When a debtor files for bankruptcy, a stay automatically goes into effect that prohibits creditors from taking collection actions against the debtor without leave of the bankruptcy court. When the debtor receives a discharge, an injunction goes into effect that prevents a creditor from pursuing the debtor on discharged debts.
A charging order seeks to place a lien on some asset, usually the distributional rights (a/k/a economic interest) of a debtor in an LLC or a partnership. But in some states a charging order can be used to create a lien against a debtor’s interest in an income stream. That a creditor files an application for a charging order may cause the payor to withhold payments from the debtor until the application is decided. The payor would withhold distributions to protect itself from potential liability to the creditor.
So, what happens if a creditor files an application for a charging order before the debtor files for bankruptcy, but the creditor does not pursue the application after the debtor files for bankruptcy and then receives a discharge?
Kathi Raley entered into a construction contract with Beaumier’s Design & Remodeling, LLC. Things didn’t go according to plan, and Raley sued the LLC as well as the husband and wife owners of the LLC. Raley’s lawsuit was brought in Arizona and ultimately she obtained a default judgment for a little over $850,000. A few days later, Raley registered her judgment in West Virginia. A month after that, Raley filed an application for a charging order against the debtor’s interest in oil & gas lease payments made by Antero Resources Corporation. When Antero received the charging order application, that company withheld the lease payments pending the outcome of the hearing on Raley’s charging order application.
About a week after Raley filed her charging order application, the husband and wife debtors filed for Chapter 7 bankruptcy. Eventually, the debtors received an order of discharge from the bankruptcy court. Despite this, Antero continued to withhold the oil & gas lease payments from the debtors because the charging order application was apparently still pending, even though Raley had done nothing to prosecute the application.
The debtors tried to get Antero to release to them the proceeds of the oil & gas leases, but to no avail. The debtor then filed an adversary proceeding against both Raley and Antero for violating the bankruptcy automatic stay that went into effect when the debtor filed for bankruptcy, and also for violating the discharge injunction. After providing certain documents and agreeing to deposit the lease payments with the bankruptcy court’s clerk, Antero was dismissed from the adversary action.
Thus, the debtor’s adversary action against Raley continued to go forward. Ultimately, the debtors moved for summary judgment against Raley and Raley requested dismissal of the debtors’ adversary action. This resulted in the opinion in Beaumier v. Raley (In re Beaumier), 2026 WL 1072965 (Bk.N.D.W.Va., April 20, 2026), that we shall now examine.
The bankruptcy court started with the simple observation that any time a bankruptcy case is commenced, an automatic stay goes into effect. The goal of the stay is twofold: First, to protect the debtor’s bankruptcy estate for the benefit of all creditors; second, to give the debtor temporary financial relief while the bankruptcy proceed is ongoing.This stay lasts until the case is closed, the case is dismissed, or a discharge is granted if the debtor is an individual. Among other things, the stay prevents a creditor from continuing to pursue a collection action or procedure that was started before the bankruptcy case was commence. This includes the securing or perfection of a lien against the debtor’s assets. Any creditor who willfully violates the stay can be liable for damages, attorney fees and costs, and also sometimes punitive damages.
The bankruptcy court held that Raley had not violated the automatic stay. Even though Raley filed an application for a charging order, that mere application did not create a lien on the debtors’ interest in the Antero royalty interest. Thus, the Antero royalty interest was still free-and-clear, even if Antero then suspended its make royalty payments to the debtors.
But more importantly, although Raley’s application for the charging order was filed pre-petition, Raley did not pursue the application after the debtors filed their bankruptcy petition and no such order was ever entered. While the debtors argued that Raley should have withdrawn her application to satisfy the automatic stay, the bankruptcy court ruled that the automatic stay imposed no duty upon Raley to do this:
“The automatic stay does not impose a duty on creditors to withdraw prepetition pleadings that have not resulted in any operative court order. The stay halts continuation of judicial proceedings and prevents further acts to collect a debt, but it does not transform a creditor’s prepetition filing into a postpetition violation simply because the creditor does not affirmatively undo what was previously done. Most cases cited by the Plaintiffs entail a creditor failing to withdraw or halt garnishment efforts from enforceable garnishment orders. Here, the application for charging order had no operative effect absent judicial action. Because the state court never entered a charging order, there was no such restraint, lien, or enforcement mechanism arising from the application itself. A pleading merely requesting relief that was never granted does not itself create a restraint on property or a violation of the stay. The Defendant had no duty to mitigate or affirmatively release a hold or restraint on lease proceeds because no such hold or restraint existed.”
The same reason largely applied to the debtors’ claims that Raley had willfully violated the discharge injunction. Raley’s filing of her application for a charging order before the debtors’ discharge did not violate the discharge injunction and she took no efforts to pursue the application thereafter the debtor’s received their discharge. Raley had no duty to withdraw her application, and at any rate no lien was placed on the debtors’ interests in the Antero royalties.
The bankruptcy court thus ruled in favor of Raley on both points and granted summary judgment in her favor against the debtors on their adversary action.
ANALYSIS
The bankruptcy court noted that these disputes usually often arise with garnishments, such as a creditor who garnishes the debtor’s wages and the debtor files for bankruptcy. In those case, the creditor has an affirmative duty to negate the garnishment and to see that any moneys garnished on or after the petition date are returned to the debtor. This can have weird consequences since there is often a lag between the time that the debtor’s employer remits money to the sheriff’s office and the sheriff’s office lags in sending the money to the creditor. In such cases, the creditor usually has to work to see that the sheriff’s office immediately returns the money to the debtor.
Note that the result might have been different in another state. According to the opinion, the mere filing of a charging order application in West Virginia does not create a lien on the interest sought to be charged. But this mileage may vary in another state; for instance, a charging order application in California and several other states does indeed operate to put a temporary lien on the debtor’s interest. Because that lien would continue to attach to the interest post-petition (or post-discharge), the debtor might have an affirmative duty to withdraw the application so as to terminate the temporary lien.
In practice, these situations are often highly confusing which generates risk to the creditor. Even if a creditor thinks it is in the right by just doing nothing, that might later turn out not to be the case. Thus, smart creditors will usually file an application with the bankruptcy court for relief from the stay. This tees the issue up before the bankruptcy court which than then either tell the creditor that they are doing nothing wrong, or tell them to immediately fix whatever problem exists.
It is far better to have a bankruptcy judge get mad and tell you that you didn’t need to ask for leave from stay than to find out later that whatever you were doing violated the stay.
Although this opinion doesn’t involved the typical charging order on an LLC or partnership, the result shouldn’t be any different. For that reason, it is quite interesting.
Read the full article here