Third Circuit Allows Repossessing Secured Lender to Hold Collateral Pending Bankruptcy Stay

"[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.

Relevance

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.").