In re Preston

• Decision Date: 07 October 2008
• Docket Number: Bankruptcy No. 08-20141.,Adversary No. 08-2017.
• Citation: 395 B.R. 658
• Parties: In re Nicole PRESTON, Debtor. Nicole Preston, Plaintiff, v. GMPQ, LLC., Defendant.
• Court: U.S. Bankruptcy Court — Western District of Missouri

Page 658

395 B.R. 658

In re Nicole PRESTON, Debtor.

Nicole Preston, Plaintiff, v. GMPQ, LLC., Defendant.

Bankruptcy No. 08-20141.

Adversary No. 08-2017.

United States Bankruptcy Court, W.D. Missouri.

October 7, 2008.

J. Brian Baehr, Baehr Law Firm, P.C., Columbia, MO, for Plaintiff.

Richard L. Beaver, Jefferson City, MO, for Defendant.

MEMORANDUM OPINION AND ORDER

DENNIS R. DOW, Bankruptcy Judge.

This adversary comes before the Court on competing Motions for Summary Judgment filed by Nicole Preston ("Plaintiff" or "Debtor") and GMPQ, LLC ("Defendant"). Plaintiff seeks that the Defendant be held liable for a willful violation of the automatic stay provisions of 11 U.S.C. § 362(a). Defendant denies that collection of sequestered funds amounts to a violation of the automatic stay and contends that any violation of the stay was not willful under § 362(k)(1). This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), (E) and (O), over which the Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b), 157(a), and 157(b)(1). The following constitutes my Findings of Fact and Conclusions of Law in accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure. For the reasons set forth below, the Court denies in part and grants in part Plaintiff's Motion for Summary Judgment and denies Defendant's Counter-Motion for Summary Judgment.

I. STANDARD FOR SUMMARY JUDGMENT

Federal Rule of Bankruptcy Procedure 7056(c), applying Federal Rule of Civil Procedure 56(c), provides that summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); Fed. R. Bankr.P. 7056; Celotex v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The party moving for summary judgment has the initial burden of proving that there is no genuine issue as to any material fact. Adickes v. S.H. Kress & Co., 398 U.S. 144, 161, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970). Once the moving party has met this initial burden of proof, the non-moving party must set forth specific facts sufficient to raise a genuine issue for trial and may not rest on its pleadings or mere assertions of disputed facts to defeat the motion. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). When reviewing the record for summary judgment, the court is required to draw all reasonable inferences in favor of the non-movant; however, the court is "not required to draw every conceivable inference from the record-only those inferences that are reasonable." Bank Leumi Le-Israel, B.M. v. Lee, 928 F.2d 232, 236 (7th Cir.1991).

II. FACTUAL BACKGROUND

The following factual summary was taken from Plaintiffs statement of uncontroverted material facts, accepted as accurate by Defendant, and the documents and affidavit submitted by Defendant and constitutes this Court's Finding of Facts.

The Circuit Court of Cole County, Missouri, adjudicated a default judgment in favor of Defendant in a lawsuit to collect a debt owed by Plaintiff on a payday loan. Pursuant to the judgment, Defendant's Collection Manager completed a sequestration form and delivered it to the Circuit Court. On November 26, 2007, the Circuit Court issued a writ of sequestration to Plaintiffs employer, the State of Missouri, in the amount of $888.42, including principal plus interest, court costs and attorney fees. Thereafter, Plaintiff's employer made three separate payments, totaling $539.15, out of Plaintiff's wages to the Cole County Sheriff's Department, including: $179.43 on December 26, 2007; $179.86 on January 14, 2008; and $179.86 on January 25, 2008.

On February 5, 2008, Plaintiff filed a petition for relief under Chapter 7 of the Bankruptcy Code with the United States Bankruptcy Court for the Western District of Missouri. A notice of the bankruptcy filing was filed with the Circuit Court of Cole County, Missouri, and sent to Mr. Richard L. Beaver, Defendant's attorney of record in the debt collection lawsuit. Defendant was not listed as a creditor in Plaintiffs bankruptcy case and the sequestration funds were not scheduled as property of the estate.

Subsequent to the bankruptcy filing, Plaintiffs employer made two additional payments, totaling $349.27, out of Plaintiff's wages to the Sheriffs Department: $179.87 on February 8, 2008; and $169.40 on February 25, 2008. On March 10, 2008, the clerk of the Circuit Court received the total $888.42 due pursuant to the writ of sequestration from the Sheriffs Department, and sent the total amount to Defendant. On March 21, 2008, upon discovery that these sequestered wages had been delivered to Defendant, Plaintiffs counsel sent another letter to Mr. Beaver demanding that the funds be returned to the bankruptcy estate.

III. DISCUSSION AND LEGAL ANALYSIS

A. Violation of Automatic Stay

Upon the filing of a bankruptcy petition, an automatic stay goes into effect, which prohibits certain actions against the debtor, property of the debtor and property of the bankruptcy estate. 11 U.S.C. § 362(a). It is well established that the act of sequestration falls within the prohibitions of the automatic stay as the continuation of a judicial proceeding prohibited by § 362(a)(1) and the enforcement, against the property of the estate, of a judgment obtained before the commencement of the bankruptcy case prohibited by § 362(a)(2). See, e.g., In re Roche, 361 B.R. 615, 621 (Bkrtcy.N.D.Ga.2005). Therefore, the continuation of a sequestration is a violation of the automatic stay. See In re See, 301 B.R. 549 (Bkrtcy. N.D.Iowa 2003) (holding that creditor violated automatic stay by continuing to garnish Chapter 7 debtor's wages postpetition); In re Yetter, 112 B.R. 301 (Bankr. S.D.Iowa 1990) (holding that the post-petition transfer of garnished funds to the creditor violated the automatic stay).

In the present case, the writ of sequestration was issued approximately two months before Plaintiff filed for Chapter 7 bankruptcy.¹ The first issue that must be addressed is whether Plaintiff maintained an interest in the sequestered wages at the time she filed her bankruptcy petition, thereby making the sequestered wages the property of her bankruptcy estate and causing any collection activities of Defendant to be a violation of the automatic stay.

Most courts have held that a debtor's interest in sequestered wages terminates upon the entry of a wage deduction or charging order by the court. Accord In re Mason, 153 B.R. 8 (Bankr.D.R.I.1993) (finding the debtor retains an interest in garnished wages until valid charging order entered by the court); In re Weatherspoon, 101 B.R. 533 (Bankr.N.D.Ill.1989) (finding termination of debtor's interest in garnished wages occurs upon court's entry of final deduction order); In re Nunally, 103 B.R. 376 (Bankr.D.R.I.1989) (same); In re Johnson, 53 B.R. 919 (Bankr.N.D.Ill. 1985) (held debtor divested of interest in wages when court enters wage deduction order). However, as discussed by this Court in In re Heerlein, 336 B.R. 148, 150 (Bankr.W.D.Mo.2006), an order directing garnished funds to be paid into the court and for the court to pay the funds over to the creditor is no longer required in Missouri.² This Court concluded that this fact "lends support to the proposition that an interest in the garnished funds must now pass from a debtor to a creditor at an earlier time, perhaps upon payment by the garnishee of funds into the court, which discharges the garnishee." Heerlein, 336 B.R. at 151-2.

In the present case, the total amount due pursuant to the writ of sequestration was bifurcated into five separate withholdings of Plaintiff's wages, each payment being made individually to the Sheriffs Department, where they were held until the total amount was collected and paid to the clerk of the Circuit Court. This Court's Heerlein decision makes it fairly clear that if any of Plaintiff's wage payments held by the Sheriffs Department had been paid to the clerk of the Circuit Court pre-petition, those funds would no long be part of Plaintiff's bankruptcy estate. The issue, of course, is that the Sheriffs Department did not send the aggregate of the sequestration funds to the clerk of the Circuit Court until after Plaintiff filed for bankruptcy.

Neither party has raised any legal arguments as to whether this Court should make a distinction for purposes of deciding the moment that title passes based upon the receipt of funds by the Sheriffs Department or receipt of said funds by the court. However, it seems that making a distinction of what constitutes property of a debtor's bankruptcy estate based upon the payment schedule of the local sheriffs department would be arbitrary. The spirit of the analysis in Heerlein suggests that once sequestered wages are delivered to the sheriffs department, acting as a conduit on behalf of the court, interest in such funds has passed to the creditor.

This conclusion can also be deduced through analogizing Rule 90.10(a), dealing with the discharge of a garnishee, to Rule 90.16(a), dealing with writs of sequestration. Rule 90.10(a) states: "Timely payment or delivery of [garnishment] property into court thereby discharges the garnishee from further liability on account of the property subject to garnishment so paid or delivered." This rule stands for the proposition that the payment of garnishment funds into the court completes the garnishment process and represents a point in which interest in the garnished funds passes from the garnishee (and therefore, the debtor) to the creditor. Although there is no direct corresponding rule to writs of sequestration, Rule 90.16(a) directs the sheriff to "take into possession any and all moneys ... for salary, wages, fees, or earnings for services rendered by the judgment...