Section 362(a) of the Bankruptcy Code provides that the filing of a bankruptcy petition automatically triggers a stay. Of particular relevance to this memorandum, Section 362(a)(3) of the Bankruptcy Code provides that a bankruptcy petition “operates as a stay, applicable to all entities, of * * * any act to obtain possession of property of the estate * * * or to exercise control over property of the estate.” Under Section 541(a) of the Bankruptcy Code, property of the bankruptcy estate, in turn, generally includes “all legal or equitable interests of the debtor in property as of the commencement of the case,” “wherever located and by whomever held.”
A dispute currently exists among the courts as to whether, due to §362(a)(3), upon receiving notice of a bankruptcy petition, a secured creditor violates the automatic stay by maintaining possession of collateral that it lawfully repossessed pre-petition. Carr v. Security Savings & Loan Ass’n, 130 B.R. 434 (D.N.J.1991) stands for the proposition that a secured creditor who has repossessed collateral in which a debtor has an interest, must turn that collateral over to the debtor’s trustee immediately upon learning of the petition. Support for this position is found in In re Knaus, 889 F.2d 773, 775 (8th Cir.1989), which stated:
The principle is simply this: that a person holding property of a debtor who filed bankruptcy proceedings becomes obligated, upon discovering the existence of the bankruptcy proceedings, to return that property to the debtor (in chapter 11 or 13 proceedings) or his trustee (in chapter 7 proceedings). Otherwise, if persons who could make no substantial adverse claim to a debtor’s property in their possession could, without cost to themselves, compel the debtor or his trustee to bring suit as a prerequisite to returning the property, the powers of a bankruptcy court and its officers to collect the estate for the benefit of creditors would be vastly reduced. The general creditors, for whose benefit the return of property is sought, would have needlessly to bear the cost of its return. And those who unjustly retain possession of such property might do so with impunity.[1]
A similar conclusion was reached in In re Sharon, 234 B.R. 676 (6th Cir.BAP 1999). In Sharon, the creditor repossessed a 1995 Mitsubishi 3000 GT automobile. Debtor subsequently filed a Chapter 13 petition and debtor’s counsel requested that the vehicle be returned. Debtor’s counsel sent to the creditor a copy of the debtor’s petition, schedules and proof of insurance. The creditor refused to return the vehicle arguing it was entitled to adequate protection. The court and the Bankruptcy Appellate Panel found that this creditor had violated Section 362(a)(3) of the Bankruptcy Code.
The court noted that the filing of a Chapter 13 petition gives rise to an automatic stay of “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property estate.” 11 U.S.C. §362(a)(3). The court then concluded that “possession of the debtor’s car was property of the Chapter 13 estate from the moment of the petition.” Id. at 681. In other words, the Debtor’s car was part of the bundle of rights that became “property of the estate” at the Chapter 13 petition. Once defined as “property of the estate” the statutory consequence in the Section 362(a) of the Bankruptcy Code was application to automatic stay. The debtor’s right to possession of the car was protected by the automatic stay. Id. at 682.
As further support for this proposition, the court noted that the phrase “to exercise control over property of the estate” was added to §362(a)(3) in 1984. Prior to 1984, §362(a)(3) simply referenced “any act to obtain possession of property of the estate or of property from the estate.” The 1984 amendment broadened in the scope of §362(a)(3).
Sharon went on to note that there is no “exception” to §362(a)(3) that excuses the creditor’s refusal to deliver possession of the debtor’s car based on the creditor’s objective opinion that adequate protection offered by the debtor was not “adequate.” Id. at 683.[2] The court stated that the Code does not put the responsibility on the debtor to initiate the request for adequate protection of a creditor’s non-cash collateral. Entitlement to adequate protection, other than cash collateral, is triggered by creditor’s requests to the court, i.e., “if you don’t ask for it, you don’t get it.”[3] The court stated:
While Congress intended “adequate protection” to limit a debtor’s right to possession or use of property of the estate, it unmistakably said so. Section 363(c)(2) of the Code defines “cash collateral” as a special category of estate property that a Debtor or trustee cannot use without first getting the lien creditor’s permission or a court order allowing you some provided adequate protection. In other words, Section 363(c)(2) trumps the Chapter 13 debtor’s right to use estate property with a lien holders right to adequate protection, but only with respect to “cash collateral.[4]
Finally, Sharon noted that when a creditor fears that its collateral is in immediate jeopardy if possession is delivered consistent with Section 542(a), the “congressionally established bankruptcy procedure” is to seek expedited relief under Section 362(f) which provides:
Upon request of a party in interest, the court, with or without a hearing, shall grant such relief from the stay provided under subsection (a) of this section as is necessary to prevent irreparable damage to the interests of an entity in property, if such interest will suffer damage before there is an opportunity for notice and a hearing under subsection (d) or (e) of this section.
A similar conclusion was reached in In re Metromedia Fiber Network, Inc., 290 B.R. 487 (Bankr.S.D.N.Y.2003). In this case, the court noted that §542(a) “on its face is clear and unambiguous, and it mandates that a party holding property of the debtor’s estate ‘shall’ deliver the property to the debtor or trustee.” Id. at 489. The court further noted that “[n]o exception is made in [§542(a)] for property in which the party-in-possession holds a security interest.” Id.
Metromedia, however, recognized that §363(e) was also mandatory, providing that the court “shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest * * * *” It further recognized that §542(a) applied only to “property that the trustee may use, sell, or lease under section 363,” creating ammunition for the argument that the §363(e) adequate protection determination must be made first before the applicability of §542(a) is established. However, the court put the issue to rest by stating:
[T]he automatic stay provision of Section 362(a)(3) prohibiting a secured party-in-possession from exercising control over the debtor’s property. The practical effect of this provision is that the secured creditor must deliver the property to the debtor to avoid violating Section 362(a)(3). The automatic stay most certainly is “self executing” in the sense that it must be complied with absent any action by the debtor or the court, at the risk of sanctions for violation.
But the secured creditor in possession of debtor property is not left without protection in the face of the debtor’s demand for turnover under Section 542(a). In a case of manifest danger of loss if the property is turned over without a court order for adequate protection, the secured creditor may protect itself against loss and a charge of violating the automatic say by timely moving (by order to show cause, if necessary) for relief from the stay under Section 362(f).[5]
The Seventh Circuit resolved this issue in Thompson v. General Motors Acceptance Corporation, LLC, 566 F.3d 699 (7th Cir.2009). The court started its analysis by noting that under the Code’s stay provision, no creditor could commit “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property estate” after a debtor has filed for bankruptcy. (Emphasis in original). The court then stated that there was no debate that the debtor had an equitable interest in the vehicle at issue and, as such, it was property of his bankruptcy estate. “Control” is defined as “restraining or directing influence over” or “to have power over.” (citing to Merriam-Webster’s Collegiate Dictionary 11th Ed.2003). Holding onto an asset, refusing to return it, and otherwise prohibiting a debtor’s beneficial use of an asset all fit within this definition of “control,” as well as within the common sense meaning of the word.
The Seventh Circuit noted further, that Congress’ decision to amend §362 evinced its intent to expand the prohibited conduct beyond mere possession. In this regard, the court noted that prior to 1984, the Code’s stay provision only prohibited acts to obtain possession of property belonging to the bankruptcy estate. Subsequently, Congress amended §362(a)(3) when it passed the Bankruptcy Amendments and Federal Judgeship Act of 1984 to include as prohibited conduct “exercising control” over any asset belonging to the bankruptcy estate. “The mere fact that Congress expanded the provision to prohibit conduct above and beyond obtaining possession of an asset suggests that it intended to include conduct by creditors who seized an asset pre-petition.”
With respect to the issue of adequate protection, Thompson noted that there was no debate that a debtor must provide a secured creditor with adequate protection of its interest in the seized asset if the creditor requests such protection. In this regard, it is the creditor who has the burden to request an adequate protection under §363(e) or, alternatively, by moving for relief from the stay under §362(d)(1).
However, if a creditor is allowed to retain possession, then this burden is rendered meaningless — a creditor has no incentive to seek protection of an asset of which it already has possession. Thus, in order for the language of 11 U.S.C. §363(e) to have meaning, Congress must have intended for the asset to be returned to the bankruptcy estate before the creditor seeks protection of its interest.
Section 542(a) also indicates that turning over seized asset is compulsory. The court noted that a subjectively perceived lack of adequate protection is not an exception to the stay provision and does not defeat this right. Therefore, first a creditor must return the asset to the bankruptcy estate. Then, if the debtor fails to show that he can adequately protect the creditor’s interest, the bankruptcy court is empowered to condition the right of the estate to keep possession of the asset on the provision of certain specified added protections to the creditor.
In In re Fulton, 926 F.3d 916 (7th Cir.2019), the court dealt with the issue of whether it was appropriate for the bankruptcy court to issue a rule to show cause why the City of Chicago should not be sanctioned for refusing to release a Chapter 13 debtor’s vehicle, which had been impounded because of unpaid parking tickets. The court held that the city’s action was a violation of the automatic stay. First, it held that there was no debate the debtor had an equitable interest in his vehicle, and “as such, it is property of his bankruptcy estate.” Id. at 923. Next, the court ruled that §362(a)(3) became effective immediately upon filing the petition and is not dependent on the debtor first bringing a turnover action. Id. at 924. The court stated:
The creditor acknowledged, and we agreed, that it has the burden of requesting protection of its interest in the asset under §363(e). “However, if a creditor is allowed to retain possession, then this burden is rendered meaningless – a creditor has no incentive to seek protection of an asset of which it already has possession.” Thompson, 566 F.3d at 704. For §363(e) to have meaning then, the asset must be returned to the estate prior to the creditor seeking protection of its interest.[6]
Fulton emphasized that because the right of possession is incident to the automatic stay, the creditor must first return the asset to the bankruptcy estate. “Only then is ‘the bankruptcy court [ ] empowered to condition the right of the estate to keep possession of the asset on the provision of certain specified adequate protections to the creditor.’” Id. at 924 (citing Thompson, 566 F.3d at 704)
The city argued that its possessory liens freed it from the obligation of returning the vehicle. The Seventh Circuit disagreed. It held that the city’s possessory lien is not destroyed by its involuntary loss of possession due to forced compliance with the Bankruptcy Code’s automatic stay. Because the city did not indicate any intent to abandon or release its lien, its possessory lien survives its loss of possession to the bankruptcy estate. The court cited to In re Estate of Miller, 556 N.E.2d 568, 572 (1990) (“The law respecting common law retaining liens is that the involuntary relinquishment of retained property pursuant to a court order does not result in the loss of the lien.”)
Other courts have rejected the Knaus approach, reasoning that §362(a)(3) freezes the status quo as of the petition date, rather than mandating an affirmative action by the creditor in possession of property seized pre-petition to return it immediately.[7] In In re Richardson, 135 BR. 256 at 258-59 (Bankr.E.D.Tex.1992), the court stated:
The effect of the stay is to freeze the status quo. To the extent that a creditor fails to desist in these collection attempts and attempts to exercise control over property of the estate post-petition, such creditor can be sanctioned pursuant to §362(h). However, this provision for creditors who affirmatively act in violation of the stay post-petition cannot be extrapolated to punish creditors who, while legally seizing the property of the estate pre-petition, failed to return this property immediately to the debtor post-petition. In maintaining the seized property in the status it enjoyed just before the filing of debtor’s petition, a creditor is merely complying with the spirit of the §362 freeze.
In re Young, 193 B.R. 620 (Bankr.D.Dist.Col.1996) has taken the position that when a vehicle is lawfully repossessed prepetition, the secured creditor was entitled to retain possession of the property pending resolution of its request for adequate protection of its interest in the property, and thus the creditor was not subject to the automatic stay sanction for “exercising control” over estate property.
In In re Barringer, 244 B.R. 402 (Bankr.E.D.Mich.1999), the court found that a creditor is not required to immediately return repossessed collateral, based upon its analysis of §§541(a), 542(a) and 362(a)(3). With respect to §541(a), the court noted that there are three sources of estate property: (i) interests owned by the Debtor when the case is commenced, see §§541(a)(1) and (2); (ii) certain narrowly defined interests which the Debtor acquires post-petition, see §541(a)(5); and (iii) interests acquired by the estate in its own right, see §§541(a)(3), (4), (6) and (7).
The court determined that when a security agreement provides creditors with the right to seize or repossess collateralized property, the creditor holds not only the physical property itself, but also the abstract right of possession when the same is seized. “It may well be true that the Debtor retains certain rights in or relating to the seized property, such as legal or equitable ownership, or right of redemption or the right to any surplus from the sale of the property. But by definition (since we are talking here about legally valid seizures), the Debtor doesn’t have the right to possess the property.” The court went on to state that the “possessory interest” in seized property does not enter the estate via §541(a)(1). To the contrary, such an interest continues to remain with the creditor as of the commencement of the case. In other words, upon the filing of a petition, possession of a lawfully repossessed vehicle is not part of the bundle of rights that become “property of the estate”.
However, such property can be brought with in this state under §542(a). Section 542(a) “brings into the estate property in which the Debtor did not have a possessory interest at the time the bankruptcy proceeding commenced.” In other words, §542(a) grants the Trustee greater rights than those held by the Debtor prior to the filing of the petition. However, a Trustee’s rights under §542(a) are not derivative. In other words, they are not simply “inherited” from the Debtor but must instead be affirmatively exercised. This requires the filing of an adversary proceeding in satisfaction of the other requirements of §542(a).
With respect to §362(a)(3), the court noted that a creditor who continues to possess property in which the estate has an interest can be said to “exercise control” over estate property only if the right of possession belongs to the estate. Id. at 408. “When a creditor’s pre-petition seizure is lawful, however, the right to possession does not automatically become part of the estate by virtue of Section 541(a)(1). Rather, this right remains not an estate property until it is acquired by the Trustee from the creditor.” The question then becomes at what point during the pendency of the bankruptcy case does the Trustee acquire the possessory interest? The court answered that this possessory right is obtained by the estate only after adversary proceedings are filed under §542(a).
The court reach its conclusion based on the various qualifications which condition the Trustee’s right under §542(a), including the creditor’s right to possession absent a hearing. As stated earlier, §542(a) applies only to property which “the Trustee may use, sell, or lease under Section 363”. Section 363, in turn, states that “the Trustee, after notice and a hearing, may use, sell or lease, other than the ordinary course of business, property of the estate”… and, “notwithstanding any other provision of,” the creditor has an absolute right to “adequate protection” of its security interest in connection with the proposed use of its collateral.
In In re Bernstein, 252 B.R. 846 (Bankr.D.Dist.Col.2000) the court found that a creditor’s continued retention of property pursuant to a prepetition seizure did not violate either §§362(a)(3) or 542(a). First, the court found that stay of §362(a)(3) was designed to prohibit only an affirmative act by a creditor (instead of a passive act) to gain possession or control of property,” and the failure to turn over property is not an affirmative act altering the status quo such as to run afoul of the spirit of the automatic stay Id. at 848, 849. Second, §542(a) is not self-executing, requiring turnover before the creditor can obtain adequate protection as a condition to turnover. Section 542(a) requires an adversary proceeding and “envisions that the creditor will be entitled to raise any defenses to turnover before it is compelled to do so.” Id. at 849. In this regard, numerous instances exist in which a creditor will need adequate protection of its lien prior to being required to turn over the collateral, lest the lien be destroyed or diminished in value during the interval between turnover and adjudication of the right to adequate protection. “It is no answer that the creditor can seek such an order on its own instead of in a turnover proceeding: if §542(a) is self-executing, such an order would come only after a period during which the creditor is in contempt.” Id. at 851.
Further, Bernstein concluded that its holding was no limited to a creditor lawfully in possession of the property on the petition date. Section 542(a) is no more self-executing in the case of unlawful possession.
Few lien disputes are susceptible of ready determination. They are ordinarily decided only after the filing of an adversary proceeding as required by F.R.Bankr.P. 7001. A turnover proceeding or similar adversary proceeding, not a contempt proceeding, is the proper vehicle for adjudicating questions of disputed ownership and, analogously, the validity of an asserted lien.. . . .The court doubts that Congress intended that a creditor can retain possession of property only at the risk that it will be held in contempt if its asserted lien is ruled invalid. Id. at 853.
In In re Cowen, 849 F.3d 943 (10th Cir.2017), the court stated that §362(a)(3), in relevant part: “operates as a stay * * * 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.” The court then broke down that sentence. The court noted that “any act” is the prepositive modifier of both infinitive phrases. “In other words, §362(a)(3) prohibits ‘any act to obtain possession of property’ or ‘any act to exercise control over property.’ The court went on to note that “Act”, in turn, commonly means to “take action” or “do something,” citing to the New Oxford American Dictionary 15 (3d ed.2010). “This section, then, stays entities from doing something to obtain possession of or to exercise control over the estate’s property. It does not cover “the act of passively holding onto an asset,” nor does it impose an affirmative obligation to turnover property to the estate. “The automatic stay, as its name suggests, serves as a restraint only on acts to gain possession or control over property of the estate.” The court went on to state:
But Congress does not “hide elephants in mouseholes.” Whitman v. American Trucking Ass’ns, 531 U.S. 457, 468, 121 S.Ct. 903, 149 L.Ed.2d 1 (2001). The amendments are equally “consonant” with another, less sweeping conclusion. “Since an act designed to change control of property could be tantamount to obtaining possession and have the same effect, it appears that §362(a)(3) was merely tightened to obtain full protection.” In re Bernstein, 252 B.R. 846, 848 (Bankr.D.D.C.2000). “[U]se of the word ‘control’ in the 1984 amendment to §362(a)(3) suggests that the drafters meant to distinguish the newly prohibited ‘control’ from the already-prohibited acts to obtain ‘possession,’ in order to reach nonpossessory conduct that would nonetheless interfere with the estate’s authority over a particular property interest.” Ralph Brubaker, Turnover, Adequate Protection, and the Automatic Stay (Part II): Who is “Exercising Control” Over What?, 33 No. 9 Bankruptcy Law Letter NL 1 (September 2013).
It’s not hard to come up with examples of such “acts” that “exercise control” over, but do not “obtain possession of,” the estate’s property, e.g., a creditor in possession who improperly sells property belonging to the estate. Similarly, “intangible property rights that belong to the estate, such as contract rights or causes of action are incapable of real possession unless they are reified. Yet, (a)(3) preserves and guards against interference with them by staying any act to exercise control over estate property.” In re Hall, 502 B.R. 650, 665 (Bankr.D.D.C.2014). If Congress had meant to add an affirmative obligation—to the automatic stay provision no less, as opposed to the turnover provision—to turn over property belonging to the estate, it would have done so explicitly. The majority rule finds no support in the text or its legislative history.
In the end, the best argument for the majority rule is that §362 should be read in conjunction with another part of the bankruptcy code – §542, the turnover provision, which provides that any 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” such property to the trustee “unless such property is of inconsequential value or benefit to the estate.”[8]
Thus, Cowen professing that it was adhering to the text of the statute, adopted the minority rule that only affirmative acts to gain possession of, or to exercise control over, property of the estate violated §362(a)(3).
In Freeman v. California Franchise Tax Board, 2019 WL 3412938 (N.D.Cal.), the Franchise Tax Board (“FTB”) revised the Freemans’ taxable income for 2011 from $33,369.00 to $2,037,448.00. The FTB accordingly proposed a tax of $195,153.00, a penalty of $39,030.60, and interest totaling $30,253.39. The FTB issued an Order to Withhold to the Freemans’ bank pursuant to California Revenue and Taxation Code Section 18670(a). This section empowers the FTB to serve a delinquent taxpayer’s bank with an Order to Withhold, so that the bank can directly transmit to the FTB either the amount that the taxpayer owes or the amount of the taxpayer’s funds in the bank’s possession, whichever is less.
One day after the bank received the Order to Withhold, Freeman filed a voluntary Chapter 13 petition. Freeman requested that the FTB revoke the Order to Withhold, which the FTB refused. One week after filing for bankruptcy, the debtor filed a Complaint for Violation of Automatic Stay with the bankruptcy court, alleging that the FTB had violated the automatic stay by refusing to revoke the Order to Withhold when Freeman filed for bankruptcy.
The court held that the FTB had not violated the automatic stay. It stated that the available funds were not part of the debtor’s bankruptcy estate, because they were no longer her property when she filed for bankruptcy. It noted that the Order to Withhold transferred ownership of the funds to the FTB the moment the bank received it, even though the 10-day grace period provided in §18670 had not lapsed. Therefore, given that only assets in which a debtor has a legal or equitable interest as of the commencement of his or her bankruptcy case become property within the debtor’s bankruptcy estate, the available funds never became part of the bankruptcy estate, and as a result, the automatic stay did not apply. Id. at *3 and 7. The court expanded on this point as follows:
The automatic stay provisions of 11 U.S.C. §362 protect only the property in which the debtor has a legal or equitable interest. Because the Order to Withhold had already transferred ownership of the Funds to the FTB, the Funds were not subject to the automatic stay. Judge Lafferty expanded on this point in his ruling, explaining that “the automatic stay is really just a procedural device. It doesn’t create any rights, it doesn’t enhance substantively anything the debtor has or doesn’t have on the petition date.” The automatic stay cannot “create” a right to freeze assets that Freeman did not have when she filed for bankruptcy. Since she did not have a right to the Funds, the automatic stay does not apply to or “enhance” her legal or equitable interest in those Funds.[9]
In In re Denby-Peterson, 941 F.3d 115 (3rd Cir.2019), the Third Circuit joined this “minority” line of decisions. In doing so, the court dissected the operative terms and phrases of §362(a)(3), i.e., the words “stay,” “act,” and “exercise control.” Because the Bankruptcy Code does not define these words, the court looked to their ordinary meanings. It started with the meaning of the word “stay,” which in Black’s Law Dictionary is defined as “[t]he postponement or halting of a proceeding, judgment, or the like” or “[a]n order to suspend all or part of a judicial proceeding or a judgment resulting from that proceeding.” Id. at 125. Next, the noun “act” was defined to mean, among other things, “[s]omething done; the action or process of achieving this.” Finally, as to the phrase “exercise control,” the court noted that the verb “exercise” means “[t]o put in action or motion.” The word “control,” as a noun, means, among other things, “[t]he fact or power of directing and regulating the actions of people or things; direction, management; command.” Id.
From these definitions, we gather that Section 362(a)(3) prohibits creditors from taking any affirmative act to exercise control over property of the estate. * * * the statutory language “is prospective in nature * * * the exercise of control is not stayed, but the act to exercise control is stayed.” Therefore, we agree with the minority position held by two of our sister courts – the text of Section 362(a)(3) requires a post-petition affirmative act to exercise control over property of the estate.[10]
The court went on to explain that under its facts, a post-petition affirmative act to exercise control over vehicle in question did not occur. The creditors repossessed the vehicle before the debtor had filed for bankruptcy. “Accordingly, pre-bankruptcy petition, the creditors had possession and control of the Corvette, and post-bankruptcy petition, the creditors merely passively retained that same possession and control.” Id. at 126. Although the creditors exercised control over the vehicle by keeping it in their possession after learning of the bankruptcy, the requisite post-petition affirmative “act * * * to exercise control over” it was not present. Id. The court stated that its:
conclusion is bolstered by the legislative purpose and underlying policy goals of the automatic stay. It is well-established that one of the automatic stay’s primary purposes is “ ‘to maintain the status quo between the debtor and [his] creditors, thereby affording the parties and the [Bankruptcy] Court an opportunity to appropriately resolve competing economic interests in an orderly and effective way.’ ” Here, the creditors had possession of the Corvette both before and after the bankruptcy filing. Thus, by keeping possession of the Corvette after learning of the bankruptcy filing, the creditors preserved the pre-petition status quo. To hold that such a retention of possession violates the automatic stay would directly contravene the status-quo aims of the automatic stay.[11]
With respect to §542, the court noted that the debtor asked it to essentially ignore the section’s statutory prerequisites and find that a creditor must immediately turn over any collateral that a debtor deems to be subject to turnover. “We will not do so.” Id. at 129. The court stated that mandating creditors to automatically turn over any property that the debtor deems worthy of turnover would allow debtors to temporarily strip creditors of their rights to assert affirmative defenses such as laches, or to claim that the property was not property of the estate. While it was true that creditors would be able to assert those defenses after turning over the collateral, the Third Circuit did not read the turnover provision as placing the onus on creditors to surrender the collateral and then immediately file a motion in Bankruptcy Court asserting their rights. Id. at 130.
A third approach to this issue is found in In re Warren, 221 B.R. 843 (Bankr.N.D.Ala.1998), where the court concluded that absent adequate protection, a secured creditor was not required to return repossessed collateral. The court’s opinion started with the premise that a debtor may recover repossessed collateral pursuant to §542(a) only if the collateral is property of a bankruptcy estate. That occurs only if the asset is property of the estate by virtue of the bankruptcy filing, or because the debtor has exercised a post-repossession, state law, right of redemption. The Court found that under Alabama’s version of Section 9-506 of the UCC, a secured party, upon repossession of its collateral, acquires both title to and the right to possession of that property subject only to the debtor’s statutory right of redemption. The Court concluded that, while the right to redeem the property would become property of the estate, the property itself does not. Because the property does not become property of the estate, following repossession and prior to redemption, the same is not subject to turnover under §542(a).
Section 9-506 of the Uniform Commercial Code provides that, in order to redeem property, the debtor must “tender fulfillment” of all obligations secured by the collateral as well as the expenses reasonably incurred by the secured party in retaking, holding and preparing the collateral for disposition, plus the creditors reasonable attorneys’ fees and expenses, to the extent provided for in the agreement. The operative phrase in §9-506 is “tendering fulfillment.” Warren stated that tendering fulfillment meant more than a new promise to perform the existing promise; it required payment in full of all monetary obligations then due and performance of all other obligations then matured. The court determined that the debtor’s treatment of the secured creditor under their Chapter 13 plan was not a proper exercise of debtor’s redemption rights.
In support of that conclusion, the court found: (1) the debtor’s plan constituted a promise to pay the lender over a period of time, rather than an immediate present payment; (2) the debtor proposed to pay the lender only $13,000.00 of the bank’s $17,190.55 debt, or 76% of the obligations secured by the automobile, rather than the full amount of the secured obligation; (3) the debtor’s plan did not include any provisions for the bank’s repossession expenses and legal expenses; and (4) the debtor proposed to possess and use the automobile before redemption is effectuated.
A similar conclusion was reached in In re Alberto, 271 P.R.223 (N.D.N.Y. 2001). In this case, the question was whether the creditor violated the automatic stay by retaining and, in fact, disposing of the collateral post-petition. The court concluded that the creditor did not “act to obtain possession or to exercise control” of the vehicle in violation of the stay, since it already lawfully possessed and controlled the vehicle when the stay went into effect. Citing to Section 9-503 of the Uniform Commercial Code, the court noted that under New York law, a secured party has the right to take possession of collateral upon default by the debtor. Pursuant to Section 9-504 of the Uniform Commercial Code, the secured party could sell or otherwise dispose of the collateral in satisfaction of the debt. Pursuant to Section 9-505 of the Uniform Commercial Code, the secured party must provide written notice to the debtor of the intent to retain the collateral in satisfaction of the debt, and in the absence of an objection by the debtor received within 21 days after notice was sent, the secured party may retain the collateral in satisfaction of the debt. Finally, §9-506 provides that the debtor retains the right to redeem the collateral by tendering fulfillment of all obligations secured by the collateral plus costs, at any time before the creditor has disposed of the collateral. The court stated:
It is beyond doubt that Alberto was in default on his obligation and the repossession of the vehicle on June 8, 1998, by M&T Trust was lawful and proper. At the time of the lawful repossession, M&T Trust had the right to possession of the vehicle. See, N.Y.U.C.C. §9-503. M&T Trust notified Alberto in writing of its intention to retain, and sell, the vehicle in satisfaction of outstanding debt. See, 9-504. Once the lawful repossession occurred, Alberto no longer had the right to possess the vehicle; he merely retained the right pursuant to Section 9-506 to redeem it before the secured party disposed of it. Alberto filed the Chapter 13 petition after the lawful repossession. Accordingly, what became property of the bankruptcy estate was the interest of the debtor, Alberto, had in the property: the right to redeem but not the right to possession.
Matthew T. Gensburg
[email protected]
[1] See also, In re Coats, 168 B.R. 159 (Bankr.S.D.Tex.1993); In re Ryan, 183 B.R. 288 (S.D.Fla.1995); and In re Zaber, 223 B.R. 102 (Bankr.N.D.Tex.1998)
[2] Sharon stated:
Nothing in Section 362 itself suggests the “adequate protection” exception to the automatic stay argued by TranSouth. As demonstrated above, the present of “property of the estate” triggers the prescription in Section 362(a)(3). There is no “exception” to property of the estate for property with respect to which a creditor claims a right of “adequate protection.”
[3] (Quoting In re Kain, 86 B.R. 506, 512 (Bankr.W.D.Mich.1988).
[4] Id. at 684.
[5] Id. at 493.
[6] Id. at 924 (emphasis added).
[7] See,; In re Briggs, 143 BR. 438,448 n.15 (Bankr.E.D.Mich.1992); In re Najafi, 154 BR. 185, 194-95 (Bankr.E.D.Pa.1993); and In re Deiss, 166 B.R. 92 (Bankr.S.D.Tex.1994) (creditor entitled to adequate protection before turnover)
[8] Id. at 949-50.
[9] Id. at *7.
[10] Id. at 125-26.
[11] Id.