MEMO:

To:

From: Rebecca Holmes

Client:

Re: Garnishment of paycheck after Automatic Stay.

Date: 6/23/2015

FACTS: Client filed bankruptcy on 5/20/15. On 5/22/15, client was garnished for pay period

5/3/15-5/16/15.

QUESTION PRESENTED: Does a creditor have to give a garnished amount of a paycheck

back post-bankruptcy petition in accordance with the Automatic Stay provisions of 11 USC §

362 if the wages are earned prior to bankruptcy petition?

RULE: Garnishment cannot continue after filing the bankruptcy for a pre-petition judgment.

The creditor has the affirmative duty to stop garnishment after notice of filing.

SHORT ANSWER: Yes, the creditor should give the money back. The debtor may file a

Motion for Turnover or ask the creditor to release all funds garnished after the bankruptcy filing

date, as those funds were taken in violation of the automatic stay.

DISCUSSION:

In Re Scroggin, 364 B.R. 772, 780-81 (B.A.P. 10th Cir. 2007), the creditor was garnishing

the debtor’s wages prior to the debtor filing for bankruptcy on October 12, 2004. The debtor sent

notice to the creditor on October 13, 2004. The creditor failed to notify the employer, the debtor,

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or the debtor’s attorney of the Release of Garnishment, and continued to garnish wages on

October 15 and October 30, 2004.The court held that once notified of a Debtor’s bankruptcy, the

creditor has to take affirmative action to stop the garnishment and that post-petition garnishment

of wages here was a violation of the automatic stay. at 780-81.

Similarly, in In re Russell, a debtor filed for bankruptcy 5/6/2010 after a garnishment

order was in effect. 441 BR 859 (Bankr. N.D. Ohio, 2010), The creditor was notified the same

day, but failed to stop the garnishment for the May 14, 2010 and May 28, 2010 wages. The

creditor was held to have violated the automatic stay because “by May 14, 2010 [when the

creditor was notified that a garnishment had taken place], an affirmative duty arose on the part of

the Creditor’s counsel to take action to release the wage garnishment.” Id. at 862. The funds

from both garnishments in this case were voluntarily released by the creditor. Id. at 863 Here, the

court ordered reasonable attorney’s fees for the creditor, but denied granting punitive damages.

Id at 863.

The difference between Russell and Scroggin is when the affirmative duty of the creditor

arose to take action to stop the garnishment. In Russell, the creditor’s duty to stop garnishment

arose after the initial notice of bankruptcy and the subsequent notice that a garnishment had been

taken. In Scroggin, the creditor had a duty to stop the garnishment upon notice of bankruptcy.

In both cases, the affirmative duty was on the creditor to return funds garnished after the

date of filing bankruptcy and the automatic stay was in effect. 11 USC § 362(a); In re Pulliam,

262 B.R. 539, 542 (Bankr. D. Kan. 2001). While neither case specifies the importance of when

wages are earned, the emphasis is on the date of the garnishment. If the garnishment takes place

after the automatic stay is in effect, it is in violation of the stay. Accordingly, the garnished

wages, reasonable attorney’s fees, and, in limited circumstances, punitive damages can be

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awarded to the debtor when a creditor takes garnishment after the automatic stay is in effect.

Russell 441 BR at 862; (the debtor may recover damages after the first violation of the automatic

stay occurred); Id. at 863 (citing In Re Pawlowicz, 337 B.R. 640, 645 (Bankr. N.D. Ohio 2005)

(“egregious misconduct on the creditor’s part… in arrogant defiance of federal law” may entitle

the debtor to punitive damages under Section 362(k)).

The actual violation of the stay is key to the recovery of damages, including garnished

wages. In re Henson, 477 B.R. 786 (Bankr. D. Colo. 2012). Henson involved an automatic,

recurring postponement of a foreclosure sale after a debtor filed for bankruptcy under Colorado

state law. The court found no violation of the automatic stay because neither the lender nor

foreclosure trustee took an action to violate the stay; such as move forward with foreclosure.

Thus, there was no violation of 11 USC § 362 (a)(1) or (6). Id. In addition, the court In re Panos,

found that there was no violation of the automatic stay where the creditor was simply awaiting

judgment in order to start garnishment after the date of the bankruptcy petition was filed. 11

USC § 362(a); No. 13-21338-GMH, unreported 2013 WL 1498889, at *2 (Bankr. E.D. Wis.

Apr. 10, 2013); (slip copy).

Unlike Henson and Panos, our client experienced actual automatic stay violations when

garnishment continued after filing for bankruptcy and notice was given to the garnishing

creditors.

Finally, In re Trujillo is most like our client’s situation. 485 B.R. 238 (Bankr. D. Colo.

2012). Here, the debtor failed to give actual notice to the court or creditor from the filings of

wage exemptions, even though they gave actual notice to the employer of the bankruptcy filing.

The employer continued to garnish wages post-petition for prep-petitioned-earned wages. Id. at

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243. (“This paycheck covered the last pre-petition pay period…”). The debtor’s counsel had to

repeatedly request the funds be returned before filing a motion to sanction the creditor. Id. 243.

The court awarded attorney’s fees here to the debtor even though the proper standing to assert a

violation of the turnover statute has traditionally belonged to the bankruptcy trustee. Id. at 234-

244 (“property of the estate” includes Garnished funds: “…§541 encompasses all of [Debtor’s]

wages, even if a portion of them may be subject to a pre-petition garnishment lien, because [the

Debtor] still held an interest in the garnished portion on the date of the petition.”) With each

garnished paycheck, “a judgment debtor has an opportunity to object.” Id at 244.  With a right to

object comes an interest in the funds on petition date. Id. at 244.

The court awarded the attorney’s fees based on the violation of the automatic stay

because the creditor retained the funds. Id. at 245. (§362(a) Automatic Stay protects the debtor

from the enforcement of lien or garnishment rights against exempt property. The lienholder may

protect their interest (during this period when the funds are property of the estate, exempt, or

discharged) by seeking adequate protection or by seeking relief form the automatic stay under

§362(d), or they may apply for emergency hearing.) The court reasoned that the Bankruptcy code

places the burden on the lien creditor “to seek protection if its interests are threatened”, and not

on the debtor. Id. at 245. “By asserting its client’s lien rights in refusing to turn over the Funds,

the [Creditor] has upset this delicate balance. Its proper remedy was to seek protection from the

bankruptcy court. Instead it continued to exercise control over the Funds in violation of the

automatic stay.” Id at 246.

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Thus, a court may entertain a motion for sanction against a creditor who held garnished

funds post-petition if the debtor brings such a motion. However, the court is only likely to grant

attorney’s fees in such a case once the funds are returned.

CONCLUSION:

In these cases, the filing and automatic stay went into effect just days before the

garnishment took place. As long as the notice of filing was provided to creditors, the debtor has a

right to recovery of the garnished funds and reasonable attorney’s fees.

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