In re Herbst

• Decision Date: 11 April 2012
• Docket Number: No. 12–11044.,12–11044.
• Citation: 77 UCC Rep.Serv.2d 346,469 B.R. 299
• Parties: In re Jason R. HERBST, Debtor.
• Court: U.S. Bankruptcy Court — Western District of Wisconsin

469 B.R. 299

77 UCC Rep.Serv.2d 346

In re Jason R. HERBST, Debtor.

No. 12–11044.

United States Bankruptcy Court,

W.D. Wisconsin.

April 11, 2012.

Colten L. Fleu, Madison, WI, for Debtor.

MEMORANDUM DECISION

ROBERT D. MARTIN, Bankruptcy Judge.

Jason Herbst (the debtor) filed a Chapter 13 petition on February 29, 2012, and a Motion for Contempt and for Return of Property on March 6, 2012. He alleges that Talmer Bank & Trust (the bank) violated the automatic stay by refusing to return equipment that the bank repossessed prepetition.

The repossessed equipment was the subject to security agreements that provided as a remedy for default, the bank “may repossess the Property so long as the repossession does not involve a breach of the peace. [The bank] may sell, lease, or otherwise dispose of the Property as provided by law.” The debtor defaulted, and in March 2011, the bank filed a complaint for replevin in Lafayette County. A default judgment was entered against the debtor on May 16, 2011, which states:

“... Plaintiff is entitled to possess and sell the following collateral:

Machinery, vehicles, fixtures, farm machinery and equipment, shop equipment, office and record keeping equipment, parts and tools

Farm products, crops, feed, seed, fertilizer, medicines and supplies.

All government program payments.

2004 Kawasaki Ninja 250R VIN: JKADXMF164DA06034

2005 Chevrolet truck VIN: 1GCJK33215F920432

Plaintiff may sell said collateral as provided in the Security Agreements subject to this action and apply the net sale proceeds to the above stated sum adjudged due and owing from Defendant to Plaintiff ...

Plaintiff shall be entitled to issuance of a Writ of Replevin upon request of plaintiff.”

Under a Writ of Replevin, the bank repossessed five items of equipment on December 8, 2011, and placed them at an auction house. There is no evidence that a sale or other disposition has yet occurred. Nor is there evidence that a contract for disposition was formed. The bank has refused to release the replevied equipment. The debtor seeks to have the bank adjudged to be in contempt for violation of the § 362(a) stay. He also seeks actual and punitive damages (including costs and attorney fees), and the return of the collateral to the debtor.

11 U.S.C. § 362(a)(3) 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.” In the Seventh Circuit, the act of passively holding an asset of the estate constitutes “exercising control” over it in violation of § 362(a)(3), even when the asset was lawfully repossessed prepetition. Thompson v. General Motors Acceptance Corp., LLC, 566 F.3d 699, 703 (7th Cir.2009). The Court of Appeals based its holding in part on United States v. Whiting Pools. In Whiting Pools, the IRS seized Whiting's equipment and other personal property to satisfy a tax lien. United States v. Whiting Pools, 462 U.S. 198, 199–200, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). The next day, Whiting filed a Chapter 11 petition. Id. at 200, 103 S.Ct. 2309. The United States intended to sell the property, and moved for a declaration that the automatic stay was inapplicable to the IRS, or in the alternative, for relief from stay. Id. at 201, 103 S.Ct. 2309. The Supreme Court held that § 542(a) required the IRS to return the assets it had seized but not yet disposed of. Id. at 211–12, 103 S.Ct. 2309. According to the Supreme Court, the bankruptcy estate includes property of the debtor that a creditor seized prepetition. Id. at 209, 103 S.Ct. 2309.Section 542(a) requires an entity (other than a custodian) holding any property of the debtor that the trustee can use under § 363 to turn that property over to the trustee. Id. at 205, 103 S.Ct. 2309. Property of the debtor repossessed by a secured creditor falls within this rule, and therefore may be drawn into the estate. Id. at 205–06, 103 S.Ct. 2309.

The Supreme Court noted that “if a tax levy or seizure transfers to the IRS ownership of the property seized, § 542(a) may not apply.” Id. at 209, 103 S.Ct. 2309. But that was not the case in Whiting Pools. The Supreme Court reasoned that the Internal Revenue Code's levy and seizure provisions, 26 U.S.C. §§ 6331 and 6332, are special procedural devices available to the IRS to protect and satisfy its liens, and are analogous to the remedies available to private secured creditors. Id. at 210–11, 103 S.Ct. 2309. These remedies “do not determine the Service's rights to the seized property, but merely bring the property into the Service's legal custody.” Id. at 211, 103 S.Ct. 2309. The Court concluded that until a sale takes place, the property remains the debtor's and thus is subject to the turnover requirement of § 542(a). Id.

The Seventh Circuit Court of Appeals relied on Whiting Pools when it held that a creditor violated § 362(a)(3) by retaining the debtor's property that it repossessed prepetition. Thompson v. General Motors Acceptance Corp., LLC, 566 F.3d 699, 703 (7th Cir.2009). In Thompson, a debtor entered into an installment contract with General Motors Acceptance Corporation (GMAC) for the purchase of a vehicle. Id. at 700–01. The debtor defaulted on the payments, and GMAC repossessed the vehicle. Id. at 701. Several days later, the debtor filed for Chapter 13 bankruptcy and requested that GMAC return his vehicle. Id. GMAC refused, and the debtor moved for sanctions pursuant to § 362(k). Id. The Seventh Circuit Court of Appeals noted Whiting Pools' principal that the primary goal of bankruptcy reorganization is to group all of the debtor's property together so he may rehabilitate his credit and pay off his debts. Id. at 702. In light of this, the court of appeals held that the act of passively holding onto an asset of the estate is “exercising control” over it in violation of § 362(a)(3), even when the asset was lawfully repossessed prepetition. Id. at 703.

The court of appeals held that GMAC must first return the vehicle and then, if necessary, seek adequate protection of its interests in the bankruptcy court. Id. at 708. The court observed that the secured creditor has the burden of requesting adequate protection for its interest either directly under 11 U.S.C. § 363(e) or by moving for relief from the stay under 11 U.S.C. § 362(d)(1). Id. at 703–04. The court reasoned that if a creditor is allowed to retain possession, “then this burden is rendered meaningless—a creditor has no incentive to seek protection of an asset of which it already has possession.” Id. at 704. The court concluded that in order for the language of 11 U.S.C. § 363(e) to have meaning, Congress must have intended for the asset to be returned to the bankruptcy estate before the creditor seeks protection of its interest. Id. The court of appeals also pointed to Whiting Pools' interpretation of § 542(a) as support for its conclusion that GMAC must first return the vehicle before seeking adequate protection. Id. The court of appeals did not require the debtor to seek turnover under § 542(a) before regaining possession of the vehicle.

In Wisconsin, a judgment in replevin allows “for the possession or for the recovery of possession of the property, or the value thereof in case a delivery cannot be had, and of damages for the detention ...” Wis. Stat. § 810.14. Replevin is primarily a possessory action—it does not necessarily involve ownership of the property. See Huesmann v. Sakowski, 1992 WL 140623, at *2, 1992 Wis.App. LEXIS 365 *4 (Wis.Ct.App.1992). However, both legal and equitable rights may be determined in such [replevin] action, and the equities to be settled must relate to the property or the rights arising out of the contract. Id. at *2, 1992 Wis.App. LEXIS 365 at *5.

In In re Karis, Judge Utschig held that FSA did not violate the automatic stay when it repossessed the debtor's cattle prepetition, because the language in the judgment of replevin terminated the debtors' rights to the collateral. In re Karis, 208 B.R. 913 (Bankr.W.D.Wis.1997). FSA had obtained a judgment of replevin, which stated: “IT IS FURTHER ORDERED that the defendants, their heirs, successors or assigns, and all persons claiming under them, be forever barred and foreclosed of all right, title, interest and equity of redemption in said mortgaged collateral.” Id. at 916. Judge Utschig concluded that when FSA arrived on the farm to collect the cattle, the debtors had only a possessory interest in the cows. Id. at 917. Any other interest in the cattle had been extinguished by the foreclosure judgment. Id. Therefore, when the debtors filed bankruptcy, the debtors did not retain a right of redemption or other equitable interest. Id. Because the debtors' rights to the cattle were terminated prior to the filing, there was no interest that could have been transferred to the bankruptcy estate. Id.

In this case, the default judgment does not extinguish “all right, title, interest and equity of redemption” the way the judgment in In re Karis did. The default judgment gives the bank the right to repossess and sell the collateral. The bank has repossessed the collateral, but it has not yet sold it. The grip of the automatic stay depends on how far the foreclosing creditor has gone before the petition is filed. 1 The Law of Secured Transactions Under the Uniform Commercial Code, ¶ 6.08[1][a] (3d ed. 2012). As long as some right of redemption remains, the stay is still applicable. Id.

Wisconsin law indicates that the debtor retains a right of redemption as long as a sale or contract for sale has not occurred. Wisconsin Statute § 409.623 governs a debtor's right to redeem collateral. It states:

(1) Persons that may redeem. A debtor, any secondary obligor, or any other secured party or lienholder may redeem collateral.

(2) Requirements for redemption. To redeem collateral, a person shall tender:

(a) Fulfillment of all obligations secured by the collateral; and

(b) The reasonable expenses and attorney...