Weber v. Sefcu (In re Weber)

• Decision Date: 08 May 2013
• Docket Number: Docket No. 12–1632–bk.
• Parties: In re Christopher WEBER, Debtor. Christopher Weber, Plaintiff–Appellee, v. SEFCU, Defendant–Appellant, Andrea E. Celli, Chapter 13 Trustee, Trustee.
• Court: U.S. Court of Appeals — Second Circuit

719 F.3d 72

In re Christopher WEBER, Debtor.

Christopher Weber, Plaintiff–Appellee,

v.SEFCU, Defendant–Appellant,Andrea E. Celli, Chapter 13 Trustee, Trustee.

Docket No. 12–1632–bk.

United States Court of Appeals,Second Circuit.

Argued: Dec. 4, 2012.

Decided: May 8, 2013.

Gary A. Lefkowitz (William B. Schiller, on the brief), Schiller & Knapp, LLP, Latham, NY, for Defendant–Appellant.

Richard Croak, Albany, NY, for Plaintiff–Appellee.

Tara Twomey (Ray DiGuiseppe, on the brief), National Consumer Bankruptcy Rights Center, San Jose, CA, for amicus curiae National Association of Consumer Bankruptcy Attorneys, in support of Plaintiff–Appellee.

Before: CABRANES, RAGGI, and CARNEY, Circuit Judges.

SUSAN L. CARNEY, Circuit Judge:

Defendant SEFCU, a lender, appeals from a judgment of the United States District Court for the Northern District of New York (Suddaby, J.) reversing an order of the United States Bankruptcy Court for the Northern District of New York (Littlefield, J.) and remanding the case to the Bankruptcy Court for further proceedings. The District Court concluded that SEFCU violated the automatic stay provision of the Bankruptcy Code, 11 U.S.C. § 362, when, after lawfully repossessing a vehicle belonging to the debtor, plaintiff Christopher Weber, it failed to deliver the vehicle to him notwithstanding its knowledge of the debtor's pending petition under Chapter 13 of the Bankruptcy Code. The District Court affirmed, holding that, by declining to surrender the vehicle absent a turnover order and protection SEFCU considered adequate, the lender wrongfully “exercised control” over the vehicle in contravention of section 362 and was liable for Weber's related damages, attorneys' fees, and costs.

On appeal to our Court, SEFCU challenges the District Court's interpretation of section 362 and other relevant provisions of the Bankruptcy Code, and argues that, under the authority of Manufacturers & Traders Trust Co. v. Alberto (In re Alberto), 271 B.R. 223 (N.D.N.Y.2001), it was entitled to retain the vehicle notwithstanding the pending bankruptcy proceedings. For the reasons set forth below, we AFFIRM the judgment of the District Court and REMAND the cause to the district court for a determination of the amount of damages, costs, and attorneys' fees that SEFCU owes Weber under section 362(k), and any other proceedings consistent with this opinion.

BACKGROUND

The relevant facts are undisputed.¹

In August 2006, Weber and SEFCU (identified in Bankruptcy Court pleadings as the “State Employees Federal Credit Union”) ² entered into a loan agreement pursuant to which SEFCU obtained a security interest in Weber's vehicle, a pickup truck. The loan agreement entitled SEFCU to repossess Weber's vehicle upon default.

In 2009, SEFCU became entitled to proceed against Weber. As a result, on January 10, 2010, SEFCU took possession of Weber's vehicle pursuant to the loan agreement, and, by notices dated January 10 and 11, 2010, advised him of his right under New York law to redeem the vehicle upon payment of amounts due and certain costs. Four days after the seizure, on January 14, Weber filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code, 11 U.S.C. §§ 109(e), 1301–08, 1321–30, in the United States Bankruptcy Court for the Northern District of New York. Weber's attorney concurrently gave SEFCU written notice of Weber's bankruptcy filing, and, invoking the stay imposed by Bankruptcy Code section 362, 11 U.S.C. § 362(a), requested the vehicle's return.

One week later, SEFCU still had the vehicle, and accordingly, on January 22, Weber filed an adversary proceeding against SEFCU seeking its return so that, as later explained by his counsel to the Bankruptcy Court, he could “continue his construction business” during the pendency of his petition. On March 1, with the vehicle still in SEFCU's possession, the Bankruptcy Court entered an order requiring SEFCU to show cause why it should not return the vehicle and why the court should not grant Weber an award of damages for SEFCU's violation of section 362 and for other relief. On March 4, the court heard argument on the order to show cause, and, although the record does not reflect entry of a related order at that time, SEFCU is reported to have returned the vehicle to Weber the following day.

The proceedings in the Bankruptcy Court continued, as Weber sought damages for his inability to use the vehicle between January 14 and March 5, attorneys' fees, and sanctions. In November 2010, SEFCU moved for summary judgment,putting to the Bankruptcy Court the question of law whether SEFCU's failure to release the vehicle promptly after the petition was filed constituted a “willful” violation of the automatic stay under subsections (a) and (k)(1) of section 362 (providing for recovery of damages, costs, and attorneys' fees for “any willful violation of a stay”). SEFCU maintained that there was no violation, and that an earlier district court decision in other proceedings, Alberto, 271 B.R. 223 (N.D.N.Y.2001), gave it a reasonable basis for declining to release the vehicle absent a court order issued pursuant to Bankruptcy Code section 542, 11 U.S.C. § 542 (relating to “Turnover of property to the estate”). Weber, for his part, argued that Alberto was wrongly decided, and that section 362 required SEFCU to release the vehicle promptly after the petition was filed. The Bankruptcy Court, in a brief Order, granted summary judgment for SEFCU.

Weber appealed to the District Court. Relying primarily on 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), and rejecting the reasoning of the Alberto court, the district court concluded that SEFCU was bound to release the vehicle to Weber, the debtor-in-possession, upon learning of Weber's pending Chapter 13 proceedings. The district court further determined that, having failed to do so, SEFCU violated section 362. Because it knew of the petition and retained the vehicle, SEFCU's violation was willful, making it liable for damages and attorneys' fees. Weber v. SEFCU, 477 B.R. 308, 311 (N.D.N.Y.2012). SEFCU timely appealed.

DISCUSSION

We conduct a “plenary review” of a decision of “a district court functioning in its capacity as an appellate court in a bankruptcy case.” Mazzeo v. United States (In re Mazzeo), 131 F.3d 295, 301 (2d Cir.1997). Thus, we review de novo the bankruptcy court's legal conclusions. Resolution Trust Corp. v. Best Prods. Co. (In re Best Prods. Co.), 68 F.3d 26, 29 (2d Cir.1995). As noted above, the relevant facts are not contested; we have no occasion to subject them to further review.

Under Bankruptcy Code section 541, governing “Property of the estate,” the act of filing a petition for bankruptcy creates an estate comprised of (as relevant here) “all legal or equitable interests of the debtor in property as of the commencement of the [bankruptcy] case.” 11 U.S.C. § 541(a)(1). Section 541 gathers into the estate all such interests in property, “wherever located and by whomever held.” Id. § 541(a).

To assemble the bankruptcy estate, section 542 of the Code requires that, during bankruptcy proceedings, an entity “in possession, custody, or control” of certain property in the estate “ shall deliver ” that property to the trustee, “unless such property is of inconsequential value or benefit to the estate.” 11 U.S.C. § 542(a) (emphasis added). The property subject to this delivery obligation is “property that the trustee may use, sell, or lease under section 363,” which grants broad powers over the estate's property to the trustee.³Id.In a Chapter 13 bankruptcy, the debtor “remain [s] in possession of all property of the estate”—acting in effect as trustee under section 542(a)—unless the debtor's reorganization plan provides otherwise. 11 U.S.C. § 1306(b).⁴ The delivery obligation of section 542(a) thus contemplates the debtor-in-possession as the recipient of the property of the estate.

While bankruptcy proceedings are pending, the automatic stay provisions of section 362 work with sections 541 and 542 to shelter the debtor's estate from action by creditors, enabling the debtor to get the relief and fresh start that are among the goals of the bankruptcy regime.⁵ Thus, under section 362, filing a bankruptcy petition automatically effects a stay of “any act to obtain possession of property of the estate ... or to exercise control over property of the estate.” 11 U.S.C. § 362(a)(3). Those who violate section 362 are liable for related damages and costs: under section 362(k), a debtor “injured by any willful violation of a stay provided by [ section 362] shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages.” Id. § 362(k)(1) (emphasis added).

We first consider whether SEFCU's refusal to return the vehicle to Weber promptly upon learning of his Chapter 13 bankruptcy filing constituted an unlawful “exercise [of] control” over the “property” of his estate, in violation of the automatic stay. We then examine whether SEFCU may be excused from promptly surrendering the vehicle because Weber had not provided “adequate protection” for SEFCU's security interest in the vehicle. Finally, because we conclude that SEFCU's actions did violate section 362, we then turn to the question whether, in light of its reliance on Alberto, SEFCU's violation was nonetheless “willful” under section 362(k), making it liable for Weber's actual damages, costs, and attorneys' fees under that section.

I.

As observed above, section 541(a) provides that a bankruptcy estate is comprised of “all legal or equitable interests in property as of the commencement of the case.” ⁶ Although SEFCU's repossession of the vehicle before Weber filed his petition lawfully overrode Weber's immediate possessory rights, the parties agree that New York law afforded Weber at least a continuing equitable...