Creditor Must Return Repossessed Vehicle upon Bankruptcy Filing

Posted by NCBRC - May 13, 2013

The Second Circuit upheld sanctions against vehicle loan creditor, SEFCU, for refusing to return debtor’s repossessed vehicle without a court order and adequate protection. Weber v. SEFCU, No. 12-1632 (May 8, 2013). SEFCU had lawfully repossessed the debtor’s pick-up truck pursuant to the loan agreement but when the debtor filed for bankruptcy SEFCU refused to return the vehicle. The bankruptcy court determined that SEFCU’s actions did not violate the automatic stay. The district court reversed. Weber v. SEFCU, 477 B.R. 308, 311 (N.D.N.Y. 2012).

On appeal, the Second Circuit walked through the relevant statutory provisions beginning with section 541(a)(1) which provides that upon the filing of the petition, the bankruptcy estate consists of “all [debtor’s] legal or equitable interests in property.” Under New York law, a debtor retains an equitable interest in repossessed property due to his right to redeem, and “under United States v. Whiting Pools, Inc., 462 U.S. 198 (1983), the filing of Weber’s bankruptcy petition transformed the equitable interest into a possessory interest held by Weber’s estate.” Section 542’s mandatory turnover obligation, in conjunction with section 1306(b)’s provision that the debtor retains possession of chapter 13 estate property, required SEFCU to return the vehicle to the debtor without further action.

The court rejected SEFCU’s argument that it did not “exercise control” over the vehicle in violation of section 362. In so holding, the court found that Manufacturers & Traders Trust Co. v. Alberto (In re Alberto), 271 B.R. 223 (N.D. N.Y. 2001), which held that a secured creditor does not violate the automatic stay by requiring that the debtor take an affirmative step, such as seeking a court order, before turning over a repossessed item, was erroneously decided. Instead, the court found that failure to return the vehicle constituted an exercise of control within the ordinary meaning of the words. See also Knaus v. Concordia Lumber Co. (In re Knaus), 889 F.2d 773, 775 (8th Cir. 1989); Thompson v. General Motors Acceptance Corp., 566 F.3d 699, 705-06 (7th Cir. 2009); But see Bell-Tel Fed. Credit Union v. Kalter (In re Kalter), 292 F.3d 1350, 1356-60 (11th Cir. 2002) (applying Florida law to find no exercise of control); Charles R. Hall Motors, Inc. v. Lewis (In re Lewis), 137 F.3d 1280, 1284-85 (11th Cir. 1998) (applying Alabama law).

The court also found that SEFCU’s position that it had the right to demand adequate protection before it had to turn over the vehicle was putting the cart before the horse. Sections 362(d), and 363(e) provide that a creditor may seek adequate protection over property that is part of the estate, not that it may retain such property until such protection is provided.

Finally, Section 362(k) provides that a willful violation of the stay results in a mandatory damages award including costs and attorney fees. SEFCU’s reliance on Alberto did not make its actions any less “willful” within the meaning of section 362. While good faith may be relevant to whether punitive damages are ordered, willfulness requires only knowledge of the bankruptcy and intentional actions that amount to an unlawful exercise of control. There is no requirement that there be an intent to violate the stay. See Crysen/Montenay Energy Co. v. Esselen Assocs., Inc. (In re Crysen/Montenay Energy Co.), 902 F.2d 1098, 1105 (2d Cir. 1990).

Ray DiGuiseppe wrote the amicus brief on behalf of the NACBA membership.

Weber opinion

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