In re Bernstein
| Decision Date | 20 September 2000 |
| Docket Number | No. 00-01372.,00-01372. |
| Citation | 252 BR 846 |
| Parties | In re Carl BERNSTEIN, Debtor. |
| Court | United States Bankruptcy Courts – District of Columbia Circuit |
Joel Steinberg, Joel Steinberg & Associates, P.L.C., Alexandria, VA, for Debtor.
Martin Mooradian, Springfield, VA, for Creditor.
AMENDED DECISION AND ORDER RE MOTION FOR EXPEDITED HEARING OF MOTION FOR CONTEMPT FOR VIOLATION OF AUTOMATIC STAY
The court declines to hear the Motion for Contempt for Violation of the Automatic Stay (Docket Entry No. 5) on an emergency basis. The contempt motion is directed to continued retention of property pursuant to a prepetition writ of fieri facias, conduct which the debtor asserts violates 11 U.S.C. § 362(a)(3).1 Because the continued retention of the property pursuant to a prepetition seizure does not violate § 362(a)(3), the court will deny the motion for an expedited hearing.2
The alleged staleness of the creditor's writ of fieri facias under local law may be a basis for contesting any lien that would otherwise have been achieved by the writ of fieri facias. But the invalidity of the creditor's asserted fieri facias lien does not require treating a failure to turn over estate assets seized pursuant to the writ as a violation of 11 U.S.C. § 362(a)(3).
As this court explained in In re Young, 193 B.R. 620, 624-25 (Bankr. D.D.C.1996), § 362(a)(3) is ambiguous: the prohibited act of exercising control can (and, for various reasons, should) be read as meaning an affirmative act by the creditor instead of the passive act of simply continuing to possess the property. As observed in Beker Indus. Corp. v. Florida Land and Water Adjudicatory Comm'n (In re Beker Industries Corp.), 57 B.R. 611, 626 (Bankr.S.D.N.Y.1986) (emphasis added):
the legislative history to § 362(a)(3), when enacted as part of the Bankruptcy Reform Act of 1978, P.L. 95-598, reveals that this branch of the automatic stay "applies to prevent dismemberment of the estate and to assure its orderly distribution." Securities and Exch. Comm. v. First Fin. Group of Tex., 645 F.2d 429, 439 (5th Cir.1981); cf. In re Lawson Burich Associates, 31 B.R. at 609-10. Since an act designed to change control of property could be tantamount to obtaining possession and have the same effect, it appears that § 362(a)(3) was merely tightened to obtain full protection. . . .
In other words, "the automatic stay, as its name suggests, serves as a restraint only on acts to gain possession or control over property of the estate." United States v. Inslaw, 932 F.2d 1467, 1474 (D.C.Cir.1991), cert. denied, 502 U.S. 1048, 112 S.Ct. 913, 116 L.Ed.2d 813 (1992). An example of an affirmative act which does constitute exercising control over property of the estate is a creditor who files a covenant not to encumber or convey real property belonging to the estate. Rothenberg v. Ralph D. Kaiser Co. (In re Rothenberg), 173 B.R. 4, 14 (Bankr.D.D.C.1994) ().3 The creditor here has taken no such affirmative step.
Even if the creditor has no lawful right of possession (because the seizure on its behalf was not in compliance with non-bankruptcy law), the failure to turn over the property is not an affirmative act altering the status quo such as to run afoul of the spirit of the automatic stay. The automatic stay ought not vary in meaning depending on whether the prepetition seizure was allegedly unlawful.
The inapplicability of § 362(a)(3) to the passive act of maintaining the status quo through continued retention of property seized prepetition is not altered by 11 U.S.C. § 542(a). Decided by a divided bankruptcy appellate panel, In re Sharon, 234 B.R. 676 (6th Cir. BAP 1999), held that § 542(a) changes the status quo because § 542(a) commands, with exceptions of no relevance here, that:
an entity . . . in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.
This court rejects the reasoning of the majority in Sharon because, as explained at length in In re Barringer, 244 B.R. 402 (Bankr.E.D.Mich.1999), § 542(a) is not self-executing.
The court agrees with Barringer that the Sharon majority read too much into the Supreme Court's decision in United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). The Court made only two holdings in Whiting Pools: first, that the estate, as defined under § 541(a)(1) generally includes property of the debtor seized by a creditor prepetition (part I of the decision) and, second, that prepetition seizure of tangible property seized by tax levy does not effect a change in title or otherwise provide an exception to the general rule (part III of the decision). The bankruptcy court order at issue in Whiting Pools ordered turnover conditioned on the provision of adequate protection. Accordingly, the passages from Whiting Pools quoted in Sharon did not address the question Sharon addressed: whether § 542(a) is self-executing, requiring turnover before the creditor can obtain adequate protection as a condition to turnover. The Court simply held that the Internal Revenue Service was required to look to the Bankruptcy Code () instead of withholding the seized property on the basis of the Service's rejected argument that its tax levy effected a change in title removing the property from the debtor's reorganization efforts. The Court did not undo long settled practice requiring a turnover order when a creditor insists upon adequate protection of its interest in property it seized prepetition. Young, 193 B.R. at 622 n. 3 and 626.4
To elaborate on Barringer, there are several reasons why § 542(a) must be held to be not self-executing.
First, Section 542(a) envisions that the creditor will be entitled to raise any defenses to turnover before it is compelled to do so. Section 542(a) contains two exceptions in itself:
If an entity possessing property raises one of these defenses, there is no indication in the Bankruptcy Code that the entity does so at the risk of being held in contempt under § 362(a)(3) in the event that the defense is rejected.
Second, § 363(e) provides that:
at any time, on request of an entity that has an interest in property used, sold, or leased, or proposed to be used, sold, or leased, by the trustee, the court, with or without a hearing, shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest.
If the creditor contests the trustee's right of turnover, for whatever reason, the Code plainly contemplates that the court will adjudicate all defenses the creditor raises to turnover, including any defense that the creditor asserts a lien and requests that the court accord adequate protection of that lien under 11 U.S.C. § 363(e). Where the creditor's lien might be destroyed if its collateral were released to the trustee without some provision for adequate protection, it stands to reason that the creditor ought to be able to defend against turnover on the basis of lack of adequate protection before being required to turn over the collateral.
Moreover, 11 U.S.C. § 507(b) recognizes that even once some provision for adequate protection is made, that protection may prove to have been inadequate, leading to an administrative claim against the estate. Section 507(b) accords superpriority status to such a claim. If § 542(a) requires turnover without the necessity of a turnover order, this would mean that there would be no necessity for the trustee to provide adequate protection. In turn, this would render § 507(b) unavailable to protect a creditor who turns over property, without any provision of adequate protection because of a court's interpretation of § 542(a) as self-executing.
Surely Congress did not intend § 542(a) to be interpreted in a fashion that would eviscerate the statutory protections of §§ 363(e) and 507(b). As observed in United Sav. Ass'n of Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 371, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988):
Statutory construction . . . is a holistic endeavor. A provision that may seem ambiguous in isolation is often clarified by the remainder of the statutory scheme — because the same terminology is used elsewhere in a context that makes its meaning clear, or because only one of the permissible meanings produces a substantive effect that is compatible with the rest of the law.
Numerous instances exist in which a creditor will need adequate protection of its lien prior to being required to turn over the collateral, lest the lien be destroyed or diminished in value during the interval between turnover and adjudication of the right to adequate protection. The obvious examples are a creditor in the possession of pledged collateral where turnover would destroy the pledge or a creditor whose collateral is uninsured. It would be incompatible with Congress's obvious intent for such a creditor to be required to turn over its collateral without awaiting a hearing which would indeed lead to an adjudication that the creditor has a right to such adequate protection.
As observed in Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 20, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995) (citation omitted): "it is an elementary rule...
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