Property taken pre petition and demand for turnover

[despritfreya]

Decision of the USSC decided yesterday 1/14/2021 in City of Chicago, Illinois v. Fulton:

https://www.scotusblog.com/case-files/cases/city-of-chicago-illinois-v-fulton/

Bottom line - It is not a violation of the Automatic Stay to "refuse" to return to a debtor a vehicle (or other property) taken pre petition. Instead, if forced, the debtor will have to take the step to file an Adversary under Section 542 to seek the turnover of property of the estate.

Des.

[justbroke]

despritfreya that's an interesting vote with a unanimous (8-0) which is impressive (since Hamilton v Lanning was 8-1). All the lower courts resolved that it was a per-se violation of the stay, but SCOTUS was unanimously convinced that it is not. What is interesting is that the use of the phrase "status quo" as the guidepost to determine whether the stay is violated.

This has major impact on those seeking to simply "demand" the return of property -- such as a vehicle -- after the filing of a bankruptcy petition. The debtor may need to file an adversary, but I hope that it wouldn't need to be under the more formal complaint procedure and can be filed as the "standard" Motion for Turnover of Property. If debtors must go through the formal adversary process, that would likely be a total game changer. (Sotomayor hints at this formality.)

I'm actually impressed with the reading of the court (Alito writing the opinion). Specifically how they looked at 362 and 524 and asked whether 524 was necessary if SCOTUS followed the reasoning in the lower court (7th). While we now have controlling precedent, it is going to make things complicated for debtors that are trying to recover a repossessed vehicle as part of their bankruptcy (strategy).

My hope is that this doesn't just cause more hearings and work because creditors will now demand a hearing. This City of Chicago stance on turnover could make for some interesting standoffs.

[despritfreya]

Here’s the problem. . .

11 USC 542 in part states:

(a) Except as provided in subsection ( c) or (d) of this section, an entity. . . , in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee. . . such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.

Creditors will now argue that the item is of inconsequential value or benefit, not to the debtor, but to the estate. While Courts have held that a vehicle, just like one's home is “necessary for an effective reorganization” that language relates to lifting of the stay under 362, not 542. In addition, while a debtor may be able to claim an exemption that exemption is subject to a lienholder’s rights. If the property has no equity it is of inconsequential value to the estate.

This will just create a lot more litigation. Good for me, bad for debtors.

The weird thing is that last week I filed an emergency petition due to a repoed vehicle. The CU immediately allowed the debtor to regain possession. Bet that would not have happened if this USSC decision had come out one week earlier.

Des.

[justbroke]

This will just create a lot more litigation. Good for me, bad for debtors.

That is what I expect to happen. Vehicle creditors, that have already repossessed but have not yet sold the property, will be in the strong position of the negotiation given this Chicago decision.

The weird thing is that last week I filed an emergency petition due to a repoed vehicle. The CU immediately allowed the debtor to regain possession. Bet that would not have happened if this USSC decision had come out one week earlier.

That's what I'm wondering. Now that a creditor-in-possession (that's what they really are, right?) isn't technically violating the 362(a) stay, will they become more aggressive in their strongarm position? A credit union (CU) might be nicer, only because the membership doesn't want the loss. But what does this mean for the financial arms of the big 3 (General Motors, Ford, Honda)? Ford Motor Credit (FMC) is already notoriously difficult to deal with in certain situations (redeem, surrender, or reaffirm).

Well, I think there will be more caselaw to clarify what is "inconsequential" to the estate. Should keep everyone busy the next few years as the law settles in.