In re Carlsen

• Decision Date: 15 August 1986
• Docket Number: Adv. No. LA 85-2258-GM.,Bankruptcy No. LA 85-10591-GM
• Citation: 63 BR 706
• Court: U.S. Bankruptcy Court — Central District of California
• Parties: In re Ben Alfred CARLSEN, Jr., aka Ben A. Carlsen, Jr., Debtor. Ben Alfred CARLSEN, Jr., aka Ben A. Carlsen, Jr., Plaintiff, v. INTERNAL REVENUE SERVICE, Defendant.

63 B.R. 706 (1986)

In re Ben Alfred CARLSEN, Jr., aka Ben A. Carlsen, Jr., Debtor Ben Alfred CARLSEN, Jr., aka Ben A. Carlsen, Jr., Plaintiff, v. INTERNAL REVENUE SERVICE, Defendant.

Bankruptcy No. LA 85-10591-GM, Adv. No. LA 85-2258-GM.

United States Bankruptcy Court, C.D. California.

August 15, 1986.

COPYRIGHT MATERIAL OMITTED

Richard I. Kohn, Hagen & Hagen, Encino, Cal., for plaintiff Carlsen.

Mason C. Lewis, Office of the U.S. Atty., Los Angeles, Cal., for defendant I.R.S.

MEMORANDUM OF OPINION

GERALDINE MUND, Bankruptcy Judge.

This Complaint was filed by the debtor alleging a violation of the automatic stay provision of 11 U.S.C. § 362 by the defendant, the Internal Revenue Service. The debtor seeks damages, the turnover of property to the estate pursuant to 11 U.S.C. § 542(a), and injunctive relief restraining the Internal Revenue Service from further levies on the debtor's salary.

The following constitutes findings of fact and conclusions of law as required by bankruptcy rule 7052. This is a core proceeding, 28 U.S.C. § 157(b)(2)(F), (I). The facts of this case are undisputed and are as follows:

On July 26, 1985, the Internal Revenue Service presented to Carlsen's employer, the Los Angeles County Auditor, Controller's Office, a notice of levy on wages, salary, and other income. On July 31, 1985, Carlsen filed a Chapter 7 petition. The monthly payroll checks issued by the County between August 15, 1985 and August 31, 1985 covered wages earned by its employees during the preceding month. On August 29, 1985, the Internal Revenue Service received a check from the County dated August 15, 1985, in the amount of $1,218.16.

It is undisputed that prior to Carlsen's payday of August 15, 1985, the Internal Revenue Service was aware of the pendency of the bankruptcy case, acknowledged the existence of the bankruptcy, and believed that the levy could still go forward because the property levied upon was wages earned prior to the bankruptcy. On August 29, 1985 the Internal Revenue Service issued to the County a release of levy on wages, salary, and other income.

There are essentially two issues before this Court:

Whether Carlsen's wages held by his employer on the date of filing, which were earned pre-petition and subject to the Internal Revenue Service's pre-petition levy, are property of the estate. If they are property of the estate, did the Internal Revenue Service violate the automatic stay of 11 U.S.C. § 362?

The Internal Revenue Service's argument that the wages are not property of the estate appears to be two-fold. First, the Internal Revenue Service contends that the wages were earned pre-petition and the mere issuance of the payroll check post-petition should not deprive the wages of the character as pre-petition earnings. Second, they claim that the Internal Revenue Service's pre-petition levy divested the debtor of any interest, equitable or otherwise, in the wages and therefore the wages cannot be characterized as property of the estate under 11 U.S.C. § 541.

Judge David L. Crawford, Bankruptcy Judge from Nebraska, confronted a situation similar to the facts and issues at hand in the case of Matter of Cudaback, 22 B.R. 914 (Bankr.Neb.1982). In Cudaback, on January 28, 1981, the Internal Revenue Service served a notice of levy on Cudaback's employer. On February 2, 1981, Cudaback filed a petition in bankruptcy under Chapter 13. On February 9, 1981, after receiving a Release of Levy with the effective date of February 2, 1981, Cudaback's employer forwarded a check for $483.72 to the Internal Revenue Service. The check represented wages earned by Cudaback during the pay period from January 11 through the 24th, less wage withholdings and less an amount of wages exempted from levy by statute. The Court, confronted by the issue of whether the wages were property of the estate, examined the language of § 541.

Under § 541, property of the estate includes ". . . all legal or equitable interest of the debtor in property as of commencement of the case." Noting that the United States Supreme Court has concluded that title to property seized or levied upon does not pass simply by virtue of the levy or seizure, the Court held that notwithstanding the Internal Revenue Service levy, the wages earned by Cudaback in the hands of her employer on the date of the petition are something she retains a legal or equitable interest in and therefore are property of the estate. Cudaback, supra, at 918 (citing, Bennett v. Hunter, 9 Wall. 326, 76 U.S. 326, 19 L.Ed. 672 (1869)).

Both parties submitted trial memoranda, setting forth their legal arguments, but citing absolutely no authority for them. The Court has had to guess on what basis the I.R.S. could possibly have argued that its pre-petition levy divests the debtor of any interest in the wages so that the wages are not property of the estate. It cites no authority for this position and fails to advise the Court of the Cudaback opinion, which is directly to the contrary.¹

It appears possible that the Internal Revenue Service relied on Riddervold v. Saratoga Hospital, 647 F.2d 342 (2d Cir.1981), and its progeny.² Although Riddervold was a preference case, the theory of whether or not a garnishment transfers property of the debtor or merely creates a lien on it is the same issue as is raised in this case. The Riddervold Court based its decision on New York state law, which holds that the execution of a garnishment terminates all property interest that a debtor could obtain in his future wages. Id. at 346, See also Matter of Coppie, 728 F.2d 951, 952 (7th Cir.1984). The theory discussed in Riddervold is commonly called the "Continuing Levy Theory" and the Internal Revenue Service is arguing that it applies to divest the debtor and the estate of any interest in the wages.

However, "if it makes sense at all, the `continuing levy' concept offered in Riddervold operates only in a state which would recognize execution of the original writ of garnishment as accomplishing the complete end to the debtor's legal and equitable rights in future wages." In re Perry, 48 B.R. 591, 596 (Bankr.M.D.Tenn.,1985). This is simply not the case in California. Under California law, the service of an Earnings Withholding Order merely creates a lien upon the earnings and does not divest the debtor of all legal and equitable rights in the wages.³ Accordingly, the "continuing levy" theory is simply not applicable in California.

Consequently, this Court concurs with the conclusion in Cudaback. It is an absurd argument under California law that the service of notice of levy on wages deprives the debtor herein of all legal or equitable interest in the wages. In light of the foregoing analysis, this Court holds that the wages held by the debtor's employer on the date of the filing of this Chapter 7 petition were property of the estate and, thus, became subject to the automatic stay of 11 U.S.C. § 362.

Having found that the automatic stay provision of 11 U.S.C. § 362 applies, the next issue is whether the Internal Revenue Service violated the stay. There are two possible violations of the stay which must be considered. First, did the I.R.S. release its levy within a reasonable period of time after notice of the bankruptcy?

11 U.S.C. § 362(a) provides:

. . . a petition . . . operates as a stay applicable to all entities, of—

(3) any act to obtain possession of property of the estate or on property from the estate or to exercise control over property of the estate;

(4) any act to create, perfect, or enforce any lien against property of the estate;

(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title.

In order to give effect to § 362, one of the most fundamental debtor protections provided by the bankruptcy law, positive action on the part of the creditor may be required in order to halt the continuation of the garnishment. In re Baum, 15 B.R. 538, 541 (Bankr.E.D.Va.1981); In re Elder, 12 B.R. 491, 494-495 (Bankr.M.D. Ga.1981). In re O'Connor, 42 B.R. 390, 392 (Bankr.E.D.Ark.1984). "It is the creditor's responsibility to stop the downhill snowballing of a continuing garnishment." Baum, supra, at 541. Accordingly, the creditor must release the levy within a reasonable period of time after notice of the bankruptcy and failure to do so is a violation of § 362. See, In re Baum, 15 B.R. 538 (Bankr.E.D.Va.1981); In re Elder, 12 B.R. 491 (Bankr.M.D.Ga.1981). What is a reasonable period of time within which to release the levy? There is no concrete time period; what is reasonable under the circumstances must be determined on a case by case basis.

It is incumbent upon the creditor to release its lien without delay as soon as it is aware of the bankruptcy and of the legal effects of that bankruptcy. Naturally this Court would not chastise a creditor for seeking legal counsel before it acts. But any delay in obtaining that legal advice is unwarranted and a violation of the...