Refusal to Turn Over Property Post-Petition Did Not Violate Stay

The U.S. Court of Appeals for the Tenth Circuit recently rejected the majority rule that a creditor violates the automatic stay by refusing to return repossessed property to a debtor post-petition. According to the court, neither the plain text of the automatic stay provision nor its legislative history supports the majority position that a creditor’s refusal to act violates the automatic stay. Violations of the automatic stay require affirmative post-petition “acts” to exercise control or to gain possession of estate property.

The debtor filed for bankruptcy under chapter 13 after secured creditors repossessed two of his commercial trucks. The debtor then demanded that the creditors return the trucks. The creditors refused, claiming that they had sold or otherwise transferred title to the trucks before the debtor’s bankruptcy filing. The bankruptcy court determined that the creditors’ assertions that they had transferred ownership of the trucks prepetition were not credible and that their refusal to return the trucks to the debtor violated the automatic stay.

The bankruptcy court applied the majority rule that passively retaining possession of an asset post-petition is the same as exercising control over the asset in violation of the stay. However, the Tenth Circuit noted that policy and practical considerations drive the majority rule rather than the plain language of the statute or its legislative history. The statute itself prohibits “any act to obtain possession of property” or “any act to exercise control” over it. This implies that the stay prohibits the doing of some act to obtain possession of or control over property. A creditor who simply refuses to return property repossessed prepetition is not taking any post-petition action to gain possession or control of the property.

Legislative History

The Tenth Circuit found support for its position in the legislative history. The 1984 amendments to the Bankruptcy Code expanded the automatic stay to prohibit any act to “control” estate property. The majority view is that Congress intended to prevent creditors from retaining possession of the debtor’s property post-petition. However, the Tenth Circuit observed that the amendments were “equally consonant” with another conclusion: that Congress intended to prohibit nonpossessory conduct that interferes with the estate’s authority over an asset. The conduct must be affirmative as when a creditor with possession of estate property sells it. The appellate court also rejected the argument that the automatic stay provides the remedy for violations of the Code’s turnover provision, Sec. 542. Not only is there an absence of a textual link between the automatic stay and Sec. 542, the argument is not supported by either the legislative history or the text of either provision.

The appellate court did not necessarily absolve the creditors of liability. The bankruptcy court determined that the creditors manufactured paperwork, forged documents, gave perjured testimony, and coached their witnesses in an attempt to convince the lower court that they had terminated the debtor’s ownership of the trucks prepetition. The Tenth Circuit concluded that the creditors’ misconduct could qualify as post-petition acts to exercise control over the debtor’s trucks in violation of the automatic stay.

Williams v. Cowen (In re Cowen), No. 15-1413, 2017 U.S. App. LEXIS 3486 (10th Cir. Feb. 27, 2017)