Judicial Activism: Creditor had duty to return repossessed car

Case Name: In re Stephen and Roberta Valichko

Ruling: The bankruptcy court ruled that a credit union willfully violated the automatic stay by refusing to return the debtors’ vehicle, which was lawfully repossessed prepetition.

What it means: The secured creditor had a duty to return the debtors’ car, and violated the automatic stay by not doing so.

Summary: The debtors filed for Chapter 7 relief four days after Quorum Federal Credit Union lawfully repossessed their 2003 Dodge Caravan. Quorum was scheduled as a creditor, and received notice of the debtors’ bankruptcy filing along with their stated intention to reaffirm the debt owed to Quorum. Despite receiving notice of the bankruptcy, Quorum kept the vehicle. The creditor told the debtors that it was not required by law to return the vehicle. If the debtors wanted their car back, they were told to pay arrearages of $817 and provide proof of insurance. After 45 days, the debtors paid the money, signed a reaffirmation agreement, provided proof of insurance, and recovered the vehicle. They then filed a motion to hold Quorum in violation of the automatic stay. Quorum argued that the vehicle was not property of the estate because, under state law, the debtors lost their possessory interest in the vehicle and had only a right to redeem it. The bankruptcy court said that was enough of an interest to include the car in the bankruptcy estate based on the U.S. Supreme Court’s decision in United States v. Whiting Pools, 462 U.S. 198 (1983). “As long as the debtor remains an interest in the repossessed property and the property is capable of being pulled into the estate by a provision under the Bankruptcy Code, that property is included in the reorganization estate at the commencement of bankruptcy proceedings.” The court concluded that Quorum had a duty to turn over the car, and violated the automatic stay by not doing so. Quorum argued that the debtors impliedly consented to its actions by signing the reaffirmation agreement. The bankruptcy court disagreed. “While it may be true that the debtors should have alerted the Court to this stay violation as soon as possible, Quorum cannot ratify its willful violation as soon as possible, Quorum cannot ratify its willful violation of the stay by forcing a debtor to sign a reaffirmation agreement prior to doing what it was required to do under the law,” the court said. “Here it is the creditor, not the debtors, who acted in bad faith by retaining property of the estate unlawfully and then conditioning its release upon the signing of a reaffirmation agreement and the collection of prepetition arrears despite the imposition of the automatic stay. If Quorum believed that it was entitled to lawfully retain the vehicle it should have sought permission of this Court to do so.” The court awarded the debtors their actual damages, including attorney’s fees and returned of the $817 arrearage payment. The court also awarded the debtors punitive damages equal to the amount of the actual damages. Finally, the court ordered Quorum to mark the debtors’ account as being current.

Case Name: In re Stephen and Roberta Valichko

Ruling: The bankruptcy court ruled that a credit union willfully violated the automatic stay by refusing to return the debtors’ vehicle, which was lawfully repossessed prepetition.

What it means: The secured creditor had a duty to return the debtors’ car, and violated the automatic stay by not doing so.

Summary: The debtors filed for Chapter 7 relief four days after Quorum Federal Credit Union lawfully repossessed their 2003 Dodge Caravan. Quorum was scheduled as a creditor, and received notice of the debtors’ bankruptcy filing along with their stated intention to reaffirm the debt owed to Quorum. Despite receiving notice of the bankruptcy, Quorum kept the vehicle. The creditor told the debtors that it was not required by law to return the vehicle. If the debtors wanted their car back, they were told to pay arrearages of $817 and provide proof of insurance. After 45 days, the debtors paid the money, signed a reaffirmation agreement, provided proof of insurance, and recovered the vehicle. They then filed a motion to hold Quorum in violation of the automatic stay. Quorum argued that the vehicle was not property of the estate because, under state law, the debtors lost their possessory interest in the vehicle and had only a right to redeem it. The bankruptcy court said that was enough of an interest to include the car in the bankruptcy estate based on the U.S. Supreme Court’s decision in United States v. Whiting Pools, 462 U.S. 198 (1983). “As long as the debtor remains an interest in the repossessed property and the property is capable of being pulled into the estate by a provision under the Bankruptcy Code, that property is included in the reorganization estate at the commencement of bankruptcy proceedings.” The court concluded that Quorum had a duty to turn over the car, and violated the automatic stay by not doing so. Quorum argued that the debtors impliedly consented to its actions by signing the reaffirmation agreement. The bankruptcy court disagreed. “While it may be true that the debtors should have alerted the Court to this stay violation as soon as possible, Quorum cannot ratify its willful violation as soon as possible, Quorum cannot ratify its willful violation of the stay by forcing a debtor to sign a reaffirmation agreement prior to doing what it was required to do under the law,” the court said. “Here it is the creditor, not the debtors, who acted in bad faith by retaining property of the estate unlawfully and then conditioning its release upon the signing of a reaffirmation agreement and the collection of prepetition arrears despite the imposition of the automatic stay. If Quorum believed that it was entitled to lawfully retain the vehicle it should have sought permission of this Court to do so.” The court awarded the debtors their actual damages, including attorney’s fees and returned of the $817 arrearage payment. The court also awarded the debtors punitive damages equal to the amount of the actual damages. Finally, the court ordered Quorum to mark the debtors’ account as being current.

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