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Ramifications of Supreme Count Decision on Recovering Repo'd Vehicle by Filing Ch 13
Judson Carusone • October 7, 2021
Can you get your repossessed vehicle back by quickly filing Ch 13?
In January of 2021, the U.S. Supreme Court decided the case of City of Chicago v. Fulton, 141 S. Ct. 585 (2021)
This case was the subject of a case review by U of O Law School Professor Andrea Coles-Bjerre in the Spring, 2021 Oregon State Bar Debtor/Creditor Subsection Newsletter. It is of great interest to us as Eugene, OR bankruptcy attorneys and debt relief lawyers because it involves the issue of whether you can get a repossessed vehicle back by quickly filing Chapter 13.
Justice Sotomayor concurred in the opinion but noted that the decision created a lack of procedures for a timely and cost-effective turnover to debtors, especially debtors seeking to recover their daily driving vehicle needed for an effective reorganization. She called this a “gap left by the court’s ruling today.”
In practice, this is a chasm with debtors facing extraordinary costs and delay in recovering a vehicle from a creditor who chooses to follow the Supreme Court’s safe harbor of “passive retention,” resulting in an increase of surrendered vehicles where the loans could have been restructured in a Chapter 13. This decision has also emboldened certain auto lenders to move vehicles to distant auction markets, making it even more difficult for a debtor to recover a vehicle. Locally, I have seen repossessed vehicles moved rapidly to Boise or Seattle for auction.
Justice Sotomayor’s concurring opinion was a direct plea to Congress and/or the Court to resolve the procedural problems the decision created. But before looking at such a response, let’s take a few minutes to review what happened after the Supreme Court’s ruling.
The case consolidated four separate Chapter 13 cases where the City of Chicago had seized a debtor’s vehicle to pay municipal obligations such as parking or traffic tickets. The Supreme Court reached a narrow ruling interpreting the stay under Section 362(a)(3) and the turnover provisions of Section 542(a). The Supreme Court did not address any other subsections of 362, and remanded the case back to the Seventh Circuit Court of Appeals. The Seventh Circuit evaluated the appeal record and determined that in two of the four cases, there were unresolved issues regarding potential stay violations of other subsections of 362. Therefore, it remanded those two cases, In Re Fulton and In Re Shannon back to the Bankruptcy Court for further proceedings. (City of Chicago v. Fulton, case no. 18-04116, nonprecedential disposition order dated April 12, 2021 (7th Cir. 2021))
Ultimately, these remands did not produce any decisions that would assist with the unanswered questions from Chicago v. Fulton.
In In Re Fulton, the Chapter 13 case had been dismissed for debtor’s failure to make Plan payments. The debtor, the City of Chicago and the trustee all agreed that there was no need to reopen the case to adjudicate potential stay violations and any related damages.
In In Re Shannon, the Chapter 13 Plan had been completed and the case was in final stages of closing. Again, the parties decided not to adjudicate any potential stay violations and related damages. The City had already surrendered the vehicle by Bankruptcy Court Order as a sanction. However, this case was somewhat unique in that there was no turnover motion but just a motion for Section 362(a) sanctions after Plan confirmation. In the approximately 40 published opinions citing Chicago v. Fulton, none have interpreted it with regard to the issues in the case. All of the written opinions cite it for other reasons.
Part of the gap identified by Justice Sotomayor was a rule-based gap in that FRBP 7001(1) requires an Adversary Proceeding “to recover money or property”. The Supreme Court’s decision was released on January 14, 2021 and, within 15 days, the legal profession had responded. On January 29, 2021, 45 law professors raised the issue to the U.S. Court’s Advisory Committee on Bankruptcy Rules. Their letter analyzed the issues and attached detailed proposed rule changes to create a new motion proceeding for turnover under Section 542. Their proposal was to create a national turnover procedure for use in all chapters by all debtors as to any property.
On February 4, 2021, three further law professors provided comment on these proposed rules and provided some minor revisions. Shortly thereafter, the National Bankruptcy Conference submitted its own comments that supported of the initial proposed rules by the 45 law professors and also provided some minor revisions.
At the May 24, 2021 meeting of the Committee, these proposals were discussed and the Committee agreed that the Consumer Subcommittee should further investigate the matter, including whether there should be an expansive rule change as proposed by the law professors or a more limited rule change. The Subcommittee would also survey Bankruptcy Courts and trustees because the Committee noted that some Bankruptcy Courts were already allowing turnover by motion.
The Subcommittee reported back and, on August 19, 2021, the Advisory Committee reached a final decision on a rule change to be published for comment. The Committee ultimately proposed a very narrow change to Rule 7001, differing substantially from the proposal by the law professors and the National Bankruptcy Conference.
The Committee felt that the rule change should focus on the issues in Chicago v. Fulton. The proposed rule would merely add a further exception to Rule 7001 that reads “a proceeding by an individual Debtor to recover tangible personal property under Section 542(a).” There is no discuss as to why “tangible personal property” was used instead of say “consumer property.” Nor did the Committee suggest how “tangible personal property” was defined. Thus, the Committee left it to local jurisdictions to craft rules for a turnover motion of tangible personal property by an individual Debtor.
The Subcommittee’s survey of Bankruptcy Courts and Trustees is somewhat interesting. It received responses from 45 clerks. 4 clerks responded that their districts, prior to Fulton, had local rules that allowed turnover of estate property by motion. Several other districts do not bar turnover motions but allow them to proceed as a motion if the respondent does not object. And 8 courts were in the process of considering rule revisions in response to Fulton.
The Trustees, perhaps providing overlapping responses, also reported that 4 courts allowed turnover by motion and 6 were considering rule changes to allow turnover by motion. And 3 commented that their courts have been allowing turnover by motion without a local rule that expressly provides for that procedure. So, it seems that the gap is closing fast and that motions under Section 542(a) for turnover will shortly be allowed in all jurisdictions.
However, neither the Supreme Court, the rules Committee nor the commentators’ proposed rules address turnover motions under Section 543, which is turnover by a custodian. Chicago v. Fulton was somewhat of an unusual case because all of the vehicles had been seized by the City and held by the City as creditor. But a far more common occurrence is an auto lender using a repossession agent to recover the collateral and to move it through the liquidation process. So, is there still a gap for the more common situation of a repossession agent in possession of a vehicle and with directions from the creditor to move the vehicle along to auction? Or can local court’s address Section 543 in conjunction with Section 542?
First, one must consider if a repo agent constitutes a custodian under Section 543. “Custodian” is defined at Section 101(11) and includes “a Trustee receiver, or agent under applicable law or under a contract that is appointed or authorized to take charge of property of the debtor for the purpose of enforcing a lien against such property or for the purpose of general administration of such property for the benefit of the debtor’s creditors.”
A repo agent would constitute a classic state law agent acting on behalf of a lender under applicable state law and contract. The agent is taking charge of a debtor’s property for the purposes of enforcing a lien against such property. Therefore, repo agents are arguably custodians.
If that is the case, then there would be no bar to local court’s enacting rules for turnover by repo agents who remain in possession of a debtor’s vehicle at the time a bankruptcy petition is filed. This is because of significant differences between Section 543 and Section 542.
One issue courts have considered in looking at Section 362, Section 542 and Rule 7001, is that Section 542, while mandatory, contains conditions and exceptions that require an adversary proceeding. But those conditions and exceptions are not present in Section 543, which is equally mandatory. More importantly, Section 543 has some different conditions and exceptions that all requires a custodian to get a court order to be relieved of Section 543's mandatory provisions, after notice and a hearing. A court is also empowered, after notice and a hearing, to enter other orders of various types, including orders to protect the custodian who complies with the turnover obligations, to provide payment to the custodian for reasonable expenses and costs, and to surcharge the custodian for any improper behavior in administering the asset.
Therefore, one cannot conclude that Section 7001 prohibits a turnover motion against a custodian because Congress expressly authorized matters related to custodian turnover to be addressed by the court after notice and a hearing. This is similar language that justified the Oregon District Court adopting rules for lien stripping under Section 506 instead of an Adversary Proceeding under Rule 7001. Rule 7001 requires an Adversary Proceeding to “determine the validity, priority, or extent of a lien” but Section 506 also allows the extent of a secured lien to be decided by motion. Since the Code supersedes the Rules and the code is clear that a court has authority to engage in motion practice under Section 543, all districts are free to proceed with Section 543 turnover motion rules.
Congress should give further thought regarding the Supreme Court’s decision and a growing safe harbor for “passive retention”. The ruling was not surprising in light of a similar ruling regarding cash collateral in Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995) and various court decisions as to pre-petition ligation allowing a creditor to passively retain a case on a state court docket instead of actively dismissing the case.
Fulton is just a another instance of passive behavior that is a judicial exception to the stay. But passivity by a creditor can ripen into sanctionable behavior. A good example are cases were a debtor surrendered a relatively worthless vehicle. The creditor then refuses to recover its collateral yet refuses to surrender title to allow a debtor to dispose of the worthless collateral. This is a type of passive behavior. But the courts, starting with In Re Pratt, 462 F.3d 14 (First Cir. 2006), have found such passive behavior can be coercive and, therefore, a violation of the discharge injunction. Similarly, under Strumpf, the passive behavior, such as a freeze on a debtor’s accounts, can quickly degenerate into a stay violation.
But a bank or credit union can no longer wait out the case to discharge and then, with the stay lifted, exercise their offset rights by seizing the cash collateral. Nor can they wait months to seek relief from stay. To do so is a stay violation. In re Orr, 234 B.R. 249 (Bankr. N.D.N.Y. 1999); In re Wicks, 215 B.R. 316 (U.S. Dist. Ct. E.D.N.Y. 1997).
Of course, it is up to Congress to address whether such passive behavior should be treated as a stay violation by amending the Code.
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Bankruptcy Attorney Q & A- (Part 2) How Soon After Bankruptcy Can I Get an FHA Loan and Buy a House?
Bankruptcy Attorney Q & A- (Part 2) How Soon After Bankruptcy Can I Get an FHA Loan and Buy a House? Clients frequently ask about future credit after bankruptcy and especially about if they will ever be able to buy a home. The answer to this question is not always as simple as it should be because it varies by the type of home loan. This blog addresses special mortgages backed directly by the federal government such as Federal Housing Administration first time home buyer and rehabilitation loans. If you do not qualify for one of these loans, you should read our related blog on conventional mortgages and buying a home after bankruptcy. Just paste this link into your browser window: https://www.oregon-attorneys.com/bankruptcy-attorney-q-a-how-soon-after-bankruptcy-can-i-buy-a-house The short answer is that a waiting period of one to three years after filing for bankruptcy is all that is required for Federal Housing Administration, Veterans Administration and US Department of Agriculture Rural Home Loans. But this is just as to the bankruptcy filing. Of course, you still need to take active steps after bankruptcy to rebuild your credit. Check out our blog posts on rebuilding your credit after bankruptcy https://www.oregon-attorneys.com/5-steps-to-rebuilding-your-credit https://www.oregon-attorneys.com/filing-bankruptcy-is-just-the-first-step-in-rebuilding-your-credit And, you have to have sufficient income, possibily a down payment and a good debt to income ratio to buy a house. A Chapter 7 or Chapter 13 bankruptcy will show on your credit report for 10 years and negatively affect your credit. However, loans targeted to special populations and backed by the federal government have rules that allow you to buy a home shortly after discharge. These rules are subject to change so we recommend that you consult a mortgage broker for the most up to date standards for qualifying. Here are the waiting periods for these loans so you can buy a house. ● If you otherwise qualify for an FHA loan, you must wait at least 2 years after a Chapter 7 discharge or 1 year after a Chapter 13 discharge. ● If you otherwise qualify for a VA loan, you must wait at least 2 years after a Chapter 7 discharge or 1 year after a Chapter 13 discharge. ● If you otherwise qualify for a USDA loan, you must wait at least 3 years after a Chapter 7 discharge or 1 year after a Chapter 13 discharge. In addition, if you are in a Chapter 13 plan and you need to refinance, then FHA and VA can also help you. FHA loans used to refinance a home while in a Chapter 13 bankruptcy require up to 2 years of on time payments to the Chapter 13 trustee. You must also meet the other loan standards such as sufficient income and appropriate loan to value ration. But the loan proceeds must allow you to conclude your Chapter 13 plan as of the closing of the loan. We sometimes call this buying out your plan. This can work well if you have the equity. It is also possible to use VA loans to refinance a home while in a Chapter 13 bankruptcy. You need up to 2 years of on time payments to the Chapter 13 trustee. You must also meet the other loan standards such as sufficient income and appropriate loan to value ration. But you do not need to buyout your plan. Here is a brief description of these home loans. ● FHA first time home buyer loans allow for a low down payment currently at 3.5% with a credit score at or above 580, or 10% if your credit score is between 500-580. The property needs to pass an inspection. And there is a cap on these loans that varies by county. For example, a home in Lane County can qualify up to $420,000 but in Multnomah County that amount is $598,000. ● FHA rehabilitation loans have similar standards. However, the loan can include cash out to bring the home up to the required inspection standards. The cash out is limited to $35,000 for qualifying improvements such as replacing roofing, enhancing accessibility for a disabled person or making energy conservation improvements. ● VA loans for new home purchase start with a Certificate of Eligibility (COE) to show your lender that you qualify based on your service history and duty status. This is obtained from the VA. The VA does not always require a down payment but one may be needed depending on the amount of the loan. The property needs to pass an inspection. But unlike the FHA, the VA does not set standards for the loans as to credit or income. Typical lenders do want minimum credit scores in the 600 range. ● USDA rural home loans do not require a down payment. But the home and its location are essential to obtaining this type of mortgage. For example, the house size is usually 2000 square feet or less. In fact, the home buyer must need the home to have decent, safe, and sanitary housing and be unable to obtain a loan from other resources on terms and conditions that can reasonably be expected to be met. Income qualifications are lenient as the loan can include a payment subsidy and are only available to low income borrowers. The USDA doesn't have a fixed credit score requirement, but most lenders require a score of at least 640, and 640 is the minimum credit score you'll need to qualify for automatic approval through the USDA's automated loan underwriting system. Conventional loans require a longer waiting period between bankruptcy discharge and requesting a home loan. These types of loans are not guaranteed by the federal government and can require significantly longer waiting periods. But your state or local government may have other programs that can also help. And a bank involved in the Community Reinvestment Act (CRA) will also have loans available for low to moderate income home buyers. Finally, if you were impacted by recent fires and lost your home in such a disaster, the Small Business Administration and FEMA may have loan options to rebuild. Filing bankruptcy is usually just the first step to rebuilding your credit and putting yourself back on track to possible home ownership in the future.
Bankruptcy Attorney Q & A - How Soon After Bankruptcy Can I Buy a House? Clients frequently ask about their future credit ratings after bankruptcy and especially about being able to get a mortgage to buy a house. The answer to this question is not always simple as it varies by the type of mortgage. This blog addresses conventional home loans. If you qualify for a FHA or VA loan, you should read our related blog. Just pasted this link into your browser window https://www.oregon-attorneys.com/bankruptcy-attorney-q-a-part-2-how-soon-after-bankruptcy-can-i-get-an-fha-loan-and-buy-a-house The majority of conventional home loans are sold with in 6 months by the original lender. Fannie Mae and Freddie Mac are the largest purchases of these home loans, buying upwards of 65% of the annual home loans. We call this the secondary mortgage market. The rest of these loans are purchased by banks, hedge funds and asset backed trusts. Over the life of a 30 mortgage, it may be sold several times. A bankruptcy or other major negative credit event will create a waiting period before you qualified for a home loan that can be purchase by Fannie Mae or Freddie Mac. Many original lenders want the home loans qualified for purchase by Fannie Mae and Freddie Mac. So they try to meet Fannie Mae and Freddie Mac standards in all cases. Here are the waiting periods for these home loans to be qualified for purchase by Fannie Mae and Freddie Mac. • A Chapter 7 or Chapter 11 Bankruptcy waiting period is 4 years from the discharge or dismissal date of the bankruptcy action. A 2 year waiting period is allowed if extenuating circumstances are documented. • A Chapter 13 Bankruptcy waiting period is 2 years from the discharge date or 4 years from the dismissal date. This shorter waiting period after discharge recognizes that borrowers have already met a portion of the waiting period within the time needed for the successful completion of a Chapter 13 plan. A borrower who was unable to complete the Chapter 13 plan must wait 4 years. A 2 year waiting period is allowed if extenuating circumstances are documented as to a dismissed case. • A borrower who filed more than one bankruptcy within the past 7 years has a 5 five-year waiting period from the most recent dismissal or discharge date. However, two or more borrowers with individual bankruptcies are not cumulative, and do not constitute multiple bankruptcies. For example, if the borrower has one bankruptcy and the co-borrower has one bankruptcy this is not considered a multiple bankruptcy situation requiring a 5 year waiting period. A 3 year waiting period is allowed if extenuating circumstances are documented and is measured from the most recent bankruptcy discharge or dismissal date. But the most recent bankruptcy filing must have been the result of the extenuating circumstances. You still need to rebuild your credit and avoid accumulating a lot new debt to before you can buy a house. And you have to have sufficient income and a good loan to value ratio to buy a house so you can meet the standards to qualify for a home loan. Check out our blog posts on rebuilding your credit after bankruptcy. Just paste these links into your browser window: https://www.oregon-attorneys.com/5-steps-to-rebuilding-your-credit https://www.oregon-attorneys.com/filing-bankruptcy-is-just-the-first-step-in-rebuilding-your-credit These bankruptcy waiting periods may or may not be better then the alternatives. Here are the waiting periods for non-bankruptcy major negative credit events. • Foreclosure requires a 7 year waiting period measured from the completion date of the foreclosure action as reported on the credit report or other foreclosure documents provided by the borrower. A 3 year waiting period is allowed if extenuating circumstances are documented. • Foreclosure and Bankruptcy on the Home Loan. If a home loan was discharged through a bankruptcy, the bankruptcy waiting periods is applied if the new lender can document that the mortgage obligation was discharged in the bankruptcy. Otherwise, the greater of the applicable waiting periods applies. • Deed-in-Lieu of Foreclosure, Pre-foreclosure Sale (often called a short sale), and Charge-Off of a Mortgage Account require a 4 year waiting period from the completion date of the deed-in-lieu of foreclosure, pre-foreclosure sale, or charge-off as reported on the credit report or other documents provided by the borrower. These events are alternatives to foreclosure. A 2 year waiting period is allowed if extenuating circumstances are documented. • A deed-in-lieu of foreclosure is a transaction in which the deed to the real property is transferred back to the servicer. These are typically identified on the credit report through Remark Codes such as “Forfeit deed-in-lieu of foreclosure.” • A pre-foreclosure sale or short sale is the sale of a property in lieu of a foreclosure resulting in a payoff of less than the total amount owed, which was pre-approved by the servicer. These are typically identified on the credit report through Remark Codes such as “Settled for less than full balance.” • A charge-off of a mortgage account occurs when a creditor has determined that there is little (or no) likelihood that the mortgage debt will be collected. A charge-off is typically reported after an account reaches a certain delinquency status and is identified on the credit report with a manner of payment (MOP) code of “9.” Additional requirements may apply, especially when seek a shorter extenuating circumstances period. Only the purchase of a principal residence is permitted. Only limited cash-out refinances are permitted. You may need a larger down payment. For the purchase of second homes or investment properties and large cash-out refinances you must wait the full 7 years. These rules are subject to change, so one should consult a mortgage broker for the most up to date requirements for buying a home.
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