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.
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
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
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.
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).
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, "[t]he 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 "[t]he 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 procedure
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.
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 Coats, 168 B.R. 159 (Bankr.S.D.Tex.1993); In re Ryan, 183 B.R. 288 (M.D.Fla.1995).
In re Knaus, 889 F.2d at 775.
In contrast, other courts have rejected the Knaus approach, reasoning that § 362(a)(3) freezes the status quo on the filing of the petition rather than mandates affirmative action by the creditor in possession of property seized prepetition to return it immediately.
In re Richardson, 135 B.R. at 258-59 (footnote omitted).
In espousing the status quo approach, the court in Richardson distinguished the contrary authority in the Eighth Circuit's decision in Knaus on the grounds that Knaus failed to address the creditor's entitlement to proof of adequate protection before the seized property is turned over. See id. at 259. Richardson distinguishes Carr on similar grounds — the creditor in that case had demanded and received proof of insurance (and thus adequate protection) from the debtor and yet still refused to turn over the property. See id. Richardson and the other courts supporting the status quo approach argue that where there is no proof of adequate protection, "prior to the turnover of property, the rights of a creditor must be adequately protected." Id.
This court rejects the Knaus court's (and its progeny's) interpretation of the amendment to § 362(a)(3) which requires immediate turnover by the secured creditor possessing property rightfully seized prepetition. At best, as will be discussed below, the meaning of the Code's restriction of an act "to exercise control" is ambiguous, and the Knaus court's analysis is too great a departure from traditional bankruptcy practice for this court to adopt that analysis without some legislative history endorsing such a dramatic change.
This is not a case controlled by United States v. Ron Pair Enterp., Inc., 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989), where the Supreme Court held that where the statutory scheme is coherent and consistent, there is no need for a court to inquire beyond the plain language. Rather, the ambiguity in the language in § 362(a)(3) requires this court to apply the Court's long held rule that "[w]hen Congress amends the bankruptcy laws, it does not write `on a clean slate.'" Dewsnup v. Timm, 502 U.S. 410, 419, 112 S.Ct. 773, 779, 116 L.Ed.2d 903 (1992) (quoting Emil v. Hanley, 318 U.S. 515, 521, 63 S.Ct. 687, 690, 87 L.Ed. 954 (1943)). Accordingly, "the Court has been reluctant to accept arguments that would interpret the Code, however vague the particular language under consideration might be, to effect a major change in pre-Code practice that is not the subject of at least some discussion in the legislative history." Id. (citations omitted); see Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. 552, 563, 110 S.Ct. 2126, 2133, 109 L.Ed.2d 588 (1990).
That § 362(a)(3) is susceptible of a plausible interpretation contrary to that in Knaus is readily demonstrated. While each of the words "exercise" and "control" is clearly defined by Webster's,
In addressing the question of possession, the Code expressly restricts only obtaining possession of the property, rather than the passive act of simply continuing to possess it.
The court concludes that the meaning of "exercise control" is ambiguous, at best.
This court finds the Knaus court's resolution of this ambiguity unsatisfactory because that court's interpretation leads to an inconsistent and illogical statutory scheme and would result in a dramatic shift in pre-Code and pre-amendment practice.
The effect of Knaus court's interpretation of § 362(a)(3) is completely to prevent creditors from retaining possession of seized property sought by the trustee. Procedurally, under the Knaus approach, the only appropriate non-sanctionable course of action for the secured creditor in possession of property of the debtor seized prepetition is to turn over the property to the estate immediately and thus waive the right to assert its defenses to turnover under § 542(a) until after the property has been turned over to the trustee pursuant to a motion for relief from stay under § 362(d) or a motion for adequate protection under § 363(e). See In re Ryan, 183 B.R. at 289. This proves too much.
Section 542(a) itself expressly recognizes one circumstance in which turnover is not required, namely, when the "property is of inconsequential value or benefit to the estate."
More importantly, § 542(a) also limits turnover to property that can be used under § 363. Under § 363(e) the creditor can obtain an order prohibiting a proposed use of the property unless the estate provides adequate protection. This constitutes a significant defense to the grant of a turnover order under § 542(a). The defense would be abrogated by an interpretation of § 362(a)(3) requiring turnover without permitting invocation of the defense.
Such an approach is contrary to the logical interaction of §§ 363(e) and 542(a). The burden is on the trustee, when the issue is raised, to prove adequate protection. 11 U.S.C. § 363(o)(1). Logically, therefore, the creditor should be entitled to hold onto the property during the pendency of the § 542 action until the adequate protection question is resolved. The obvious rationale implicit in permitting the secured creditor to retain possession of the seized property while opposing turnover under § 542(a) is that the creditor may suffer the very harm that adequate protection is designed to avoid if the property is turned over to the trustee before the trustee proves that the creditor is being given the adequate protection to which it is entitled.
Finally, § 363(c)(2) provides that the trustee may not use cash collateral without the creditor's consent or a court order. Section 542(a) does not require turnover of such collateral in a creditor's possession
Beyond being statutorily illogical, the creation of such an affirmative duty on the creditor's part immediately to turn over the property pursuant to the automatic stay would also represent a dramatic shift from pre-Code practice and pre-amendment practice and a dramatic expansion of the automatic stay.
In Whiting Pools, the Court noted that "[u]nder Chapter X, the reorganization chapter of the Bankruptcy Act of 1878 . . ., the bankruptcy court could order the turnover of collateral in the hands of a secured creditor. Reconstruction Finance Corp. v. Kaplan, 185 F.2d 791 (1st Cir.1950)." 462 U.S. at 208, 103 S.Ct. at 2315 (other citations omitted).
Furthermore, as can also be seen from the Whiting Pools decision, under the Code, prior to the § 362(a)(3) amendment, the common practice of conditioning turnover orders on proof of adequate protection continued. Courts uniformly supported the practice that "[a] secured creditor may insist upon adequate protection as a condition precedent to the turnover of property since the property may not be used, sold or leased under section 363 without it." In re Purbeck & Assoc., Ltd., 12 B.R. 406, 408 (Bankr.D.Conn.1981) (emphasis added); accord In re Williams, 44 B.R. 422, 425 (Bankr.N.D.Miss.1984); In re Loof, 41 B.R. 855, 856 (Bankr.E.D.Pa.1984); In re Radden, 35 B.R. 821, 826 (Bankr. E.D.Va.1983); In re Day Resource & Development Co., Inc., 21 B.R. 176, 177 (Bankr.D.Idaho 1982); In re Bridges, 19 B.R. 847 (Bankr.D.Me.1982); In re Williams, 6 B.R. 789, 792 (Bankr.E.D.Mich.1980); In re Fairway Records, Inc., 6 B.R. 162, 164 (Bankr.E.D.N.Y.1980); In re Troy Ind. Catering Serv., 2 B.R. 521, 526 (Bankr. E.D.Mich.1980).
Hence, were this court to interpret the ambiguous amendment to § 362(a)(3) to require immediate turnover, it would represent a dramatic shift in both pre-Code and pre-amendment practice, all of which without one word of legislative history. It is difficult for this court to believe that Congress intended such a radical change, and the court declines to adopt it.
Finally, from the perspective of equity, the potential harm to the secured creditor of requiring immediate turnover far outweighs any harm to the debtor or the estate. From the creditor's perspective, such a turnover is without any guarantee of adequate protection, such as proof of insurance, to which the creditor is clearly entitled. In the case of an uninsured automobile, this is a depreciating asset subject to tremendous risk of diminution in value and even possible destruction in the event of an accident.
Furthermore, prepetition repossession is often undertaken to assure adequate protection (such as when a car is uninsured or a lack of interest payments has increased the
By forcing immediate turnover without addressing adequate protection, the Knaus interpretation of § 362(a)(3) would render the costs of prepetition repossession a totally wasted expense when the lack of adequate protection leads to relief from the automatic stay and a second repossession. That would represent an unwarranted alteration of the parties' prepetition bargaining strengths, with no suggestion in the legislative history that § 362(a)(3) was intended to alter this.
John C. Chobot, Some Bankruptcy Stay Metes and Bounds, 99 Com.L.J. 301, 307 n. 43 (1994).
Additionally, the effect of interpreting § 362(a)(3) as requiring immediate turnover would be to destroy some security interests. Under non-bankruptcy law, some security interests arise solely from the creditor's possession of the collateral, as in the case of a pledge. If such property is turned over to the debtor, the security interest would no longer exist. It is doubtful that the bankruptcy court could declare to the contrary, and such a declaration would not protect the creditor if the collateral were dissipated or destroyed before adequate protection was accorded the creditor
In contrast, the potential harm to the debtor or the estate is minimal. If the creditor refuses to turn over property seized prepetition, then the debtor or trustee simply files an adversary proceeding
This court finds the concerns expressed by the Knaus court about the cost to the debtor or the estate of such a procedure exaggerated.
That the exercise control language in § 362(a)(3) requires only that the secured creditor maintain the status quo is also supported by a decision in this circuit in United States v. Inslaw, 932 F.2d 1467 (D.C.Cir. 1991), cert. denied, 502 U.S. 1048, 112 S.Ct. 913, 116 L.Ed.2d 813 (1992). In Inslaw, the debtor alleged that the Justice Department's continued use and dissemination of the debtor's trade secrets in computer software that were the subject of a title dispute constituted an act to "exercise control over the property of the estate" prohibited by § 362(a)(3). In reversing this court's decision
Id. at 1472.
The court of appeals further noted, however, that such a broad reading of § 362(a) would also be contrary to Congress's intent.
Id. at 1473 (citation omitted).
Continuing in the same vein, the court of appeals chastised the bankruptcy court for finding a violation of the stay for a "failure to cure alleged pre-petition misconduct." Id. (emphasis in original).
Id. (emphasis in original; citations omitted).
The court of appeals' view of § 362(a)(3) supports this court's conclusion that Congress did not intend to expand the automatic stay to mandate affirmative acts on the part of the creditors. Nor did Congress intend with this amendment to abrogate the creditor's right to assert an entitlement to adequate protection prior to turnover. Rather, as the court of appeals stated, the stay is intended only to prohibit postpetition affirmative acts by creditors and thus acts as a freeze of the status quo at petition.
For all these reasons the court concludes that Toyota Motor should not be cited for contempt for retaining possession of the debtor's vehicle in this case pending resolution of the question of adequate protection. An appropriate order will follow.