In February, the Tenth Circuit deepened an existing split of circuits by holding that an affirmative action is required for an automatic stay violation. A July 7 opinion by Bankruptcy Judge Robert E. Nugent of Wichita, Kan., demonstrates how his circuit’s narrow view of Section 362(a) erodes the rights of debtors and creditors when mere inaction cannot be a stay violation.
The Circuit’s Cowen Opinion
In WD Equipment v. Cowen (In re Cowen), 849 F.3d 943 (10th Cir. Feb. 27, 2017), the appeals court held 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.” Cowen involved a lender who repossessed a debtor’s truck before bankruptcy and refused to return the vehicle after the chapter 13 filing.
To read ABI’s discussion of Cowen, click here.
Affirmed in district court, the bankruptcy court had ruled that holding the truck in the face of a demand for return was an automatic stay violation by exercising control over estate property. Based on the plain meaning of the statute, not on “policy considerations,” the Tenth Circuit reversed and held that Section 362(a)(3) “stays entities from doing something to obtain possession of or to exercise control over the estate’s property. It does not cover ‘the act of passively holding onto an asset.’”
The Facts Before Judge Nugent
The debtor was injured in the workplace before filing her chapter 13 petition. For her injuries and medical expenses, she received workers’ compensation benefits paid by her employer both before and after filing.
After bankruptcy, she sued a third party vendor that had supplied the floor mat on which she slipped and fell. With the bankruptcy court’s approval, she settled her claim against the third party for $45,000, considerably more than she had received in workers’ compensation benefits.
The Kansas workers’ compensation statute gives employers the right to subrogation with respect to benefits paid to an employee. Automatically, the statute also gives the employer a lien on the employee’s recoveries against third parties for the amount of compensation and medical expenses the employer has paid.
The debtor’s chapter 13 trustee contended that the automatic stay under Section 362(a)(4) blocked the employer’s lien from attaching to the settlement proceeds. That section automatically enjoins “any act to create, perfect, or enforce any lien against property of the estate.”
Judge Nugent’s Prior Decisions
Judge Nugent had two prior decisions that were on point. Both involved auto accident claims where the insurer had rights of subrogation and an automatic lien on the insured’s recoveries against third parties. In those cases, Judge Nugent held that the attachment of the insurers’ liens was barred by the automatic stay under Section 362(a)(4).
Cowen Demands a Different Result
Before following his prior decisions, Judge Nugent studied Cowen. He noted the split of circuits, where the Tenth is in the minority, allied only with the District of Columbia Circuit. The Seventh, Second, Ninth and Eighth Circuits take the contrary view and hold that retention of estate property after demand for turnover does violate the automatic stay.
Contrary to his prior decisions, Judge Nugent held that the automatic stay in Section 362(a)(4) did not apply because “Cowen suggests that a right of subrogation and lien that arises automatically . . . would not amount to an act of possession or an act to exercise control of property of the estate.” Indeed, he said that the employer in his case was “more passive” than the creditor in Cowen.
Although Cowen was a case under Section 362(a)(3), Judge Nugent saw “no reason to believe” that the Tenth Circuit would interpret “any act” differently under Section 362(a)(4) than it did under Section 362(a)(3). Judge Nugent said he was thus “duty bound to follow Cowen.”
Because the employer’s lien arose by operation of law and not as the result of any action taken by the employer, Judge Nugent decided that the attachment of the lien was valid and not in violation of the automatic stay.
Judge Nugent ended his opinion by noting how the result might have been different had the trustee raised other theories against the attachment of the lien. Without intimating how he might have ruled, he said the trustee had not relied on avoiding powers, such as the ability to set aside unauthorized postpetition transfers under Section 549.
Judge Nugent’s case would be an excellent vehicle for direct appeal to the Tenth Circuit coupled with a request for en banc review of the holding in Cowen. If the circuit sticks to its guns, the trustee could file a petition for certiorari to the Supreme Court to resolve the circuit split and decide whether the automatic stay sometimes is not automatic.