Repossessed Vehicles Must Be Returned to Debtor upon Filing Chapter 13

By: Michael Vanunu
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
It is not uncommon for a chapter 13 debtor to file for bankruptcy after certain assets have already been repossessed.  This leaves the courts in the position of having to decide whether a particular creditor can continue to hold the asset it has repossessed, or must return it to the bankruptcy estate. Recently, in a case of first impression for the circuit, the Seventh Circuit, in Thompson v. General Motors Acceptance Corp.,[1] was called upon to determine whether an asset lawfully seized pre-petition must be returned to the estate after debtor files for chapter 13 bankruptcy, and if so, whether the asset must be returned even without a showing by the debtor that he can adequately protect the creditor’s interest.[2] In the case, Thompson had his car repossessed by General Motors Acceptance Corp (“GMAC”), a secured creditor.  A few days later Thompson filed for chapter 13, and sought the return of his vehicle from GMAC through the automatic stay provision of § 362(a)(3), which provides that “a petition filed [for bankruptcy] . . . operates as a stay . . . of any act to obtain possession of property of the estate . . . or to exercise control over property of the estate.”[3] GMAC refused because it claimed that Thompson could not adequately protect its interest.[4]
Following precedent within the Seventh Circuit, the Bankruptcy Court for the Northern District of Illinois held that Thompson did not have a right for automatic return of his vehicle without showing adequate protection for GMAC’s interest because “a creditor . . . retain[s] possession of a seized asset until the creditor subjectively determines that the debtor . . . can provide adequate protection of the creditor’s interest.”[5]  However, the Seventh Circuit disagreed and held that GMAC was required to return Thompson’s vehicle because it violated the automatic stay by exercising control of the vehicle, and that GMAC could always ask for adequate protection from bankruptcy court if it wanted.[6]
The Seventh Circuit looked at the plain meaning of section 542(a) as well as the Supreme Court‘s decision in United States v. Whiting Pools, Inc..[7]  Section 542(a) states that an entity in possession of property “that the trustee may use, sell, or lease . . . shall deliver to the trustee, and account for, such property . . . unless such property is of inconsequential value or benefit to the estate.”[8]  The Seventh Circuit interpreted sections 542(a) and 362(a) to determine that property seized pre-petition must first be returned before any creditor can claim adequate protection of his interest.[9]  This meant that GMAC first had to return the car before it could claim that Thompson could not adequately protect GMAC’s interest.
The contrary position was taken by the Eleventh Circuit. On similar facts, the court in Bell-Tel Federal Credit Union v. Kalter[10]held that a secured creditor does not have to return a vehicle that was seized pre-petition.  While the Thompson court analyzed whether the car must be returned without a showing by the debtor that the creditor’s interest is protected, the Bell-Tel court focused on whether the car was even part of the estate.[11]  The Eleventh Circuit stated that if the property was not part of the bankrupt estate, then the debtor had no right to have the car returned.[12] Section 541(a)(1) states that property of the estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case.”[13]  Since property seized before filing can be considered property of the estate only if the debtor still had a legal or equitable interest at the time of filing, the Eleventh Circuit turned to Florida state law to determine whether the debtor had a legal or equitable interest in the car.[14]  Specifically, the court looked to see if the creditor took legal title to the car when it was repossessed. The Eleventh Circuit found that, following repossession, the debtor held a bare right of redemption and that, therefore, the car itself was not part of the estate.[15]  Because the car was not part of the estate, the court held that the secured creditor did not have to return the car.
Whether the debtor had any legal or equitable interest in the repossessed vehicle was not at issue in Thompson.  In Thompson, both parties agreed that Thompson had an equitable interest in the vehicle, and, therefore, the vehicle was part of the estate under section 541(a).[16]  The Eleventh Circuit did not analyze any of the issues addressed by the Seventh Circuit.  The Eleventh Circuit had no need to discuss whether the debtor must show adequate protection of the secured creditor’s interest prior to receiving the vehicle because the debtor must show his vehicle is considered property of the estate before it could be transferred to him from the creditor pursuant to the automatic stay provision.

[1] Thompson v. Gen. Motors Acceptance Corp., 566 F.3d 699, 700 (7th Cir. 2009).
[2] Id. at 700.
[3] Id. at 701; 11 U.S.C. § 362(a)(3) (2006).
[4] Thompson, 566 F.3d. at 700. A secured creditor, such as GMAC, has a right under the bankruptcy code to protect its interest in a debtor’s property. See Black’s Law Dictionary, 8th ed. (defining adequate protection as “the protection afforded to a holder of a secured claim against the debtor, such as a periodic cash payment or an additional lien”); see also 11 U.S.C. § 363(e) (2006) (“[O]n request of an entity that has an interest in property used, sold, or leased . . . the court, with or without a hearing, shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest”).
[5] Thompson, 566 F.3d. at 700. (emphasis added).
[6] Id. at 700, 704 (adopting analysis of Sixth, Eighth, Ninth, and Tenth Circuits, by altering the standard procedure in the Northern District of Illinois).
[7] Thompson, 566 F.3d at 703 (citing United States v. Whiting Pools, Inc., 462 U.S. 198 (1983) (holding that the Internal Revenue Service was subject to the automatic stay provision of section 362, and pursuant to section 542(a) had to return a vehicle it repossessed pre-petition to the debtor, a corporation)).  
[8] 11 U.S.C. § 542(a) (2006).
[9] Thompson, 566 F.3d at 704.
[10] Bell-Tel Fed. Credit Union v. Kalter, 292 F.3d 1350, 1351–52 (11th Cir. 2002) (litigating two cases at once, where two different debtors had their vehicles seized by secured creditors pre-petition for Chapter 13).
[11] 1352.
[12] Id.
[13] 11 U.S.C. § 541(a)(1) (2006) (stating the estate is comprised of “property[] wherever located and by whomever held: . . . all legal or equitable interests of the debtor in property as of the commencement of the case.”).
[14] Bell-Tel Fed. Credit Union, 292 F.3d at 1353; see United States v. Whiting Pools, Inc., 462 U.S. 198, 209 (1983) (“[T]he reorganization estate includes property of the debtor that has been seized by a creditor prior to the filing of a petition for reorganization.”).
[15] Bell-Tel Fed. Credit Union, 292 F.3d at 1360 (finding that, under the Florida Certificate of Title State, ownership of a vehicle passes from debtor to a secured creditor upon repossession, and therefore the vehicle is not property of the debtor’s bankruptcy estate).
[16] Thompson, 556.F.3d at 701.