In a break with other courts and longstanding bankruptcy practice, the Third Circuit Court of Appeals has ruled that auto lenders who have repossessed a car do not have to automatically return it when the borrower files a bankruptcy. Instead, the borrower has to file suit in the bankruptcy court to get it back. This decision, In re Joy Denby-Peterson, is a boon for creditors. It also has ramifications to a lot of related situations.
Ms. Peterson’s Corvette, purchase from a “buy here, pay here” used car lot, was repossessed when she did not make payment. She filed bankruptcy. Consistent with previously established law, her attorney demanded the car back and when the lender refused, filed a “turnover motion” along with a request for counsel fees and sanctions based on a violation of the Bankruptcy Code’s automatic stay provisions, 11 U.S.C. 362, that prohibit virtually all collection efforts or efforts to exert control over property that the debtor owns or has a legal claim to. The bankruptcy court ordered the car returned but refused sanction and counsel fees.
On appeal, the Third Circuit, adopting a minority position among the Circuit Courts of Appeal, upheld the refusal to sanction or to find a violation of the automatic stay. Applying a reading of the statutory language and common meaning of its words, the Court reasoned that a creditor who has legally repossessed property before a bankruptcy, is not prevented from doing nothing until ordered to do so. This, it said, was different than an act or effort to collect a debt or recover collateral after a bankruptcy. In other words, actions but not inaction are prohibited. Also, it said, this gives the creditor an opportunity to have its day in court to defend its actions and keep what it legally got back.
Until this ruling, bankruptcy attorneys were typically getting cars released merely on demand and if the creditor did not want to comply it had to go to court right away to get a ruling in its favor or faced paying sanctions and attorneys fees. Now the burden has shifted to the debtor to take action.
This decision easily applies to situations where a Sheriff has levied on a bank account and as a result a debtor’s access to money is frozen. While a bankruptcy court will typically order the money released in most situations, in the meantime, the debtor has to wait and spend money on legal fees to get her money back.
This narrow reading of the automatic stay will no doubt spawn other disputes and litigation. We would expect that the debtor will Petition the Supreme Court to ask it to issue a final ruling on this point. Stay tuned.
