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Third Circuit Allows Repossessing Secured Lender to Hold Collateral Pending Bankruptcy Stay
"[A] secured creditor [has no] affirmative obligation under the automatic stay to return a debtor's [repossessed] collateral to the bankruptcy estate immediately upon notice of the debtor's bankruptcy," the U.S. Court of Appeals for the Third Circuit held on Oct. 28, 2019. In re Denby-Peterson, 2019 WL 5538570, 1 (3d Cir. Oct. 28, 2019). Affirming the lower courts, the Third Circuit joined "the minority of our sister courts — the Tenth and D.C. Circuits" with its holding. According to the court, it was "[g]uided by the plain language of the Bankruptcy Code's automatic stay and turnover provisions, the legislative purpose and policy goals of the automatic stay, and the reasoning of the Supreme Court and our two sister circuits …." Id. at 13. In sum, because "a secured creditor [need not] return the [repossessed] collateral to the debtor until the debtor obtains a [bankruptcy] court order … requiring the creditor to do so," it does "not violate the automatic stay" of Bankruptcy Code (Code) §362(a)(3) (creditors stayed from "any act to obtain possession of property of the debtor … or to exercise control over property of the estate."). Id. at 5-6. The court essentially allowed lenders with statutory defenses to a debtor's turnover claim to retain possession pending a bankruptcy court order resolving the issue.
Relevance
The Third Circuit followed the holdings of the Tenth and D.C. Circuits "that a creditor does not violate the stay in regard to property of the estate if it merely maintains the status quo." Id. at 3, citing In re Cowen, 849 F.3d 943, 950 (10th Cir. 2017) (only "affirmative acts" to take "possession of, or to exercise control over" debtor's property "violate" automatic stay); United States v. Inslaw, Inc., 932 F.2d 1467, 1474 (D.C. Cir. 1991) ("Nowhere in [§362(a)] is there a hint that it creates an affirmative duty…"). In contrast, the "Second, Seventh, Eighth, … Ninth [and Eleventh] Circuits … have held that the Bankruptcy Code's turnover provision requires immediate turnover of estate property that was seized [prior to bankruptcy] and that failure to do so violates the automatic stay." Id., citing In re Fulton, 926 F.3d 916 (7th Cir. 2019); In re Weber, 719 F.3d 72 (2d Cir. 2013); In re Del Mission Ltd., 98 F.3d 1147 (9th Cir. 1996); In re Knaus, 889 F.2d 773 (8th Cir. 1989); and In re Rozier, 376 F.3d 1323, 1324 (11th Cir. 2004) (creditor held "in willful contempt of the automatic stay … by refusing to return the vehicle.").
The Supreme Court should resolve this circuit split. It did so 24 years ago in Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995), when it "considered the interplay between the automatic stay and the turnover provision in [Code §]542(b)." 2019 WL 5538570, at 12. In Strumpf, the court held "that a bank's temporary withholding of funds in a debtor's bank account, pending resolution of the bank's setoff right … did not violate the automatic stay," reasoning "among other things, that [to] interpret … [§]542(b)'s turnover provision as self-executing would 'eviscerate' the provision's exceptions to the duty to pay." Id. at 12. The City of Chicago, in fact, sought Supreme Court review on Sept. 17, 2019 of the Seventh Circuit's Fulton decision, 926 F.3d 916,923 (passive retention of debtor's property was "an act to … exercise control" over property).
Facts
The individual debtor bought a used Chevrolet Corvette in July, 2016. After making several installment payments on her financing agreement, the secured lenders repossessed the car when the debtor later defaulted on her car payments. The debtor then filed a Chapter 13 petition, notifying the secured lenders of the bankruptcy filing and demanding that they return the car to her.
The lenders rejected the debtor's demand. She then moved for a turnover order in the bankruptcy court under Code §542(a) (creditor "shall deliver" debtor's property to debtor), seeking not only the return of the car, but also sanctions under Code §363(k) for the lenders' alleged "willful violation" of the Code's automatic stay.
The Lower Courts
The bankruptcy court ordered the turnover of the car but denied the debtor's request for sanctions, reasoning that the lenders had not violated the stay by failing to return the car after receiving notice of the bankruptcy filing. The district court affirmed.
The Third Circuit
The Third Circuit noted the "twofold" purpose of the automatic stay in Code §362(a). Not only does it protect the debtor "by stopping all collection efforts, harassment, and foreclosure actions," but it also protects creditors by "preventing particular creditors from acting unilaterally in self-interest to obtain payment from a debtor to the detriment of other creditors." 2019 WL 5538570, at 5. The stay thus "prevent[s] dismemberment of the estate," enabling an "orderly" distribution of the debtor's assets. Id., citing Taggart v. Lorenzen, 139 S.Ct. 1795, 1804 (2019) (automatic stay "aims to prevent damaging disruptions to the administration of a bankruptcy case in the short run.").
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