It happens every Friday afternoon, usually around 2 p.m.
“My client filed chapter 13 today and you have to give the car back or you’re in contempt.” Then, the most persuasive argument of all: “They really need the car for the weekend.” Bankruptcy can be magic. File an electronic image of a piece of paper and the time moves backwards; the world stops at your convenience, and you get back a repossessed vehicle. But the Bankruptcy Code also provides the creditor with the right to protect its interests. So, to what extent may a perfected lienholder condition return of properly repossessed property?
Bankruptcy Code §362(a)(3) prohibits the “exercise of control over property of the estate.” How long of “exercising control” constitutes contempt? There are no cases specifically addressing the issue, as it gets subsumed in the larger issues of conditioning return of the vehicle in the first place. Most debtor attorneys have the sense and good humor to understand that, given the logistics of a late Friday afternoon, their clients might plan for a quiet weekend at home. However, expect the car to be used for the work commute the following week.
What, under these circumstances, is “property of the estate,” as defined in Code §541(a), over which the creditor may not exercise control? Upon lawful repossession in all states the ostensible owner no longer has the right to possess the property, but only a “right to recover” it, by either reinstating the purchase contract, or by redemption with full payment of the debt, either under the Uniform Commercial Code, or more likely, a specific motor vehicle financing law. It is this right to recover that is property of the estate. See, Motors Acceptance Corporation v. Rozier (In Re: Rozier), 376 F3d 1323 (11th Cir. 2004); Tidewater Finance Co v. Moffett (In re: Moffett), 288 B.R. 721 (Bankr. E.D. Va. 2002). Much depends on particular state laws as to the point at which a debtor loses all rights in a repossessed vehicle. See, Hall Motors v. Lewis (In re: Lewis), 137 F3d 1280 (11th Cir. 1998); In Re Fox, 274 B.R. 909 (Bankr. M.D. Fla. 2002)
A bit of Bankruptcy Code prestidigitation transforms the ugly duckling of “right to recover” into the swan of possession. The simple act of filing a petition for relief—no schedules required—is considered by the courts a sufficient substitute for all state law and contractual obligations of a debtor to retrieve the vehicle. Code §542(a) grants the bankruptcy estate a possessory interest in property not actually held by the debtor at the commencement of the case, subject to a right of the creditor to adequate protection of its interests. See, United States v. Whiting Pools, 462 U.S. 168, 103 S. Ct. 2309, 76 L.Ed2d 515 (1983), 76 L.Ed2d at 2313.
Case law is quick to acknowledge the right of a secured creditor to adequate protection of its interests, Code §§363(b)(1) and 363(e), even when penalizing a creditor for refusing to turn over a vehicle. (See, In re: Patterson, 263 B.R. 82, at 90 fn 15 [Bankr. E.D. Pa. 2001], which details everything a creditor should never demand in exchange for the car, e.g., a new loan application.) Repayment of repossession costs, in cash, as a condition of or turnover is generally not permitted. See, In re: Ratliff, 318 B.R. 579 (Bankr. E.D. Okla. 2004).
Still, courts have not set forth an objectively standard minimum level of adequate protection that can be demanded as a condition of return of the property. A creditor is entitled to adequate protection, courts note, only upon specific request, as in Code §363(e). Thus, a lienholder cannot itself determine what constitutes sufficient adequate protection as a condition of returning the vehicle. The burden of proving the sufficiency of adequate protection is going to be on the debtor, whether the property had been leased [Code §365(b)(1)] or subject to a security interest. See, Code §362(g)(2). The courts, however, jealously guard the right to determine just what is sufficient adequate protection.
Compared to the creditor’s right to adequate protection upon request in Code §363(e), the prohibition against exercising control over property of the estate in Code §362(a)(3) appears absolute. There are cases that suggest that return of a repossessed vehicle must be “automatic.” See, Knaus v. Concordia Lumber Co., Inc. (In re Knaus), 889 F2d 773 (8th Cir. 1989); Ratliff, supra. That is, the duty to turn over property of the estate is self-effectuating; the right to adequate protection is the creditor’s to have only upon request to the court. See, Knaus, supra, at 889 F2d at 775. Other cases hold that retaining the vehicle is merely maintaining the status quo and, therefore, is not automatically a violation of Code §362. In re: Albro, 307 B.R. 523 (Bankr. E.D. Va. 2004); In re: Young, 193 B.R. 620 (Bankr. D. D.C. 1996); In re Patterson, supra. Even in these cases, where the obligation to cease exercising control is not automatic, a court hearing on adequate protection is ultimately necessary in the absence of agreement by counsel.
Nonetheless, “automatic” is not synonymous with “unconditional.” A towing company was allowed to retain possession of a vehicle picked up at the direction of state police until it was provided adequate protection. In re: Hayden, 308 B.R. 428 (BAP 9th Cir. 2004). Most cases, do not involve the authority of a state. They are simply repossessions as a result of financial defaults. Creditors, however, appear to have a free pass to demand proof of casualty insurance (not just state mandated liability insurance), with properly designated loss payees, as a condition of returning a vehicle. There is no specific case law explanation of this common sense requirement. Perhaps it is protection of the driving and pedestrian public, or that the purchase contract which requires the insurance is now being revived (see, Albro, supra at 525), or because continued use by the debtor can result in loss of the collateral even at the fault of someone other than the debtor. Aside from demanding insurance, there is little support for refusing turnover of a vehicle in ordinary circumstances. In re: Williams, 316 B.R. 534 (Bankr. E.D. Ark. 2004) (Assertion of a lack of adequate protection is not a defense to a turnover complaint.) The creditor’s remedy is to immediately file for relief from the stay and/or adequate protection and, in appropriate circumstances, seek expedited relief under Code §362(f).
Curiously, the cases generally involve first-time bankruptcy filers for whom the magic and palliative effects of the Bankruptcy Code are most appropriate. What happens when there are multiple repossessions, bankruptcy filings and turnovers? The creditor should probably stand tougher, but had better file for that expedited hearing.