Mere Retention of Property Does Not Support Stay Violation

Posted by NCBRC - March 29, 2017

Breaking with the majority view that passive retention of estate property may be an “exercise of control,” the Tenth Circuit held that the lender must take some affirmative action to support a stay violation claim. WD Equipment, LLC. v. Cowen, No. 15-1413 (10th Cir. Feb. 27, 2017).

Jared Cowen defaulted on the purchase money security interest loan for one vehicle and a non-pmsi loan for another vehicle. After the vehicles were repossessed, by separate but related lenders, Mr. Cowen filed for chapter 13 bankruptcy. The case was dismissed, however, because, without his trucks, he could not earn income to finance his plan. The bankruptcy court retained jurisdiction over Mr. Cowen’s adversary complaint for violation of the automatic stay. In the hearing on that complaint, the lenders lied and presented forged documents to support their claims that the sale of one vehicle and title transfer of the other took place pre-bankruptcy. The bankruptcy court found that the lenders’ failure to turn over the vehicles constituted continuing violation of the automatic stay and awarded damages. The district court recalculated damages but otherwise affirmed.

The circuit court began by rejecting the lenders’ argument that the bankruptcy court lost jurisdiction over the adversary complaint when the bankruptcy case was closed, finding that it had no support in the Code and was precluded by the prior case of Johnson v. Smith (In re Johnson), 575 F.3d 1079, 1083 (10th Cir. 2009).

On the merits, the court interpreted the language in section 362(a)(3) that bankruptcy’s automatic stay provision prohibits a lender from “any act” to exercise control over property of the estate. The court found that the phrase “any act” requires an affirmative action beyond mere passive retention of property, stating, “stay means stay, not go.” The court rejected the argument that when, in 1984, Congress added the language prohibiting exercise of control over property to the automatic stay provision, it intended to cover situations such as the one at bar. Instead, the court found that the amendment was amenable to the less drastic interpretation that Congress meant to include situations where the creditor violated the stay without actually taking possession of the property, as in situations involving intangible property rights.

The court also found that Mr. Cowen could not hang his hat on the relationship between the turnover provision of section 542 and violation of stay under section 362. The court found the two provisions function separately with the court’s power to enforce section 542 arising out of section 105(a).

Having found that mere retention of the vehicles was insufficient to support a stay violation, however, the court offered an alternative basis for stay violation. It found that the lenders’ lying and forging of documents in an attempt to show pre-bankruptcy ownership of the vehicles were affirmative acts to exercise control over estate property. The court remanded to the district court to reconsider the case in light of this finding.

Cowen 10th Cir. opinion Feb 2017

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