Bankruptcy court protects creditors and banks holding seized funds

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The Ninth Circuit Bankruptcy Appeal Panel (BAP) recently ruled that simply freezing the bank account of a debtor holding funds that had been seized by a judgment creditor did not violate the automatic stay. This decision was based on last year’s decision by the United States Supreme Court in City of Chicago vs. Fultonholding that the retention of repossessed vehicles that were owned before filing for bankruptcy did not violate the automatic stay.

In In re Stuart, a judgment creditor seized funds held in the judgment debtor’s bank account. The bank froze the account and, before any further action in state court, the debtor filed for Chapter 13 bankruptcy. The creditor quickly took steps to stay the court garnishment proceedings. state after filing for bankruptcy. The debtor argued that the automatic stay required the creditor and the bank to release the seized funds and that failure to do so constituted a breach of the automatic stay. The debtor filed a motion for sanctions against the creditor, seeking damages for physical and psychological distress, punitive damages and attorneys’ fees.

Most institutional creditors are familiar with the automatic stay which, true to its name, takes effect upon the filing of a bankruptcy petition and protects debtors from actions by creditors to collect debts or take possession of the debtor’s assets. The previous law indicated that a creditor had a positive obligation to return a debtor’s funds that had been seized before the petition. However, as a logical extension of the Supreme Court’s judgment in Fulton, the BAP ruled that a judgment creditor and the bank, holding funds that had been seized before the bankruptcy filing, did not violate the automatic stay by withholding the funds until a decision could be made. be made regarding the disposition of funds. Merely maintaining the status quo does not violate automatic suspension.

This decision is a welcome development for both creditors and financial institutions, protecting them from claims for violation of the automatic stay, which could expose them to damages and penalties. Once a creditor learns that a bankruptcy has been filed, he must of course immediately cease all affirmative action to collect pre-bankruptcy debts. However, under this case, maintaining the status quo will not be considered a violation of the automatic stay.

Please contact our experienced team of creditor rights lawyers to help you resolve these and other bankruptcy issues.

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