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Lessor Repossession of Property on Eve of Lessee Bankruptcy: Voluntary Turnover or Face Contempt

By Theresa A. Driscoll

Lessors who repossess property immediately prior to a lessee bankruptcy filing may be required to return such property or face sanctions by the bankruptcy court. Federal courts are currently split on the issue of whether the lessor must voluntary surrender property seized pre-petition or may hold such property until such time as the debtor seeks, and obtains, an order of turnover. In June, the U.S. Court of Appeals for the Seventh Circuit weighed in and decided four appeals involving chapter 13 debtor filings following the City of Chicago's seizure of vehicles based on unpaid fines. See, In re Fulton, 2019 U.S. App. LEXIS 18393 (7th Cir. 2019). In Fulton, the Seventh Circuit ruled that the City of Chicago must comply with the automatic stay by returning impounded cars immediately after being notified of a chapter 13 filing. (The Fulton decision is not the first time the Seventh Circuit decided the issues presented. In 2009, the court held that a creditor must comply with the automatic stay and return a debtor's vehicle upon her filing of a bankruptcy petition. See, Thompson v. General Motors Acceptance Corp., 566 F.3d 699 (7th Cir. 2009)).

The Seventh Circuit's holding in Fulton is consistent with decisions from the Second, Eighth, and Ninth Circuits, each of which hold that a secured creditor or owner must turn over repossessed property immediately or face a contempt citation. See, Weber v. SEFCU (In re Weber), 719 F.3d 72 (2d Cir. 2013); Cal. Emp't Dev. Dep't v. Taxel (In re Del Mission), 98 F.3d 1147 (9th Cir. 1996); Knaus v. Concordia Lumber Co. (In re Knaus), 889 F.2d 773 (8th Cir. 1989). A minority of the circuits disagree. Specifically, the Tenth and the District of Columbia Circuits and the District Court for the District of Delaware have ruled that holding property of the estate seized prepetition does not violate the automatic stay in Section 362(a)(3) because such section applies prospectively and prohibits “any [postpetition] act … to exercise control over property of the estate.” WD Equip., LLC v. Cowen (In re Cowen), 849 F.3d 943 (10th Cir. 2017); United States v. Inslaw, Inc., 932 F.2d 1467 (D.C. Cir. 1991); Denby-Peterson v. Nu2u Auto World, 595 B.R. 18 (D.N.J. 2018).

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