Taking sides with the minority in a circuit split, the Third Circuit held that the automatic stay in Section 362(a) does not require a secured creditor to turn over repossessed property immediately or face a contempt citation.
The Philadelphia-based appeals court went on to hold that a creditor is not required to turn over property under Section 542(a) unless the debtor has mounted an adversary proceeding and filed a complaint demanding turnover.
The appeals court found the answers in the language and purpose of the statute.
The identical issue is now before the Supreme Court on a pending petition for certiorari to the Seventh Circuit in City of Chicago v. Fulton, 19-357 (Sup. Ct.). The petition was filed in September. The response is due November 18. We may know before the year’s end whether the justices will take the case and resolve the split. As it now stands, five circuits hold that a creditor violates the automatic stay by not turning over property on request after notice of filing. Three circuits believe that inaction does not violate the stay.
The Facts
The facts in the Third Circuit case were typical. The debtor had purchased a car but defaulted on payments to the lender. Before bankruptcy, the lender repossessed the car.
After filing, the debtor demanded that the lender turn over the car. When the lender did not comply, the debtor filed a turnover motion in bankruptcy court and sought the imposition of sanctions under Section 362(k) for willful violation of the automatic stay.
Bankruptcy Judge Andrew B. Altenburg, Jr., of Camden, N.J., directed the lender to turn over the auto, assuming the debtor could show proof of insurance. Predicting how the Third Circuit would rule, he followed the minority and denied the motion for sanctions, holding that the lender had not violated the automatic stay.
Also predicting how the Third Circuit would come down, District Judge Noel L. Hillman, also of Camden, upheld Judge Altenburg in an opinion in November 2018. To read ABI’s report, click here.
Stay Violation Requires an Affirmative Act
In his October 28 opinion, Circuit Judge Julio M. Fuentes was answering a case of first impression in the circuit. He said that the Second, Seventh, Eighth, Ninth and Eleventh Circuits would find a stay violation in the circumstances, while the Tenth and District of Columbia Circuits would not.
The case turned on Section 362(a), which “operates as a stay . . . of . . . (3) any act . . . to exercise control over property of the estate.” Applied to the case at hand, Judge Fuentes found no ambiguity in the statute.
For Judge Fuentes, the critical words were “control” and “exercise.” From dictionary definitions, he deduced that Section 362(a)(3) “prohibits creditors from taking any affirmative act to exercise control over property of the estate.” In other words, he said, “the text of Section 362(a)(3) requires a post-petition affirmative act to exercise control over property of the estate.”
In the case on appeal, Judge Fuentes said that retaining possession of the car was not a post-petition affirmative act.
Beyond the language of the statute, Judge Fuentes said that his conclusion was in accord with “the legislative purpose and underlying policy goals of the automatic stay.” The “primary purpose” of the stay, he said, is “to maintain the status quo.”
By retaining possession of the car, Judge Fuentes said that the lender was maintaining the status quo. Holding otherwise, he said, “would directly contravene the status quo aims of the automatic stay.” Congress, in his view, “did not intend passive retention to qualify” as an act to exercise control of estate property.
Judge Fuentes rejected the debtor’s argument based on the 1984 amendments, which added the “exercise control” language. The amendment carried no weight, he said, because there was no legislative history explaining the intent of Congress.
Section 542(a) Doesn’t Help
The debtor argued that Section 362(a)(3) operates hand in glove with Section 542(a), which says that someone in possession or control of estate property “shall deliver” the property to the trustee. To the debtor’s way of thinking, the word “shall” means the person in control of property must turn it over automatically, without court compulsion.
To the contrary, Judge Fuentes said that turnover under Section 542(a) “is not self-effectuating; in other words, a creditor’s obligation to turn over estate property to the debtor is not automatic.”
“Rather,” Judge Fuentes said, “the turnover provision requires the debtor to bring an adversary proceeding in Bankruptcy Court in order to give the Court the opportunity to determine whether the property is subject to turnover under Section 542(a).”
As it was with the automatic stay, Judge Fuentes said that “the plain language” of Section 542(a) “also shows that the provision is not self-effectuating.” That is to say, the “shall” language, he said, “is mandatory in the context of an adversary proceeding presided over by the Bankruptcy Court.”
Because the lender elected not to participate in the appeal, the Third Circuit tapped Craig Goldblatt of Wilmer Cutler Pickering Hale & Dorr LLP in Washington, D.C., to submit a brief and argue on behalf of the lender. Coincidentally or not, Mr. Goldblatt is counsel for the petitioner for certiorari in Fulton. Mr. Goldblatt has argued three cases in the Supreme Court.
Observations
This writer interprets the opinion to mean that a debtor must initiate an adversary proceeding, pay the filing fee, file a complaint, and submit a motion for summary judgment or a motion for a temporary or preliminary injunction before securing possession of a car or other estate property.
In addition to delay, mounting an adversary proceeding will add measurably to the debtor’s costs and attorneys’ fees. On the other hand, the increased cost and delay may end the practice of filing a chapter 13 petition in the Third Circuit only to regain possession of a car.
The Third Circuit’s discussion of Section 542(a) is a curious interpretation of “shall.” In substance, the court says that turnover is mandatory only after the bankruptcy court has directed the creditor to turn over property. In that sense, the use of “shall” seems superfluous because court orders are always mandatory.
To read ABI’s discussion of the Seventh Circuit’s Fulton decision, which is the subject of a petition for certiorari, click here.
Taking sides with the minority in a circuit split, the Third Circuit held that the automatic stay in Section 362(a) does not require a secured creditor to turn over repossessed property immediately or face a contempt citation.
The Philadelphia-based appeals court went on to hold that a creditor is not required to turn over property under Section 542(a) unless the debtor has mounted an adversary proceeding and filed a complaint demanding turnover.
The appeals court found the answers in the language and purpose of the statute.
The identical issue is now before the Supreme Court on a pending petition for certiorari to the Seventh Circuit in City of Chicago v. Fulton, 19-357 (Sup. Ct.). The petition was filed in September. The response is due November 18. We may know before the year’s end whether the justices will take the case and resolve the split. As it now stands, five circuits hold that a creditor violates the automatic stay by not turning over property on request after notice of filing. Three circuits believe that inaction does not violate the stay.