CHAPTER 5, B. Return of Vehicles Seized Before a Chapter 13 Filing

• Jurisdiction: United States

B. Return of Vehicles Seized Before a Chapter 13 Filing

Does the Debtor Have to File a Turnover Motion?

ABI Journal

April 2019

Hon. Eugene R. Wedoff (ret.)

Oak Park, Ill.

One of the significant unresolved issues in consumer bankruptcy law is the right of a chapter 13 debtor to obtain the return of a vehicle seized before the bankruptcy was filed. The majority of the courts that have ruled on the issue, including the Seventh Circuit in Thompson v. GMAC and several other circuit courts, have held that creditors have a duty to return the seized vehicle to the debtor under the automatic stay set out in § 362(a)(3).¹

However, the Tenth Circuit's recent Cowen decision adopted a minority interpretation, holding that the automatic stay does not apply to vehicles seized pre-petition and that a creditor need only return the collateral to a chapter 13 debtor if the bankruptcy court grants a debtor's motion for turnover.² ABI's Rochelle's Daily Wire, in reporting both this decision and a subsequent one by the Tenth Circuit, noted the potential for a grant of certiorari to resolve the circuit split.³

Before any consideration by the U.S. Supreme Court, the Seventh Circuit is being asked to address the issue. The City of Chicago has enacted ordinances that (1) allow the city to seize vehicles for parking, revenue and camera-recorded driving violations, and (2) grant the city a possessory lien on the seized vehicles.⁴ Vigorous enforcement of these ordinances has resulted in thousands of chapter 13 filings in Chicago.⁵

In these cases, the debtors have cited the Thompson decision as requiring the city to return seized vehicles to them when it receives notice of their bankruptcy filings. However, the city has contested Thompson's applicability, arguing that in order to retain its possessory lien, it is allowed to continue holding seized vehicles under § 362(b)(3), an exception to the automatic stay that allows creditor action to maintain lien perfection. The city's more basic argument is that Thompson was incorrectly decided, and that the Seventh Circuit should overrule it and adopt the minority interpretation of § 362(a)(3). Five bankruptcy judges have ruled on the city's arguments, and one found that the automatic stay exception applied.⁶ The other four rejected that argument.⁷ However, none of the judges found that Thompson should be overruled. The city has appealed the four decisions that denied it relief, and the Seventh Circuit has consolidated the cases for direct appeal.⁸

The narrow issue — application of the stay exception in § 362(b)(3) — will only be relevant in the appeal if Thompson is upheld. Unless § 362(a)(3) generally requires the return of seized collateral, there would be no need to consider a special exception for collateral subject to a possessory lien.⁹ The applicability of § 362(a)(3) then becomes the principal issue to be determined by the Seventh Circuit, and it is a major issue for consumer bankruptcy, since it affects not only Chicago vehicle seizures but the repossession of vehicles for ordinary auto loan defaults across the nation. There are three major arguments about the application of § 362(a)(3) to repossessed collateral: (1) the requirements for turnover under § 542(a); (2) the meaning of § 362(a)(3); and (3) compliance with general bankruptcy policy.

Turnover Under § 542(a)

Section 542(a) provides that a party holding property that a trustee can use under § 363 must deliver that property to the trustee unless it has inconsequential benefit to the estate.¹⁰ Section 1306(b) generally places chapter 13 debtors in possession of estate property; § 1303 gives them the general rights of a trustee under § 363; and § 542(a) gives them the right to receive property that a trustee could use under § 363. Minority decisions acknowledge that chapter 13 debtors have the property rights of trustees, but argue that § 542 requires the debtors to obtain a court order before creditors are required to turn over seized property to the debtor.¹¹

The difficulty with this argument...