Maryland Legal Alert for Financial Services
We recently reported on the eagerly awaited decision of the United States Supreme Court in City of Chicago, Illinois v. Fulton, in which the Court held that the mere withholding of the bankruptcy real estate by a creditor after the petition does not amount to an exercise of control over the real estate in violation of the automatic stay. the Fulton case concerned repossessions before the application and impoundment of motor vehicles. However, as detailed in a recent decision of the United States Bankruptcy Court for the Intermediate District of Pennsylvania, the Principles of Fulton cases extend to other prepetition attachments.
In Pennsylvania Bankruptcy Court, a judgment creditor served a writ of execution on the debtor’s credit union, which was attached to the debtor’s deposit account. Subsequently, the debtor filed for voluntary bankruptcy. The debtor repeatedly asked the creditor to lift the attachment, but the creditor refused. The obligee did not comply with an order directing the disbursement of funds or other acts to enforce his garnishment of the account prior to the petition. The debtor then initiated adversarial proceedings against the creditor, alleging a willful violation of the automatic stay and requesting a rotation order.
The bankruptcy court, relying on the Fulton decision, decided in favor of the creditor. The obligee has not taken positive action to enforce or otherwise continue to pursue the prior garnishment. Under Pennsylvania law – and Maryland law – the writ of prepetition functions as a lien on the debtor’s accounts with the garnishee. The court ruled that the creditor did not violate the automatic stay by simply keeping a valid prior attachment.
Practice point: Judicial creditors and depository institutions that regularly process garnishment orders should study the lessons of this decision. Creditors should ensure that they do not take any further action to pursue accounts attached to the pre-petition. Likewise, debtors should recognize that they must take positive action (eg, pursue a rotation order) if they wish to obtain funds held under prior account garnishments.