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By Stephanie M. Acree
A creditor who failed to immediately return a repossessed vehicle after learning of a debtor's bankruptcy willfully violated the automatic stay of Bankruptcy Code Section 362, the U.S. Court of Appeals for the Second Circuit held May 8 (Weber v. SEFCU (In re Weber), 2d Cir., No. 12-1632-bk, 5/8/13).
Judge Susan L. Carney found that the district court decision relied on by the creditor had been incorrectly decided. The court said that because the debtor retained an equitable interest in the vehicle, it was part of the estate and the creditor was required to immediately turn the vehicle over after learning of the bankruptcy.
“The decision is in accord with most other courts of appeals,” Henry Sommer, former president of the National Association of Consumer Bankruptcy Attorneys (NACBA), which submitted an amicus brief in the case, told BNA May 13. “It effectuates an important right for Chapter 13 debtors--the right to preserve their cars from being lost because of a default on a car loan. In Chapter 13 they can restructure payments and keep their cars, often essential to maintaining employment. It means that if they file a Chapter 13 case a creditor who repossessed a car must return it, without the necessity of the debtor filing an expensive and possibly time-consuming court proceeding which could delay return of the car so long that the debtor loses his/her job.”
On Jan. 14, 2010, Weber filed for Chapter 13 protection. Weber sent written notice of the bankruptcy filing to SEFCU and requested the vehicle's return pursuant to the automatic stay. When SEFCU failed to return the vehicle, Weber filed an adversary proceeding on Jan. 22, 2010, seeking the vehicle's return, which he claimed he needed for his construction business. On March 1, 2010, the bankruptcy court ordered SEFCU to show cause why SEFCU should not have to return the vehicle and why SEFCU should not be obligated to pay Weber damages. SEFCU returned the vehicle on March 5, 2010.
The bankruptcy court granted summary judgment to SEFCU and Weber appealed. Relying on the U.S. Supreme Court's decision in United States v. Whiting Pools Inc., 462 U.S. 198 (1983), the district court reversed the bankruptcy court's ruling and found that SEFCU had willfully violated the automatic stay and was liable for damages and attorneys' fees. SEFCU appealed to the circuit court.
The court said that it was not in dispute that New York law gave Weber a continuing equitable interest in the vehicle constituting property of the estate under Section 541. However, SEFCU argued that it did not “exercise control” over the vehicle in violation of the automatic stay pursuant to Section 362.
The circuit court found the reasoning in Alberto unpersuasive. The court said that the Section 542 requirement of delivery is “self-executing” and requires no affirmative step by the debtor. In determining whether SEFCU exercised control, the court said it “need only consult an ordinary dictionary” and concluded that “by keeping custody of the vehicle and refusing Weber access to or use of it, SEFCU was 'exercising control' over the object in which the estate's equitable interest lay, and its retention of the vehicle violated the stay.” The court further noted that this interpretation is the majority rule based on rulings from other circuit courts, with only the Eleventh Circuit adopting a different approach.
Therefore, the court held that “[S]ection 362 requires a creditor in possession of property seized as security--but subject to a state-law-based residual equitable interest in the debtor--to deliver that property to the trustee or debtor-in-possession promptly after the debtor has filed a petition in bankruptcy under Chapter 13.”
“A creditor willfully violates [S]ection 362 when it knows of the filing of the petition (and hence of the automatic stay), and has the general intent simply to perform the act found to violate [S]ection 362; no specific intent to violate [S]ection 362 is necessary,” the court said. The court held that this is the case even if, as SEFCU argued, it was the “rule and custom” of the Northern District of New York to not surrender a vehicle absent a court order.
The court also disagreed with SEFCU's argument that it was entitled to hold the vehicle to provide itself with “adequate protection. The court said a creditor must seek adequate protection from the bankruptcy court after it has surrendered the property. The court said that Section 542(a) provides “without qualification” that the creditor must deliver the property. Therefore, the court found that SEFCU's claim that it was seeking adequate protection did not cure its violation of the stay.
Accordingly, the district court's ruling was affirmed.
Judges Jos A. Cabranes and Reena Raggi joined in the opinion.
Richard Croak of the Richard Croak Law Firm, Albany, N.Y., represented Christopher Weber.
William B. Schiller of Schiller & Knapp LLP, Latham, N.Y., represented SEFCU.
Tara Twomey of the National Consumer Bankruptcy Rights Center, San Jose, Calif., represented NACBA as amicus curiae.
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