A third party citation served upon a bank operates as freeze on any money that the debtor has in his account. Plus, any funds that the debtor deposits after service, but prior to the termination of the citation, will also be subject to the citation freeze. If the debtor files bankruptcy, does the creditor have to dismiss the citation and release the account?
The U.S. Bankruptcy Court for the Northern District of Illinois just analyzed this issue in the case In re Kuzniewski, 2014 Bankr. LEXIS 1443. In that case, after filing bankruptcy, the debtor's attorney made a demand upon the bank and the creditor's attorney to immediately release the account. The bank and the creditor's attorney refused and the debtor filed a motion for sanctions against each for violation of the automatic stay.
The court analyzed the unique nature of a citation lien under Illinois law. A citation lien gives a creditor secured status in a bankruptcy. While the automatic stay does prevent a creditor from taking certain actions in furtherance of a lawsuit, the Bankruptcy Code generally requires notice and an opportunity to be heard before a creditor in bankruptcy may be deprived of a property interest, including a lien. The court noted that there are several provisions of the Code that would authorize avoidance of the citation lien, but all of those provisions require notice and a hearing. Without notice and a hearing on an avoidance action, liens generally pass through bankruptcy.
For these reasons, the court found that the creditor's actions did not violate the automatic stay. If the debtor wanted the account released, she had an obligation to file an adversary proceeding or a contested matter for avoidance of the lien, not simply make unsubstantiated demands that were not warranted by existing law. In other words, this was a decision to be made by a judge, not by debtor's counsel.