Why Is This Injunction Different From All Other Injunctions? The Automatic Stay, An Update

Addressing an insolvency crisis and the rights and responsibilities of debtors and creditors can be accomplished through consensual, out of court procedures as well as through the bankruptcy court system, with certain exceptions.  

Among these exceptions is where an injunction is needed.

Under the United States Bankruptcy Code Section 362, an automatic stay arises upon the filing of the case. We have addressed this in several previous Client Alerts. See, for example “Bank Freezes and the Automatic Stay”; “The Automatic Stay: Even Pre-Petition Seizures May Be Covered”; “Automatic Stay Violators and Pre-Petition Seizures”.

The United States Supreme Court addressed the question of whether a pre-petition act, without any more acts post-petition, still violates the automatic stay.

We examined that almost 6 years ago in our December 31, 2019 Client Alert entitled “Supreme Court to Decide Whether Creditor’s Inaction Violates the Automatic Stay”. Subsequently, in the case City of Chicago v. Fulton, the Supreme 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.” City of Chicago v. Fulton, 592 U.S. 154, 162 (2021). 

The Supreme Court explained that “section 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. at 158.

More recently, in the United States Bankruptcy Court for the Middle District of Florida, Judge Jason Burgess was presented with an argument that the Fulton decision applied to a pre-petition garnishment that resulted in post-petition garnishments that were detrimental to the Debtor’s reorganization efforts.  In re Namen, 649 B.R. 603 (Bankr. M. D. Fla. 2023).  

However, the Court found that the creditor was in violation of the automatic stay and distinguished the facts of Fulton with that of Namen.  

The Namen Court explained that the facts were distinguishable from Fulton because “the continued post-petition garnishments materially altered the status quo.” Id. at 611.  By the creditor failing to dissolve the writ, the Debtor’s finances were directly affected, and the Debtor was unable to pay his employees. Id. at 610. 

This is different than the facts of Fulton in that the City’s inaction in Fulton did not alter the status quo of the bankruptcy estate.  As the Supreme Court explained, the “language of section 362(a)(3) implies that something more than merely retaining power over property is required to violate [section 362(a)(3)].” Fulton, at 159.

Thus, the key distinction is whether the post-petition enforcement of a pre-petition garnishment or seizure alters the status quo of the debtor’s bankruptcy estate.

Recently, our pharmaceutical client was faced with a similar set of facts as in Namen, in a bankruptcy court in New York when a pharmaceutical client’s bank accounts were restrained pre-petition. The restraints prevented our pharmaceutical debtor client from using the funds that were deposited into the accounts post-petition to operate its business and prevented it from providing routine medical prescriptions, along with critical-care medicines such as heart medicine, HIV medicine, and anti-suicide medicine to customers.

On behalf of our client, our team, including Ralph E. Preite, Michelle McMahon and Kyri Christodoulou, filed an emergency motion for turnover of accounts, and termination of the restraints on the accounts due to the inability to get the medications to the customers who relied on them. Judge John P. Mastando III of the United States Bankruptcy Court for the Southern District of New York granted the emergency motion pursuant to Section 362(a)(1), (2), (3) and (6) of the Bankruptcy Code, along with referring to the Namen case for the turnover of accounts and termination of restraints on accounts. 

Judge Mastando explained that “[t]he Court is most concerned with getting the medications to the persons who need them, to the customers who require the medications. . . .” New London Pharmacy Inc. v. Omonoia Society of Kastorians Inc., Adv. Case No. 25-01006-jpm (January 29, 2025).

Similar to Namen, the continued restraints on the accounts of the Debtor altered the status quo of the bankruptcy estate because money was being deposited into the accounts post-petition, but the Debtor could not use the money as a Debtor-in-possession to pay vendors to obtain the much needed medication for its customers. 

Although, merely holding onto the property might not violate the automatic stay, if the retention or affirmative act significantly interferes with the bankruptcy estate, then a violation may be found.  Our client prevailed.

Creditors should be mindful of the action, or inaction, that they take after a bankruptcy petition is filed.  When in doubt, consult legal counsel and consider the effects of any action or inaction that may be taken.

Please note this is a general overview of developments in the law and does not constitute legal advice.  Nothing herein creates an attorney-client relationship between the sender and the recipient.  If you have any questions regarding the provisions discussed above, or any other aspect of bankruptcy law, please contact Michael H. Traison (mtraison@cullenllp.com) at 312.860.4230 or Ralph E. Preite (rpreite@cullenllp.com) at 212.380.6878 or Kelly McNamee (kmcnamee@cullenllp.com) at 516.296.9166.