Holding Debtor’s Trucks Didn’t Violate Bankruptcy Stay

Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.

By Daniel Gill

Failing to return two trucks repossessed from a debtor before he filed bankruptcy wasn’t a willful violation of the automatic bankruptcy stay, the Tenth Circuit held Feb. 27 ( WD Equip., LLC v. Cowen (In re Cowen) , 10th Cir., No. 15-1413, 2/27/17 ).

The decision deepened a split with the majority of other circuits, which have held that the failure to turn over property after a bankruptcy is filed is an exercise of control violating the bankruptcy stay. Judge Monroe G. McKay wrote for the court.

The decision is also instructive regarding a court’s jurisdiction. The court found that a bankruptcy court may have jurisdiction over automatic stay violation claims even if the underlying bankruptcy case is dismissed.

Trucker’s Luck Runs Out

Jared Trent Cowen ran a trucking business with two trucks. He was forced to take a loan when his 2000 Peterbilt required repairs. Aaron Williams provided the loan and took a lien on the truck as collateral.

Cowen’s other truck, a 2006 Kenworth, was encumbered by a purchase money lien held by another lender, Bert Dring.

When Cowen was unable to make the payments on his trucks, Dring and Williams seized them. Cowen filed for Chapter 13 bankruptcy.

Chapter 13 allows individuals receiving regular income to obtain debt relief while retaining their property. To do so, the debtor must propose a plan that uses future income to repay all or a portion of his debts over a three to five year period.

A bankruptcy petition creates an automatic stay halting all judicial proceedings against the debtor or its property. Willful violation of the stay can subject the offender to civil fines and penalties.

On Cowen’s motion, the bankruptcy court ordered the trucks returned to him.

Dring and Williams refused, and Cowen filed a complaint seeking damages for willfully violating the stay.

In the meantime, Cowen’s bankruptcy case was dismissed. Due to the seizure of his trucks, he no longer had a steady income, a requirement for Chapter 13.

But the bankruptcy court retained jurisdiction over the stay violation claim. Because a claim for violating the automatic stay “derives directly from the Bankruptcy Code and can be brought only in the context of a bankruptcy case,” the bankruptcy court may have jurisdiction over such claims even if and when the underlying bankruptcy case is dismissed, the Tenth Circuit said.

‘Exercising Control’ Over Estate Property

Under a strict reading of the automatic stay statute, 11 U.S.C. §362(a), merely holding a debtor’s property isn’t a willful violation, the Tenth Circuit held. It acknowledged that it was contradicting the majority of circuit courts that had considered the same question.

The court held that the failure to return property was not an “exercise of control” over that property.

However, on remand, the bankruptcy court could determine that other behavior of the creditors—manufacturing evidence and perjury during the trial—would “qualify as post-petition acts to exercise control over the debtor’s property in violation of the automatic stay,” the court said.

Judges Paul J. Kelly Jr. and Carolyn B. McHugh joined the decision.

Alexander M. Musz, Cohen & Cohen, P.C., Denver, represented Dring and Williams. C. Todd Morse, Denver represented Cowen.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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