Tenth Circuit Opinion Can Be the Springboard for a ‘Cert’ on the Automatic Stay

Predictably, the Tenth Circuit reaffirmed a deepening circuit split yesterday by holding that the automatic stay does not prevent a statutory worker’s compensation lien from attaching automatically after bankruptcy to a recovery in a lawsuit. Yesterday’s ruling sets up an opportunity for the Supreme Court to resolve the split and decide whether the automatic stay is really automatic.

Yesterday’s decision in Davis v. Tyson Prepared Foods Inc. (In re Garcia), 17-3247 (10th Cir. Oct. 17, 2018), was a foregone conclusion given WD Equipment v. Cowen (In re Cowen), 849 F.3d 943 (10th Cir. Feb. 27, 2017), where the Tenth Circuit held last year 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.”

As the Tenth Circuit said yesterday, Cowen means that an “‘act’ for the purposes of [Section] 362(a)(3) is limited to affirmative conduct.” The appeals court said that the automatic stay did not apply in Garcia because the “subrogation lien arose solely by operation of law.”

In the lower court in Garcia, Bankruptcy Judge Robert E. Nugent of Wichita, Kan., reluctantly held, contrary to two prior decisions of his own, that the automatic stay did not prevent a statutory worker’s compensation lien from attaching automatically after bankruptcy to a recovery in a lawsuit. Judge Nugent certified the case for direct appeal, and the circuit accepted the invitation.

The circuit court’s decision in Garcia allows the lien to attach automatically despite the policy in Section 552(a), which precludes a “security interest” from attaching to property acquired after filing, with exceptions.

According to the transcript of oral argument in Garcia on September 26, the three-judge panel did not seem receptive to the idea of a rehearing en banc, which would allow the Tenth Circuit to revisit Cowen. If the trustee in Garcia is bent on further appellate review, he may opt for filing a petition for certiorari and bypass an attempt at rehearing en banc.

The Tenth Circuit is in accord with the District of Columbia Circuit in holding that inaction does not violate the automatic stay. The Second, Seventh, Eighth, Ninth and Eleventh Circuits hold to the contrary, having ruled that a lender or owner must turn over repossessed property immediately or face a contempt citation.

At present, there is a race to decide whether a decision by the Tenth Circuit or Seventh Circuit will arrive first in the Supreme Court. In Chicago, some but not all bankruptcy judges have held that the city must automatically turn over automobiles that were impounded before bankruptcy on account of unpaid parking fines. The Seventh Circuit accepted a direct, consolidated appeal. The last brief is due in the Seventh Circuit on December 31. Consequently, the trustee in Garcia may end up filing the first certiorari petition.

To read some of ABI’s coverage of Cowen, Garcia, and the Chicago cases, click here, here, here, here, and here.