CHAPTER 8 AUTOMATIC STAY

• Jurisdiction: United States

CHAPTER 8: AUTOMATIC STAY

The relief afforded to debtors through the automatic stay is one of the most powerful and important tools of bankruptcy. The stay prohibits collection actions such as foreclosure, garnishment and repossession. In a Tenth Circuit decision, the Court found that § 362(a)(3) does not prohibit passive exercise of control, or a refusal to act. This remains the minority interpretation, but one that the City of Chicago attempted to use in seeking payments of parking tickets. The City passed a law that any vehicle impounded would be subject to a possessory lien, and argued that this lien would not be released upon filing of a chapter 13 case. Several cases addressing this policy followed.

After BAPCPA, § 362(c)(3) was added to state that the stay "shall terminate with respect to the debtor" after 30 days. Courts have considered the meaning behind "with respect to the debtor" and its affect on stay actions. Courts differ on whether this means the stay terminates in its entirety after 30 days, or if it will only terminate for actions against the debtor personally.

Another stay consideration is whether the co-debtor stay prevents collection actions to collect the debt owed only by the nondebtor spouse in a community property state. In a Seventh Circuit decision of first impression, the Court concluded that the co-debtor stay does not apply under these circumstances.

A. The Automatic Stay and Creditor Inaction

2018 Southwest Bankruptcy Conference

Written by:

Robert M. Charles¹

Lewis Roca Rothberber Christie LLP

Tucson, Ariz. and Las Vegas, Nev.

The automatic stay is perhaps one of the two fundamental pieces of individual bankruptcy relief, in addition to the discharge. Recent opinions by appellate and lower courts holding that creditor inaction is not an exercise of control in violation of §362(a)(3) may reflect a course change in applying the stay. These decisions are likely to result in the types of actions that the automatic stay should prevent. An interpretation of the Code that requires the trustee or debtor to obtain court intervention to stop creditor hostage-taking thereby gives the creditor leverage.

Section 362(a)(3)

Since 1984, §362(a)(3) automatically stays "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate"² This language seems fairly clear.

Passive Inaction

However, occasionally creditors argue that "passive" action does not "exercise control", as prohibited by the Code. Until recently, cases approving this suggestion were outliers. For example, consider the secured creditor that repossesses collateral, but has not extinguished the debtor's interest via foreclosure. If a bankruptcy petition intervenes while the debtor still owns the collateral prior to foreclosure, under most state laws the collateral is considered property of the estate.³ Since the Supreme Court's opinion in Whiting Pools⁴ and the 1984 Amendments, most courts found the repossessing creditor that refuses to return collateral af-ternotice of the bankruptcy filing to be in violation of the stay,⁵ although there were outlying opinions.⁶ Where a vehicle is seized as a post-judgment remedy, but before title is lost via an execution sale, the repossessing entity violates the stay by holding the vehicle subject to a demand for payments.⁷ Where a creditor garnishes a debtor's wages and then bankruptcy intervenes, the creditor must quash the garnishment.⁸ Nor may the creditor condition return of collateral upon the debtor or trustee obtaining bankruptcy court approval,⁹ although not all courts agree.¹⁰ Some courts say that the creditor has a reasonable time in which to return the repossessed collateral.¹¹ The creditor who ignores the bankruptcy filing faces sanctions under§362(k)¹² or the bankruptcy court's contempt power. The rule logically puts the burden on the creditor to obtain relief in the event of a crisis.¹³

The Cowen Decision

More recently, however, the Tenth Circuit accepted the views of the outlier decisions and made them binding in that circuit. In Cowen,¹⁴ the court held that the passive exercise of control is not an affirmative act, and thus does not violate §362(a)(3).¹⁵ The creditors in Cowen aggressively used self-help to repossess two over-the-road tractors and ignored the bankruptcy court's turnover order. The bankruptcy court imposed actual and punitive damages pursuant to §362(k)(1). The Circuit Court reversed, finding that §362(a)(3) restrains only affirmative acts, and adding the word "gain" to read the statute as prohibiting acts to acts to gain possession or control over property of the estate."¹⁶ The Cowen decision has been followed in New Jersey.¹⁷

Thinking About Cowen And Section 362(a)(3)

The bankruptcy court opinions from the Federal Circuit explain the minority rule better than the Cowen opinion. The Hall court argues that the majority rule may eviscerate a creditor's right of adequate protection, so that collateral may be at risk if uninsured, a garnishment or possessory lien may disappear upon return of possession, and nothing in §362(b) authorizes a temporary withholding of possession to preserve the status quo.¹⁸ But there is explicit protection in §362(b)(3) for possessory liens superior to the estate's rights.¹⁹ Nor is the proposition that a bank may temporarily freeze an account to preserve rights of setoff²⁰ inconsistent with the idea that §362(a)(3) requires turnover upon a bankruptcy filing without the necessity of a turnover complaint. These issues raise difficult conflicting concerns.

Prior to Cowen, the Seventh Circuit persuasively addressed the argument that only affirmative acts violate the stay, not refusal to act.

This interpretation is at odds with the plain meaning of "exercising control." Webster's Dictionary defines "control" as, among other things, "to exercise restraining or directing influence over" or "to have power over." Merriam- Webster's Collegiate Dictionary (11th Ed. 2003). Holding onto an asset, refusing to return it, and otherwise prohibiting a debtor's beneficial use of an asset all fit within this definition, as well as within the commonsense meaning of the word.²¹

In a Texas case, certain lawyers received payments from the debtor's settlement recovery in violation of the Bankruptcy Code and Rule provisions governing post-petition payments to lawyers. Two lawyers each received $73,333 each. Neither lawyer had been disclosed to the court, approved by the court as special counsel, or authorized to receive payments. After determining that the lawyers were not entitled to receive the funds, the bankruptcy court found that the lawyers violated the stay by holding the funds instead of returning the funds to the estate.²² If passive exercise of control does not violate the stay, then the lawyers had no liability to the estate to return the funds until ordered to after a trial.

The City of Chicago has taken the idea of passive exercise of control, and the Code's protection of possessory liens, and turned these concepts into a scheme to collect parking tickets. The City tried to create a possessory lien system to collect tickets by booting vehicles. When the vehicle owner files bankruptcy, the City argues that it need not release the vehicle as its possessory lien is excepted from the stay under § 362(b)(3) or is an exercise of police power within the exception of § 362(b)(4). A Chicago bankruptcy judge administering a chapter 13 case rejected the City's arguments, finding that the City's demand that the tickets be paid in full under the chapter 13 plan before the debtor's vehicle was released was a naked effort to coerce payment of an alleged secured claim. The court agreed with another judge that the alleged possessory lien violated Illinois law,²³ making the exception of § 362(b)(3) inapplicable.²⁴ The police power exception did not apply to the City's effort to collect debt as a creditor, for a "pecuniary purpose."²⁵ The debtor was awarded an injunction directing return of the vehicle, albeit only after prosecuting litigation and four months after her bankruptcy filing. In contrast, the Howard court sanctioned the city for violation of the stay.²⁶

The hypothesis that only affirmative acts are violative of the stay is illogical if compared to affirmative action to maintain control, such as maintaining a gate over an estate easement.²⁷ Does any court seriously believe that a debtor attempting to recover collateral from the "repo man" would not be met with affirmative action to maintain possession? Where the creditor takes steps to protect its possession of the collateral, those actions must violate the stay. What if the locked-up collateral was, for example, cattle or other living collateral not being properly maintained by the creditor?

The minority Cowan rule leaves a family homeless that has been locked out of their residence before termination of ownership or tenancy; and the family deprived of a car after repossession and before foreclosure without transportation. The minority rule increases the burden on a trustee or a secured creditor injured by a creditor, such as a towing company, holding estate property hostage²⁸ or a depository bank indefinitely administratively freezing chapter 7 debtor bank accounts.²⁹ The result is not justified by the plain language of the Bankruptcy Code; it appears to be premised on the prejudice that requiring a turnover action is consistent with the "breathing spell" for which Congress provided in the automatic stay.

B. Opinions Regarding the City of Chicago and Vehicle Immobilization

2018 Hon. Eugene R. Wedoff Seventh Circuit Consumer Bankruptcy Conference

Written by:

Nathan Delman³⁰

The Semrad Law Firm, LLC

Chicago, Ill.

Introduction

In late 2016 the City of Chicago amended its municipal code 9-92-080(f), stating that "Any vehicle impounded by the City or its designee shall be subject to a possessory lien in favor of the City in the amount...