In re Trujillo

• Decision Date: 27 September 2012
• Docket Number: No. 11–29274 EEB.,11–29274 EEB.
• Citation: 485 B.R. 238
• Parties: In re Mark TRUJILLO, Emily Trujillo, Debtors.
• Court: U.S. Bankruptcy Court — District of Colorado

485 B.R. 238

In re Mark TRUJILLO, Emily Trujillo, Debtors.

No. 11–29274 EEB.

United States Bankruptcy Court, D. Colorado.

Sept. 27, 2012.

Michael Baetz, Denver, CO, for Debtors.

ORDER ON STAY VIOLATION BY GARNISHING CREDITOR'S ATTORNEY

ELIZABETH E. BROWN, Bankruptcy Judge.

THIS MATTER comes before the Court on the Debtors' “Motion for Order to Show Cause Why Charles B. Darrah & Associates, LLC Should Not Be Held in Contempt for Violating the Automatic Stay Order,” and the Response of Charles B. Darrah & Associates, LLC (the “Law Firm”). At a non-evidentiary hearing, the parties agreed to submit this matter on briefs. The Debtors complain of the Law Firm's failure to turn over Mr. Trujillo's garnished pre-petition wages that the Law Firm received post-petition. The Law Firm counters that it had no obligation to return these funds because its client held a valid garnishment lien on them. Having reviewed the briefs and applicable law, the Court concludes that the Law Firm violated both the turnover statute and the automatic stay. The more difficult question, however, is whether these chapter 7 Debtors have standing to seek sanctions attributable to the stay violation. Recently, several courts have held that only the chapter 7 trustee has standing to assert such a claim against a party who refuses to turn over funds that are property of the estate. For the reasons stated below, this Court concludes that, while the Debtors were not legally entitled to use these garnished funds, this fact bears only on the damages they may claim. It does not deprive them of standing to bring a stay violation to the attention of the Court.

I. BACKGROUND

On August 24, 2007, Legal Collection Co. LLC (the “Creditor”) obtained a judgment against Mr. Trujillo in the amount of $19,664.37 in a Colorado state court action. The Law Firm, which represented the Creditor, served a valid, continuing writ of garnishment on Mr. Trujillo's employer. On August 12, 2011, the Debtors filed their Chapter 7 petition. They immediately notified Mr. Trujillo's employer of the bankruptcy filing. Their attorney also listed the garnishment activity on the Debtors' Statement of Financial Affairs, but he neglected to include this debt in their schedules. Consequently, neither the Creditor nor the Law Firm appeared on the mailing matrix and they did not receive the initial notice of the bankruptcy filing from either the Court or the Debtors.

Despite the fact that his employer had actual notice of the bankruptcy filing, Mr. Trujillo's employer withheld funds from his August 18, 2011 paycheck. This paycheck covered the last pre-petition pay period, ending August 11, 2011. The Law Firm received these garnished funds on August 22, 2011. That afternoon Debtors' counsel telephoned the Law Firm to demand return of the funds and termination of the continuing writ of garnishment. This was the first time that the Law Firm and its client learned of the Debtors' bankruptcy filing. In response, on August 24, 2011, the Law Firm delivered a release of the writ of garnishment to Mr. Trujillo's employer. It did not, however, return the funds garnished from the last pay period in the amount of $335.80 (the “Funds”).

From August 22, 2011 until September 27, 2011, Debtors' attorney contacted the Law Firm several times, demanding the return of these Funds. At one point, one of the employees of the Law Firm asked whether the Funds were attributable to a pre-petition pay period and indicated that, if they were, then his client “may have a prior garnishment lien right” to these funds. He assumed the Debtors' attorney would get back to him with this information. When the Debtors' attorney called back, his call was directed to another employee, who indicated that she would look into the matter and return his call. When his telephone calls did not secure the release of the Funds, the Debtors' attorney filed the instant Motion, seeking to sanction the Law Firm for violating the Debtors' automatic stay.

In the meantime, the bankruptcy trustee sued the Creditor directly to recover all funds garnished from Mr. Trujillo's wages during the ninety days preceding the bankruptcy filing, aggregating over $2,000. The Creditor immediately repaid the garnished funds to the trustee, including the Funds at issue in this matter.¹ This repayment, however, has not satisfied the Debtors, who continue to seek sanctions, including attorney fees, costs, damages for emotional distress, other unspecified actual damages, and punitive damages. They are not seeking to recover damages from either the Creditor or Mr. Trujillo's employer, but only against the Law Firm.

It is unclear from the Debtors' Schedule C whether they intended to claim an exemption in the Funds. They have claimed an exemption in a bank account balance in the amount of $144, relying on the wage exemption statute, Colo.Rev.Stat. § 13–54–104(2)(a). None of their other exemptions appear to cover funds held by others. Of course, a debtor may amend his Schedule C to add an exemption and the Court was concerned that they might be planning to do so if they were to receive a return of the Funds. At oral argument, however, Debtors confirmed that the Funds represent the non-exempt portion of Mr. Trujillo's August 18, 2011 paycheck and they acknowledged the Creditor's prior garnishment lien on the Funds.²

Despite their acknowledgement that the Funds represent non-exempt property, the Debtors explained that they had intended to use the Funds anyway and then to repay this amount to the trustee over time. This belief stems from a fairly common, but unsanctioned practice in this district. Debtors will sometimes spend proceeds of non-exempt property that are in their possession on the filing date or they will sometimes spend the tax refund received after the petition date that they know they are obligated to surrender to the trustee. They do so believing that they may then enter into a stipulation with their trustee to repay the debt owed to the estate over time. This practice has been the cause of some debtors losing their discharge when they found they were not able to repay the trustee as they had hoped.

II. DISCUSSIONA. “Property of the Estate” Includes the Garnished Funds

Under 11 U.S.C. § 541(a)(1)³, the filing of a bankruptcy petition creates an estate that includes “all legal or equitable interests of the debtor in property as of the commencement of the case.” In United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983), the Supreme Court held that the reach of § 541 was broad enough to include property that had been seized by a creditor prior to the petition date. Id. at 210–11, 103 S.Ct. 2309. In the present case as well, § 541 encompasses all of Mr. Trujillo's wages, even if a portion of them may be subject to a pre-petition garnishment lien, because Mr. Trujillo still held an interest in the garnished portion on the date of the petition.

Colorado Rule of Civil Procedure 103 provides:

If a judgment debtor objects to the initial or a subsequent calculation of the amount of exempt earnings, the judgment debtor shall have 7 days from the receipt of the copy of the writ of garnishment or calculation of the amount of exempt earnings for subsequent pay periods, within which to resolve the issue of such miscalculation by agreement with the garnishee.

Colo. R. Civ. P. 103 § 6(a)(1) (emphasis added). Thus, even though a continuing garnishment was in effect, the emphasized language in this rule provides that with each paycheck to be garnished, a judgment debtor has an opportunity to object. Mr. Trujillo would have received a “subsequent calculation of the amount of exempt earnings” with his paycheck on August 18, 2011. Under state law, he still had a right to object to this garnishment within five days. Until the time has passed within which a judgment debtor may claim exemptions or otherwise lodge an objection, the garnishment is not considered final. Nolan v. District Court, 195 Colo. 6, 575 P.2d 9, 11 (1978). Since Mr. Trujillo had a right to object, he held an interest in the Funds on the petition date.

B. Retention of the Garnished Funds Violated the Automatic Stay

Mr. Trujillo's remaining interest in the Funds fell under the protective umbrella of the automatic stay imposed by § 362(a). Among other things, the stay prevents a creditor from taking any further action to collect a prepetition debt or to enforce its lien rights, including the following provisions that are implicated by the facts of this case:

(1) the commencement or continuation, ... of a judicial, administrative, or other action or proceeding against the debtor ... to recover a claim against the debtor ...; (2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case ...;

(3) any act to obtain possession of property of the estate or of 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;

(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case ... [.]”

11 U.S.C. § 362(a)(1)–(6).

Under this statutory framework, once a debtor informs his creditors of his bankruptcy filing, he is not required to do anything else. The automatic stay operates as its name states—“automatically”—to enjoin further collection actions for as long as the automatic stay remains in effect. At the conclusion of the typical chapter 7 case, the automatic stay is replaced by the discharge injunction set forth in § 727. The discharge injunction eliminates the debtor's personal liability for the debt owed to the creditor (unless it is a...