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Wednesday, May 27, 2009

Ind. Decisions - 7th Circuit decides whether creditor must return the car to the bankruptcy estate

In Thompson v. GMAC (ND Ill.), a 19-page opinion, Judge Willaims writes:

This case involves an all too common occurrence that bankruptcy courts must deal with: a buyer defaults on his car payments, a secured creditor seizes the asset, the buyer files for Chapter 13 bankruptcy, and the big question that ensues is whether the creditor must return the car to the bankruptcy estate. In this case, we are asked to consider a procedural conflict between many bankruptcy courts within this circuit, and those in the sixth, eighth, ninth, and tenth circuits.

We must decide whether an asset that a secured creditor lawfully seizes pre-petition must be returned to the buyer’s estate after he files for Chapter 13 bankruptcy, and, if so, whether the creditor must immediately return the asset even in the absence of a showing that the debtor can adequately protect the creditor’s interest in the asset. In the United States Bankruptcy Court for the Northern District of Illinois, it has been an accepted standard procedure for a creditor to retain possession of a seized asset until the creditor subjectively determines that the debtor has shown the creditor that it can provide adequate protection of the creditor’s interests. If a dispute ensues, it is the debtor’s obligation to litigate the adequate protection issue in turnover proceedings before the bankruptcy court. In the sixth, eighth, ninth, and tenth circuits, the procedure is just the opposite. Upon the debtor filing for Chapter 13, the creditor must im- mediately return the asset to the bankruptcy estate, and, if the debtor and creditor cannot achieve accord on the issue of adequate protection, it is the creditor’s obliga- tion to file a motion before the bankruptcy court.

Here, a creditor refused to relinquish possession of an asset because it felt that the debtor could not adequately protect its interests. The debtor claimed that this refusal violated the Bankruptcy Code’s stay provisions and moved for sanctions against the creditor. The bankruptcy court denied this motion. Because we find that a plain reading of the Bankruptcy Code’s provisions, the Supreme Court’s decision in United States v. Whiting Pools, Inc., 462 U.S. 198, 211 (1983), and various practical considerations require that a creditor immediately return a seized asset in which a debtor has an equity interest to the debtor’s estate upon his filing of Chapter 13 bankruptcy, we reverse.

Posted by Marcia Oddi on May 27, 2009 12:40 PM
Posted to Ind. (7th Cir.) Decisions