In the case of In re Weber, the Second Circuit Court of Appeals ruled that, because the lender failed to return a repossessed vehicle to the debtor-in-possession promptly after receiving notice of the debtor's pending bankruptcy petition under Chapter 13, the lender willfully violated the bankruptcy stay and was therefore liable for the debtor's costs, related damages and attorney's fees.
In 2006, the debtor obtained a loan which gave the lender a security interest in the debtor's pickup truck and the right to repossess the truck upon default. In 2009, the debtor defaulted on the loan. In 2010, the lender repossessed the truck. Four days after the repossession, the debtor filed a voluntary Chapter 13 petition, sent written notice to the lender of the bankruptcy filing, and requested the vehicle's return under the automatic stay provisions imposed by bankruptcy law.
A week later, after the lender failed to return the vehicle, the debtor filed an action against the lender in the bankruptcy court seeking the vehicle's return so that the debtor could continue his construction business during the bankruptcy proceedings. The lender eventually returned the vehicle, but the adversary proceedings continued on the debtor's claim for damages resulting from the inability to use the vehicle for 50 days, plus attorneys' fees and sanctions. The bankruptcy court summarily denied the debtor's claim. The debtor filed an appeal with the district court.
The district court held that the lender wilfully violated the stay because it knew of the bankruptcy filing and retained the vehicle, therefore rendering it liable for the debtor's damages and attorney's fees. The lender filed an appeal with the Second Circuit.
The Second Circuit's ruling
The Second Circuit upheld the decision of the district court. Even though the vehicle had been repossessed, the creditor did not automatically obtain an ownership interest in the vehicle. The debtor still retained an equitable interest in the property. The creditor's rights to seize and sell the vehicle were subject to state law provisions under the Uniform Commercial Code and also subject to the rights and remedies provided under the Bankruptcy Code. After the debtor files a Chapter 13 petition, said the Second Circuit, a creditor who possesses property that was seized as security subject to a residual equitable interest of the debtor under state law must promptly deliver that property to the trustee or the debtor-in-possession.
The Second Circuit also held that the lender's stated belief that the debtor had not provided "adequate protection" for the lender's security interest in the vehicle did not forgive the failure to return the vehicle. The Bankruptcy Code provides without qualification that anyone in possession of Chapter 13 property must deliver the property to the trustee and that the creditor must first surrender the property and then request adequate protection from the bankruptcy court.
The Second Circuit further found that the lender's violation was willful since it failed to return the repossessed vehicle to the debtor-in-possession promptly after it gets notice of the bankruptcy. Specific intent to violate the Bankruptcy Code is not required. General intent to take any action that would violate the automatic stay is sufficient. Good faith did not excuse the lender's actions. Thus, the lender was liable for the debtor's actual damages, plus costs and attorney's fees.
Individuals facing bankruptcy are urged to seek the advice of a competent attorney experienced in such matters in order to protect their legal rights.