The Tenth Circuit has just granted a direct appeal involving a deepening split where a minority of two circuits held that the automatic stay is not automatic.
In WD Equipment v. Cowen (In re Cowen), 849 F.3d 943 (10th Cir. Feb. 27, 2017), the Tenth Circuit 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 was important, because it means that debtors in chapters 7, 11, 12 and 13 cannot recover their repossessed vehicles in six states without mounting a turnover action. It also means that businesses in chapter 11 cannot immediately resume operations if property was repossessed before filing.
In substance, the Tenth Circuit held that the automatic stay is not really automatic. Latching onto the words “any act” in Section 362(a)(3), the appeals court held that inaction is not an act and thus cannot violate the automatic stay.
The Tenth Circuit in Cowen sided with the D.C. Circuit. The Second, Seventh, Eighth, Ninth and Eleventh Circuits hold the opposite, having ruled that a lender or owner must turn over repossessed property immediately or face a contempt citation.
The case being directly appealed to the Tenth Circuit is Davis v. Tyson Prepared Foods Inc. (In re Garcia), 17-5006, 2017 BL 235622 (Bankr. D. Kan. July 7, 2017), decided in July by Bankruptcy Judge Robert E. Nugent of Wichita, Kan. Forced to rule contrary to two prior decisions of his own, Judge Nugent reluctantly held that the automatic stay did not prevent a statutory worker’s compensation lien from attaching automatically after bankruptcy to a recovery in a lawsuit. In other words, the lien attached to after-acquired property despite the policy evident in Section 552(a).
The chapter 13 trustee in Garcia appealed and obtained a certification of direct appeal from the district court without opposition. On Nov. 20, the Tenth Circuit granted a direct appeal.
The trustee’s petition for direct appeal said that Cowen “deepened an existing split in the Circuit Courts” and “has been criticized by a bankruptcy court and commentators.” The trustee cited the American Bankruptcy Institute among those who criticized Cowen.
The trustee in Garcia may mount a frontal assault on Cowen, but the upcoming three-judge panel in the Tenth Circuit might attempt to narrow Cowen. To the extent that the three judges rely on Cowen, they nonetheless will have laid the groundwork for an en banc rehearing to set aside Cowen entirely.
Preferably, the Tenth Circuit should address Cowen en banc, because attempting to narrow Cowen will result in increased complexity and a lack of predictability in how the Tenth Circuit might rule under slightly different circumstances.
To read ABI’s discussion of Cowen and Garcia, click here and here.