In re Cowen, ___F.3d___, 2017 Westlaw 745596 (10th Cir. 2017)
In re Cowen, ___F.3d___, 2017 Westlaw 745596 (10th Cir. 2017): The US Court of Appeals for the Tenth Circuit held in Cowen that when two creditors “passively retained” the debtor’s property, that they did not violate the automatic stay by “passively retaining” debtor’s property (which they had possession of at the time debtor filed bankruptcy), because the creditors did NOT engage in any affirmative acts to “control” the debtor’s property. However, the creditors’ post-petition forgery and perjury did violate the stay.
Note that (as stated in Cowen) the Second, Seventh, Eighth, and Ninth Circuits (California is in the Ninth Circuit) have all ruled that passive retention of an asset can constitute a violation of the statute, but the Tenth Circuit disagreed. The court construed the language of the statute in light of the 1984 amendments:
This issue is now a “Circuit Split” (Different US Courts of Appeals for Different Circuits have taken opposite positions), which at some point is likely to get decided by the US Supreme Court, by some party in interest, in some case, bringing a petition for certiorari, and the US Supreme Court granting same, to decide the issue.
FACTS: The owner of a commercial truck brought it in for repair; he could not afford to pay cash and instead executed a note secured by the truck. At around the same time, the owner defaulted on another note secured by a second truck; that note was held by the repairman’s father-in-law. The second truck was repossessed under hostile circumstances. During the next few days, title to the first truck was supposedly transferred to the repairman, and the second truck was allegedly sold for cash to an unknown Mexican national in an undocumented transaction.
Ten days after the repossession, the owner of the trucks filed a Chapter 13 petition. He demanded the immediate return of the trucks. The bankruptcy court soon issued a turnover order and an order to show cause why the retention of the trucks was not a willful violation of the automatic stay. The repairman and his father-in-law failed to turn over the trucks.
The debtor brought an adversary proceeding seeking damages for violations of the automatic stay. The creditors argued that the debtor’s rights in the trucks had terminated prior to the filing of the petition, as shown by the documents concerning the title transfer and the sale. After finding that that the creditors had forged those documents and had committed perjury, the court awarded compensatory and punitive damages. The district court affirmed the liability phase of the case, and the creditors appealed to the Tenth Circuit.
REASONING: On appeal, the creditors argued that 11 U.S.C.A. §362(a)(3) does not cover the act of passively holding onto an asset of the debtor, as distinguished from taking an affirmative act against that asset. The court candidly noted that the Second, Seventh, Eighth, and Ninth Circuits had all ruled that passive retention of an asset can constitute a violation of the statute, but the Tenth Circuit disagreed. The court construed the language of the statute in light of the 1984 amendments: As noted supra, the Second, Seventh, Eighth, and Ninth Circuits have all ruled that passive retention of an asset can constitute a violation of the 11 USC 362(a)(3) bankruptcy automatic stay, which prohibits “any act to obtain possession of property” or “any act to exercise control over property.” “Act”, in turn, commonly means to “take action” or “do something.” … This section, then, stays entities from doing something to obtain possession of or to exercise control over the estate’s property. Per Cowen, it does not cover “the act of passively holding onto an asset,” …, nor does it impose an affirmative obligation to turnover property to the estate.
The court then reasoned that if Congress had wanted to cover passive activity, as being a stay violation, it would have done so in the wording of 362(a)(3):
However, (not surprisingly) if the creditors had committed affirmative misconduct of forging title papers and lying, that conduct could be sanctioned. Per § 362(a)(3) and under § 105(a), which “grants bankruptcy courts the power to sanction conduct abusive of the judicial process.” … The bankruptcy court here “found the Defendants’ attitudes while testifying to be contemptuous of the bankruptcy process, the Debtor, and the Court.” … It also found that Defendants “manufactured the paperwork … after the bankruptcy filing.” … And it noted that Defendants “likely forged documents and gave perjured testimony,” and “coached their witnesses on what to testify to during [ ] breaks.” …This was all done in an “attempt to convince the Court that [the debtor’s] rights in the Trucks had been terminated prebankruptcy.” (Id.) These would qualify as post-petition acts to exercise control over the debtor’s property in violation of the automatic stay.