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In re Denby-Peterson

United States Court of Appeals, Third Circuit

October 28, 2019

In re: JOY DENBY-PETERSON, Appellant

          Argued May 23, 2019

          Appeal from the United States District Court for the District of New Jersey (D.C. No. 1-17-cv-09985) District Judge: Hon. Noel L. Hillman

          Ellen M. McDowell [Argued] Daniel Reinganum McDowell Law Counsel for Appellant

          Craig Goldblatt [Argued] WilmerHale Counsel for Amicus Curiae in Support of the District Court's Judgment

          Before: McKEE, SHWARTZ, and FUENTES, Circuit Judges.

          OPINION

          FUENTES, CIRCUIT JUDGE.

         At the center of this bankruptcy appeal is "America's first sports car": the Chevrolet Corvette.[1] Joy Denby-Peterson purchased a Chevrolet Corvette in July 2016. Several months later, the Corvette was repossessed by creditors after Denby-Peterson defaulted on her car payments. Denby-Peterson subsequently filed an emergency voluntary Chapter 13 petition in the Bankruptcy Court for the District of New Jersey. She then notified the creditors of the bankruptcy filing and demanded that they return the Corvette to her.

         After the creditors did not comply with her demand, Denby-Peterson filed a motion for turnover in the Bankruptcy Court. She sought an order (1) compelling the creditors to return the Corvette to her, and (2) imposing sanctions for the creditors' alleged violation of the Bankruptcy Code's automatic stay.[2] The Bankruptcy Court entered an order mandating turnover of the Corvette to Denby-Peterson but denying Denby-Peterson's request for sanctions. The Bankruptcy Court denied the sanctions request on the basis that the creditors did not violate the automatic stay by failing to return the repossessed Corvette to Denby-Peterson upon receiving notice of the bankruptcy filing. Denby-Peterson appeals from an order of the District Court affirming the Bankruptcy Court.

         We are now presented with an issue of first impression for our Court: whether, upon notice of the debtor's bankruptcy, a secured creditor's failure to return collateral that was repossessed pre-bankruptcy petition is a violation of the automatic stay. We answer in the negative, and thus join the minority of our sister courts-the Tenth and D.C. Circuits-in holding that a secured creditor does not have an affirmative obligation under the automatic stay to return a debtor's collateral to the bankruptcy estate immediately upon notice of the debtor's bankruptcy because failure to return the collateral received pre-petition does not constitute "an[] act . . . to exercise control over property of the estate."[3] We will therefore affirm the order of the District Court affirming the Bankruptcy Court.

         I.

         A. Facts

         On July 21, 2016, Debtor Joy Denby-Peterson purchased a used yellow 2008 Chevrolet Corvette from a car dealership named Pine Valley Motors. To finance her purchase, Denby-Peterson entered into a retail installment contract with Pine Valley Motors, which, in turn, assigned its rights under the contract to its affiliate company, NU2U Auto World.[4] Under the contract, Denby-Peterson agreed to pay (1) a $3, 000 cash down payment; (2) a deferred down payment of $2, 491 by August 11, 2016 to pay sales taxes and registration fees to obtain permanent license plate tags; and (3) weekly installment payments of $200 for 212 weeks. Between July 2016 and February 2017, Denby-Peterson made payments totaling $9, 200 under the contract, including the $3, 000 down payment applied on the day of the sale. She never made the required down payment of $2, 491. As a result, the creditors repossessed the Corvette in February or March 2017.[5] The Corvette was never titled or registered in Denby-Peterson's name.

         B. Bankruptcy Court Proceedings

         i. Denby-Peterson's Chapter 13 Bankruptcy Petition

         After the Corvette was repossessed, Denby-Peterson filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code on March 21, 2017. Under Section 362 of the Code, the filing of the petition triggered an automatic stay of "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."[6]

         Within two days, the creditors received notice of Denby-Peterson's bankruptcy filing. Counsel for Denby-Peterson had notified them of the filing and demanded that they return the Corvette to Denby-Peterson. Counsel also maintained that the creditors' failure to return the Corvette would result in a violation of the automatic stay. He faxed a letter to the creditors which stated, in relevant part:

BE ADVISED your failure to release the vehicle to Ms. Denby-Peterson is a violation of the Automatic Stay. If the vehicle has not been released before 5pm today, this firm will seek damages, costs, and attorneys' fees against your company for willful violations of the automatic stay.[7]

         The creditors did not comply with Denby-Peterson's demand and thus remained in possession of the Corvette.

         ii. Denby-Peterson's Motion for Turnover and Sanctions

         Denby-Peterson then filed a motion[8] for turnover in Bankruptcy Court, asking the Bankruptcy Court to (1) order the creditors to return the Corvette to her, and (2) impose sanctions for the creditors alleged violation of the automatic stay. Denby-Peterson sought costs and attorneys' fees for filing the motion; compensation for "non-economic damages"; punitive damages; and "all other relief the Court deem[ed] just and equitable."[9]

         The creditors opposed the motion. They also filed a proof of claim, asserting a security interest in the Corvette in the amount of $28, 773.[10]

         iii. The Bankruptcy Court's Decision

         Following a two-day hearing, the Bankruptcy Court issued a written decision and order granting the motion in part and denying it in part. The Bankruptcy Court, inter alia, granted Denby-Peterson's request for turnover and thus ordered the creditors to return the Corvette to Denby-Peterson within seven days, but denied Denby-Peterson's sanctions request.

         The Bankruptcy Court held, inter alia, that (1) the creditors must return the Corvette under the Bankruptcy Code's turnover provision in Section 542(a), [11] and (2) the creditors did not violate the automatic stay by retaining possession of the Corvette upon receiving notice of the bankruptcy filing. Thus, the Bankruptcy Court determined that the creditors were not liable for sanctions based on an alleged violation of the automatic stay.

         In reaching its holdings, the Bankruptcy Court found that Denby-Peterson had an equitable interest in the Corvette at the time of the bankruptcy filing, and therefore, the Corvette was property of the estate subject to turnover.[12]

         Next, the Bankruptcy Court considered whether the creditors violated the automatic stay by failing to return the Corvette after learning of the bankruptcy filing. It identified the split among our sister circuits on this issue, pointing out that the Second, Seventh, Eighth, and Ninth Circuits ("the majority") have held that the Bankruptcy Code's turnover provision requires immediate turnover of estate property that was seized pre-petition and that failure to do so violates the automatic stay.[13] However, the Tenth and D.C. Circuits ("the minority") "have instead held that a creditor does not violate the stay in regard to property of the estate if it merely maintains the status quo."[14] The Bankruptcy Court noted that the minority was critical of the majority's rule that Section 542(a)'s turnover provision "is self-effectuating" because "it does not allow for the possibility of defenses to turnover."[15]

         The Bankruptcy Court ultimately adopted the minority position, describing it as "particularly persuasive"[16] and pointing out that "[f]rom the inception of this case there was an issue regarding exactly what . . . [Denby-Peterson]'s interest in . . . [the Corvette] was."[17] Accordingly, the Bankruptcy Court concluded that the creditors did not violate the automatic stay by failing to turn over the Corvette to Denby-Peterson "prior to adjudication of . . . [her] right to redeem the [Corvette]," and thus, sanctions were not warranted.[18]

         C. Denby-Peterson's Appeal to the District Court

         Denby-Peterson appealed the Bankruptcy Court's order denying her sanctions request. Similar to the Bankruptcy Court, the District Court found "the minority position more persuasive."[19] The District Court thus affirmed the Bankruptcy Court's order denying Denby-Peterson's sanctions request.[20]

         Denby-Peterson now appeals to our Court.[21] Because the creditors are not participating in this appeal, we appointed Craig Goldblatt as amicus curiae to defend the judgment of the District Court.[22]

         II.

         On appeal, Denby-Peterson renews her argument that the creditors violated the automatic stay by not returning the repossessed Corvette upon learning of the bankruptcy filing. To provide context for the issue before us, we will discuss the Bankruptcy Code's automatic stay before addressing the merits of this appeal.

         Under Section 362 of the Bankruptcy Code, entitled "[a]utomatic stay," the filing of a bankruptcy petition automatically triggers a stay.[23] Of particular relevance to this appeal, subsection (a)(3) provides that a bankruptcy petition "operates as a stay, applicable to all entities, of . . . any act to obtain possession of property of the estate . . . or to exercise control over property of the estate."[24] Property of the bankruptcy estate, in turn, generally includes "all legal or equitable interests of the debtor in property as of the commencement of the case, "[25] "wherever located and by whomever held."[26]

         The automatic stay imposed by the Bankruptcy Code has a "twofold" purpose:

(1) to protect the debtor, by stopping all collection efforts, harassment, and foreclosure actions, thereby giving the debtor a respite from creditors and a chance 'to attempt a repayment or reorganization plan or simply be relieved of the financial pressures that drove him [or her] into bankruptcy;' and (2) to protect 'creditors by preventing particular creditors from acting unilaterally in self-interest to obtain payment from a debtor to the detriment of other creditors.'[27]

         In furtherance of the automatic stay's overarching purpose, Section 362(a)(3) "prevent[s] dismemberment of the estate," and enables an "orderly" distribution of the debtor's assets.[28]

         The consequences for willful violations of the automatic stay are set forth in Section 362(k) which provides that, subject to one exception, "an individual injured by any willful violation" of the automatic stay is entitled to "actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages."[29]We have explained that "[i]t is a willful violation of the automatic stay when a creditor violates the stay with knowledge that the bankruptcy petition has been filed. Willfulness does not require that the creditor intend to violate the automatic stay provision, rather it requires that the acts which violate the stay be intentional."[30]

         III.

         With the foregoing statutory background in mind, we now turn our attention to the issue of first impression before our Court: whether, upon receiving notice of a bankruptcy petition, a secured creditor violates the automatic stay by maintaining possession of collateral that it lawfully repossessed pre-petition. Specifically, we must decide whether the creditors' failure to return the Corvette to Denby-Peterson upon learning of her bankruptcy filing was a violation of the automatic stay.[31]

         As we previously acknowledged, there is a circuit split on this issue, which we have not yet joined. Under the majority position, held by the Second, Seventh, Eighth, Ninth, and Eleventh Circuits, a secured creditor, upon learning of the bankruptcy filing, must return the collateral to the debtor and failure to do so violates the automatic stay.[32] However, both the Tenth and D.C. Circuits disagree with the majority's interpretation of the automatic stay provision.[33] Under their view, a secured creditor is not obligated to return the collateral to the debtor until the debtor obtains a court order from the Bankruptcy Court requiring the creditor to do so. Thus, according to the minority, a creditor does not violate the automatic stay by retaining possession of the collateral after being notified of the bankruptcy filing.

         Here, Denby-Peterson urges us to adopt the view of the majority of our sister circuits, advancing two theories in support of her position that the creditors violated the automatic stay. First, she maintains that the creditors' failure to return the Corvette violated the plain language of Section 362(a)(3)'s automatic stay provision by being "an[] act . . . to exercise control over property of the estate."[34] Second, Denby-Peterson asserts that Section 362(a)(3)'s automatic stay provision and Section 542(a)'s turnover provision operate together such that a violation of the turnover provision results in a violation of the automatic stay. Thus, according to Denby-Peterson, the creditors were required to immediately turn over the Corvette, and by not doing so, they violated the automatic stay. For the reasons that follow, we are not persuaded by those arguments and thus hold that the creditors in this case did not violate the automatic stay. In so holding, we join the minority of our sister circuits.

         IV.

         A.

         We begin our interpretation of Section 362(a)(3) of the Bankruptcy Code "where all such inquiries must begin: with the language of the statute itself."[35]

         In examining the Bankruptcy Code, we are not "guided by a single sentence or member of a sentence, but look to the provisions of the whole law, and to its object and policy."[36]Thus, to determine the plainness or ambiguity of Section 362(a)(3)'s statutory language, in addition to considering the statutory language itself, we may also engage in "a studied examination of the statutory context."[37] If we ultimately determine that a provision "is clear and unambiguous, [we] must simply apply it."[38] However, if we find that a provision is ambiguous, [39] "we then turn to pre-Code practice and legislative history to find meaning."[40]

         With these principles of construction in mind, we will now examine the language of Section 362(a)(3). To reiterate, Section 362(a)(3) provides, in relevant part, that the filing of a bankruptcy petition "operates as a stay . . . of . . . any act to . . . exercise control over property of the estate."[41] According to Denby-Peterson, under the plain language of the automatic stay, a creditor who does not turn over property of the estate after a debtor demands its return exercises control over that property, thereby violating the automatic stay. While we agree that Section 362(a)(3) is unambiguous, we decline to hold that a plain reading of that Section compels the conclusion that the creditors in this case violated the automatic stay by failing to turn over the Corvette to Denby-Peterson.

         The operative terms and phrases of Section 362(a)(3) are "stay," "act," and "exercise control." Because the Bankruptcy Code does not define them, we must look to their ordinary meanings.[42]

         We start with the meaning of the word "stay." Black's Law Dictionary defines "stay" as "[t]he postponement or halting of a proceeding, judgment, or the like" or "[a]n order to suspend all or part of a judicial proceeding or a judgment resulting from that proceeding."[43] Moreover, Webster's Third New International Dictionary defines "stay" as a noun (as it is used in Section 362) as: (1) "a bringing to a stop," (2) "the action of halting," and (3) "the state of being stopped."[44]

         Next, the noun "act" means, among other things, "[s]omething done; the action or process of achieving this."[45]Black's Law Dictionary similarly defines "act," in relevant part, as "[s]omething done or performed," or "[t]he process of doing or performing."[46]

         Finally, as to the phrase "exercise control," we will separately consider the verb "exercise" and the noun "control." The relevant definition of "exercise" is "[t]o put in action or motion."[47] Webster's Third New International Dictionary also defines "exercise," in relevant part, as "to . . . make effective in action."[48] Additionally, "control," as a noun, means, among other things, "[t]he fact or power of directing and regulating the actions of people or things; direction, management; command."[49]

         From these definitions, we gather that Section 362(a)(3) prohibits creditors from taking any affirmative act to exercise control over property of the estate. As correctly pointed out by the District Court, the statutory language "is prospective in nature . . . the exercise of control is not stayed, but the act to exercise control is stayed."[50] Therefore, we agree with the minority position held by two of our sister courts-the text of ...


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