Pinal J. Shah

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
PINAL J. SHAH
DEBTOR
CASE NO.
05-01929-5-ATS
ORDER REGARDING MOTION FOR TURNOVER AND
MOTION TO DETERMINE APPLICABILITY OF AUTOMATIC STAY
The matters before the court are the motion for turnover filed by
the debtor and the motion to determine the applicability of the
automatic stay filed by Peoples Community Bank. A hearing took place
in Raleigh, North Carolina on July 14, 2005.
Pinal J. Shah filed a petition for relief under chapter 13 of the
Bankruptcy Code on May 11, 2005. Peoples Community Bank ("PCB") holds
a judgment against Ms. Shah, and on May 2, 2005, the sheriff faxed a
notice of levy to Ms. Shah’s bank, Bank of America. Upon receipt of
the notice from the sheriff, Bank of America placed a hold on the
debtor’s account and advised Ms. Shah that it would forward a check to
the sheriff in approximately ten days. On May 12, 2005, after learning
of the bankruptcy filing, the sheriff faxed another letter to Bank of
America purporting to cancel the levy, but on the same day Bank of
America remitted the entire balance on deposit in Ms. Shah’s joint
checking account (approximately $52,000) to the sheriff. PCB filed a
motion to determine the applicability of the automatic stay to
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1 The parties have agreed that if the levy was valid, the amount
of the lien is $20,000.
2
determine whether the transfer of funds to the sheriff violated the
stay. An interim order was entered on May 23, 2005, directing the
sheriff to return funds exceeding the judgment amount of $39,671 to the
debtor and reserving the question of whether PCB held a valid
prepetition judicial lien.
Ms. Shah filed a motion for turnover, contending that the
sheriff’s release of the levy on May 12, 2005, defeated any prepetition
lien that PCB may have had. At a hearing on June 23, 2005, Ms. Shah
also contended that most of the funds taken by the sheriff are not
leviable, either because they belonged to her non-debtor spouse or
because they were recent earnings exempt under North Carolina General
Statute § 1-362.1 Ms. Shah’s primary argument, however, is that the
levy was not complete until the sheriff gained possession of the funds,
which was after Ms. Shah filed bankruptcy and the automatic stay went
into effect. Because the automatic stay stopped the process, she
contends, the levy was never complete and there is no valid lien.
North Carolina General Statute § 1-313 sets forth the form of
execution for particular types of property. Section (a) addresses
personal property, and provides
(1) Against Property--No Lien on Personal Property until
Levy.--If it is against the property of the judgment debtor,
it shall require the officer to satisfy the judgment out of
his personal property; . . . but no execution against the
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3
property of a judgment debtor is a lien on his personal
property, as against any bona fide purchaser from him for
value, or as against any other execution, except from the
levy thereof.
N.C. Gen. Stat. § 1-313. Ms. Shah contends that this section requires
the sheriff to have taken actual possession of the funds for the levy
to be complete, while PCB contends that the lien was perfected when the
sheriff issued the notice of levy to the bank.
The lien was created when the levy was issued, not when the funds
were turned over to the sheriff. Once the sheriff sent the notice of
levy to Bank of America, the bank was not free to release the funds to
any party other than the sheriff, including the debtor, absent further
instructions from the court. The notice of levy was enough to create
the lien. Technically, the transfer to the sheriff may have violated
the automatic stay, but it did not extinguish the lien. The bank was
apparently unaware of the debtor’s bankruptcy case, and no purpose
would be served by requiring the funds to be transferred back to the
bank.
Accordingly, PCB had a valid lien on $20,000 when the bankruptcy
case was filed. It is possible that the holder of a valid lien may
release that lien after a bankruptcy is filed. The court does not have
enough facts before it to ascertain whether the purported release by
the sheriff extinguished the lien and will reserve that issue for the
future, along with the issues regarding whether the lien was a
preference or other avoidable transfer.
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Based on the foregoing, the motion for turnover is DENIED as to
$20,000. To the extent the sheriff holds funds in excess of $20,000,
those funds are to be returned to the debtor. Because the notice of
levy was sufficient to create a lien on the funds in the debtor’s
account, the lien was not affected by the turnover of the funds to the
sheriff.
SO ORDERED.
DATED: July 28, 2005
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