By: Ian Park
St. John's Law Student
American Bankruptcy Institute Law Review Staff
In the first appellate court decision on the issue that favors the debtor, the Sixth Circuit Court of Appeals splits with the Fourth and Eleventh Circuits and holds that the repossession of collateral under UCC Article 9 does not alter the debtor’s property rights or remove the collateral from the estate.
The effect of this ruling is that the debtor may retain the collateral by paying its value to the creditor and is not limited to the state law redemption rights, which require payment in full of the secured obligation.
In Curry, Ms. Curry, a consumer-debtor, purchased a car from a dealer in Ohio and granted a security interest in the car to Tidewater.
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When she defaulted on her monthly payments, Tidewater repossessed her car, but did not sell it.
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A few weeks following the repossession, Ms. Curry filed for Chapter 13 bankruptcy and demanded that Tidewater return her car.
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Tidewater refused, claiming that because it had lawfully repossessed her car prepetition under Ohio law, Ms. Curry merely had a right to redeem rather than to possess it.
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The Sixth Circuit Court did not accept Tidewater’s argument; it held that bankruptcy “estate” includes property repossessed prepetition, therefore, Ms. Curry could keep the car while making monthly payments to Tidewater.
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The issue in Curry is whether a debtor whose car has already been repossessed holds title to the car or merely an option to redeem it. The Bankruptcy Appellate Panel in the opinion adopted by the Sixth Circuit looked for guidance to United States v. Whiting Pools, Inc.
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, which stands for the proposition that the definition of bankruptcy “estate” under 11 U.S.C. § 541(a) is broad and includes collateral that has been repossessed by creditors prior to the bankruptcy filing.
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The Court in Curry also relied on other Sixth Circuit cases that have tracked Whiting Pools’ broad reading of section 541(a), including In re Sharon,
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. The Curry Court distinguished cases cited by the creditor for the proposition that it owned Ms. Curry’s car because it repossessed it before she filed for bankruptcy. Those include two Eleventh Circuit cases, In re Kalter
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and a Fourth Circuit case, In re Moffett.
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Curry was different from Kalter because in the former, the lower court was able to refer to Ohio’s version of Article 9 of the Uniform Commercial Code (“UCC”) which specifically dealt with repossessed collateral, whereas in Kalter, “the court found no language in the [Florida] UCC addressing title, transfer of title, or ownership of repossessed collateral, thereby restricting case law interpreting the statute, [and] concluded that the Florida UCC provided no guidance as to who owns the vehicle upon repossession.”
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Similarly, in Lewis, the court could not refer to the UCC, not because it did not address the issue, but because Alabama traditionally relied only on the common law of conversion, which provides that ownership transfers upon a debtor’s default.
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Furthermore, the Court distinguished Moffett by explaining that the court there did not actually address the issue of ownership of a repossessed car, hence, it was not even authority for the case at bar.
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In re Curry is an important case because it illuminates the current split among courts regarding the issue of whether a debtor whose car has already been repossessed holds title to the car or merely an option to redeem it. The Sixth Circuit tracks United States v. Whiting Pools and says that the debtor still has title to the car, hence, she can seek turnover of the car and can modify the secured debt in accordance with the Bankruptcy Code. The conflicting view that was adopted by the Eleventh Circuit holds that the debtor merely has a right of redemption, and can recover the car only by paying the entire secured debt. So when your debtor-client asks, “Can I get my car back?” the answer should be, “Depends on where you live.”
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[1]
See In re Curry, 509 F.3d 735 (6th Cir. 2007) (adopting opinion of Bankruptcy Appellate Panel of Sixth Circuit, infra note 2, in full because “issuance of a full written opinion by this court would be duplicative and would serve no useful purpose”).
[9]
234 B.R. 676, 682 (6th Cir. 1999) (holding repossessed car not yet sold prepetition is part of debtor’s “bundle of rights” included in estate).
[10]
214 B.R. 148, 152 (6th Cir. 1997) (holding creditor does not have ownership of repossessed car remains property of estate if not sold prepetition).
[11]
376 F.3d 1323, 1324 (11th Cir. 2004) (holding debtor has ownership of car repossessed prepetition).
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292 F.3d 1350, 1360 (11th Cir. 2002) (holding debtor’s right in repossessed car is mere right of redemption).
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137 F.3d 1280, 1284 (11th Cir. 1998) (holding debtor does not have “title, possession or any other functionally equivalent ownership interest” in repossessed car).
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356 F.3d 518, 523 (holding legal ownership of repossessed car is governed by state law, not federal law, hence creditor has both legal and equitable interest).
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But even if assuming your client lives in the Sixth Circuit where the repossessed car can be dealt with bankruptcy, meaning it comes into the bankruptcy estate, there is another issue to deal with, which is whether the car is subject to turnover or cram down. In re Curry allowed the debtor a cram down, so she was allowed to keep her car while paying Tidewater a present value of the car, which was substantially lower than the contract price. 347 B.R. 596 at 599.
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