Creditor repossesses car and Customer subsequently files Bankruptcy –
Does the Creditor Really have to immediately give the car back to the Debtor/Customer
The law applicable in bankruptcy cases in Florida allows an auto lender to retain and sell a vehicle lawfully repossessed pre-petition where the customer subsequently files bankruptcy. In Bell-Tel Federal Credit Union (In re Kalter), 292 F.3d 1350 (11th Cir. 2002). This is an exception, because in most jurisdictions a secured creditor which repossesses a car pre-petition must return the car to the debtor after a bankruptcy filing. A common question by creditors in this situation is what conditions, if any, can be imposed before returning the car to the debtor.
Most creditors believe the debtor must first provide evidence of insurance or some other form of “adequate protection” before the creditor has to return the vehicle. In a recent decision, however, the Second Circuit Court of Appeals found that a creditor cannot put conditions on returning a car once the debtor files Chapter 13.
In In re Weber, 719 F.3d 72 (2nd Cir. May 8, 2013), the creditor lawfully repossessed the car. Four days later, the customer filed Chapter 13 and his attorney sent written notice to the creditor requesting the car’s return. After a week the creditor failed to return the car, so the debtor filed an adversary action against the creditor for turnover and sanctions. After an order to show cause hearing, the car was returned to the debtor. At the show cause hearing, the creditor argued that it relied on a 2001 New York District Court opinion (In re Alberto, 271 B.R. 223 (N.D. N.Y. 2001)), which provided the creditor with a reasonable basis for declining to release the vehicle absent a court order issued pursuant to a turnover action under Bankruptcy Code Section 542. The Bankruptcy Court considered but denied the debtor’s request for sanctions, relying on the Alberto case. On appeal, the District Court reversed and found that the creditor had violated the automatic stay. On further appeal, the Second Circuit affirmed the finding of a violation of the stay. The Second Circuit in Weber found the following –
1. the secured creditor was required to deliver the car back to the trustee or debtor-in-possession promptly after receiving notice that the debtor filed Chapter 13.
2. the secured creditor’s refusal to return the vehicle to the debtor promptly upon learning of his
Chapter 13 filing constituted a willful and unlawful exercise of control over the property of the estate in violation of the automatic stay, and the creditor was liable for damages, costs and attorneys fees.
3. the secured creditor’s belief that the Chapter 13 debtor had not provided “adequate protection” for the creditor’s security interest in the debtor’s car did not excuse the creditor’s violation of automatic stay for failing to promptly return the repossessed car upon learning of the debtor’s Chapter 13 filing.
The Weber case suggests that auto lenders should take a very conservative approach in these situations, and not withhold the return of a vehicle lawfully repossessed pre-petition upon receiving notice of a Chapter 13 filing. A few take-away from the Weber case for most jurisdictions (this would not apply to Florida cases) –
1. Does the creditor have to give the car back to the debtor upon learning of a Chapter 13 bankruptcy filing? Yes
2. How Soon? Promptly
3. Should the creditor wait until the debtor asks for the car back? No; however, the creditor should always ask whether the debtor actually wants the car back (because he may not)
4. Should the creditor wait until the debtor files a motion for turnover before giving back the car? No
5. Should the creditor wait until it receives evidence that the vehicle is insured, or other “adequate protection” before returning the car? No, not according to the Weber case 6. What if the debtor was a skip, had not paid in several months, or had been arrested in the car – can the creditor do anything to avoid returning the car? Yes, the creditor can immediately file a Motion for relief from the automatic stay, set forth the reasons, and request an expedited or emergency hearing. There is no guaranty, however, that filing the Motion will completely protect the creditor from a sanctions motion
7. Should the creditor rely on a bankruptcy court or even a district court case in the jurisdiction which states the creditor does not have to immediately return the car to the debtor? According to the Weber case, relying on such a case may later be found to be a mistake.
8. Can the creditor take time to first consult with an attorney before returning the car to the debtor? Yes; however, the creditor must act within a reasonable period of time after receiving notice of the bankruptcy filing. See In re Makowski, 2013 WL 2154788 (Bankr. D. Alaska 2013)
9. What if the creditor has knowledge of the bankruptcy filing, but the car is nevertheless sold by mistake at auction? Big trouble. See In re Carlton, 2013 WL 2297082 (Bankr. E.D. N.C. 2013)(creditor had knowledge of bankruptcy filing, but due to a mistake in their system allowed car to be sold at auction. Court awarded sanctions totaling $24,000)
10. Is the answer different in a chapter 7 case, as opposed to a chapter 11 or chapter 13 case? Maybe. Since the Chapter 7 trustee arguably is the party in interest, and not the debtor, you should contact the Chapter 7 trustee and your bankruptcy counsel in this situation
Three recent cases illustrate this issue –
In re Castillo, 456 B.R. 719 (Bankr. N.D. Ga. 2011)
1/3 – Repo
1/7 – BK filed
1/13 – Demand for return of car
1/13 – Creditor advises debtor it wants proof of the bankruptcy filing and proof of insurance
1/15 – Creditor receives copy of the petition as proof of the bankruptcy filing
1/20 – Debtor files a Motion for Sanctions
1/27 – Hearing on Motion for Sanctions
2/3 – Debtor picks up car
The Court in In re Castillo held that the creditor violated the automatic stay by refusing to return the car upon the debtor’s request. The Court stated that a creditor cannot unilaterally decide whether a debtor’s proposed Chapter 13 Plan provides adequate protection. Under the Code, a creditor is required to file a Motion for adequate protection (which is determined by the Court). The creditor can file an emergency motion. The creditor cannot hold the car and force the debtor to take action (i.e. file a motion for turnover). The Court awarded the debtor sanctions in the amount of $1,600 in actual damages, plus attorneys fees.
In re Makowski, 2013 WL 2154788 (Bankr. D. Alaska 2013)
10/4 – Repo
10/11 – BK filed
10/11 – Demand for return of car
10/12 – Creditor advises debtor it wants to consult counsel, and is given an extension to 10/15
10/15 – Creditor tells debtor’s atty they will not release the car
10/15 – Debtor files a Motion for Sanctions
10/15 – Creditor releases car
In In re Makowski, the creditor ultimately returned the car to the debtor, but the issue was whether the creditor did so timely. The Court described timely as “within a reasonable period of time after notice of bankruptcy.” The Court noted cases which recognize that there is no bright line to define how quickly a creditor must release a hold on collateral, and the answer will depend on the circumstances of each case. The Court stated “It is incumbent upon the creditor to release its lien without delay as soon as it is aware of the bankruptcy and of the legal effects of that bankruptcy. Naturally this Court would not chastise a creditor for seeking legal counsel before it acts. But any delay in obtaining that legal advice is unwarranted and a violation of the stay.” While the Court found taking four days to consult with counsel was reasonable, once the creditor advised the debtor’s attorney that the car would not be returned, the creditor had willfully violated the automatic stay by exercising control over property of the estate. The Court was not impressed with the argument that the car was returned the same day, since that occurred only after the debtor filed a Motion for sanctions.
In re Stephens, 495 B.R. 608 (Bankr. D. Ga. 2013)
2/12 – repo.
2/15 – filed Chapter 13 case
2/15 – debtor’s attorney notified creditor, Guaranteed Auto
2/18 – attorney called creditor, advised of bankruptcy filing and requested return of the car
2/18 – creditor demands proof of full insurance coverage
2/19 – fax to creditor which included notice of the bankruptcy filing and proof of insurance 2/20 –
2/ 20 – creditor advised debtor’s the attorney that it would not return the vehicle because it had been repossessed before the Chapter 13 filing. Debtor’s counsel urged Mr. Hart to consult a bankruptcy attorney.
2/20 – debtor filed adversary against Guaranteed Auto, asserting a violation of the automatic stay and seeking turnover of the car.
2/20 – Court set an emergency hearing for 2/26 (copies of the complaint and notice of the hearing were sent by mail, facsimile, and hand delivery).
2/25 – creditor advised that it sold the car on 2/24
2/26 – creditor appears at hearing without an attorney, and hearing is continued.
After the continued hearing, the Court held that the creditor willfully violated the automatic stay by refusing to return the car, demanding proof of insurance without moving for an order requiring adequate protection, and ultimately selling the vehicle before the Court’s emergency hearing. The Court awarded $1,559 as actual damages, $4,325 as attorney fees, and punitive damages in the amount of $17,890 (i.e. twice the amount of the scheduled debt) based on the egregious nature of the stay violations.