Mitchell v. BANKILLINOS

• Decision Date: 28 July 2004
• Docket Number: No. CIV.A. H-02-3834,CIV.A. H-02-3834
• Citation: 316 B.R. 891
• Parties: In re Georgina P. MITCHELL, Debtor/Appellee v. BANKILLINOIS, Appellant.
• Court: U.S. District Court — Southern District of Texas

316 B.R. 891

In re Georgina P. MITCHELL, Debtor/Appellee v. BANKILLINOIS, Appellant.

No. CIV.A. H-02-3834

Unirted State District Court S.D. Texas, Houston Division.

July 28, 2004

COPYRIGHT MATERIAL OMITTED

Susan Rae Fuertes, Baker & Hostetler LLP, Houston, TX, for Bank Illinois, Appellant.

Richard W. Aurich, Jr, Attorney at Law, Houston, TX, for Georgina P Mitchell, Debtor.

Georgina P. Mitchell, Houston, TX, pro se.

MEMORANDUM AND ORDER

ROSENTHAL, District Judge.

Appellant Banklllinois financed debtor/appellee Georgina Mitchell's purchase of an automobile in 2000. On March 12, 2002, Banklllinois repossessed Mitchell's vehicle for failure to make payments. Later that same day, Mitchell filed for bankruptcy protection under Chapter 13 of the Bankruptcy Code. Mitchell demanded that Banklllinois return her vehicle, but Bank-Illinois refused. Mitchell filed a Complaint for Turnover and for Damages in the bankruptcy court. The court found that the vehicle was property of the bankruptcy estate under 11 U.S.C. § 542(a) and that Banklllinois had violated the automatic stay imposed under 11 U.S.C. § 362(a)(3) by failing to return the vehicle in response to Mitchell's demand. The court awarded Mitchell $8,520.97 in actual damages and attorney fees under 11 U.S.C. § 362(h). Banklllinois appeals this judgment, arguing that an automobile repossessed prepetition is not property of the estate and that Banklllinois was entitled to hold the vehicle until Mitchell demonstrated that its interest in the vehicle was adequately protected. Banklllinois contends that although Mitchell provided proof of insurance for the automobile, this did not show adequate protection of Bank-Illinois's interests.

After careful consideration of the parties' submissions and the record on appeal, with the applicable law, this court AFIRMS the bankruptcy court's ruling. The reasons are set out in detail below.

I. Background

Mitchell purchased a 1997 Chevrolet Monte Carlo (the "vehicle") on December 5, 2000. Banklllinois financed Mitchell's purchase. Banklllinois repossessed the vehicle on March 12, 2002, after Mitchell failed to make payments. Later that day, Mitchell filed a Chapter 13 bankruptcy petition. Mitchell notified Banklllinois by facsimile of the bankruptcy filing and demanded that Banklllinois return the vehicle. (Debtor's Exs. 5, 6). Mitchell included proof of her insurance on the vehicle in this facsimile. (Debtor's Ex. 6).

The next day, counsel for Banklllinois replied to Mitchell's facsimile. In the reply, counsel stated that its bankruptcy attorney, John Maloney, was away until March 18, but the office would instruct Banklllinois to protect the vehicle until Maloney's return. (Debtor's Ex. 7). Banklllinois's counsel also requested a copy of Mitchell's Chapter 13 plan. (Id.).

On March 18, Maloney responded by letter. (Def.'s Ex. 5). Maloney acknowledged receiving Mitchell's proof of insurance. Maloney contended that Mitchell only retained a right of redemption because the repossession occurred prepetition. Maloney stated that Banklllinois wanted to discuss "what arrangements can be made ... that would allow your client to reinstate the loan," and to have "some serious Code Section 362 discussions." Maloney repeated Banklllinois's request for a copy of Mitchell's Chapter 13 plan, but made no reference to a need for additional proof of adequate protection.

In a facsimile sent to Banklllinois's counsel on March 19, Mitchell repeated her demand that Banklllinois return her automobile. (Debtor's Ex. 8). Mitchell also stated that she had lost time at work and was renting a car in order to travel to work. Mitchell stated that she would file an adversary action for turnover of the automobile if Banklllinois did not return the vehicle.

On March 21, Mitchell filed a Complaint for Turnover and Damages in the bankruptcy court. On March 27, Banklllinois filed a motion for relief from the automatic stay of 11 U.S.C. § 362 and for adequate protection. Banklllinois requested that this motion be considered on an emergency basis, but withdrew that request at the hearing on Mitchell's complaint. (Transcript, March 28, 2002, p. 33, 1.19-1.22).

The bankruptcy court held an evidentiary hearing on Mitchell's motion for turnover on March 28, 2002. In that hearing, Banklllinois took the position that the vehicle was not property of Mitchell's bankruptcy estate and Mitchell had no possessory right in the car because it was repossessed prepetition. (Id. at p. 13, 1.16-1.19). The bankruptcy court disagreed. Relying primarily on United States v. Whiting Pools, 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983), the bankruptcy court held that the vehicle was property of the estate and subject to turnover despite the fact that it was seized prepetition. (Op. at 5-6). The court found that under Texas law, ownership of collateral remains with the debtor until sale. (Id. at 6). Because of this, Banklllinois did not own the repossessed vehicle and the vehicle became property of the estate once Mitchell filed her Chapter 13 bankruptcy petition.

The court ordered Banklllinois to return the vehicle to Mitchell. (Id. at p. 34, 1.23p. 35, 1.11; Op. at 5-7). The court stated that although Banklllinois was entitled to request adequate protection of its interest in the vehicle, Banklllinois did not request adequate protection in its initial correspondence with Mitchell, and only raised the issue of adequate protection six days after Mitchell filed her turnover action. (Id. at 6-7). The court concluded that "Banklllinois used possession of the vehicle to coerce Chapter 13 plan treatment to its liking." (Id. at 7). The court found that Banklllinois willfully violated section 362(a)(3) and ordered it to pay $8,520.97 actual damages and attorney fees under section 362(h).¹ The court did not award sanctions or punitive damages.

II. The Standard of Review

In reviewing a bankruptcy court decision, a district court functions as an appellate court and applies the standards of review generally applied in federal courts of appeal. 28 U.S.C. § 158(a); In re Webb, 954 F.2d 1102, 1103-04 (5th Cir. 1992). This court will not set aside a bankruptcy court's findings of fact unless they are clearly erroneous. FED. R. BANKR. P. 8013; In re McDaniel, 70 F.3d 841, 842-43 (5th Cir.1995). A finding of fact is clearly erroneous if, after review of all the evidence, the court is left with a firm and definite conviction that the bankruptcy court erred. In re McDaniel, 70 F.3d at 843. This court reviews legal conclusions de novo. Id.; In re Herby's Foods, Inc., 2 F.3d 128, 131 (5th Cir.1993).

III. Analysis

Banklllinois argues that the bankruptcy court erred in concluding that the vehicle was property of the estate. Banklllinois also contends that even if the vehicle was property of the estate, Banklllinois did not violate the automatic stay by refusing to return the vehicle on demand because its interest in the vehicle was not adequately protected. Banklllinois argues that Mitchell's proof of insurance did not constitute adequate protection. Banklllinois also challenges the bankruptcy court's award of attorney fees, contending that the amount was unreasonably high.

Each contention and response is analyzed below.

A. The Issue of Whether the Vehicle Was Property of the Estate

Banklllinois contends that the vehicle was not property of the estate because it was repossessed before Mitchell filed her Chapter 13 bankruptcy petition. Mitchell responds that under Texas law, she retained ownership of the vehicle after it was repossessed, so that the vehicle became property of the bankruptcy estate once she filed her Chapter 13 petition.

Under 11 U.S.C. § 541(a)(1), a bankruptcy estate is comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case." Section 542(a) requires that an entity in possession of property "that the trustee may use, sell, or lease under section 363" must deliver that property to the trustee. The Supreme Court in Whiting Pools, 462 U.S. 198, 103 S.Ct. 2309 held that if a secured creditor repossesses the debtor's property prepetition, that property may be included in the estate. "Section 542(a) grants to the estate a possessory interest in certain property of the debtor that was not held by the debtor at the commencement of the reorganization proceedings." 462 U.S. at 207, 103 S.Ct. at 2314-15. Whiting Pools involved a Chapter 11 proceeding, and the Court reserved the question whether section 542(a) has the same effect in Chapter 13 proceedings. 462 U.S. at 208 n. 17, 103 S.Ct. 2309. However, many courts have applied Whiting Pools to Chapter 13 cases. See In re Robinson, 285 B.R. 732, 735 (Bankr.W.D.Okla.2002); In re Sharon, 234 B.R. 676, 681-82 (6th Cir. BAP 1999); In re Spears, 223 B.R. 159, 163 (Bankr.N.D.Ill.1998); In re Richardson, 135 B.R. 256, 257 (Bankr.E.D.Tex. 1992); In re Attinello, 38 B.R. 609, 610-11 (Bankr.E.D.Pa.1984).

The Whiting Pools Court stated that section 542(a) may not apply if the seizure of the property transferred ownership. Ownership under section 541 is determined under state law. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979); In re Thomas, 883 F.2d 991, 995 (11th Cir.1989); In re Robinson, 285 B.R. at 735. Once the debtor's state law property rights are determined, federal bankruptcy law applies to establish the extent to which those rights are property of the estate. Butner, 440 U.S. at 55, 99 S.Ct. 914; In re Thomas, 883 F.2d at 995; In re Robinson, 285 B.R. at 735. This court must decide whether Banklllinois's repossession of the vehicle gave it ownership of the vehicle, or whether Mitchell retained ownership after Banklllinois took possession. This is a question of Texas law.

Under TEX. BUS. & COM. CODE § 9.609,² a secured party may take possession of collateral after default without judicial process if it proceeds without a breach of the peace....