Maryland Legal Alert for Financial Services

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Bankruptcy Court: Creditor’s Refusal to Release Prepetition Account Garnishment Does Not Violate Automatic Stay

We recently reported on the much-anticipated U.S. Supreme Court decision in City of Chicago, Illinois v. Fulton, in which the Court held that mere retention of bankruptcy estate property by a creditor post-petition does not amount to an exercise of control over estate property in violation of the automatic stay. The Fulton case concerned prepetition repossessions and impounding of motor vehicles. However, as detailed in a recent decision from the U.S. Bankruptcy Court for the Middle District of Pennsylvania, the principles of the Fulton case extend to other prepetition attachments.

In the Pennsylvania Bankruptcy Court case, a judgment creditor served a writ of execution on the debtor’s credit union, which attached to the debtor’s deposit account. Thereafter, the debtor filed a voluntary bankruptcy petition. The debtor requested that the creditor release the attachment on several occasions, but the creditor declined. The creditor did not pursue an order directing disbursement of funds or other acts to enforce its prepetition account garnishment. The debtor then filed an adversary proceeding against the creditor alleging a willful violation of the automatic stay and seeking a turnover order.

The bankruptcy court, relying on the Fulton decision, ruled in favor of the creditor. The creditor did not take an affirmative action to enforce or, otherwise, continue to pursue the prepetition attachment. Under Pennsylvania law — and Maryland law — the prepetition writ functions as a lien against the debtor’s accounts with the garnishee. The court held that the creditor did not violate the automatic stay by merely retaining a valid prepetition attachment.

Practice Point: Judgment creditors and depository institutions that regularly process writs of garnishment should study the lessons of this ruling. Creditors must ensure that they take no further action to pursue accounts attached prepetition. Debtors, likewise, should recognize that they must take affirmative steps (e.g., pursue a turnover order) if they wish to obtain funds held pursuant to prepetition account garnishments.

Please contact Bryan M. Mull with any account garnishment questions.

For additional articles in the November 2021 issue of the Maryland Legal Alert, click here.

 

Bryan M. Mull
410-576-4227 • bmull@gfrlaw.com