In re Newberry
| Decision Date | 15 August 2019 |
| Docket Number | Case No. 19-30726-jda |
| Parties | IN RE: Joshua Aaron NEWBERRY, Debtor. |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan |
James P. Frego, II, Frego & Assc.-The Bankruptcy Law Office, Eric P. Mulka, Glen Turpening, David Samuel Wilkinson, Frego & Associates, P.L.C., Dearborn Heights, MI, for Debtor.
The matter before the Court is Debtor's motion to hold RPM Auto Sales, Inc. in contempt for violating the automatic stay by retaining funds received from the garnishment of Debtor's state tax refund. For the reasons set forth below, this Court GRANTS Debtor's motion for contempt for violation of the automatic stay and for actual damages. Debtor has fifteen days to submit support for his request for actual costs under § 362(k) of the Bankruptcy Code.
This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (O), over which this Court has jurisdiction pursuant to 28 U.S.C. § 1334. An order awarding damages under § 362(k)(1) of the Bankruptcy Code is a final order. See In re Webb , 2012 WL 2329051 at *5 (6th Cir. BAP Apr. 9, 2012). "[B]ecause ‘[a] claim under § 362(k)(1) for an automatic stay violation ... derives directly from the Bankruptcy Code’ and ‘necessarily stems from the bankruptcy itself,’ the Court has the constitutional authority to enter a final order in this matter after Stern v. Marshall , 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011)." In re Johnson , 580 B.R. 766, 769 (Bankr. S.D. Ohio 2018) (internal citations omitted).
The facts of this case are uncontested. On July 23, 2018, RPM filed a Request and Writ for Garnishment (Income Tax Refund/Credit) (the "Writ") against Debtor in the District Court for the 73A Judicial District located in Sandusky, Michigan. The district court issued the Writ on July 31, 2018. In the portion of the Writ addressed "TO THE DEFENDANT ," the Writ states:
You have 14 days after being notified of an intercept to file objections to the writ of garnishment with the court. If you do not object within this time, the intercepted tax refund or credit held under this writ will be applied to the judgment 28 days after the disclosure was filed with the court. (emphasis in original)
On November 1, 2018, the Writ was served on both the State of Michigan and Debtor. Sometime prior to March 5, 2019, Debtor filed his 2018 State of Michigan Income Tax Return and, on March 5, 2019, the Michigan Department of Treasury issued its Garnishment Disclosure, serving both RPM and Debtor. The Garnishment Disclosure stated that Debtor's 2018 State of Michigan income tax refund in the amount of $665.43 would be sent to RPM care of its counsel in "28 days from the date of the Garnishment Disclosure" and, further, "[I ]f a garnishment release, satisfaction of judgment, or bankruptcy notice (validated by the court) is received in our office within the 28 days, we [State of Michigan] will issue a refund to the principal defendant or bankruptcy trustee if there are no other debts to be paid." (emphasis added). The Garnishment Disclosure form did not indicate that the 14-day objection period had begun to run.
On March 26, 2019, after the expiration of the 14-day objection period but within the 28-day bankruptcy notice period, Debtor filed his voluntary petition under chapter 7 of the Bankruptcy Code. RPM was properly notified of Debtor's bankruptcy filing on that day.2 On April 1, 2019, RPM received a check from the Michigan Department of Treasury in the amount of $655.43 as a result of RPM's garnishment.
On at least one occasion, Debtor's counsel spoke with RPM's counsel and requested that the refund be turned over to Debtor. RPM refused counsel's request. On May 15, 2019, Debtor filed this Motion to Hold RPM Auto Sales, Inc. in Contempt of Court for Violation of the Automatic Stay on the grounds that RPM's acceptance of the tax refund, and its subsequent refusal to turn the money over to Debtor, constituted violations of the automatic stay. Debtor seeks the garnished funds, along with attorneys' fees and costs pursuant to 11 U.S.C. § 362(k)(1). Debtor is not seeking punitive damages in this case.
On June 5, 2019, RPM filed its response to Debtor's Motion, arguing that the tax refund was not property of Debtor or the bankruptcy estate and, therefore, RPM's retention of the funds could not be a stay violation. RPM also argues that the post-petition receipt of an income tax refund resulting exclusively from a pre-petition garnishment is not an act in violation of the automatic stay. A hearing on the motion was held on July 24, 2019, at which time the Court took the matter under advisement.
There are two issues now before the Court. First, did RPM violate the automatic stay when it received the tax refund and then refused to turn it over to Debtor and, second, if RPM violated the automatic stay, was the violation willful such that Debtor is entitled to an award of actual damages, including attorney's fees and costs, pursuant to § 362(k)(1) of the Bankruptcy Code ? The Court has reviewed the excellent papers submitted by the parties and has had the opportunity to consider this matter fully. For the reasons explained below, the Court concludes that RPM willfully violated the automatic stay and, therefore, Debtor's motion is GRANTED.
The automatic stay prohibiting certain actions against the debtor or property of the bankruptcy estate goes into effect immediately upon the filing of a bankruptcy petition. It is considered "one of the fundamental debtor protections provided by the bankruptcy laws." Midlantic Nat'l Bank v. New Jersey Dep't of Envtl. Prot. , 474 U.S. 494, 503, 106 S.Ct. 755, 88 L.Ed.2d 859 (1986). The automatic stay is designed to provide blanket relief from creditor action once the bankruptcy case has commenced to provide breathing space so that the debtor may reorganize his or her affairs. In re Banks , 253 B.R. 25, 29 (Bankr. E.D. Mich. 2000). The protections provided by the automatic stay are set forth in 11 U.S.C. § 362(a), which provides in pertinent part:
The automatic stay also protects against actions against the debtor or property of the debtor. As used in § 362(a), the "stay protects exempt assets that cease to be property of the estate and assets acquired after the commencement of a case ...," 3 Collier on Bankruptcy ¶ 362.03[4] (Richard Levin & Henry J. Sommers eds., 16th ed.) and Id. at ¶362.03[7].
Under § 541(a)(1), property of the estate includes "all or legal or equitable interests of the debtor in property as of the commencement of the case." " ‘[T]he term ‘property’ has been construed most generously and an interest is not outside its reach because it is novel or contingent or because enjoyment must be postponed’.... In fact, every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative, is within the reach of § 541." In re Yonikus , 996 F.2d 866, 869 (7th Cir. 1993), abrogated on other grounds by Law v. Siegel , 571 U.S. 415, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014). Even a bare possessory interest such as a tenancy at sufferance, is "an interest in real property within the scope of the estate in bankruptcy under section 541." Convenient Food Mart No. 144, Inc. v. Convenient Ind. Of America, Inc. (In re Convenient Food Mart No. 144, Inc.) , 968 F.2d 592, 594 (6th Cir. 1992) (internal citations omitted).
Although the issue of what property is included in the debtor's bankruptcy estate raises a federal question, a debtor's property rights are created and defined by state law. Barnhill v. Johnson , 503 U.S. 393, 398, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992) ; Corzin v. Fordu (In re Fordu) , 201 F.3d 693, 700 (6th Cir. 1999). Here, the applicable state law is Mich. Comp. Laws §§ 600.4061 and 600.4061a, which address the procedures governing garnishments of state tax refunds.
Section 600.4061 sets out the procedures a plaintiff must follow in a garnishment proceeding in which the State of Michigan is the garnishee. Section 600.4061a, in turn, sets forth the obligations of the State as garnishee in responding to a properly served writ of garnishment. Under this section, barring a timely objection, the state treasurer is required to intercept a state tax refund, calculate the amount available from the interception to satisfy all or part of the garnishment, file with the court and serve a garnishment disclosure upon the plaintiff and defendant, and either deposit the money into the court or pay it to plaintiff's attorney of record in the garnishment action....
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