The Tenth Circuit widened an existing split among the courts of appeals by ruling that passively holding an asset of the estate, in the face of a demand for turnover, does not violate the automatic stay in Section 362(a)(3) as an act to “exercise control over property of the estate.”
The Tenth Circuit allied itself with the District of Columbia Circuit. The Seventh, Second, Ninth and Eighth Circuits are arrayed on the other side and hold that retention of estate property after demand for turnover does violate the automatic stay.
Taking the minority position, the Feb. 27 opinion authored by Circuit Judge Monroe G. McKay was based on the plain meaning of the statute, not on “policy considerations.”
Before bankruptcy, a lender repossessed the debtor’s truck. After filing a chapter 13 petition, the debtor requested the return of the truck. The creditor refused, claiming he had sold the truck before the bankruptcy filing.
A month later, the debtor moved to hold the creditor in contempt for willful violation of the automatic stay. The bankruptcy court granted the motion and directed the creditor to turn the truck over immediately, coupled with a warning that failure to do so could result in imposition of monetary damages for willful violation of the stay under Section 362(k)(1).
When the creditor did not comply, the debtor initiated an adversary proceeding. At trial, the creditor contended there was no stay violation because the debtor’s ownership interest was terminated by the sale before bankruptcy.
The bankruptcy judge ruled that documents showing a sale of the truck were “likely forged.” The judge also said that the creditor “gave perjured testimony.” Even if the testimony were correct, the bankruptcy judge held that the debtor’s ownership had not been terminated properly under Colorado law.
The bankruptcy judge concluded that the creditor violated Section 362(a)(3) and imposed actual and punitive damages under Section 362(k)(1). On appeal, the district court set aside the calculation of damages but otherwise upheld the bankruptcy court.
The creditor came out on top in the Tenth Circuit in terms of statutory interpretation, but it might not escape sanctions.
Judge McKay described the “majority rule” as saying that “‘the act of passively holding onto an asset constitutes “exercising control” over it, and such action violates Section 362(a)(3),’” quoting the Seventh Circuit in Thompson v. General Motors Acceptance Corp., 566 F.3d 699, 703 (7th Cir. 2009). He described the majority as “driven more” by “practical” and “policy considerations” than by “faithful adherence to the text.”
Concluding that the language of the statute is “plain,” Judge McKay aligned the Tenth Circuit with the D.C. Circuit’s U.S. v. Inslaw, 932 F.2d 1467 (D.C. Cir. 1991).
Observing that the statute bars “any act to exercise control over property,” Judge McKay said that “act” means “to ‘take action’ or ‘do something.’” Because the stay enjoins “doing something,” he said, “It does not cover ‘the act of passively holding onto an asset.’”
Significantly also, Judge McKay said that Section 362(a)(3) does not “impose an affirmative obligation to turnover property.”
Judge McKay conceded that the majority’s “best argument” is for reading Section 362(a)(3) in tandem with Section 542, which provides that someone in “control” of estate property “shall deliver” it to the trustee. Arguably, Section 542 provides a right to return, while Section 362 imposes a sanction for failure to do so.
Judge McKay said that the majority’s “policy argument” in combining the two sections “is simply not supported by the statute’s text or its legislative history,” in part because there is “no textual link between Section 542 and Section 362.”
The opinion adopted “the minority rule: only affirmative acts to gain possession of, or to exercise control over, property of the estate violate Section 362(a)(3).”
Judge McKay said that his statutory interpretation may not absolve the creditor of liability for damages. On remand, he instructed the bankruptcy court to employ Sections 362(a)(3) and 105(a), which give power to “‘sanction conduct abusive of the judicial process.’”
He said that the bankruptcy court’s finding that the creditor likely forged documents and gave perjured testimony “would qualify as post-petition acts to exercise control over the debtor’s property in violation of the automatic stay.”
The Tenth Circuit does not seem to undercut the notion that the debtor retains the right to recover possession of repossessed property if title has not transferred. The opinion could be interpreted to mean that a creditor need not heed a demand for turnover but may await entry of a turnover order.
Consequently, debtors who lose possession of their cars before filing may now be obliged in the Tenth Circuit to initiate legal proceedings to recover possession. In other circuits, bankruptcy has the virtue of enabling debtors to recover repossessed autos immediately because lenders know they face contempt sanctions if they do not cooperate.
The opinion has a beneficial feature: It removes the need for courts to explain why a bank’s “administrative freeze” does not violate the automatic stay.
The opinion includes a holding favorable to debtors. In the case at hand, the bankruptcy court dismissed the chapter 13 petition because loss of the truck bereft the debtor of ability to generate regular income.
Judge McKay held that jurisdiction to impose damages under Section 362(k) continues after dismissal because a “‘court must have the power to compensate victims of violations of the automatic stay and punish violators, even after the conclusion of the underlying bankruptcy case,’” citing Johnson v. Smith (In re Johnson), 575 F.3d 1079, 1083 (10th Cir. 2009).