In re Dungey

• Decision Date: 02 May 1989
• Docket Number: Bankruptcy No. 2-88-06544.
• Citation: 99 BR 814
• Parties: In re Ramona Denise DUNGEY, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

99 B.R. 814 (1989)

In re Ramona Denise DUNGEY, Debtor.

Bankruptcy No. 2-88-06544.

United States Bankruptcy Court, S.D. Ohio, E.D.

May 2, 1989.

Herbert L. Lawrence, Columbus, Ohio, for debtor.

Norman M. Frank, Columbus, Ohio, for Beneficial Financial, Inc.

Charles M. Caldwell, Office of U.S. Trustee, Asst. U.S. Trustee, Columbus, Ohio.

OPINION AND ORDER

R. GUY COLE, Jr., Bankruptcy Judge.

I. Preliminary Statement

This matter is before the Court upon the motion for sanctions ("Motion") filed by Ramona Denise Dungey, the debtor in this Chapter 7 case ("Debtor"). Debtor's Motion seeks monetary damages and the imposition of sanctions against Bencharge Credit Service ("Bencharge"). This contested matter came on for hearing on April 25, 1989. The Court has jurisdiction over this case pursuant to 28 U.S.C. § 1334(b) and the General Order of Reference entered in this district. This is a core proceeding which the Court is empowered to hear and determine in accordance with 28 U.S.C. § 157(b)(1) and (2)(A), (E) and (G). See, Budget Service Company v. Better Homes of Virginia, 804 F.2d 289 (4th Cir.1986). The following Opinion and Order shall constitute the Court's findings of fact and conclusions of law pursuant to Bankruptcy Rule ("B.R.") 7052.

II. Factual Findings

1. Debtor filed a petition under Chapter 7 of the Bankruptcy Code on December 21, 1988;

2. The schedules accompanying Debtor's petition listed Bencharge and The Living Room ("Living Room") as holders of claims against the Debtor. There is no dispute that Bencharge and Living Room received notice of the filing of Debtor's Chapter 7 bankruptcy case from the Bankruptcy Clerk;

3. Prior to the filing of her bankruptcy petition, Living Room and Bencharge had instituted separate collection actions and received judgments against the Debtor in the Franklin County Municipal Court. In connection therewith, both Bencharge and Living Room caused Affidavits and Orders of Garnishment of Personal Earnings ("Garnishment Order") to be entered by the Franklin County Municipal Court. The date upon which Living Room filed its Garnishment Order is unknown. Bencharge filed its Garnishment Order with the Municipal Court on December 16, 1988;

4. Pursuant to the Garnishment Order filed by Bencharge, a deduction of approximately $140 was made from the January, 1989, paycheck issued to Debtor by her employer, The Ohio State University Hospitals. A garnishment withholding in the amount of approximately $122 also was made from Debtor's February, 1989, paycheck as a result of the Garnishment Order previously filed by Living Room. This latter amount was returned to Debtor in full after a demand for turnover of the garnished funds was made by Debtor's counsel. Bencharge has retained the $140 garnisheed from the Debtor's wages which remain in the custody of its counsel, Norman M. Frank ("Frank"); and

5. On February 1, 1989, Debtor personally filed a handwritten suggestion of stay with the Franklin County Municipal Court. The suggestion of stay reflects that it was served upon Bencharge.

III. Conclusions of Law

Section 362 of the Bankruptcy Code generally provides for the automatic stay of any and all proceedings against the debtor once a bankruptcy petition is filed. The automatic stay's importance is echoed in the legislative history of § 362, which provides in pertinent part that:

The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.

H.R.Rep. No. 595, 95th Cong. 1st Sess. 340-42 (1977); S.Rep. No. 989, 95th Cong. 2d Sess. 54-55 (1978); reprinted in 1978 U.S.Code Cong. & Admin.News 5787 at 5840 and 6296-97. The consequences of violating the automatic stay provisions are set forth in § 362(h), which 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."

11 U.S.C. § 362(h); Archer v. Macomb County Bank, 853 F.2d 497, 499 (6th Cir. 1988); In re Holman, 92 B.R. 764, 767-68 (Bankr.S.D.Ohio 1988).

Actions by creditors to collect a debt from the debtor, which are taken after the filing of a bankruptcy petition, are void ab initio and of no legal effect. See, Kalb v. Feuerstein, 308 U.S. 433, 60 S.Ct. 343, 84 L.Ed. 370 (1940); Borg-Warner Acceptance Corp. v. Hall, 685 F.2d 1306 (11th Cir.1982); In re Eisenberg, 7 B.R. 683 (Bankr.E.D.N.Y.1980). Such actions are invalid even though the creditor had no notice of the bankruptcy filing. In re Miller, 10 B.R. 778 (Bankr.D.Md.1981), aff'd., 22 B.R. 479 (D.Md.1982); In re Stephen W. Grosse, P.C., 68 B.R. 847 (Bankr.E.D.Pa. 1987). Lack of notice on the part of the creditor of the bankruptcy case means only that his action was not willful and, therefore, not contemptuous. See, Fidelity Mortgage Investors v. Camelia Builders, Inc., 550 F.2d 47 (2d Cir.1976), cert. denied, 429 U.S. 1093, 97 S.Ct. 1107, 51 L.Ed.2d 540 (1977); Matter of Endres, 12 B.R. 404 (Bankr.E.D.Wis.1981).

A creditor who has initiated collection action without knowledge of a bankruptcy petition has an affirmative duty to restore the status quo without the debtor having to seek relief from the Bankruptcy Court. See, Miller, 10 B.R. at 780, aff'd., 22 B.R. 479, 481 (D.Md.1982); Endres, 12 B.R. at 406 (holding that "refusal to return the property upon learning of the proceeding is a willful violation of the stay provisions and may be contemptible"); Wariner v. First State Bank of Livingston (In re Wariner), 16 B.R. 216, 218 (Bankr.N.D. Tex.1981) ("creditor has an affirmative duty to return the property and restore the status quo once it learns its actions violated the stay"); Matter of Clark, 60 B.R. 13, 14 (Bankr.N.D.Ohio 1986) ("creditor who violates the automatic stay has an affirmative duty to return the property and restore the status quo once it learns its actions violate the stay"); Grosse, 68 B.R. at 850 ("creditor should undo its postpetition collection activities without the debtor having to seek affirmative relief from bankruptcy court"). The rationale which underpins this sound rule of law was aptly summarized by the district court in its affirmance of the bankruptcy judge's imposition of sanctions in Miller 10 B.R. 778:

The courts have been quick to realize that creditor inaction can often be as disruptive to the debtor as affirmative collection efforts. E.g., In re Elder, 12 B.R. 491, 494 (Bankr.M.D.Ga.1981) ("No action is unacceptable; no action is action to thwart the effectiveness of the automatic stay.") In recognition of this problem, creditors have been required, when necessary, to take affirmative steps to restore the status quo at the time of the filing of the petition for relief. See In re Norton, 15 B.R. 627 (Bankr.E.D.Pa.1981) (retention of tax refund by I.R.S. held contemptuous); In re Howren, 10 B.R. 303 (Bankr.D.Kan.1981) (withholding by university of debtor\'s transcript violated automatic stay); In re Eisenberg, 7 B.R. 683 (Bankr.E.D.N.Y.1980) (refusal by city to withdraw tax lien from tax lien sale contemptuous). To place the onus on the debtor, as the Bank would have the Court do, to take affirmative legal steps to recover property seized in violation of the stay would subject the debtor to the financial pressures the automatic stay was designed to temporarily abate, and render the contemplated breathing spell from his creditors illusory.

22 B.R. at 481.

Bencharge asserts that because the garnishment was commenced on a prepetition basis, its conduct should not be found to be contemptuous. Inasmuch as it took no affirmative collection action postpetition, Bencharge argues, the imposition of sanctions pursuant to 11 U.S.C. § 362(h) would not be appropriate. This argument is patently absurd. As the foregoing discussion has demonstrated, a creditor has an affirmative obligation to halt all collection activity and restore the status quo which was altered by its actions upon learning of the filing of a bankruptcy petition. This rule is derived from the plain language of § 362(a)(1) of the Code which stays "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 a case under this title. . . ." 11 U.S.C. § 362(a)(1) (emphasis added). Courts construing the foregoing language in the context of a garnishment proceeding have held that "at whatever stage the garnishment is, the creditor's attorney must do everything he can to halt the proceeding." O'Connor v. Methodist Hospital of Jonesboro, Inc. (In re O'Connor), 42 B.R. 390, 392 (Bankr.E.D.Ark. 1984). The rationale underlying this rule was articulated in Elder v. City of Thomasville, Georgia (In re Elder), 12 B.R. 491, 494-95 (Bankr.M.D.Ga.1981), wherein the bankruptcy court stated:

Part of what is stayed in 11 U.S.C. § 362 is "continuation." Garnishment involves a creditor, a garnishee, and a court. Creditor sets in motion the process. Creditor is in the driver\'s seat and very much controls what is done thereafter if it chooses. If the "continuation" is to be stayed, it cannot choose to do nothing and pass the buck to the garnishee or the court in which the garnishment is filed to effectuate the stay. Positive action on the part of the creditor is necessary so that "continuation" may be stayed.

The creditor can stop the snowball by dismissing the garnishment. In these facts this is the practical thing to do as the creditor would reap no benefits, and this has been what creditors have done since the advent of the automatic stay in 1973. If not dismissal, then creditors

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