Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_18-cv-04501/USCOURTS-cand-3_18-cv-04501-0/pdf.json

Parties Involved:
California Franchise Tax Board
Appellee
Maria C. Freeman
Appellant

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United States District Court 

Northern District of Californi

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IN THE UNITED STATES DISTRICT COURT 

FOR THE NORTHERN DISTRICT OF CALIFORNIA 

MARIA C. FREEMAN, 

Plaintiff, 

v. 

CALIFORNIA FRANCHISE TAX 

BOARD, 

Defendant. 

Case No. 18-cv-04501-CRB 

ORDER AFFIRMING ORDER OF 

THE BANKRUPTCY COURT 

Appellant Maria C. Freeman (“Freeman”) appeals a May 2018 summary judgment 

ruling issued by Bankruptcy Court Judge William J. Lafferty in favor of Appellee 

California Franchise Tax Board (the “FTB”). Notice of Appeal (dkt. 1) at 1. Judge 

Lafferty determined that the FTB’s refusal to release an Order to Withhold Personal 

Income Tax (an “Order to Withhold”) on Freeman’s bank account after she filed for 

Chapter 13 bankruptcy did not violate the automatic stay provisions of 11 U.S.C. § 362(a). 

Appellee’s ER, Part 1 (dkt. 12) at 100–01. This Court finds this matter suitable for 

resolution without oral argument pursuant to Civil Local Rule 7-1(b), VACATES the 

hearing currently set for August 2, 2019, and AFFIRMS the ruling of the Bankruptcy 

Court. 

I. BACKGROUND 

A. Factual Background 

Maria C. Freeman and her spouse, Timothy D. Freeman, (together, the “Freemans”) 

filed their 2011 tax return with the FTB on April 15, 2012. Appellee’s ER, Part 2 (dkt. 12) 

at 138. In their return, the Freemans declared a taxable income of $33,369.00, and stated 

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that they owed to the FTB no tax for 2011. Antic-Jezildzic Decl. ¶ 3, Appellee’s ER, Part 

2 at 137–50. Just over four years later, on June 24, 2016, the FTB mailed the Freemans a 

Notice of Proposed Assessment related to their 2011 tax filing. Ditlevsen Decl. ¶ 4, 

Appellee’s ER, Part 1 at 56–59. In this notice, the FTB revised the Freemans’ taxable 

income for 2011 from $33,369.00 to $2,037,448.00. Id. The FTB accordingly proposed a 

tax of $195,153.00, a penalty of $39,030.60, and interest totaling $30,253.39. Id.

The Freemans did not protest the Notice of Proposed Assessment, and so the 

assessment became final on August 23, 2016. Id.; see Cal. Rev. & Tax. Code § 19041 

(explaining that the taxpayer has 60 days to protest the proposed deficiency); Cal. Rev. & 

Tax. Code § 19042 (determining that if the taxpayer does not protest within 60 days, then 

the proposed amount becomes final). 

On September 19, 2016, nearly one month after the assessment became final, the 

FTB mailed the Freemans a Notice of State Income Tax Due relating to their taxes and 

fines for 2011. Antic-Jezildzic Decl. ¶ 5, Appellee’s ER, Part 2 at 137–50. The notice 

informed the Freemans that the interest on their payments was continuing to accrue, and 

warned them that “failure to contact [the FTB] and resolve [the outstanding] balance could 

cause [the FTB] to . . . levy [the Freemans’] bank accounts.” Id.; Appellee’s ER, Part 2 at 

142. The FTB stated that the Freemans could “prevent involuntary collection actions” if 

they either: (1) paid off the tax liability in full; (2) entered into an installment agreement 

with the FTB; (3) proposed a compromise with the FTB; or (4) proved that financial 

hardship prevented them from paying their liabilities. Appellee’s ER, Part 2 at 142. 

In Freeman’s first filing with the Bankruptcy Court for the Northern District of 

California on January 13, 2017, she referenced financial hardship issues, stating that the 

“FTB’s conduct ha[d] caused [her] to experience nervousness, anxiety, and fear of her 

ability to meet her daily living obligations . . . .” Compl. ¶ 14, Appellant’s ER (dkt. 9) at 

20. However, Freeman never requested a hardship hearing, which the FTB informed 

Freeman in both written and oral communications was within her rights. Ditlevsen Decl. 

¶ 15, Appellee’s ER, Part 1 at 56–59; Cabrera Decl. ¶ 4, Appellee’s ER, Part 1 at 61–63. 

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By January 3, 2017, the Freemans’ liability for their 2011 taxes had grown to 

$245,230.25. Antic-Jezildzic Decl. ¶ 6,7, Appellee’s ER, Part 2 at 137–50. On that date, 

the FTB issued an Order to Withhold to the Freemans’ bank, BAC Community Bank (the 

“Bank”) in Stockton, California, pursuant to California Revenue and Taxation Code 

Section 18670(a). Freeman Decl. ¶¶ 2, 7, Ex. 1; Appellant’s ER at 32–37. California 

Revenue and Taxation Code Section 18670(a) empowers the FTB to serve a delinquent 

taxpayer’s bank with an Order to Withhold, so that the bank can directly transmit to the 

FTB either the amount that the taxpayer owes (the “Amount Due”) or the amount of the 

taxpayer’s funds in the bank’s possession (the “Available Funds”), whichever is less. See 

Cal. Rev. & Tax. Code § 18670(a). Section 18670(a) provides: 

The Franchise Tax Board may by notice, served personally or 

by first-class mail, require any . . . person . . . having in their 

possession, or under their control, any credits or other personal 

property or other things of value, belonging to a taxpayer or to 

an employer or person who has failed to withhold and transmit 

amounts due pursuant to this article, to withhold, from the 

credits or other personal property or other things of value, the 

amount of any tax, interest, or penalties due from the 

taxpayer . . . and to transmit the amount withheld to the 

Franchise Tax Board at the times that it may designate. 

However, in the case of a depository institution . . . amounts 

due from a taxpayer under this part shall be transmitted to the

Franchise Tax Board not less than 10 business days from 

receipt of the notice. 

Cal. Rev. & Tax. Code § 18670(a). 

In this case, the Bank received the Order to Withhold on or before January 5, 2017. 

Appellant’s ER at 86–91; Appellee’s ER, Parts 1 and 2 at 63, 109, 199, 138, 148–50, 156, 

198, 230, 275, 276. At that time, the funds in the Freemans’ bank account totaled 

$96,939.14. Freeman Decl. ¶ 7, Appellee’s ER, Part 1 at 32–37. Because Freeman’s 

Available Funds of $96,939.14 were less than the Amount Due of $245,230.25, the Bank 

was required to transmit the Available Funds to the FTB. Appellant’s ER at 33, 37, 122, 

127; Appellee’s ER, Part 2 at 184, 187. Section 18670(a) required the Bank to complete 

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this transaction in “not less than 10 business days from receipt” of the Order. See Cal. 

Rev. & Tax. Code § 18670(a). 

On January 6, 2017, at least one day after the bank received the Order to Withhold, 

Maria Freeman filed a voluntary Chapter 13 petition, commencing her bankruptcy case. 

Appellee’s ER, Part 1 at 87. Freeman requested that the FTB revoke the Order to 

Withhold, and the FTB refused to do so. Goldstein Decl. ¶¶ 4–6, Appellant’s ER at 39. 

B. Procedural History 

On January 13, 2017, one week after filing for bankruptcy, Freeman filed a 

Complaint for Violation of Automatic Stay with the U.S. Bankruptcy Court in this district. 

Compl. ¶ 14, Appellant’s ER at 20. In her complaint, Freeman alleged that the FTB had 

violated the automatic stay by refusing to revoke the Order to Withhold when Freeman 

filed for bankruptcy. Appellant’s ER at 18–22. She requested actual and punitive 

damages in accordance with 11 U.S.C. § 362(k). She also filed a motion for a temporary 

restraining order. See Appellee’s ER, Part 1 at 11. 

The FTB maintained, first in successfully opposing the motion for a temporary 

restraining order, and later in a cross-motion for summary judgment, that it had not 

violated the automatic stay. Appellee’s ER, Part 1 at 37–46; id. at 68 (Order Denying 

TRO); id. at 111–31. The core of the FTB’s argument was (and is) that, at the moment the 

Bank received the Order to Withhold, ownership of the Available Funds transferred to the 

FTB—meaning that the funds were no longer Freeman’s property when she filed for 

bankruptcy, and therefore did not become part of her bankruptcy estate. Id. at 40–42, 124–

28. Because the funds were not part of Freeman’s bankruptcy estate, the FTB argued, they 

could not be subject to the automatic stay, and so there was no violation. Id. at 43, 130. 

Freeman filed a cross-motion for summary judgment. See generally Appellant’s ER 

at 108–17. Freeman argued that the 10-day processing period provided in Section 

18670(a) had not yet lapsed by the time she filed for bankruptcy, and so the Funds 

remained in her control, even after the Bank received the Order to Withhold. Id. at 113 

(“At best, the [Order to Withhold] was an incomplete levy at the time of the bankruptcy 

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filing”); id. (“FTB’s OTW (without transmittal of the Funds to the FTB) was incomplete”); 

id. at 114 (“the FTB possessed only an incomplete demand for payment of the Funds at the 

time of the bankruptcy filing.”). Freeman added that Section 18670 does not explicitly 

state that property immediately transfers upon the issuance of an Order to Withhold. Id. at 

112–15. 

In a Joint Stipulation, the parties agreed to the facts. Appellee’s ER, Part 2 at 155–

78, 203–04. Their litigation focused only on the narrow issue of whether the FTB violated 

the automatic stay. Id. 

Judge Lafferty ruled on the parties’ cross-motions for summary judgment on May 

23, 2018, holding that the FTB did not violate the automatic stay. See generally Tr. of S.J. 

Hearing, Appellant’s ER (dkt. 9). The Bankruptcy Court held that the Bank’s receipt of 

the Order to Withhold terminated any interest Freeman had in the Available Funds, and 

immediately transferred ownership of those Funds to the FTB. Id. The Bankruptcy Court 

also concluded that even if Freeman did have an interest in the Funds, such that they had 

become part of her estate and subject to the automatic stay, there was no legitimate 

bankruptcy purpose to activate the automatic stay in the first place. Id. at 152. 

Freeman appealed on June 21, 2018. Appellant’s ER at 9–14. On July 18, 2018, 

the case was transferred from the Bankruptcy Appellate Panel to this Court, per 28 U.S.C. 

§ 158. Id. at 17. The parties stipulated to move the hearing in this case from June 21, 

2019 to August 2, 2019. Mtn. to Continue Hearing (dkt. 15) at 1. 

II. LEGAL STANDARD 

A district court reviews a bankruptcy court’s findings of fact for clear error, and its 

conclusions of law de novo. In re Int’l Fibercom, Inc., 503 F.3d 933, 940 (9th Cir. 2007). 

Mixed questions of law and fact are reviewed de novo. Hamada v. Far E. Nat’l Bank, 291 

F.3d 645, 649 (9th Cir. 2002). Here, the parties have agreed to the facts and have agreed 

to litigate only the narrow issue of whether the FTB violated the automatic stay. 

Appellee’s ER at 155–78, 203–04. Whether the FTB violated the automatic stay is a 

question of law, to be reviewed de novo. See In re Perl, 811 F.3d 1120, 1124 (9th Cir. 

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2016) (citing In re Mwangi, 764 F.3d 1168, 1173 (9th Cir. 2014)). 

III. DISCUSSION 

The Court AFFIRMS the Bankruptcy Court’s order entering summary judgment in 

favor of the FTB, for two reasons. First, the Available Funds were not part of Freeman’s 

bankruptcy estate, so no automatic stay violation occurred. Second, even assuming that 

the Funds were part of Freeman’s estate, there was no legitimate bankruptcy purpose to 

trigger the automatic stay. 

A. The Available Funds Were Not Property of Freeman’s Bankruptcy 

Estate 

The first reason the Court affirms the Bankruptcy Court is that the Available Funds 

were not part of Freeman’s bankruptcy estate, because they were no longer her property 

when she filed for bankruptcy. The Order to Withhold, received by the Bank on January 5, 

2017 at the latest, transferred ownership of the Funds to the FTB the moment the Bank 

received it, even though the 10-day period provided in Section 18670 had not lapsed. As a 

result, the Available Funds never became part of the bankruptcy estate that Freeman 

created on January 6, 2017, and the automatic stay did not apply to them. An automatic 

stay applies only to property that belongs to the debtor. In re Majestic Star Casino, LLC, 

716 F.3d 736, 750 (3d Cir. Del. 2013). The FTB therefore did not violate the automatic 

stay by refusing to release the Order to Withhold. 

1. The Effect of the Order to Withhold 

The dispositive issue in this case is whether Freeman had any ownership over or 

interest in the Available Funds when she filed her bankruptcy petition, such that the Funds 

became part of her bankruptcy estate. Judge Lafferty held that the Order to Withhold had 

already transferred ownership of the Funds to the FTB, and de novo review supports his 

assessment. 

a. The Ordinary Meaning of Section 18670(a) 

The ordinary meaning of California Revenue and Taxation Code Section 18670(a) 

indicates that ownership of the Available Funds transferred to the FTB the moment 

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Freeman’s bank received the Order to Withhold. 

“Congress has generally left the determination of property rights in the assets of a 

bankrupt’s estate to state law.” In re Majestic Star Casino, LLC, 716 F.3d at 751 (citing to 

Butner v. United States, 440 U.S. 48, 54 (1979); see also In re Caldwell, 111 B.R. 836, 837 

(Bankr. C.D. Cal. 1990) (finding that in order to determine the nature of a debtor’s legal 

and equitable interest, courts must look to non-bankruptcy law). Moreover, when 

interpreting state law, federal courts must rely on the state’s rules of statutory 

interpretation, and determine what meaning the state’s highest court would give the statute. 

GreenCycle Paint, Inc. v. PaintCare, Inc., 250 F. Supp. 3d 438, 453 (N.D. Cal. 2017). In 

California, courts interpret statutes by examining their plain language, giving words their 

usual and ordinary meaning. DuBois v. Workers’ Comp. Appeals Bd. 5 Cal. 4th 382, 387–

88 (1993) (citing Moyer v. Workmen’s Comp. Appeals Bd., 10 Cal.3d 222, 230 (1973)). 

California Revenue and Taxation Code Section 18670(a) provides in part that “in 

the case of a depository institution . . . amounts due from a taxpayer under this part shall be 

transmitted to the Franchise Tax Board not less than 10 business days from receipt of the 

notice.” Cal. Rev. & Tax. Code § 18670(a). The FTB’s position is that a bank’s receipt of 

an order to withhold immediately transfers ownership of the funds to the FTB, even before 

the 10-day period lapses. Appellee’s Brief (dkt. 11) at 20. The FTB interprets the 10-day 

processing period in Section 18670(a) as simply administrative, allowing the bank to 

gather the funds and remit them to the state, without providing any leeway for the 

taxpayer. See id. at 18–19. 

Freeman responds that an order to withhold does not take effect until the10-day 

period has lapsed and the bank has completed transferring the funds to the FTB. 

Appellant’s Opening Brief (dkt. 8) at 2,10. She considers the Order to Withhold in this 

case to be “incomplete.” Id. at 8–10. Freeman bolsters her point by comparing Section 

18670(a) with Section 6703(a). Id. at 10. Section 6703(a) states that the “notice of levy 

shall have the same effect as a levy pursuant to a writ of execution.” Cal. Rev. & Tax. 

Code § 6703(a). Freeman contends that because Section 6703(a) explicitly extinguishes 

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the debtor’s interest in the funds, and Section 18670(a) does not, the Order to Withhold 

that her bank received pursuant to Section 18670(a) did not immediately terminate her 

interest. See Appellant’s Opening Brief at 10–11. Accordingly, she asserts, because fewer 

than 10 days had elapsed, and no transfer had taken place, the Funds were still her property 

when she filed for bankruptcy. Id. at 15. 

But Freeman’s comparison to Section 6703(a) is unpersuasive given the plain 

language of the Section 18670(a). The plain language of Section 18670(a) states that, 

upon receipt of an Order to Withhold, the Freemans’ bank was “require[d]” to and “shall . . 

. transmit[]” the Available Funds to the FTB. See Cal. Rev. & Tax. Code § 18670(a). 

That language is mandatory and binding, as it commands the Bank to transfer the Funds to 

the FTB. The Section contains no language indicating that the taxpayer or Bank can 

contest these commands. 

Freeman’s Section 6703 comparison is also inconsistent with the Supreme Court’s 

analysis of orders to withhold. The Supreme Court found that orders to withhold are “in 

operation and effect . . . identical to the judgment of a court.” Franchise Tax Board of 

California v. United States Postal Service, 467 U.S. 512, 523 (1984). Although that case 

did not involve a taxpayer attempting to thwart an order to withhold by filing for 

bankruptcy within the 10-day period provided in Section 18670(a), it is nonetheless 

instructive. The Court explained that orders to withhold “give rise to a binding legal 

obligation to pay the assessed amounts; the taxpayer may no more dispute this liability 

than the liability under any other judgment.” Id. And it observed that neither a bank 

receiving an order to withhold nor a taxpayer subject to an order to withhold can dispute 

liability under the order until after the tax has been paid—at which point the bank or 

taxpayer can only request a refund. Id. at 522, 523. 

Thus, while Postal Service did not address the effect of what Freeman calls an 

“incomplete” Order to Withhold, it did recognize that all orders to withhold are mandatory, 

binding, and contestable only after the fact. Because a taxpayer has no opportunity to 

challenge such an order within the 10-day period, it is consistent with the Supreme Court’s 

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reading of Section 18670(a), and the plain meaning of the Section, for this Court to 

conclude that transfer of ownership is immediate. That Section 18670(a) does not contain 

the exact same wording as Section 6703(a) does not dictate otherwise.1

b. The Context of Section 18670(a) 

Moving beyond the text of Section 18670(a), the California Revenue and Taxation 

Code as a whole and other authority support the interpretation of Section 18670(a) as 

immediately transferring ownership to the FTB, even before the 10-day period lapses. 

i. Other Tax Sections 

Four sections of the California Revenue and Taxation Code are especially 

instructive. 

First, California Revenue and Taxation Code Section 18674(a) states that, upon 

receipt of an Order to Withhold, a bank “shall” comply with the Order “without resort to 

any legal or equitable action in a court of law or equity.” Cal. Rev. & Tax. Code 

§ 18674(a). The word “shall” again communicates a binding requirement: a bank must 

comply without litigating or contesting the order. This supports the notion that the 10-day 

processing period referenced in Section 18670(a) is simply intended to provide the bank 

with the time necessary to gather the funds. See Cal. Rev. & Tax. Code § 18670(a). The 

Court therefore rejects Freeman’s argument that the Order to Withhold was not finalized 

until the 10-day processing period had lapsed. Appellant’s Opening Brief at 2, 8, 10–12, 

13, 15. 

 

1

 Freeman also contends that the Available Funds remained her property not only because the 

statute did not immediately transfer the funds to the FTB, but also because the Funds physically 

remained in her bank account at the time of her bankruptcy filing on January 6, 2017. Appellant’s 

Opening Brief at 9–10. This point is just another variation on who owned the funds, rather than a 

separate argument. As a threshold matter, money is fungible and is not physically stored in any 

one person’s bank account. That may be the very reason why Section 18670(a) gives banks 10 

days to collect what can be large sums of funds. Moreover, bankruptcy courts have found that the 

location of contested property is not determinative of ownership. Funds may not be the property 

of the debtor even if they do remain held by the debtor’s bank. See, e.g., Illinois Dep’t of Revenue 

v. Valentino’s Restoration & Clearly Serv., 215 B.R. 153 (Bankr. N.D. Ill. 1997) (finding that 

contested funds held by a bank were not owned by a debtor even if the bank was physically 

holding those funds until it had completed transfer). 

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Second, California Revenue and Taxation Code Section 18672 states that failure to 

comply with an order to withhold renders the bank in question liable for the amount it 

should have withheld and paid to the FTB. Cal. Rev. & Tax. Code § 18672. To Judge 

Lafferty, this was an important point. “If somehow the money is not paid,” he explained, 

“it becomes a personal liability for the party who is directed to pay it who doesn’t 

otherwise owe the debt. This is a powerful statement that it is essentially [game] over in 

terms of the debtor’s interest.” Tr. of S.J. Hearing, Appellant’s ER at 149. Thus, after a 

bank receives an order to withhold, it is liable to the FTB for any losses—suggesting that 

ownership really lies with the FTB. 

Third, like the bank in question, the debtor in question also may not contest the 

transfer of Available Funds to the FTB. California Revenue and Taxation Code Section 

19381 states that “no . . . legal or equitable process shall issue in any suit, action, or 

proceeding in any court against this state or against the officer of this state to prevent or 

enjoin the . . . collection of any tax under this part . . . .” Such sweeping language grants 

the FTB broad protection from challenges to their tax-collecting powers. See also Postal 

Service, 467 U.S. at 523 (analogizing an order to withhold to a judgment of a court). The 

Freemans could not “resort to any legal or equitable action in a court of law or equity” to 

dispute the Order to Withhold, which arguably includes the action of filing for Chapter 13 

bankruptcy. See Cal. Rev. & Tax. Code § 18674(a). Thus, an order to withhold is binding 

on both the bank and debtor. See Kanarek v. Davidson, 85 Cal. App. 3d 341, 345–46 

(1978) (determining that compliance with an order to withhold is required despite 

conflicting claims to funds). 

Fourth, and relatedly, because a taxpayer cannot prevent the FTB’s collection under 

an order to withhold, the sole remedy envisioned in the California Tax Code is the ability 

to seek a refund after the FTB has already obtained the Funds. See Cal. Rev. & Tax. Code 

§ 19382 (stating that “any taxpayer claiming that the tax computed and assessed is void in 

whole or in part may bring an action, upon the grounds set forth in that claim for refund, 

against the [FTB] for the recovery of the whole or any part of the amount paid.”). See also 

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Postal Service, 467 U.S. at 512, 513 (explaining that liability under an order to withhold 

cannot be contested until after the tax has been paid and a refund action brought.). 

Because of the final and uncontestable nature of the Order to Withhold, neither the 

Bank nor Freeman had any right to challenge the Order to Withhold once it was issued, 

even before the 10-day processing period had lapsed. Judge Lafferty emphasized this 

point: “The debtor really lacks any real-world functional ability to make any use of these 

funds and they were effectively the FTB’s money at that point.” Tr. of S.J. Hearing, 

Appellant’s ER at 149–51. The California Revenue and Taxation Code as a whole 

indicates that the Available Funds became the property of the FTB as soon as the Order to 

Withhold was received by the Bank, by January 5, 2017, the day before Freeman filed for 

Chapter 13 bankruptcy. 

ii. Beyond the Tax Code 

Even beyond the California Revenue and Taxation Code, the California 

Constitution prohibits any legal or equitable process that would prevent or enjoin tax 

collection. See Cal. Const. art. XIII, § 32. Courts in this state have repeatedly emphasized 

the importance of the state’s taxing power. See, e.g., Greene v. Franchise Tax Bd., 27 Cal. 

App. 3d 38, 42 (1972) (citing Watchtower B. & T. Soc. v. County of L.A., 30 Cal.2d 426, 

429 (1947)) (“The power to levy and collect taxes is a vital, essential attribute of 

government without which it could not function.”). And the California Supreme Court has 

held that “a statute will not be construed to impair or limit the sovereign power of the state 

to act in its governmental capacity and perform its governmental functions on behalf of the 

public in general, unless such intent clearly appears.” People v. Centr-O-Mart, 34 Cal.2d 

702, 703–04 (Cal. 1950). Adopting Freeman’s reading would “limit the sovereign power 

of the state to act in its governmental capacity and perform its governmental functions” 

without any such clear intent in the text. See id. 

Thus, the ordinary meaning as well as the broader context of Section 18670(a) 

indicate that ownership of the Available Funds transferred to the FTB the moment the 

Bank received the Order to Withhold, which was January 5, 2017 at the latest. 

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2. The Funds Did Not Become Part of the Bankruptcy Estate 

Only assets in which a debtor has a legal or equitable interest as of the 

commencement of his or her bankruptcy case become property within the debtor’s 

bankruptcy estate. 11 U.S.C. § 541(a)(1). Of course, “the [debtor’s] estate may take no 

greater interest than that held by the debtor.” In re Farmers Mkts., Inc., 792 F.2d 1400, 

1403 (9th Cir. 1986). And a debtor has no legal or equitable interest in an asset that is not 

the debtor’s property or over which the debtor has no control. In re Majestic Star Casino, 

LLC, 716 F.3d at 750. 

Here, any property that Freeman owned at the time of her filing on January 6, 2017 

would have become part of her bankruptcy estate. See 11 U.S.C. § 541(a)(1). As 

explained above, the FTB’s Order to Withhold transferred ownership of the funds to the 

FTB by January 5, 2017. Freeman had no ownership, control, or interest in the Available 

Funds when she filed her bankruptcy petition on January 6, 2017. The Funds therefore did 

not become part of her bankruptcy estate. 

3. Because the Funds Were Not Part of the Bankruptcy Estate, They 

Were Not Subject to the Automatic Stay 

The automatic stay provisions of 11 U.S.C. § 362 protect only the property in which 

the debtor has a legal or equitable interest. Interstate Commerce Comm’n v. Holmes 

Transp., Inc., 931 F.2d 984, 987 (1st Cir. 1991). Because the Order to Withhold had 

already transferred ownership of the Funds to the FTB, the Funds were not subject to the 

automatic stay. Judge Lafferty expanded on this point in his ruling, explaining that “the 

automatic stay is really just a procedural device. It doesn’t create any rights, it doesn’t 

enhance substantively anything the debtor has or doesn’t have on the petition date.” Tr. of 

S.J. Hearing, Appellant’s ER at 147. The automatic stay cannot “create” a right to freeze 

assets that Freeman did not have when she filed for bankruptcy. Since she did not have a 

right to the Funds, the automatic stay does not apply to or “enhance” her legal or equitable 

interest in those Funds. 

Because the funds were not subject to the automatic stay, no stay violation 

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occurred. A stay cannot be violated when the debtor does not have an interest in or 

ownership over the property in question. See, e.g., In re Caldwell, 111 B.R. 836, 837 

(Bankr. C.D. Cal. 1999) (finding that “section 362 [of 11 U.S.C.] has no application to 

property that debtors ceased to have an interest in prior to the filing of the bankruptcy 

petition.”). For example, in In re Perl, the Ninth Circuit determined that because the 

debtor in question no longer had a legal interest in the contested property when she filed 

for bankruptcy, she could not successfully claim that the opposing party violated the 

automatic stay triggered by her filing for Chapter 13. 811 F.3d at 1130. See also In re 

Hernandez, 483 B.R. 713, 720 (B.A.P. 9th Cir. 2012) (finding no stay violation when the 

disputed funds had already been rightfully transferred from the debtor into someone else’s 

possession, thereby terminating the debtor’s interest in the funds). 

Similar to the property that had already been transferred away from the Perl 

appellant’s ownership, interest in the Available Funds had already been transferred from 

Freeman to the FTB. The automatic stay does not apply to property in which Freeman has 

no interest, and it does not “create” a new right to such property, as Judge Lafferty noted. 

As a result, the FTB did not violate the automatic stay provisions by refusing to release the 

Order to Withhold. 

B. There was No Legitimate Bankruptcy Purpose 

A second, independent reason the Court affirms the Bankruptcy Court is that when 

a debtor files for bankruptcy, her purpose must be legitimate, valid, and honest. In Re 

Liberate Technologies, 314 B.R. 206, 211 (Bankr. N.D. Cal. 2004) (explaining that 

because the bankruptcy process provides “strong weapons, not generally available outside 

of bankruptcy . . . [t]o prevent abuse . . . courts have implied the requirement that the 

petition be filed in good faith.”). The purposes of bankruptcy are generally to (1) enable a 

“fresh start” for the debtor, and (2) ensure equity among creditors. See, e.g., National 

Consumer Law Center, Consumer Bankruptcy Law and Practice (11th ed.), 2.3 “Purposes 

of Bankruptcy,” www.nclc.org/library (last visited May 29, 2019). Courts have repeatedly 

emphasized the “fresh start” concept. The Supreme Court described bankruptcy as a 

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process that “gives the honest but unfortunate debtor a new opportunity in life and a clear 

field for future effort, unhampered by the pressure and discouragement of preexisting 

debt.” Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). The Ninth Circuit recognizes 

the “fresh start” concept as one of the legitimate purposes of bankruptcy law. See, e.g., In 

re Dumont, 581 F.3d 1104, 1111 (9th Cir. 2009); In re Majewski, 310 F.3d 653, 658 (9th 

Cir. 2002). 

Courts do not recognize as legitimate those bankruptcies in which the principal 

purpose of the debtor’s effort is to avoid paying taxes. See 11 U.S.C. § 1129(d) (stating 

that a court “may not confirm a plan if the principal purpose of the plan is the avoidance of 

taxes . . . .”). This suggests that a court cannot entertain a bankruptcy case in which the 

debtor’s primary aim appears to be circumventing the payment of legitimately owed taxes. 

Freeman admits that she filed for bankruptcy in order to access the Available Funds 

for personal use, which would prevent the money from being used to pay the FTB taxes, 

penalties, and interest that she owes. Freeman Decl. ¶ 11, Appellant’s Excerpts of Record 

at 32–37. Although Freeman may legitimately need money for the purposes she 

describes—namely, mortgage payments and childcare—she did not contest the FTB’s 

revised tax assessment at the outset, seek a hardship hearing as the interest penalty began 

to increase, or propose a comprise with the FTB that would have allowed her to pay in 

installments. Indeed, Freeman had “a lengthy period of time to have a dialogue with the 

FTB about other alternatives.” See Tr. of S.J. Hearing, Appellant’s ER at 151. 

Bankruptcy is not an alternative to paying taxes. See, e.g., 11 U.S.C. § 1129(d). Without 

an explanation from Freeman beyond tax avoidance, it seems that Freeman’s bankruptcy 

case was not motivated by a legitimate bankruptcy purpose. 

Without a legitimate bankruptcy purpose, there can be no violation of the automatic 

stay because there is no valid underlying bankruptcy case to trigger the automatic stay 

provisions. For example, in In re Spaulding Composites Co., a Bankruptcy Appellate 

Panel (BAP) for the Ninth Circuit determined that an automatic stay violation is dependent 

upon there being a proper bankruptcy purpose in the first place. 207 B.R. 899, 908 (B.A.P 

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9th Cir. 1997). The BAP found that it was an illegitimate use of the bankruptcy process to 

capture within the debtor’s estate property owned by people or entities other than the 

debtor. Id. at 906–08. Because there was no legitimate bankruptcy purpose with respect to 

the property in question, the automatic stay did not apply to that property. And because 

the stay did not apply, no automatic stay violation occurred. Id. at 908. 

Here, Judge Lafferty expressed concern that Freeman’s bankruptcy filing had no 

proper bankruptcy aim. “The debtor’s actions,” he concluded, “were just so consistently 

inconsistent with the purposes of the Bankruptcy Code . . . .” Tr. of S.J. Hearing, 

Appellant’s ER at 155. Judge Lafferty gave several examples. First, Freeman’s 

bankruptcy case lasted only one month. Id. at 152. The case was dismissed on February 6, 

2017 due to Freeman’s failure to comply with the “most basic” obligations of a debtor, 

including her failure to file the required schedules and a statement of financial affairs. Id. 

at 152–53; Appellee’s ER at 65. This lack of compliance is comparable to Freemans’ 

income tax underreporting, which led to the FTB’s revised income tax assessment at the 

genesis of this case. Tr. of S.J. Hearing, Appellant’s ER at 155. Second, Freeman said 

that if the Order to Withhold was withdrawn, she would give the money to her husband so 

that he could pay his company’s subcontractors. Id. at 154. Judge Lafferty observed that 

this would be “totally inconsistent with the requirements of Chapter 13 bankruptcies,” in 

which the priority is the repayment of creditors. Id. Third, obtaining release of the Order 

to Withhold was the only purpose of Freeman’s bankruptcy case; Judge Lafferty 

determined that Freeman’s “whole goal” in filing for bankruptcy was to prevent the FTB 

from obtaining the Funds. Id. at 154–55. Yet the automatic stay is supposed to be “just a 

tool . . . not a goal in itself.” Id. at 155. Because of Freeman’s actions and intentions, 

Judge Lafferty found that “there is simply no bankruptcy purpose that has been served or is 

going to be served by this.” Id. at 153. 

In response to concerns about her approach to the bankruptcy process, Freeman 

claims that the FTB’s refusal to release the hold on her bank account leaves her “without 

the funds necessary to ‘reorganize’ in the Chapter 13 bankruptcy.” Appellant’s Reply 

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