Repossessions And bankruptcy: What The Fulton Decision Means For Turnover | McGlinchey Stafford
Excellence in Automotive Financing – May 7, 2021
February short Supreme decision in City of Chicago v. Fulton was widely celebrated in the lending community because the court found that a lender who repossesses a vehicle before a borrower goes bankrupt does not violate the section’s “exercise control” provision. automatic suspension of the Bankruptcy Code. This provision was the only one at issue in Fulton, and the court ruled that this provision does not require lenders to turn over a repossessed vehicle as soon as a bankruptcy petition is filed.
At first glance, this is good news for auto lenders. however, Fulton left open a number of other areas of exposure for lenders who refuse to return the repossessed collateral to borrowers who have filed for Chapter 13 bankruptcy. In view of these areas of exposure, the time has come for lenders to update their repossession and bankruptcy policies and procedures to avoid or mitigate a potential wave of new lawsuits by taking advantage of loopholes left by Fulton.
Before examining the effects of the Supreme Court’s ruling, let’s look at the intersection of repossessions and bankruptcy. In most states and jurisdictions, when a borrower falls behind on car loan payments, a lender is allowed to repossess their collateral and have the vehicle seized and then sold to honor the loan.
Often times, the borrower hires an attorney who advises them to declare Chapter 13 personal reorganization bankruptcy because, once a bankruptcy petition is filed, an automatic stay is imposed on any action against the borrower and the property of the lender. borrower, who becomes the property of the new bankruptcy estate. .
The automatic stay prevents a lender from selling the vehicle, and the Chapter 13 debtor is permitted under the turnover section of the Bankruptcy Code to seek repossession of the vehicle. The repayment of the loan is processed later in the case of bankruptcy in the debtor’s Chapter 13 plan.
Before the Fulton decision, several appellate courts have ruled that a lender violated the automatic stay because it “exercised control” over the bankruptcy real estate when it did not immediately return the repossessed vehicle to the borrower after filing the bankruptcy case. These decisions have subjected lenders to damages, possibly even punitive damages, as well as the award of legal fees to debtors.
In Fulton, the Supreme Court sided with the courts of appeal which had ruled that the lack of turnover did not violate the “exercise control” provision of the Bankruptcy Code.
However, the Fulton the decision did not relate to three other provisions of the Bankruptcy Code: two other automatic suspension subsections and the section on turnover itself. All of this could affect a lender’s obligations after filing for bankruptcy. The Supreme Court left open the possibility that a lender’s failure to return a vehicle would violate these other provisions.
Therefore, Fulton did not close the door on a borrower’s actions to regain possession of a vehicle by filing for Chapter 13 bankruptcy, but simply encouraged debtors’ lawyers to make different arguments in an attempt to regain possession. Because of Fulton, debtors will now sue in bankruptcy court, through adversarial turnover complaints, rather than simply filing claims in their bankruptcy cases.
Unlike a motion for a stay violation, an adversarial turnover proceeding is an ordinary legal action, which usually takes a long time. What we are seeing is that debtors’ attorneys are now filing these turnover complaints, but they are also trying to bypass the normal timeframe by including expedited motions to recover possession of repossessed vehicles in their proceedings. contradictory.
These motions often require vehicle finance lenders to make quick decisions about whether to relinquish possession of repossessed vehicles or to challenge vehicle rotation on the basis of a lack of “adequate protection”. Even if the lender gives up possession of the vehicle, the litigation may not end, as debtors often seek damages from lenders for breach of vehicle possession and also seek to recoup their attorney fees.
Auto finance lenders should give serious thought to preparing for a possible wave of adversarial revenue proceedings. For example, a lender may wish to establish a policy on what constitutes a minimum level of “adequate protection” of the lender’s security interest in a repossessed vehicle before handing the vehicle over to the borrower. At a minimum, adequate protection includes proper insurance coverage on the vehicle to protect the lender against the loss of its collateral during the bankruptcy event.
Based on particular circumstances, adequate protection may also include cash payments to be made prior to confirmation of the Chapter 13 plan that approximate depreciation in the value of the vehicle resulting from its use by the debtor. If a debtor provides evidence that meets the lender’s minimum level of protection, then the lender’s lawyer may consider arranging for vehicle rotation with the debtor’s lawyer, in accordance with local practice.
However, it is important to note that lenders may seek to challenge any claim for violation of automatic stay brought in adversarial turnover proceedings, or by separate petition in the main bankruptcy case, as such claims are probably no longer viable according to the reasoning used by the Supreme Court in Fulton.
The rationale for Fulton is that the automatic stay freezes the status quo from the date the borrower files for bankruptcy. If the lender does nothing more than retain possession of the vehicle and makes no attempt outside of the bankruptcy case to collect the loan or assert its lien, Fulton’s rationale supports the position that the lender is not violating no provision of the automatic right of stay section of the Bankruptcy Code.
The section on turnover of the Bankruptcy Code should not be interpreted as obliging a lender to return a repossessed vehicle at the request of a debtor without a decision by a bankruptcy court in the context of adversarial proceedings in the matter. of turnover brought by the debtor. Therefore, without breach of such a court order imposing turnover, a lender should not be required to violate the turnover article simply by retaining possession of a repossessed vehicle.
This article first appeared on Excellence in automotive financing, a sister service of Auto Finance News, and is reprinted with permission. McGlinchey is pleased to be the Official Compliance Partner of Auto Finance Excellence, providing insight and thought leadership through webinars, podcasts and monthly columns.