No Stay Violation When Creditor Retains Vehicle Repossessed Pre-Petition

Posted by NCBRC - November 29, 2019

The Third Circuit joined the Tenth and D.C Circuits to hold that, “upon notice of the debtor’s bankruptcy, a secured creditor’s failure to return collateral that was repossessed pre-bankruptcy petition is [not] a violation of the automatic stay,” because it is not an act “to exercise control over property of the estate.” In re Denby-Peterson, No. 18-3562 (3rd Cir. Oct. 28, 2019).

After Joy Denby-Peterson paid $9,200 over approximately eighteen months toward her used Chevy Corvette, the holder of the loan repossessed the vehicle due to her failure to pay the $2,491 down payment that the purchase agreement required. Ms. Denby-Peterson filed for chapter 13 bankruptcy. She notified the creditor of the petition and demanded return of the vehicle. When the creditor failed to return the vehicle, the bankruptcy court granted Ms. Denby-Peterson’s motion for turnover under section 542(a), but, finding that the creditor’s retention of the vehicle did not violate the automatic stay, denied her demand for sanctions. The district court affirmed.

On appeal, the debtor argued that the creditor’s retention of the vehicle violated the stay in either of two ways: first, it was an exercise of control over estate property in direct violation of section 362(a), and second, it was a violation of the turnover provision, section 542, which, itself, constitutes a stay violation.

Section 362(a) prohibits a creditor from obtaining possession of or exercising control over estate property. The purpose of the stay is to relieve debtors from collection efforts, and to protect creditors from loss of estate property which would otherwise be distributed through the plan. The circuit court noted that the Second, Seventh, Eighth, and Ninth Circuits have held that failure to turn over property repossessed pre-petition is a violation of the automatic stay, but it found that the minority view, represented by the Tenth and D.C. Circuits, was more persuasive.

Beginning with the text of section 362(a)(3), the court found the key words and phrases to be “stay,” “act,” and “exercise control.” Interpreting this text, the court found that the stay is prospective; it does not prohibit exercise of control, it prohibits an affirmative post-petition act to exercise control. Because the creditor repossessed the car pre-petition its continued retention of the vehicle was passive nonaction that did not meet the standard for a stay violation. The court reasoned that this conclusion comported with the underlying purpose of the automatic stay to maintain the pre-petition status quo.

The court was unconvinced by Ms. Denby-Peterson’s legislative history argument that the fact that Congress added the phrase “exercise control” to the 1984 amendments indicates that Congress intended to extend the scope of the automatic stay to cover the situation presented here. The court found that Ms. Denby-Peterson’s view was contradicted by the plain language of the statute, and there was insufficient evidence of Congress’s intent to adopt that contrary interpretation.

The court turned to Ms. Denby-Peterson’s argument that section 542’s turnover provision is self-executing and, therefore, the creditor’s failure to turn over the vehicle after learning of the bankruptcy constituted a violation of the automatic stay. The court disagreed finding that section 542 is not self-executing, but is triggered by an adversary proceeding, as contemplated by Rule 7001(1), and a court order. Prior to that, the creditor has no turnover obligation and, in fact, may not be required to turn over estate property if the property is inconsequential or of no benefit to the estate. The court found that the mandatory language in section 542(a) that the creditor “shall deliver” to the debtor estate property, is subject to judicial action determining that such delivery is required. Finally, the court found that even if the turnover provision were self-executing, there is no textual connection between section 542 and section 362 that would link their requirements in the way propounded by the debtor.

The court affirmed.

Denby-Peterson 3rd Cir Oct 2019


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