David Wovrosh, Associate Member, University of Cincinnati Law Review
Is it possible to do something by not doing anything at all? At issue is a relatively common occurrence with an uncommonly difficult question: should a creditor return repossessed property to the debtor as soon as a bankruptcy petition has been filed? Recently, the Tenth Circuit accused the majority of circuits of fundamentally misreading the Bankruptcy Code.[1] In so doing, the Tenth Circuit has invited the Supreme Court to trek into a semantical thicket: what does it mean to “control” something? The Supreme Court should look to the contested statutory language as well as the purpose and practical considerations of the Bankruptcy Code for answers. The Court should decide that creditors, holding onto property seized before the debtor filed petition for bankruptcy (pre-petition), must return the property to the debtor.
In re Cowen Creates a Divide
The automatic stay provision of the Bankruptcy Code prohibits a creditor from taking “any act to exercise control over property of the [debtor’s] estate.”[2] The automatic stay provision operates to “afford the debtor a ‘breathing spell’ by halting the collection process.”[3] This allows the debtor to formulate a “plan or simply . . . be relieved of the financial pressures that drove [the debtor] into bankruptcy.”[4]
In 1983, the Supreme Court expanded the “breathing room” of the debtor’s bankruptcy estate in U.S. v. Whiting Pools, Inc.[5] Critically, the Whiting Court held that the debtor’s bankruptcy estate included property that had been repossessed pre-petition.[6] The following year, Congress expanded protections to the debtor’s estate by extending the Bankruptcy Code’s stay provision from prohibiting only acts to obtain possession to prohibiting any act that “exerts control” over the debtor’s property.[7] This amendment, read together with Whiting Pools, dictates that a creditor may not “exert control” over any property that it seized pre-petition. The legislative history is silent as to what Congress meant by “exerting control.”[8] This left the courts to determine whether “exerting control” requires an affirmative act, or if merely possessing the property is a violation of the stay.
The majority of jurisdictions would have the creditor return any secured collateral to the debtor’s bankruptcy estate immediately after the debtor files a bankruptcy petition.[9] The Seventh Circuit in Thompson v. General. Motors Acceptance Corp., LLC, examined the frequent occurrence of a repossessed car.[10] The court determined that the creditor, having seized the car before the bankruptcy petition, was exerting control over the collateral by storing the car on the lot and refusing to return it.[11]
In a nearly identical scenario, the Tenth Circuit explicitly rejected the Thompson court’s holding.[12] In In re Cowen, a debtor’s commercial truck was repossessed by a lender after the debtor defaulted on payment and the lender refused to return the truck to the bankruptcy estate.[13] Under circumstances virtually identical to those of Thompson, the Tenth Circuit found the plain text of the automatic stay provision dispositive.[14] The court held that the stay provision requires a creditor to take an affirmative step before any violation occurs.[15] The Tenth Circuit lamented that Thompson had prioritized policy and practicality over what the Tenth Circuit found to be a plain reading of the statute.[16] However, inspection of the statute reveals that there may not be a satisfactory “plain reading” after all.
The Automatic Stay Provision is Ambiguous
The Thompson court first focused on the plain meaning of what it means to “exert control.” The plain meaning of “control”, the court found, meant that simply possessing pre-petition property was sufficient.[17] This “possession as control” approach to the automatic stay provision is not a novel reading of the provision, with most courts using an identical interpretation.[18]
Cowen, in contrast, places emphasis not just on “control,” but on “acts . . . to control.”[19] The Tenth Circuit found that “acts” necessarily require an affirmative step.[20] Passive possession, therefore, does not constitute an “act” under the automatic stay provision.[21] The only commonality between the circuits, it seems, is that Congress was silent on what they meant when they added “control” to the automatic stay provision.[22] The disagreement over the plain meaning of the automatic stay is a strong case in itself for ambiguity.[23] Therefore, a deeper inquiry into the animating forces behind the provision is necessary.
Legislative History and Policy Evince Greater Protections
In Whiting Pools, the Supreme Court noted that the Bankruptcy Code encouraged the efficient use of a debtor’s assets.[24] The Supreme Court held that “under the reorganization provisions of the Bankruptcy Code, a troubled enterprise may be restructured to enable it to operate successfully in the future.”[25] The legislative history of the Bankruptcy Code’s reorganization provisions points to an intent to encourage the use of all the estate’s assets.[26] Assets in the debtor’s possession better serve the purpose of reorganization when they are in use than if they were to be “sold as scrap.”[27] The majority position recognizes the Code’s protective purpose and is therefore the correct reading of the statute.
Against this backdrop, the Thompson court argued that to “hold that ‘exercising control’ over an asset encompasses only selling or otherwise destroying the asset would not be logical given the central purpose of reorganization bankruptcy.”[28] The Thompson court further observed that “[a]n asset actively used by a debtor serves a greater purpose to both the debtor and his creditors than an asset sitting idle on a creditor’s lot.”[29] The majority position points to further Bankruptcy Code provisions to suggest the automatic stay provision, as the majority understands it, is intended to work in tandem with other Code provisions to make the automatic stay self-executing upon bankruptcy petition.[30]
While the Tenth Circuit court in Cowen found their own interpretation of the stay provision dispositive, it nevertheless leveled further critique at the majority position.[31] The Tenth Circuit iterated that the majority position’s “best argument” was the link between the automatic stay and other Code provision.[32] The Cowen court found this line of reasoning unpersuasive, finding no “textual link” between the provisions to support such a reading of the Bankruptcy Code.[33] Cowen further criticized the majority position as being too broad in its reading of legislative intent.[34] “Congress,” the Tenth Circuit warned, “does not ‘hide elephants in mouseholes.’”[35]
The Tenth Circuit’s categorical rebuke of the majority position invites the Supreme Court to weigh in.[36] On closer examination, it becomes evident that the majority position, requiring a self-executing automatic stay provision mandating the return of pre-petition property, more closely embodies the legislative intent of the automatic stay provision.
Cowen Undermines the Purpose of the Automatic Stay
Much of the seminal litigation around the automatic stay provision involves the disposition of commercial vehicles.[37] Often, the debtor seeks to reclaim the use of the vehicle, aiming to utilize it in a commercial capacity in order to satisfy the bankruptcy estate’s creditors. These vehicles are, as the Supreme Court has noted, more efficiently used when they are poised to generate revenue to satisfy the debts of the estate.[38] A self-executing automatic stay provision promotes industrious use of collateral.[39] A self-executing automatic stay provision allows the debtor to pay off the creditor without requiring the estate to motion the court for a return of the collateral. Cowen’s interpretation would discourage and even require an inefficient use of property squarely within the debtor’s estate.[40] To achieve the return and, therefore, efficient use of the debtor’s collateral, the burden is shifted to the (already strained) bankruptcy estate to petition the court for a return.[41]
But this holding ignores the burdens that the automatic stay provision mandates. The stay provision squarely places the burden on the creditor to motion the court for the return of any property.[42] Even then, this is a heightened burden that is only to be granted if the court finds that the debtor is not sufficiently protecting the creditor’s collateral.[43] Under this framework, the debtor is allowed to generate revenue through the use of their property, while simultaneously protecting the creditor’s interest in the value of the collateral. The Tenth Circuit’s interpretation would paradoxically require the debtor to resort to court-petitioning in order to put to use what is already their own property.[44] The Tenth Circuit’s reading is contrary to both the fundamental protections of the automatic stay provision[45] and the Bankruptcy Code’s requirement of judicial efficiency.[46] For these reasons, the majority reading should be adopted by the Supreme Court.
Conclusion
Cowen has acted as a needless agitator to a common occurrence in bankruptcy. The Tenth Circuit has ignored the majority of circuits’ identical understanding of the plain meaning of the Bankruptcy Code’s stay provision. Instead, the Tenth Circuit found its own understanding of the Code dispositive and would require an affirmative act to “establish control” of seized pre-petition collateral. The Tenth Circuit ignores the expansive and fundamental tenants of the Bankruptcy Code. This expansive reading was articulated by legislative history as well as Supreme Court precedent. The Cowen court criticized the majority’s use of Code provisions working in tandem to support its textual interpretation. The Cowen reading, however, results in an inefficient burden-shifting that the drafters of the Code had not intended and one that goes against the core tenants of the Code. For these reasons, the Supreme Court should find that the proper reading of the automatic stay provision mandates any property seized pre-petition to be returned upon bankruptcy filing.
[1] 849 F.3d 943, 946 (10th Cir. 2017).
[2] Id.
[3] In re Siciliano, 13 F.3d 748, 750 (3d Cir. 1994).
[4] H.R. Rep. No. 595, 95th Cong., 2d Sess. 340 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6296.
[5] 462 U.S. 198, 199 (1983).
[6] Id. at 209.
[7] PL 98–353 (HR 5174), PL 98–353, July 10, 1984, 98 Stat 333.
[8] Thompson v. Gen. Motors Acceptance Corp., LLC, 566 F.3d 699, 702 (7th Cir. 2009).
[9] See, e.g. Weber v. SEFCU (In re Weber), 719 F.3d 72, 81 (2d Cir. 2013); Thompson v. Gen. Motors Acceptance Corp. (In re Thompson), 566 F.3d 699, 703 (7th Cir. 2009); In re Sharon, 234 B.R. 676, 681 (B.A.P. 6th Cir. 1999).
[10] Thompson v. Gen. Motors Acceptance Corp., LLC, 566 F.3d 699 (7th Cir. 2009).
[11] Id. at 704.
[12] In re Cowen, 849 F.3d 943 (10th Cir. 2017).
[13] Id. at 946.
[14] Id. at 949.
[15] Id. at 949.
[16] In re Cowen, 849 F.3d at 948-49.
[17] “Holding onto an asset, refusing to return it, and otherwise prohibiting a debtor’s beneficial use of an asset all fit within this definition, as well as within the commonsense meaning of the word.” Thompson, 566 F.3d at 702. This conclusion was reached by consulting the dictionary version of “control.”
[18] See, e.g. In re Weber, 719 F.3d 72, 79 (2d Cir. 2013) (holding that the standard dictionary definition of “control” unavoidably lead to the conclusion that holding a debtor’s car post-petition constituted exercising authority over the property and therefore fit squarely into the definition of “control”); In re Sharon, 234 B.R. 676, 682 (Bankr. App. 6th Cir. 1999) (“Withholding possession of property from a bankruptcy estate is the essence of ‘exercising control’ over possession.”).
[19] “Breaking down the sentence, ‘any act’ is the prepositive modifier of both infinitive phrases. In other words, § 362(a)(3) prohibits ‘any act to obtain possession of property’ or ‘any act to exercise control over property.’” Cowen, 849 F.3d at 949.
[20] “’Act’, in turn, commonly means to ‘take action’ or ‘do something.’” Cowen, 849 F.3d at 949
(citing New Oxford American Dictionary 15 (3d ed. 2010)).
[21] Cowen, 849 F.3d at 949.
[22] Cowen, 849 F.3d at 949; Thompson, 566 F.3d at 702.
[23] See Frank H. Easterbrook, Statutes’ Domains, 50 U. Chi. L. Rev. 533 (1983). “Too often the meaning of a statute is smuggled into the rules that determine when, and why, to cut off debate. The philosophy of language . . . has established that sets of words do not possess intrinsic meanings and cannot be given them; to make matters worse, speakers do not even have determinative intents about the meanings of their own words.” Id. at 536.
[24] Whiting Pools, 462 U.S. at 203.
[25] Id.
[26] “It is more economically efficient to reorganize than to liquidate, because it preserves jobs and assets.” H.R. REP. 95-595, 220, 1978 U.S.C.C.A.N. 5963, 6179.
[27] Id.; See also Whiting Pools, 462 U.S. at 203.
[28] Thompson, 566 F.3d at 702.
[29] Id.
[30] “This reading supports a framework wherein § 542 creates a self-executing obligation for creditors to return assets to the estate, and § 362 provides a ‘remedy for failure to do so.’” Anne Zoltani & Hon. Janice Miller Karlin, Examining S 362(a)(3): When “Stay” Means Stay, 36 Am. Bankr. Inst. J. 20, 21 (May 2017) (quoting Abrams v. Sw. Leasing & Rental Inc. (In re Abrams), 127 B.R. 239, 242-43 (B.A.P. 9th Cir. 1991)).
[31] “In this case, [this] is . . . where the inquiry ends, for where, as here, the statute’s language is plain, the sole function of the courts is to enforce it according to its terms.” Cowen, 849 F.3d at 949.
[32] Cowen, 849 F.3d at 950.
[33] Id.
[34] Id. at 949.
[35] Id.
[36] Anne Zoltani & Hon. Janice Miller Karlin, Examining S 362(a)(3): When “Stay” Means Stay, supra note 32, at 61.
[37] See, e.g. Cowen, 849 F.3d; Thompson, 566 F.3d; Weber v. SEFCU (In re Weber), 719 F.3d 72 (2d Cir. 2013); In re Sharon, 234 B.R. 676 (Bankr. App. 6th Cir. 1999).
[38] H.R. REP. 95-595, 220, 1978 U.S.C.C.A.N. 5963, 6179; Whiting Pools, 462 U.S. at 203.
[39] Even outside the context of commercial use, cars are often necessary tools to have debtors remain in an economically viable position. A simple statistic highlights this necessity: over 86 percent of Americans rely on a car to go to work. U.S. Census Bureau, Who Drives to Work? Commuting by Automobile in the United States: 2013, at 2 (2015), https://goo.gl/1Uj34z.
[40] “We conclude that the reorganization estate includes property of the debtor that has been seized by a creditor prior to the filing of a petition for reorganization.” Whiting Pools., 462 U.S. at 209. Cowen, on the other hand, does not require an automatic turnover, nor does Cowen apply the automatic stay provision to pre-petition property at all. Cowen, 849 F.3d at 950.
[41] Id. The practical effect of not applying the automatic stay provision in so place no affirmative obligation on the debtor; rather the creditor most move the court to compel a return. Anne Zoltani & Hon. Janice Miller Karlin, supra note 37, at 61.
[42] 11 U.S.C.A. § 362(d); see also 3-362 Collier on Bankruptcy P 362.07 (16th 2017).
[43] 11 U.S.C.A. § 361.
[44] Whiting Pools., 462 U.S. at 209.
[45] H.R. REP. 95-595, 220, 1978 U.S.C.C.A.N. 5963, 6179.
[46] “These rules shall be construed to secure the just, speedy, and inexpensive determination of every case and proceeding.” Fed. R. Bankr. P. 1001.
