Creditor Levies on Debtor’s Bank Account but the Debtor Files Bankruptcy Before the Sheriff Turns Over the Money to the Creditor. Who Gets the Money?
Collect Access, LLC (“Collect”) sought to enforce a judgment against Jose J. Hernandez and instructed the Sheriff to conduct a bank levy on the judgment-debtor’s bank account. The sheriff did so and seized $712.39 from the Debtor’s Wells Fargo bank account. Three days later, the debtor filed Chapter 7 bankruptcy before the sheriff had released the money to Collect. Despite having notice of the bankruptcy, Collect did not notify the sheriff and the sheriff eventually released the money to Collect. In the meantime, the Chapter 7 Trustee brought not one, but two motions seeking turnover of these funds from the sheriff on the theory the money was properly an asset of the bankruptcy estate.
But how could the funds be part of the debtor’s estate? The money was held by the Sheriff so it no longer belonged to the debtor, right? WRONG. Federal Bankruptcy Judge Margaret Mann reviewed California’s Enforcement of Judgment Law (“EJL”) and concluded that the judgment lien is only satisfied after the creditor receives the money. Accordingly, she reasoned that since the money had not been released to the creditor, the creditor still only held a lien. [Cal.Civ.Proc.Code § 697.710]
Further, the debtor under both California and federal bankruptcy law was entitled to exemptions while the Sheriff held the money, which the debtor did claim in his bankruptcy filings (The debtor elected for the “wildcard” exemption.) Further, the debtor was entitled to an exemption for his Social Security benefits. [Cal.Civ.Proc.Code § 704.080(b)] These exemption rights rendered the funds subject to turnover. The Chapter 7 Trustee filed a motion and the bankruptcy court ordered that the funds be turned over to the Trustee. Unfortunately, that Order was not served on the sheriff and sheriff released the funds to Collect’s law firm. The debtor filed a second motion for turnover and that turnover order was served on Collect’s attorney who eventually filed a motion to vacate the order.
While the opinion states that the first turnover order was only served on the debtor, in this era of e-filing where creditors usually receive alerts of all new filings and orders if they file a Notice of Appearance and Request for Notice, Collect’s attorney probably knew about the first turnover order. Despite that, Collect did nothing for nearly a month, a fact that Judge Mann was clearly displeased with.
While the creditor was likely unhappy about the bankruptcy filing, Collect’s delay made the situation worse. Judge Mann noted, “Collect’s disregard of its affirmative duty to stop the garnishment for several weeks after he knew of the bankruptcy renders him an unworthy candidate for relief.”
Of course, Collect is also facing potential sanctions for violating the automatic stay. The Court noted, “That the creditor had an argument that its conduct was appropriate is no defense.”
TAKEAWAY LESSON Lenders and other creditors can learn from this cautionary tale. What did Collect do wrong?
- Collect failed to halt all collection efforts after the bankruptcy petition was filed. The creditor had an affirmative duty to notify the Sheriff of the bankruptcy;
- Collect failed to object to the debtor’s “wildcard” exemption (creditors have 30 days to do this); and
- Collect disobeyed a Court order for turnover of the funds and instead received them from the Sheriff. The Chapter 7 Trustee was forced to file a 2nd motion for turnover.
What should they have done? The creditor should always file a Request for Notice when they learn of the bankruptcy filing. That Notice entitles the creditor to receive court notices and orders. It also never hurts to take the temperature of the Chapter 7 Trustee early before getting wrangling with them. What hurt the creditor here was its failure to demonstrate it was “respecting” the automatic stay. This means it needed to notify the Sheriff immediately of the debtor’s bankruptcy filing and coordinate with County Counsel and the Chapter 7 Trustee about the disposition of the funds.
In re Hernandez, 468 B.R. 396 (Bankr. S.D. Cal. 2012)
If you have a matter related to this article, or anything else relating to real estate law, please contact the Law Offices of Peter N. Brewer at (650) 327-2900, or visit our website at www.BrewerFirm.com.