Automatic Stay Does Not Require Return of Repossessed Property

Posted by NCBRC - November 6, 2018

A New Jersey District Court applied the minority view that a creditor does not have an affirmative duty to return a vehicle repossessed pre-petition upon learning of the debtor’s bankruptcy filing. Denby-Peterson v. Nu2u Auto World, No. 17-9985 (D. N.J. Nov. 1, 2018).

Joy Denby-Peterson entered into a purchase money security agreement for the purchase of her 2008 Corvette. The original seller transferred the debt to Nu2u. When Ms. Denby-Peterson failed to make payments according to the agreement, Nu2u repossessed the vehicle. Ms. Denby-Peterson filed for chapter 13 bankruptcy and initiated an adversary proceeding seeking turnover of the vehicle and actual damages for violation of the automatic stay. The bankruptcy court ordered return of the vehicle, but denied Ms. Denby-Peterson’s motion for sanctions.

On appeal, the district court addressed the question of whether failure to turn over the vehicle constitutes an “act . . . to exercise control over property of the estate,” within the meaning of the 1984 amendment to section 362(a)(3). The court noted a split in the circuits as to whether this provision mandates that a creditor return property to the debtor that it repossessed prior to bankruptcy, or merely prohibits post-petition affirmative action to exercise control over estate property. The court found that the New Jersey district courts have historically followed the minority position, represented by the Tenth and the D.C. Circuits, which holds that the automatic stay requires only that the creditor maintain the status quo. The court rejected the majority position, represented by the Second, Seventh, Eighth and Ninth Circuits, which imposes an affirmative duty on creditors to return property possessed pre-petition once the debtor files for bankruptcy.

The court reasoned that the automatic stay does not prohibit any “exercise of control” over estate property, but “an act to exercise control” over the property. It found this distinction dispositive as requiring that the creditor perform some post-petition affirmative act rather than merely maintain the status quo by inaction. The court found that the statutory language relating to exercising control expanded the automatic stay’s coverage to nonpossessory post-petition affirmative actions a creditor might take, but did not bring passive non-action into the realm of automatic stay violation. Had Congress intended to expand the automatic stay to a failure to return property, it could have done so explicitly. The court also found the minority rule better reflected the balance between allowing a debtor to improve her financial situation and protecting the rights of creditors. In the event of abusive behavior on the part of the creditor, the bankruptcy court has power to sanction under its inherent powers.

The court affirmed and dismissed the appeal.

Denby-Peterson D NJ Nov 2018



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