Tuesday, May 14, 2013

FYI: 2nd Cir Rules Creditor Violated Automatic Stay By Failing to Automatically Return Repossessed Vehicle in BK Filed After Repossession

The U.S. Court of Appeals for the Second Circuit recently ruled that a secured creditor willfully violated the automatic stay in a Chapter 13 bankruptcy that was filed after repossession of a debtor's vehicle, because the creditor failed to return the repossessed vehicle to the debtor.


The Court held that the creditor was thus liable for debtor's actual damages during the period when the debtor was without the use of his vehicle, because once the creditor knew of the bankruptcy filing, Bankruptcy Code Sections 541 and 542 required the creditor to surrender the repossessed vehicle back to the debtor as debtor-in-possession, and the debtor was not required to take any additional steps, such as obtaining a court order requiring the creditor to turn over the repossessed vehicle.


A copy of the opinion is available at:  Download Link.

Plaintiff ("Debtor") obtained a loan from defendant, a federal credit union ("FCU"), which was secured by a pickup truck that Debtor used to commute to his construction business.  The loan agreement entitled FCU to repossess the truck upon default.

Debtor defaulted several years later, and FCU repossessed the truck, advising Debtor of his rights under New York commercial law to redeem the vehicle.  Shortly after the repossession, Debtor filed for Chapter 13 bankruptcy protection, giving FCU written notice of Debtor's bankruptcy filing, and, invoking the automatic stay imposed by Section 362 of the Bankruptcy Code, demanded return of the vehicle.

A week later, with FCU still in possession of the vehicle, Debtor filed an adversary proceeding against FCU seeking its return.  Over a month later, the Bankruptcy Court entered an order requiring FCU to show cause why it should not return the vehicle, and why an award of damages was not warranted for FCU's violation of the automatic stay.  Following a hearing, FCU finally returned the vehicle to Debtor.

Debtor then sought damages for his inability to use his vehicle while FCU had possession of it, as well as attorneys' fees, and sanctions.  FCU moved for summary judgment, arguing that there was no violation of the automatic stay and that, under a bankruptcy court decision dealing with turnover of property to the bankruptcy estate, it had a reasonable basis for declining the release the vehicle absent a court order.  In response, Debtor argued in part that Section 362 unconditionally required FCU to release the vehicle promptly after the filing of the bankruptcy petition. 

The Bankruptcy Court granted summary judgment in favor of FCU.  Debtor appealed to the District Court, which ruled that FCU was bound to release the vehicle to Debtor upon learning of his Chapter 13 filing and, further, that FCU's violation was "willful," thus making it liable for damages and attorneys' fees.  The Second Circuit affirmed.

As you may recall, under Section 362 of the Bankruptcy Code, the filing of a bankruptcy petition automatically effects a stay of "any act to obtain possession of property of the estate . . . or to exercise control over property of the estate."  11 U.S.C. § 362(a)(3).  Moreover, a debtor "injured by any willful violation of [the automatic stay] shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages."  Id. § 362(k)(1).


In addition, "all legal or equitable interests of the debtor in property as of the commencement of the [bankruptcy] case" are gathered into the bankruptcy estate, "wherever located and by whomever held" and an entity "in possession, custody, or control" of certain property in the estate "shall deliver" that property to the bankruptcy trustee "unless such property is of inconsequential value or benefit to the estate." 11 U.S.C. §§ 541(a)(1); 542(a).  The property subject to the delivery obligation is "property that the trustee may use, sell or lease."  Id. at § 542(a).


Finally, in a Chapter 13 bankruptcy, the debtor "remain[s] in possession of all property of the estate," effectively acting as the trustee under Section 542(a).  11 U.S.C. § 1306(b). 


Noting that under New York commercial law, Debtor had a continuing equitable interest in the vehicle, and that the equitable interest thus constituted "property" of the bankruptcy estate, the Second Circuit turned to Debtor's argument that in failing to return the vehicle, FCU "exercise[d] control" over Debtor's equitable interest and thereby violated the automatic stay.    See N.Y. U.C.C. § 9-623(right to redeem vehicle prior to sale by secured creditor) ("UCC").


Relying on a Supreme Court decision that addressed a Chapter 11 reorganization, the Second Circuit recognized that the term "property" under Section 541(a) included property repossessed by a secured creditor and that "any other interpretation of § 542(a) would deprive the bankruptcy estate of the assets and property essential to its rehabilitation effort . . . ."  United States v. Whiting Pools, Inc., 462 U.S. 198, 205-06, 208 (1983).  Accordingly, the Court reasoned that FCU's rights in the vehicle were subject to Debtor's equitable interest under the UCC, but also that, once Debtor filed for bankruptcy protection, that equitable interest gave the bankruptcy estate a superior possessory right in the vehicle.  See id. at 207.


Next, in rejecting FCU's argument that, as the secured creditor in possession of the vehicle, it was not obligated to surrender the collateral to the estate because Debtor had to take an "affirmative step," such as obtaining a court order requiring it to do so, the Second Circuit reasoned that since Section 541 expressly provides that "property" of the bankruptcy estate includes equitable interests and Section 542 is "self-executing," Debtor did not need to take any further steps beyond the filing of his Chapter 13 petition to compel the turnover of his vehicle.  Cf. Manufacturers & Traders Trust Co. v. Alberto (In re Alberto), 271 B.R. 223 (N.D.N.Y. 2001)(concluding that secured creditor did not violate the automatic stay when after learning of bankruptcy, it failed to return a debtor's repossessed vehicle immediately). 


In so ruling, the Second Circuit, noting that the Alberto decision ran counter to the trend of decisions from sister circuits, stressed that FCU "exercised control" over the vehicle and thus violated both the automatic stay and the plain language in Section 542 directing that those with assets of the estate "shall deliver" them to the trustee.  See, e.g., Thompson v. General Motors Acceptance Corp., 566 F.3d 699 (7th Cir. 2009); Knaus v. Concordia Lumber Co. (In re Knaus), 889 F.2d 773 (8th Cir. 1989).


Similarly, the Second Circuit also rejected FCU's assertion that it was entitled to hold onto the vehicle until such time as Debtor provided "adequate protection" for its security interest, ultimately concluding that the requirement that those in possession of estate property "shall deliver" it to the trustee was unambiguous and unqualified.   In so doing, the Court pointed out that a different interpretation would allow creditors to "negotiate[e] a better security package" than other creditors, thereby affording themselves a priority position above other secured creditors.  See Thompson, 566 F.3d at 707.


Finally, addressing FCU's argument that it was not obligated to pay damages because any violation of the automatic stay was in good faith and thus not "willful," the Second Circuit concluded that a willful violation merely required the general intent to keep the vehicle and that FCU did not need specific intent to violate the automatic stay.  As the Court explained, "any deliberate act taken in violation of a stay, which the violator knows to be in existence, justifies an award of actual damages."  Crysen/Montenay Energy Co. v. Esselen Assocs., Inc. (In re Crysen/Montenay Energy Co.), 902 F.2d 1098, 1105 (2d Cir. 1990). 


Thus, the Court ruled that FCU was liable for Debtor's actual damages for the loss of his vehicle, but offered that good faith may prevent the imposition of punitive damages.





Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
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Email: RWutscher@mwbllp.com


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