In re Young

• Citation: 193 BR 620
• Decision Date: 13 March 1996
• Docket Number: Bankruptcy No. 95-567.
• Parties: In re David V. YOUNG, Debtor.
• Court: United States Bankruptcy Courts. District of Columbia Circuit

193 B.R. 620 (1996)

In re David V. YOUNG, Debtor.

Bankruptcy No. 95-567.

United States Bankruptcy Court, District of Columbia.

March 13, 1996.

Madeline A. Trainor, Tyler, Bartl, Burke & Albert, Alexandria, VA, for creditor.

David V. Young, Washington, DC.

Brad D'Amico, Alexandria, VA, for debtor.

Cynthia A. Niklas, Washington, DC.

FINDINGS OF FACT AND CONCLUSIONS OF LAW ON DEBTOR'S MOTION FOR CONTEMPT

S. MARTIN TEEL, Jr., Bankruptcy Judge.

The Debtor's Motion for Contempt for Violations of Automatic Stay seeks to hold his secured creditor in contempt for allegedly violating the proscription of 11 U.S.C. § 362(a)(3) against, among other things, acts "to exercise control over property of the estate." Specifically, the alleged contempt is based on the creditor's admitted failure to return its collateral, a car, which the creditor repossessed before the petition was filed. The court determines that such a failure does not violate § 362(a)(3) and will deny the motion.

I

The debtor owns a Toyota vehicle. Toyota Motor Credit Corporation ("Toyota Motor") holds a security interest against the vehicle to secure the payment of amounts owed under the retail installment contract whereby the debtor purchased the vehicle. (Toyota Motor holds the installment sales contract as the assignee of the car dealership, Kline Tysons Toyota, Inc.) The debtor fell into arrears in making payments as required by the terms of the contract. Pursuant to its remedies under the contract, on April 13, 1995, Toyota Motor repossessed the vehicle. Subsequently, on May 15, 1995, the debtor filed a chapter 13 petition.

The contract provided that the debtor's right to redeem "will end when the vehicle is sold or when the Creditor enters into a contract for its disposition, whichever occurs first." The contract further provided that

The Creditor will send you a written notice of the sale at least 10 days before selling the vehicle. If you do not redeem the vehicle by the date on the notice, the Creditor can sell it.

Toyota Motor has alleged that the debtor's contractual remedy of redemption expired on May 2, 1995, as outlined in a notice of redemption mailed to the debtor on or about April 14, 1995. However, Toyota Motor did not introduce the notice into evidence and presented no evidence that Toyota Motor had sold the vehicle or entered into a contract for its sale. The court must assume that the notice was simply the 10-day warning the contract required the creditor to issue before it could proceed to sell the vehicle. Under the terms of the contract, Toyota Motor was free to sell the vehicle once the notice period had expired.

Although Toyota Motor may have been free to sell the vehicle, this did not place title to the vehicle in Toyota Motor. Title still rested in the debtor with the right to redeem the vehicle at any time prior to the only two events specified by the contract as terminating the right to redeem: sale of the vehicle or Toyota Motor's entering into a contract for sale. The mere seizure of the vehicle did not suffice to destroy the debtor's title as long as the debtor had a right to redeem. United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983).

The debtor filed a motion for contempt against Toyota Motor for violation of the automatic stay under the Bankruptcy Code for Toyota Motor's continued retention of the vehicle, which is the issue under consideration here.

Section 362(a)(3) of the Bankruptcy Code prohibits a creditor postpetition from taking "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." Clearly, the creditor in this case did not take a postpetition act to "obtain possession" because it rightfully obtained possession prepetition. Rather, the question raised here is whether simply maintaining the status quo postpetition by not affirmatively returning the vehicle to the debtor is an act to "exercise control" in violation of § 362(a)(3). In other words, is a mere failure to release possession of a repossessed vehicle postpetition an exercise of control over the vehicle, particularly in circumstances where the creditor is entitled to adequate protection of its interest in the property?

For reasons explained below, the court concludes that the creditor is entitled to retain possession of the property pending resolution of the request for adequate protection of its interest in the property and thus is not subject to sanctions.

II

Critical to ascertaining the proper interpretation of § 362(a)(3) is an examination of the provisions of the Bankruptcy Code governing use of property and turnover of property. The debtor generally may use property of the estate in the ordinary course of the debtor's business. 11 U.S.C. § 363(c)(1). However, on request of a secured creditor, the court must condition such use on the debtor's furnishing adequate protection. 11 U.S.C. § 363(e).¹ In turn, under § 542(a) of the Code, a creditor "in possession, custody or control . . . of property that the trustee may use, sell or lease under section 363 of this title, shall deliver to the trustee . . . such property . . . unless such property is of inconsequential value or benefit to the estate."²

In Whiting Pools, the debtor sought a turnover order against the Internal Revenue Service ("IRS"). The court of appeals upheld the bankruptcy court's power to order turnover. In seeking reversal of the court of appeals, the IRS urged that its prepetition seizure by tax levy removed the property from the reach of the debtor's reorganization efforts. In disagreeing, the Supreme Court determined that § 542(a) mandates that a secured creditor in possession of the debtor's property seized prepetition must turn over that property to the trustee if the trustee is authorized to use, sell or lease the property under § 363. Whiting Pools, 462 U.S. at 203-207, 103 S.Ct. at 2312-2315. The Court reasoned that "§ 542 modifies the procedural rights available to creditors to protect and satisfy their liens. . . . In effect, § 542 grants to the estate a possessory interest in certain property of the debtor that was not held by the debtor at the commencement of reorganization proceedings." Id. at 206-207, 103 S.Ct. at 2314 (footnotes and citations omitted).

Significant to the issue in this case, the Court went on to state that in return for giving up those possessory rights, "the Bankruptcy Code provides secured creditors various rights, including the rights to adequate protection, and these rights replace the protection afforded by possession." Id. at 207, 103 S.Ct. at 2315. In this regard, the Court concluded that "the IRS, under § 363(e), remains entitled to adequate protection for its interests. . . . Section 542(a) simply requires the Service to seek protection of its interest according to the congressionally established bankruptcy procedures, rather than by withholding the seized property from the debtor's efforts to reorganize." Id. at 212, 103 S.Ct. at 2317.

The relevant question not directly addressed by the Court in Whiting Pools is whether the secured creditor must immediately turn over the property, thus making § 542 self-executing, or may hold it until the question of adequate protection pursuant to § 363 is resolved. However, the Court's recitation of the case's procedural history indicates that the Supreme Court was well aware of and did not question the propriety of the common procedure³ whereby the secured creditor would be permitted to retain the property until adequate protection was proven by the debtor. After quoting the language of § 363(e), the Court noted that the "bankruptcy court directed the IRS to turn the property over to Whiting on the condition that Whiting provide the Service with specified protection for its interests." Whiting Pools, 462 U.S. at 201, 103 S.Ct. at 2311 (emphasis added). "Pursuant to this section, the Bankruptcy Court set the following conditions to protect the tax lien: Whiting was to pay the Service $20,000 before the turnover occurred. . . ." Id. at 201 n. 7, 103 S.Ct. at 2312 n. 7 (emphasis added). The Court further noted that the court of appeals upheld the bankruptcy court and "remanded the case for reconsideration of the adequacy of the Bankruptcy Court's protection conditions." Id. at 201, 103 S.Ct. at 2312. The Supreme Court made no further comment on the bankruptcy court's procedural handling of the case or the court or appeals' remand order.

Accordingly, the Court's decision in Whiting Pools cannot be read as holding anything more than that a bankruptcy court may invoke § 542(a) to order the IRS to turn over property seized by tax levy.⁴ None of the courts involved in Whiting Pools intimated that turnover duties under § 542(a) could be self-executing in the face of a request for proof of adequate protection.

III

Some would argue that this practice of retaining the property during the pendency of the resolution of the adequate protection issue was barred by the 1984 amendments to § 362(a)(3) which stayed "any act . . . to exercise control over property of the estate." (Emphasis added.) This amending language was added to the then existing restriction under § 362(a)(3) which stayed "any act to obtain possession of property of the estate or of property from the estate. . . ." (Emphasis added.) In amending § 362(a)(3), Congress gave no explanation of its intent.

As suggested, the 1984 language forbidding an act to exercise control over property has been interpreted by some courts to mean that any postpetition retention of the debtor's property violates the automatic stay and is, indeed, sanctionable. See In re Knaus, 889 F.2d 773 (8th Cir.1989) (duty to return property arises upon the filing of petition); Carr v. Security Savings & Loan Association, 130 B.R. 434 (D.N.J.1991) (creditor sanctioned for not turning over property despite alleged bad faith of petition); In re...