Lessor Repossession of Property on Eve of Lessee Bankruptcy: Voluntary Turnover or Face Contempt

The Seventh Circuit's holding in Fulton is consistent with decisions from the Second, Eighth, and Ninth Circuits, each of which hold that a secured creditor or owner must turn over repossessed property immediately or face a contempt citation. See, Weber v. SEFCU (In re Weber), 719 F.3d 72 (2d Cir. 2013); Cal. Emp't Dev. Dep't v. Taxel (In re Del Mission), 98 F.3d 1147 (9th Cir. 1996); Knaus v. Concordia Lumber Co. (In re Knaus), 889 F.2d 773 (8th Cir. 1989). A minority of the circuits disagree. Specifically, the Tenth and the District of Columbia Circuits and the District Court for the District of Delaware have ruled that holding property of the estate seized prepetition does not violate the automatic stay in Section 362(a)(3) because such section applies prospectively and prohibits “any [postpetition] act … to exercise control over property of the estate.” WD Equip., LLC v. Cowen (In re Cowen), 849 F.3d 943 (10th Cir. 2017); United States v. Inslaw, Inc., 932 F.2d 1467 (D.C. Cir. 1991); Denby-Peterson v. Nu2u Auto World, 595 B.R. 18 (D.N.J. 2018).

A lessee's chapter 13 filing invokes the broad protections of the automatic stay. Section 362(a)(3) of the Bankruptcy Code provides that a chapter 13 petition “operates as a stay applicable to all entities, of … any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” 11 U.S.C §362(a)(3). The concept of property of the estate is likewise broad and is defined in the Bankruptcy Code to include “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. §541(a)(1). To the extent that a lessee has a right of redemption under applicable state law, the debtor has an interest in property repossessed as of the petition date. The split among federal courts focuses on the extent to which the lessor has an affirmative obligation to return property repossessed on the eve of a bankruptcy filing as opposed to requiring the debtor to affirmatively seek turnover of such property. The majority of courts hold that a lessor's holding onto property upon a bankruptcy filing is “exercising control” over such property within the meaning of the automatic stay section 362 of the Bankruptcy Code. These courts also rely on the turnover section of the Bankruptcy Code which effectively requires that any entity in possession of property of the estate as of a bankruptcy filing is required to turnover such property to the trustee. 11 U.S.C. §542(a) (“an entity … in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title … shall deliver to the trustee, and account for, such property”).