by Reasoning that the case involved a lien rather than an administrative freeze on funds in a bank account, the bankruptcy court found that the automatic stay did not require the bank to take affirmative steps to release its citation lien. In re Smiley, No. 17-27169 (Bankr. N.D. Ill. Jan 11, 2018).
J.P. Morgan Chase Bank froze the bank accounts belonging to chapter 13 debtor, Kim Smiley, pursuant to a citation to discover assets filed by Bank of America. Under Illinois law, the citation created a lien on Ms. Smiley’s accounts. After Ms. Smiley filed her bankruptcy petition, Bank of America refused to release the lien and unfreeze the funds. Ms. Smiley sought sanctions for violation of the automatic stay under section 362(k).
Relying on the reasoning in In re Tires N Tracks, Inc., 498 B.R. 201 (Bankr. N.D. Ill. 2013), and In re Kuzniewski, 508 B.R. 678 (Bankr. N.D. Ill. 2014), the bankruptcy court held that, while the automatic stay prohibits a creditor from foreclosing on a citation lien, it does not require the creditor to give up the lien. The basis of the court’s decision was that the citation lien was more than a mere “hold” on an account: it was a lien that was not avoided by any provision of the Code or non-bankruptcy law. The court found that the automatic stay does not usually require the “affirmative act of dismissal of a judicial proceeding.”
The court distinguished the holding in Thompson v. General Motors Acceptance Corporation, LLC, 566 F.3d 699 (7th Cir. 2009), where the Seventh Circuit required a creditor to release a vehicle it had repossessed prior to the debtor’s bankruptcy. In this case, the court found that because the funds were held by a court-ordered citation lien, release required a court order and therefore, unlike the creditor in Thompson, the Bank was not in control of the funds. Also, the creditor in Thompson had a security interest in the vehicle that could be protected by the bankruptcy court even if the car were in the possession of the debtor. In the case of the funds in Ms. Smiley’s account, however, the court found the creditor would have no ability to protect its interest in the funds through a motion for relief from stay or for adequate protection if the citation lien were released.
The court cited Tires N Tracks as a cautionary tale. In that case, the creditor with a citation lien on the debtor’s personal property voluntarily dismissed its lien after the debtor filed for bankruptcy. The Tires N Tracks court found that by doing so, the creditor lost its security interest in the property. Here, the court found that the Bank would similarly lose its protections under the Code if the automatic stay required release of the citation lien.
Finally, the court fell back on the general principle that a lien passes through bankruptcy unaffected unless avoided by application of an appropriate provision in the Code and after due process is afforded the lienholder. The court concluded that the Bank “retains its pre-petition lien rights in bankruptcy,” and the Bank, therefore, was not required to release its citation lien over Ms. Smiley’s accounts.
In a non-dispositive part of the opinion, the court, again relying on language in Kuzniewski, found that the funds in Ms. Smiley’s account were “cash collateral” under section 363(c)(2) requiring the creditor’s or court’s consent before they could be used. While the court did not discuss that conclusion, cash collateral typically applies to business revenues the debtor seeks to use for continuing his or her business while in bankruptcy. In fact, the funds at issue in Kuzniewski were the debtor’s business accounts.