In re Denby-Peterson, 102819 FED3, 18-3562

Docket Nº:18-3562
Opinion Judge:FUENTES, CIRCUIT JUDGE.
Party Name:In re: JOY DENBY-PETERSON, Appellant
Attorney:Ellen M. McDowell [Argued] Daniel Reinganum McDowell Law Counsel for Appellant Craig Goldblatt [Argued] WilmerHale Counsel for Amicus Curiae in Support of the District Court's Judgment
Judge Panel:Before: McKEE, SHWARTZ, and FUENTES, Circuit Judges.
Case Date:October 28, 2019
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit
 
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In re: JOY DENBY-PETERSON, Appellant

No. 18-3562

United States Court of Appeals, Third Circuit

October 28, 2019

Argued May 23, 2019

Appeal from the United States District Court for the District of New Jersey (D.C. No. 1-17-cv-09985) District Judge: Hon. Noel L. Hillman

Ellen M. McDowell [Argued] Daniel Reinganum McDowell Law Counsel for Appellant

Craig Goldblatt [Argued] WilmerHale Counsel for Amicus Curiae in Support of the District Court's Judgment

Before: McKEE, SHWARTZ, and FUENTES, Circuit Judges.

OPINION

FUENTES, CIRCUIT JUDGE.

At the center of this bankruptcy appeal is "America's first sports car": the Chevrolet Corvette.[1] Joy Denby-Peterson purchased a Chevrolet Corvette in July 2016. Several months later, the Corvette was repossessed by creditors after Denby-Peterson defaulted on her car payments. Denby-Peterson subsequently filed an emergency voluntary Chapter 13 petition in the Bankruptcy Court for the District of New Jersey. She then notified the creditors of the bankruptcy filing and demanded that they return the Corvette to her.

After the creditors did not comply with her demand, Denby-Peterson filed a motion for turnover in the Bankruptcy Court. She sought an order (1) compelling the creditors to return the Corvette to her, and (2) imposing sanctions for the creditors' alleged violation of the Bankruptcy Code's automatic stay.2 The Bankruptcy Court entered an order mandating turnover of the Corvette to Denby-Peterson but denying Denby-Peterson's request for sanctions. The Bankruptcy Court denied the sanctions request on the basis that the creditors did not violate the automatic stay by failing to return the repossessed Corvette to Denby-Peterson upon receiving notice of the bankruptcy filing. Denby-Peterson appeals from an order of the District Court affirming the Bankruptcy Court.

We are now presented with an issue of first impression for our Court: whether, upon notice of the debtor's bankruptcy, a secured creditor's failure to return collateral that was repossessed pre-bankruptcy petition is a violation of the automatic stay. We answer in the negative, and thus join the minority of our sister courts-the Tenth and D.C. Circuits-in holding that a secured creditor does not have an affirmative obligation under the automatic stay to return a debtor's collateral to the bankruptcy estate immediately upon notice of the debtor's bankruptcy because failure to return the collateral received pre-petition does not constitute "an[] act . . . to exercise control over property of the estate."3 We will therefore affirm the order of the District Court affirming the Bankruptcy Court.

I.

A. Facts

On July 21, 2016, Debtor Joy Denby-Peterson purchased a used yellow 2008 Chevrolet Corvette from a car dealership named Pine Valley Motors. To finance her purchase, Denby-Peterson entered into a retail installment contract with Pine Valley Motors, which, in turn, assigned its rights under the contract to its affiliate company, NU2U Auto World.4 Under the contract, Denby-Peterson agreed to pay (1) a $3, 000 cash down payment; (2) a deferred down payment of $2, 491 by August 11, 2016 to pay sales taxes and registration fees to obtain permanent license plate tags; and (3) weekly installment payments of $200 for 212 weeks. Between July 2016 and February 2017, Denby-Peterson made payments totaling $9, 200 under the contract, including the $3, 000 down payment applied on the day of the sale. She never made the required down payment of $2, 491. As a result, the creditors repossessed the Corvette in February or March 2017.5 The Corvette was never titled or registered in Denby-Peterson's name.

B. Bankruptcy Court Proceedings

i. Denby-Peterson's Chapter 13 Bankruptcy Petition

After the Corvette was repossessed, Denby-Peterson filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code on March 21, 2017. Under Section 362 of the Code, the filing of the petition triggered an automatic stay of "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."6

Within two days, the creditors received notice of Denby-Peterson's bankruptcy filing. Counsel for Denby-Peterson had notified them of the filing and demanded that they return the Corvette to Denby-Peterson. Counsel also maintained that the creditors' failure to return the Corvette would result in a violation of the automatic stay. He faxed a letter to the creditors which stated, in relevant part:

BE ADVISED your failure to release the vehicle to Ms. Denby-Peterson is a violation of the Automatic Stay. If the vehicle has not been released before 5pm today, this firm will seek damages, costs, and attorneys' fees against your company for willful violations of the automatic stay.7

The creditors did not comply with Denby-Peterson's demand and thus remained in possession of the Corvette.

ii. Denby-Peterson's Motion for Turnover and Sanctions

Denby-Peterson then filed a motion8 for turnover in Bankruptcy Court, asking the Bankruptcy Court to (1) order the creditors to return the Corvette to her, and (2) impose sanctions for the creditors alleged violation of the automatic stay. Denby-Peterson sought costs and attorneys' fees for filing the motion; compensation for "non-economic damages"; punitive damages; and "all other relief the Court deem[ed] just and equitable."9

The creditors opposed the motion. They also filed a proof of claim, asserting a security interest in the Corvette in the amount of $28, 773.10

iii. The Bankruptcy Court's Decision

Following a two-day hearing, the Bankruptcy Court issued a written decision and order granting the motion in part and denying it in part. The Bankruptcy Court, inter alia, granted Denby-Peterson's request for turnover and thus ordered the creditors to return the Corvette to Denby-Peterson within seven days, but denied Denby-Peterson's sanctions request.

The Bankruptcy Court held, inter alia, that (1) the creditors must return the Corvette under the Bankruptcy Code's turnover provision in Section 542(a), 11 and (2) the creditors did not violate the automatic stay by retaining possession of the Corvette upon receiving notice of the bankruptcy filing. Thus, the Bankruptcy Court determined that the creditors were not liable for sanctions based on an alleged violation of the automatic stay.

In reaching its holdings, the Bankruptcy Court found that Denby-Peterson had an equitable interest in the Corvette at the time of the bankruptcy filing, and therefore, the Corvette was property of the estate subject to turnover.12

Next, the Bankruptcy Court considered whether the creditors violated the automatic stay by failing to return the Corvette after learning of the bankruptcy filing. It identified the split among our sister circuits on this issue, pointing out that the Second, Seventh, Eighth, and Ninth Circuits ("the majority") have held that the Bankruptcy Code's turnover provision requires immediate turnover of estate property that was seized pre-petition and that failure to do so violates the automatic stay.[13] However, the Tenth and D.C. Circuits ("the minority") "have instead held that a creditor does not violate the stay in regard to property of the estate if it merely maintains the status quo."14 The Bankruptcy Court noted that the minority was critical of the majority's rule that Section 542(a)'s turnover provision "is self-effectuating" because "it does not allow for the possibility of defenses to turnover."[15]

The Bankruptcy Court ultimately adopted the minority position, describing it as "particularly persuasive"16 and pointing out that "[f]rom the inception of this case there was an issue regarding exactly what . . . [Denby-Peterson]'s interest in . . . [the Corvette] was."17 Accordingly, the Bankruptcy Court concluded that the creditors did not violate the automatic stay by failing to turn over the Corvette to Denby-Peterson "prior to adjudication of . . . [her] right to redeem the [Corvette]," and thus, sanctions were not warranted.18

C. Denby-Peterson's Appeal to the District Court

Denby-Peterson appealed the Bankruptcy Court's order denying her sanctions request. Similar to the Bankruptcy Court, the District Court found "the minority position more persuasive."19 The District Court thus affirmed the Bankruptcy Court's order denying Denby-Peterson's sanctions request.20

Denby-Peterson now appeals to our Court.21 Because the creditors are not participating in this appeal, we appointed Craig Goldblatt as amicus curiae to defend the judgment of the District Court.22

II.

On appeal, Denby-Peterson renews her argument that the creditors...

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