In re Ortiz

Guy R. Humphrey United States Bankruptcy Judge

Chapter 13

MEMORANDUM ORDER DENYING, WITHOUT PREJUDICE, CHAPTER 13 TRUSTEE'S MOTION FOR DAMAGES FOR VIOLATION OF THE AUTOMATIC STAY AND FOR RETURN OF ASSETS OF THE ESTATE (DOC. 41)

Guy R. Humphrey United States Bankruptcy Judge

This matter is before the court on the Chapter 13 Trustee's Motion for Damages for Violation of the Automatic Stay and for Return of Assets of the Estate (doc. 41) (the "Motion") filed by John G. Jansing, the Chapter 13 Trustee ("Trustee"). Through his Motion, the Trustee seeks an entry from this court finding that Kettering Health Network ("KHN") has violated the automatic stay pursuant to 11 U.S.C. § 362(a)(3) and ordering KHN to return an overpayment made by the Trustee to KHN in the amount of $381.17. Though KHN has not responded to the Trustee's Motion, the court finds that the Motion is deficient for two (2) reasons: (1) the Motion lacks sufficient allegations to justify an order holding that KHN violated the automatic stay, and (2) the Motion fails to comply with Rule 7001 of the Federal Rules of Bankruptcy Procedure.

The Debtor filed his voluntary Chapter 13 petition on August 31, 2017. Doc. 1. KHN filed Claims 5 and 6, each in the amount of $2117.60, on October 11, 2017. The Chapter 13 plan was confirmed on January 22, 2018. Doc. 20. The plan provided for a 7% dividend to non-priority unsecured creditors, including KHN. Doc. 2. More than four (4) years after the plan was confirmed, the Trustee filed an objection to KHN's Claim 6, alleging that the claim was a duplicate of KHN's Claim 5. Doc. 38. On March 31, 2023, the court entered an order sustaining the Trustee's objection and disallowing KHN's Claim 6. Doc. 39.

In his Motion, the Trustee alleges that a total of $381.17 in payments were disbursed to KHN prior to the Trustee objecting to KHN's Claim 6 as a duplicate claim. See Doc. 41. The Trustee alleges that the objection ultimately resulted in an order disallowing KHN's duplicate claim, which lead to the inadvertent overpayment. Id. Realizing this mistake, the Trustee contacted KHN through written correspondence on March 15, 2023 and requested that KHN return the overpayment in the amount of $381.17. Id. On September 7, 2023, the Trustee sent a second request to KHN for return of the overpayment. Id. The Trustee alleges that KHN has not responded to these requests. Id. The Trustee claims that KHN's actions constitute a willful violation of the automatic stay by failing to comply with the Trustee's request for return of the overpayment. Id. The court finds that the Trustee's Motion is not well-taken for the following reasons.

First, the Trustee's Motion does not provide adequate claims to warrant a judgment that KHN has willfully violated the automatic stay. Matters pertaining to the automatic stay are governed by § 362 of the Bankruptcy Code. This section provides that a bankruptcy petition operates as a stay of actions and proceedings against the debtor and property of the bankruptcy estate, including 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. 11 U.S.C. § 362(a)(3). It further provides limits on the duration of the stay, exceptions to the applicability of the stay, and the criteria for granting relief from the stay. See generally 11 U.S.C. § 362.

Subsection (k)(1) provides in pertinent part that "an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages." 11 U.S.C. § 362(k)(1). To prevail on a § 362(k) claim, a plaintiff must prove by a preponderance of the evidence that the stay imposed under § 362 was violated, that the violation was committed willfully, and that plaintiff was injured by the violation. Grine v. Chambers (In re Grine), 439 B.R. 461, 466 (Bankr.N.D.Ohio 2010). The plaintiff must also prove, by a preponderance of the evidence, that damages were "proximately caused by and reasonably incurred as a result of the violation of the automatic stay." In re Baer, No. 11-8062, 2012 Bankr. LEXIS 2849, at *27, 2012 WL 2368698, at *10 (B.A.P. 6th Cir. June 22, 2012) (quoting Grine at 471).

In determining whether KHN violated the automatic stay, the court looks to the Supreme Court's landmark decision in City of Chicago v. Fulton. In Fulton, the Court held that "mere retention of estate property after the filing of a bankruptcy petition does not violate § 362(a)(3) of the Bankruptcy Code." 141 S.Ct. 585, 592 (2021). The Court explained that under § 362(a)(3), "the filing of a bankruptcy petition operates as a 'stay' of 'any act' to 'exercise control' over the property of the estate." Id. at 590. The Court reasoned that "the most natural reading of these terms-'stay,' 'act,' and 'exercise control'-is that § 362(a)(3) prohibits affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed." Id. The Court noted that while omissions can qualify as acts, "the language of §362(a)(3) implies that something more than merely retaining power is required to violate the disputed provision." Id.

The Court also addressed the interplay of § 362 and § 542 of the Bankruptcy Code. Section 542(a) governs turnover proceedings and provides that an entity in possession, custody, or control of property of the estate shall deliver that property to the trustee. 11 U.S.C. § 542(a). Notably, the Court explained that interpreting § 362(a)(3) to include "mere retention" of property would "render the central command of § 542 largely superfluous" and would turn § 362(a)(3) into a "blanket turnover provision." Fulton at 591. "The better account of the two provisions is that §362(a)(3) prohibits collection efforts outside the bankruptcy proceeding that would change the status quo, while §542(a) works within the bankruptcy process to draw far-flung estate property back into the hands of the debtor or trustee." Id.

The Trustee's Motion fails to meet the burden of proof under § 362(k) and disregards Fulton's interpretation of § 362(a)(3). The Trustee alleges that KHN violated the automatic stay under § 362(a)(3) because KHN received an overpayment and failed to respond to the Trustee's requests for the return of the overpayment. The Trustee's argument falls flat under Fulton. A violation of the automatic stay necessitates more than "mere retention" of assets. Under Fulton, the Trustee must demonstrate that KHN performed an affirmative action that constitutes a violation of the automatic stay. The Trustee does not point to any affirmative action taken by KHN that would indicate a violation of the automatic stay. Instead, the Trustee admitted to inadvertently disbursing payments to KHN prior to objecting to KHN's duplicate Claim 6. Though the Trustee argues that KHN's failure to return the overpayment is a violation of the automatic stay, a failure to respond to a request for return of payment is not an "act" under § 362(a)(3).

Furthermore, the onus to prove a violation of the automatic stay remains with the Trustee, despite KHN's lack of response to the Motion. Based on the contents of the Motion, the Trustee has not set forth sufficient allegations to justify a finding that KHN violated the automatic stay. The Fulton decision underscores the importance of requiring more than "mere retention" to prove a violation of the automatic stay.

Second, the Motion does not comply with the requirements of Rule 7001 of the Federal Rules of Bankruptcy Procedure. To the extent the Trustee's Motion is requesting a turnover of property of the estate pursuant to § 542(a), the court denies the Motion. The Federal Rules of Bankruptcy Procedure treat most "proceeding[s] to recover . . . property" as "adversary proceedings." Fed.R.Bankr.P. 7001(1). "The Bankruptcy Rules require that a party seeking a turnover file that request as an adversary proceeding rather than as a motion in another bankruptcy proceeding." Camall Co. v. Steadfast Ins. Co. (In re Camall Co.), 16 Fed.Appx. 403, 407 (6th Cir. 2001) (citing Fed.R.Bankr.P. 7001). "Courts have given effect to Bankruptcy R. 7001 by holding that a turnover proceeding commenced by motion . . . will be dismissed." Id. (citing In re Perkins, 902 F.2d 1254, 1258 (7th Cir. 1990)) (internal quotations omitted).

As the Motion relates to the allegations that KHN violated the automatic stay, the Trustee has failed to present sufficient information to meet the burden of proof under § 362(k) and Fulton's precedent. To the extent the Trustee is seeking turnover of the funds from KHN, an adversary proceeding is required. For all of these reasons, the Motion is denied without prejudice.

IT IS SO ORDERED.