Court Opinion

ID: 9517489
Source: CourtListenerOpinion
Date Created: 2023-08-07 00:18:31.613259+00
Date Added: 2024-06-11T09:54:03.692448
License: Public Domain

FENNING, Bankruptcy Judge,
concurring.
I concur in the judgment of the Court and generally concur in its reasoning. I write separately to emphasize the obligation of creditors and levying agents in state court proceedings to respect the automatic stay. I want there to be no room for misunderstanding in future cases: if creditors or levying agents take any steps to alter the status quo at the time of the bankruptcy filing without first obtaining relief from stay in the bankruptcy court, they will subject themselves to potential liability for compensatory and punitive damages under § 362(h) of the Bankruptcy Code. Especially given our ruling in this ease, they cannot justify continued enforcement action on the grounds that they reasonably believe a debtor’s property in the hands of a keeper is beyond the protection of the automatic stay.
The automatic stay triggered by the filing of a bankruptcy petition is the bedrock foundation upon which the entire Bankruptcy Code is built. Designed to freeze ongoing efforts by creditors to enforce their claims against the debtor, the automatic stay is supposed to halt creditors’ costly and disruptive scrambles to seize the debtor’s property and shut down the debtor’s business. This freeze provides the essential “breathing space” required for the equitable processes of bankruptcy to assure preservation of viable businesses and fair distribution of available assets to creditors.
Actions in violation of the stay are void. In re Schwartz, 954 F.2d 569, 571 (9th Cir.1992); In re Williams, 124 B.R. 311, 317-18 (Bankr.C.D.Cal.1991). The debtor is entitled to rely on the stay. After giving notice of the bankruptcy filing, the debtor is not supposed to have to go to other courts to prevent further collection or enforcement action. Creditors and their agents must immediately stop all collection and enforcement actions affecting the debtor or property of the estate. If there is any question about the applicability or scope of the stay, the creditors are required to come to the bankruptcy court to obtain clarification or relief from the stay. In re Schwartz, 954 F.2d at 572.
Any erosion of these fundamental precepts would undercut the very attribute that accounts for the effectiveness of this powerful legal tool — its automatic nature. Any creditor or agent that continues collection or enforcement actions after notice of a bankruptcy filing acts at its peril. Intentional acts in knowing disregard for the automatic stay subject the violator to compensatory and punitive damages. In re Bloom, 875 F.2d 224, 226-27 (9th Cir.1989).
In the present case, the status quo as of the filing was a keeper in place at the debt- or's office. All client files and personal property were still intact and in place. Because the execution sale had not yet occurred, the debtor still held title to all of these items which therefore became property of the estate upon the filing of the bankruptcy petition. Under California law, a judgment debtor’s title to property is not transferred until the execution sale, when the debtor’s title is sold to a purchaser. Cal.Civ.Proc. Code § 701.640 (West 1987). If the sale realizes more than the debt to be satisfied, the excess proceeds must be returned to the debtor. Cal.Civ.Proc.Code § 701.810(h) (West 1987). Rather than transfer title, the completed levy only “creates an execution lien on the property from the time of the levy.” Cal.Civ.Proe.Code § 697.710 (West 1987).6 A debtor’s property that has been seized prepetition by a creditor nevertheless retains its character as property of the estate within the expansive scope of § 541(a)(1) of the Bankruptcy Code. United States v. Whiting Pools, Inc., 462 U.S. 198, 203-09, 103 S.Ct. 2309, 2312-16, 76 L.Ed.2d 515 (1983).
*592Therefore, the keeper should have taken no further steps toward execution sale, unless and until relief from stay was obtained from the bankruptcy court. Instead, however, he flatly refused to turn over the client flies. He then caused the furniture, office equipment, and client files to be removed from the debtor’s office to a storage facility. This removal had several direct consequences: (1) moving and storage costs were incurred; (2) the client files were rendered wholly inaccessible during the period of storage; and (3) once the files were ordered returned to debtor, having to retrieve the files from an off-site storage facility resulted in substantial further delays. Thus, the debtor’s damages from the violation of the automatic stay may include reimbursement of storage and transportation charges, loss of income resulting from the post-petition disruption'of his practice, and attorney fees and costs for the resulting proceedings in the state and bankruptcy courts. Whether punitive damages are warranted, however, is more problematic. The debtor must bear some responsibility for having erroneously sought a turnover order from state court, which no longer had jurisdiction over property of the estate, rather than from the bankruptcy court.which did. While the state court orders are presumptively void under In re Schwartz, 954 F.2d at 571, the unusual circumstances of the debtor’s conduct should be taken into account in assessing blame and measuring damages in this case.
In addition to my serious concerns about the apparent disregard for, and misunderstanding about the automatic stay demonstrated by the conduct of the parties, I was also troubled by the manner in which the client flies were handled. Under California law, client files belong to the client, not to the attorney. See, e.g., Rose v. State Bar, 49 Cal.3d 646, 655, 262 Cal.Rptr. 702, 706, 779 P.2d 761, 765 (1989) (file belongs to client and must be surrendered promptly upon client’s request; attorney’s failure promptly to retrieve and deliver client’s flies from possession of a third party violated applicable rule); Kallen v. Delug, 157 Cal.App.3d 940, 950, 203 Cal.Rptr. 879, 885 (Ct.App.1984) (attorney has unconditional duty to turn over files upon client’s request, and cannot insist upon payment of unpaid fees). Such files are not the attorney’s “assets,” and therefore could not properly be included in an execution sale of the attorney/debtor’s property. See Cal.Civ.Proc.Code §§ 695.010 — 695.070 (West 1987). Neither the judgment creditor nor the keeper could ever acquire any cognizable interest in the client files. Unassignable or nontransferable property is exempt from levy and execution. Cal.Civ.Proc.Code § 695.030(a) (West 1987).
The attorney, however, has a possessory interest in the files for purposes of the representation of the client in the matters for which the attorney has been retained. This possessory interest comes into the estate upon the filing of the bankruptcy petition as property of the estate within the scope of § 541(a), As the Ninth Circuit has emphasized, Congress intended to include “all legally recognizable interests” within the definition of property of the estate. In re Ryerson, 739 F.2d 1423, 1425 (9th Cir.1984). Upon the filing of this case, the rights to, possession of, and duties to maintain the client files and records became the responsibility of the debtor as the representative of the estate. See In re Englewood Community Hosp. Corp., 117 B.R. 352, 355 (Bankr.N.D.Ill.1990) (J. Squires) (estate is administratively liable for medical records storage and disposition costs incurred by duly authorized agent of the estate, but not by unauthorized claimant). Because the automatic stay thus protects these files and records against creditor enforcement actions, the bankruptcy court can act to protect the interests of both the debtor/attomey and his clients in this ease.
But the conflict between the client’s interest and the judgment creditor’s enforcement action transcends the bankruptcy issues. Attorneys have professional and ethical obligations with respect to client files. The California Rules of Professional Conduct prohibit the transfer of client property without the *593client’s authorization, and impose upon attorneys an affirmative duty to protect, preserve, and account for the client’s papers and property. See California Rules of Professional Conduct Rules 3-700(D)(l), 4-100(B) (West Supp.1995).
This debtor’s strenuous efforts to recover the client files for the purposes of completing his representation of his clients were consistent with these important professional obligations. His clients urgently required assistance in defense against criminal charges. Their attorney’s failure to pay a debt should not deprive them of an adequate and timely defense by a member of the bar, aided by the materials in their client files.
As a matter of California law, it is extremely difficult to discern any legal justification for the keeper’s refusal to release the client files immediately. I urge the appropriate state authorities to clarify the responsibilities of levying officers with respect to such client files.

. See, e.g., Grothe v. Cortlandt Corp., 11 Cal. App.4th 1313, 1321, 15 Cal.Rptr.2d 38, 42 (Ct. App.1992) (levy on real property creates an execution lien which does not sever a joint tenancy *592or transfer title until the execution sale is completed); California Commerce Bank v. Superior Court, 8 Cal.App.4th 582, 587, 10 Cal.Rptr.2d 418 (Ct.App.1992) (marshal's levy created an execution lien upon bank deposit, subject to judgment debtor's right to immediate release of the lien and return of the asset upon posting of an appeals bond).