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"[A] secured creditor [has no] affirmative obligation under the automatic stay to return a debtor's [repossessed] collateral to the bankruptcy estate immediately upon notice of the debtor's bankruptcy," the U.S. Court of Appeals for the Third Circuit held on Oct. 28, 2019. In re Denby-Peterson, 2019 WL 5538570, 1 (3d Cir. Oct. 28, 2019). Affirming the lower courts, the Third Circuit joined "the minority of our sister courts — the Tenth and D.C. Circuits" with its holding. According to the court, it was "[g]uided by the plain language of the Bankruptcy Code's automatic stay and turnover provisions, the legislative purpose and policy goals of the automatic stay, and the reasoning of the Supreme Court and our two sister circuits …." Id. at 13. In sum, because "a secured creditor [need not] return the [repossessed] collateral to the debtor until the debtor obtains a [bankruptcy] court order … requiring the creditor to do so," it does "not violate the automatic stay" of Bankruptcy Code (Code) §362(a)(3) (creditors stayed from "any act to obtain possession of property of the debtor … or to exercise control over property of the estate."). Id. at 5-6. The court essentially allowed lenders with statutory defenses to a debtor's turnover claim to retain possession pending a bankruptcy court order resolving the issue.
The Third Circuit followed the holdings of the Tenth and D.C. Circuits "that a creditor does not violate the stay in regard to property of the estate if it merely maintains the status quo." Id. at 3, citing In re Cowen, 849 F.3d 943, 950 (10th Cir. 2017) (only "affirmative acts" to take "possession of, or to exercise control over" debtor's property "violate" automatic stay); United States v. Inslaw, Inc., 932 F.2d 1467, 1474 (D.C. Cir. 1991) ("Nowhere in [§362(a)] is there a hint that it creates an affirmative duty…"). In contrast, the "Second, Seventh, Eighth, … Ninth [and Eleventh] Circuits … have held that the Bankruptcy Code's turnover provision requires immediate turnover of estate property that was seized [prior to bankruptcy] and that failure to do so violates the automatic stay." Id., citing In re Fulton, 926 F.3d 916 (7th Cir. 2019); In re Weber, 719 F.3d 72 (2d Cir. 2013); In re Del Mission Ltd., 98 F.3d 1147 (9th Cir. 1996); In re Knaus, 889 F.2d 773 (8th Cir. 1989); and In re Rozier, 376 F.3d 1323, 1324 (11th Cir. 2004) (creditor held "in willful contempt of the automatic stay … by refusing to return the vehicle.").
The Supreme Court should resolve this circuit split. It did so 24 years ago in Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995), when it "considered the interplay between the automatic stay and the turnover provision in [Code §]542(b)." 2019 WL 5538570, at 12. In Strumpf, the court held "that a bank's temporary withholding of funds in a debtor's bank account, pending resolution of the bank's setoff right … did not violate the automatic stay," reasoning "among other things, that [to] interpret … [§]542(b)'s turnover provision as self-executing would 'eviscerate' the provision's exceptions to the duty to pay." Id. at 12. The City of Chicago, in fact, sought Supreme Court review on Sept. 17, 2019 of the Seventh Circuit's Fulton decision, 926 F.3d 916,923 (passive retention of debtor's property was "an act to … exercise control" over property).
The individual debtor bought a used Chevrolet Corvette in July, 2016. After making several installment payments on her financing agreement, the secured lenders repossessed the car when the debtor later defaulted on her car payments. The debtor then filed a Chapter 13 petition, notifying the secured lenders of the bankruptcy filing and demanding that they return the car to her.
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