer on January 3.²²

The second paper was a traverse of the unfiled answer,²³ which the Bank filed alternatively, to the extent the Employer's response was considered timely.²⁴ The traverse asserted that the purported answer was “untrue or legally insufficient” because of the deficiencies just mentioned.²⁵ The Bank concluded its traverse with a request for the garnishment court to set a hearing and enter judgment for the entire amount of its debt.²⁶

Unlike its motion for default judgment, the Bank's traverse did address the automatic stay. Referring to wages owed prior to the filing of the bankruptcy case, the traverse stated that the Employer “was required to seize and turn these funds over to the garnishment court together...