Creditors’ inactions confirmed to not violate the automatic stay in the Third Circuit after United States Bankruptcy Court for the Middle District of Pennsylvania Judge Conway’s opinion in In re Anthony Mark Margavitch, Jr., v. Southlake Holdings, LLC, Auburn Loan servicing, Inc., (In re Anthony Mark Margavitch, Jr.), Adv. No. 20-00014. In Margavitch, the Court ruled in favor of the creditor for not violating the automatic stay under 362(a)(1)-(6) where there had been no affirmative action and/or change in status quo. The creditor refused to withdraw a pre-petition attachment of certain bank accounts after becoming aware the debtor filed for bankruptcy protection; however, the creditor took no post-petition affirmative action as to the garnished accounts.
Section 362(a) provides in relevant part:
(a) … a petition … operates as a stay, applicable to all entities, of—
(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;
(4) any act to create, perfect, or enforce any lien against property of the estate;
(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.
To recover for a violation of the automatic stay, a debtor must show by a preponderance of the evidence that a violation of the stay occurred; (2) the creditor had knowledge of the bankruptcy case when acting; and (3) the violation caused actual damages.
Ultimately, the Court concluded that the creditor was not required to withdraw the attachment because to do so would put them in a more disadvantageous position than they had been as of the petition date and they were entitled to maintain the status quo. This holding expanded on the prior leading case of City of Chicago v. Fulton, 141 S. Ct. 585 (2021) where the Supreme Court held in relation to Section 362(a)(3), an affirmative act is likely necessary to violate this section. In Margavitch, Judge Conway applied the reasoning of Fulton to the other subsections of 362, determining that because (a)(4),(5) and (6) also all begin with the phrase, “any act to…”, an affirmative post-petition act is necessary to constitute a violation of those subsections. Accordingly, the mere retention of a valid pre-petition state court attachment or lien without more, is not a violation of §362(a)(4) – (6).
Likewise, as to (a)(1), the Court distinguished its ruling from the ruling in In re Iskric, 496 B.R. 355 (Bankr. M.D. Pa. 2013) a previous Middle District of PA case wherein the Court held that a creditor must take an affirmative action to avoid violating the stay. However, the Court reasoned that in Iskric, the factual scenario resulted in the creditor putting a process into effect that, without intervention, causes a change in the status quo as to the property of the debtor or estate, and so the creditor had an affirmative duty to avoid that change but here, the action was essentially laying dormant/pending without the creditor taking additional action. Significantly, the court stated in a footnote, that had the creditor actually advanced the garnishment action post-petition (rather than not doing anything) then, that action would have violated the automatic stay. But the failure to withdraw the attachment without more, did not constitute a violation of 362(a)(1). Similarly, the Court held there was no violation of 362(a)(2), as there must have been some action to enforce a pre-petition judgment and the passive maintenance of its lien did not change the status quo.
Bankruptcy & Restructuring partner
Bankruptcy & Restructuring associate