Appeal from the United States District Court for the Northern District of Indiana, Hammond Division. No. 07 C 285-Philip P. Simon, Judge.
The opinion of the court was delivered by: Evans, Circuit Judge.
Before KANNE, ROVNER, and EVANS, Circuit Judges.
This is an appeal from an order of the district court, in turn affirming a judgment of the bankruptcy court in an adversary proceeding.
Barry G. Radcliffe owned a company called Glass Service, Inc. As part of a labor agreement the company contributed to the International Painters and Allied Trades Industry Pension Fund. When the company's payments became delinquent, Radcliffe signed a personal guarantee to pay the contributions, but he failed to do so. The Fund sued for breach of contract and obtained a default judgment against him. He declared bankruptcy, but not before requesting his own pension benefits from the Fund. The Fund agreed that he was entitled to benefits but told him that it would withhold payment and apply the amounts withheld to his debt arising from the default judgment.
Radcliffe informed the Fund of his belief that the "setoff" violated the automatic stay that took effect when he filed for bankruptcy (see 11 U.S.C. § 362). The Fund, nevertheless, withheld payment. Radcliffe filed this adversary action to enforce the stay and he prevailed in the bankruptcy court. International was ordered to pay compensatory damages, interest, punitive damages, and attorney fees. In a decision with considerable flair, the*fn1 district court affirmed. We commend both the bankruptcy and the district courts for the clarity of their discussion of these issues. And we agree with them even though we are somewhat uneasy with the end result which gives a seemingly undeserved windfall to Mr. Radcliffe.
It is not hard to guess that this situation presents a thicket of legal issues in which, if one is not careful, it would be possible to get hopelessly tangled. For that reason, we ignore side issues, such as standing (Radcliffe has standing) and mutuality (a concept thrown about but never really grounded in the case), and address what we see to be the dispositive issues before us.
The first issue is whether the setoff (or freeze on payments as the Fund terms it) violates the automatic stay under 11 U.S.C. § 362(a)(6). If it does, the second issue is whether the stay should have been lifted to allow the setoff. Involved in that issue is whether the setoff violates the anti-alienation provisions of the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1056(d)(1). If it does, there would be no reason to lift the stay. On then to the first issue.
Immediately upon the filing of a bankruptcy petition, § 362 of the bankruptcy code provides for an automatic stay of efforts outside the bankruptcy proceeding to collect debts from the bankrupt debtor. Aiello v. Providian Fin. Corp., 239 F.3d 876 (7th Cir. 2001). Bringing all debts within the jurisdiction of the bankruptcy court allows for the orderly distribution of assets. Holtkamp v. Little-field (In re Holtkamp), 669 F.2d 505 (7th Cir. 1982). The stay prevents pre-petition creditors from taking any action to collect their debts. In re Vitreous Steel Prods. Co., 911 F.2d 1223 (7th Cir. 1990). But in cases where the stay will simply delay the inevitable-that is, the creditor will be allowed at some point to collect his debt- the bankruptcy code in § 362(d) permits relief from the automatic stay on "the request of a party in interest after notice and a hearing . . . ."
The district court found that the Fund's conduct violated the provision of the stay found in § 362(a)(6), which prohibits "any act to collect, assess, or recover a claim against the debtor that arose before the commencement" of the case. The prohibition includes threats of immediate action by creditors. Matter of Duke, 79 F.3d 43 (7th Cir. 1996). What the Fund did here which, in the district court's view, violated the stay was to inform Radcliffe by letter that his "monthly pension benefits will be offset against [his] debt to the Pension Fund until such time as the judgment has been satisfied."
The Fund claims that the pension benefits were not property of the estate and therefore the offset was proper. It argues that the letter it sent to Radcliffe was not in violation of § 362(a)(6) because it was not coercive or harassing. Relying primarily on Citizens Bank of Mary-land v. Strumpf, 516 U.S. 16 (1995), the Fund says that nothing prohibits it from freezing payments until the validity of the offset is determined.
The situation here differs in at least two material respects from Strumpf. First, in Strumpf there was an undeniable right to a setoff. The bank had a right under Maryland law to set off a defaulted loan against Strumpf's checking account balance. The Court pointed out that, under section 553(a) of the bankruptcy code, "whatever right of setoff otherwise exists is preserved in bankruptcy." Here, as we shall soon see, there was no right to a setoff. Secondly, in Strumpf, even though, except for the stay, the bank had a clear right to a setoff, it merely placed an administrative hold on the checking account until it could seek relief from the automatic stay, which it in fact sought five days later. The Court found that there was no violation of the stay because the action the bank took was not a setoff at all. The bank was holding the payment only for a brief period of time while it sought relief from the stay. It did not "purport permanently to reduce respondent's account balance by the amount of the defaulted loan."
In our case, the Fund did not move for relief from the stay until six months had passed. It had requested that the stay be modified in its answer to Radcliffe's complaint, but even this came two months after the Fund's letter to Radcliffe stating its intention to withhold payment and well after the first payment was, in fact, withheld. The bankruptcy court found that the Fund's request in its answer to the complaint was not sufficient to modify the stay, especially since no affirmation action was requested at the time regarding any right to a setoff. The bankruptcy court found even the ultimate motion for relief from the stay to be "woefully inadequate under the requirements of Fed.R.Bank.P. 9013," and it was filed only after the court required it. The Fund went far beyond placing a temporary hold on the benefits so that it could promptly seek relief from the stay. Rather, it refused to pay the pension and did nothing about the stay until urged to do so by the court. The Fund's comparison of its situation to Strumpf is way off the mark.
Furthermore, the Fund's letter to Radcliffe is in violation of § 362(a)(6). As the district court correctly noted, the Fund held all the cards. Without seeking court approval, it simply made a unilateral decision not to pay the pension benefits. It informed Radcliffe that it did not need court approval because it did not believe the bankruptcy law applied to ...